IP in China

["Ian Murray" <seamus2001@xxxxxxxxx>]

< http://www.feer.com >
INTELLECTUAL PROPERTY
Navigating in a Sea of Pirates

Bizarrely, the world's most paranoid companies are creating the technologies of the future in China--the world's
leakiest intellectual-property environment. It's a risky business, but given the immense market opportunities and a
talented pool of engineers, hi-tech giants are piling in
By Ben Dolven/BEIJING and SHANGHAI
Issue cover-dated April 11, 2002


IT'S NO SECRET that China is the world's leakiest spot for intellectual property. The United States Department of
Commerce estimates that American companies lose some $2 billion a year from ripped-off software and entertainment. The
main culprits: Pirates in China that churn out cheap fakes. And if you can copy a product, you can certainly copy a
piece of research before the product hits the market.

But if you think that technology firms steer clear of China when they plan and develop new products and new business
directions, think again. Dozens of hi-tech multinationals have set up high-level research centres in China, tapping
rapidly improving engineering and software skills to do increasingly advanced work. These aren't simple technical teams
servicing Chinese customers or slapping Chinese-language capabilities on products developed elsewhere. Many of these
research centres do advanced work--the kind of "look 5-10 years into the future" projects that help forge a company's,
and an industry's, future.

It seems incongruous: The world's most paranoid firms working in the world's leakiest environment. But look at the
roster. Intel, whose former chief executive, Andy Grove, wrote a best-seller called Only the Paranoid Survive, has a
centre in Beijing writing software for its cutting-edge Pentium 4 chips. Microsoft, famous for its secrecy over source
code, has placed one of its five global "vision" research centres in Beijing, looking at everything from voice-synthesis
to face-recognition technology. And Oracle, which admitted in 2000 that it had hired a corporate-espionage firm that was
found searching through Microsoft's garbage in the United States, is setting up a 100-person research centre this month
in Shenzhen.

Given all that security consciousness, and the potential for losing crucial intellectual property, why are these
companies taking the risk? Two things: They're tapping talent and eyeing market opportunities. Companies simply cannot
afford to ignore the capabilities of the hundreds of thousands of engineers and programmers who graduate from Chinese
universities each year. Then there are the thousands of Chinese academics and engineers returning from work and study
overseas armed with new skills.

Furthermore, many firms are doing visionary research that dictates market direction; they're not just writing source
code for products. Pirates can't rip off long-term projects for immediate blackmarket loot. And some companies,
particularly in telecoms, are thinking about the bigger picture. Solutions they find for China's particular challenges,
like glitches in switching systems, can be used to solve technical problems around the world.

Says James Yeh, director of IBM's China Research Lab in Beijing. "Not only am I tapping into the universities and the
research community in China, but I'm also a market outpost looking at what's going on here."

Yeh's lab is a spacious facility spread over two floors of a building in a northern Beijing hi-tech park. His 90
engineers are working on voice-recognition projects, and hacking away on the same programs that their counterparts in
Toronto and New York are. In a wired-up conference room, one staffer dictates commands into a computer that raise and
lower the curtains, turn the lights on and off and change channels on a television.

OPENNESS ESSENTIAL
Tapping into IBM's global research pool in Beijing raises plenty of security concerns. But there are procedures to
minimize risk. The company stores source code related to the research projects at its eight global centres on a central
network of servers. Access to it is restricted, so people working on voice-recognition projects, for example, can only
access the code related to those projects, not other areas.

Still, openness is essential to long-term development. "I worry more about having a technology and sitting on it than I
worry about people stealing it," says Yeh. "We want people to talk to other people and we want people to talk to other
people globally. People can't do everything by themselves."

Hiring local researchers also offers an edge into the particular needs of a market that's huge, and distinctive. As part
of its integration with Shanghai Bell, a local telecoms-equipment provider, French telecoms giant Alcatel will form a
2,100-engineer team in Shanghai later this year. Some 10% of that workforce will be employed on advanced projects.

What's worth doing in Shanghai over Paris or Japan? Joseph Cho, Alcatel China's chief technology officer points to CDMA
2000, one of the standards that will drive the next generation of telecoms services, known as 3G. Third-generation
services are still several years away for China, but it's the natural technical evolution of CDMA, a mobile-phone
standard that's taking off in China. Shanghai researchers will take the lead on it and their results could contribute to
3G services in other countries.

Then consider the bigger picture: If they can crack China, they can crack the world. The unique demands of the Chinese
market push research in directions that will eventually drive global projects. Alcatel, for instance, is trying to learn
from the clunky ways in which mobile phones switch from one network to another in China so that they can improve
switching for the next generation of services around the world.

VISION VS. SECURITY
Meanwhile, Zhang Yaqin, managing director of Microsoft Research Asia in Beijing, points to the market numbers: 30
million personal computers but 180 million mobile phones, making China a natural place to study the ways people use
devices that aren't computers. That means projects looking into "digital ink," like the styluses used with a Palm Pilot,
or voice commands and voice-morphing, or new ways to funnel the Internet through television sets (see story at left).

Remember, though, that Microsoft has been hit hardest by China's rip-off merchants. Pirated versions of Windows are
ubiquitous in major cities and the company has taken the lead in lobbying the U.S. government to get tough on software
piracy. It's also the driving force behind U.S.-based lobby group Business Software Alliance. So how does it square the
dilemma of fighting fakes at the same time as developing the next generation of products in the heart of Beijing?

Like every firm developing or customizing products in China, Microsoft needs to protect products that are about to come
to market. That makes for a tough balance, because long-term projects and short-term product-development inevitably
cross from time to time.

On the side of openness, much of Microsoft's research is long-term vision--aimed at leadership, not at putting a product
on the market quickly. A "getting-to-know-you-strategy" is essential: So when Microsoft donates Windows software to
universities, it's not being charitable--it's ensuring that young programmers get used to working on Windows. Similarly,
when its research centre publishes a paper on a new area like voice synthesis or digital media, it isn't putting
together source code for a product that can be pirated--it's staking an intellectual claim to the area and trying to
steer researchers from universities and technical institutes into areas it wants to see develop. "Ninety per cent of the
things we're working on are in the public domain," Zhang says.

But there are limits: Zhang Hongjiang is the engineer who put together security procedures for Microsoft's research
centre. He says security at the product-development department downstairs is much tighter than at the long-term research
centre. He says an open, collaborative atmosphere is needed there to come up with new programs, but adds that the code
for existing products is more strictly protected.

Not everyone is so sanguine. In January, California-based software developer Adobe Systems Inc. said it was considering
stopping Chinese localization of its products because so many were being copied. It isn't only in China: Last year, two
engineers at a Lucent research lab in New Jersey were arrested and charged with stealing source code that ran the
company's telecoms-switching base stations. Detectives claimed the pair and a third man, described as their business
partner, intended to transfer the technology to Chinese state-owned Datang Telecom Technology. Datang, which had a joint
venture with a company the three had set up, denied it had authorized any wrongdoing. The case hasn't been brought to
trial yet.

"Some companies come here thinking they can have their open culture and environment and transfer it to this country, and
they're completely wrong," says one corporate-security expert. "You have to have walls, you have to have firewalls, you
have to have controls of process, controls between departments."

There are, of course, protective measures companies can take. Even though protection of patents is uneven, Tan Loke
Khoon, an intellectual-property specialist at law firm Baker & McKenzie in Hong Kong advises clients in China to seek
patents as early as possible and "more aggressively" than elsewhere in the world. And don't use CD-ROMs. Many companies,
including Oracle and IBM, place the source code related to their research on centralized servers. "Access to the source
code is controlled like bank information," says Kevin Walsh, an Oracle vice-president who helped set up the company's
new research centre in Shenzhen. "When you put your whole product on a CD and someone can walk out the door with it then
you have a problem."

In the end, the solution comes down to keeping the clamps on the right information--projects that can be copied--while
allowing researchers the space to work on long-term projects. "The company and the staff have to decide what they want t
o protect and what they don't want to protect," says Sam Porteous, China country manager for U.S.-based Kroll
Associates, a corporate-intelligence firm. "The culture of exchange of information is very important for both parties to
have. That's a trade-off there."