Legal recourse, however, often is not
the most effective means for
combating IPR violations, since even
perfect laws are difficult to enforce
systematically in a country as large
and complex as China. Companies
who suffer from such crimes have to
convince both customers to buy the
original product and corporate
partners to adhere to standards of good conduct. To start with, the
original needs to provide consumers
with better value for money than
illegally copied goods. In one sense,
companies unwittingly helped
promote piracy. Whereas in the past,
brands stood for excellent product
quality, nowadays, they are often just
a label for shoddy products made by
contractmanufacturers, with the only
value being social status or fashion
appeal. Consumers who understand
the erosion of the substance behind
brands regard pirated goods as perfect
substitutes for the real thing. To
counter this harmful trend, original
equipment manufacturers (OEM) can
make software updates available only
to users of genuine versions. Music
labels should put in place elaborate
systems to ensure that the quality of
the recording medium is superior to
pirated goods.
Many multinational companies may
have to transform their corporate
culture to enable such radical
rethinking. As regards pricing,
sacred cows must be slaughtered. In
many cases, at least at the initial
stage, intellectual property should be
sold in China at prices only slightly
higher than in the black market.
Then, consumers have no real
incentive to accept the
inconveniences associated with
pirated products, such as missing
out on the last few dramatic minutes
of a movie because of scratches on
the surface of a DVD. In particular,
executives may need to get rid of
what I call “margin obsession”. High
volumes resulting from low prices
will help generate significant profits
even when margins are low. This
will unleash a virtuous circle. The
cash can be used to fund Research
and Development, which will help
the firm keep an edge over
competitors. In contrast, premiums
prices may lead to a vicious circle of
low demand, dwindling funding
and an erosion of competitive
advantage. Companies that adopt the
revolutionary pricing scheme only
need to protect mature markets from
parallel Chinese imports. For
example, Singapore sells original
music CDs with licensed contents
from Sony, which are made for the
Chinese market. These imports from
China are sold for half of the price of
the CDs with identical contents
targeted at maturemarkets.
As an incentive for Chinese contract
manufacturers, OEMs should hold
out the prospects of granting them
preferred supplier status if they
perform well. This way, one-off and
arm’s length transactions can be
transformed into long-term trustbased
relations. The latter are a form
of “repeated game” with reputational
effects, in which players have less
incentive to fool others than in games
that are only played once. To
discipline Chinese suppliers, OEMs
also need to link up with alternative
service providers elsewhere. For
example, consumer goods companies
could start working with an EMS
company based in the Philippines if
the latter has a strong track record of
IPR protection. Many Chinese
employees dream of setting up their
own firmandmight steal trade secrets
to be used after they have jumped
ship. In contrast, personnel in the
Philippines tends to prefer working
for large companies indefinitely.
Faced with credible foreign
competitors, Chinese contract
manufacturers might feel a sense of
urgency to improve their conduct.
Here is another example of how
companies may counter intellectual
theft: A foreign publisher works
together with Chinese counterparts
who have a similar interest in
developing awareness for copyright
issues. Besides, products can be
divided into modules that are
developed in different countries.
Even if Chinese companies were to
copy one module, they would still
lack the other parts needed for the
final product.
In China, what do you think is
more important: First Mover
Advantage or Second Mover
Advantage?
Most executives do not analyze the
facts to determine whether they
should invest in China. Few of those
who feel compelled to go ahead
think carefully about the optimal
timing of their moves. Following the
herd, they succumb to what I call the
“early bird syndrome”, assuming
that investing in China earlier is
always better than later.
Instead of relying solely on instinct
and mimicry to make decisions, I
recommend managers to go through
the following non-exhaustive
checklist to determine whether they
should act first or wait and see. The
result may be a differentiated
approach: Based on the analysis,
executivesmay conclude that in some
cases they have to move first to
dominate certain product categories,
locations, customer segments and
channels. In other cases, they may
first study the performance of
competitors before making a decision
as to whether to follow suit. The
more of the following external and
internal factors, many of which are
interrelated, are present in their
situation, the more likely it is that
they can benefit from first mover
advantages. Those make it possible to
create industries or improve industry
structures, and build strong positions
in a cost-efficient manner that are
difficult to conquer or replicate by
others. As I will show, careful factbased
analysis is a must, because first
mover advantages may be an illusion
in the first place or turn into
disadvantages at a later stage:
