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China Learns to Say, "Stop, Thief!"

By Bruce Einhorn As the top Asia-Pacific official for the biggest lobbying group of U.S. software makers, Jeffrey Hardee has every reason to be downcast about the situation in China. The country is notorious for having one of the world's worst piracy rates: According to Hardee's group, the Business Software Alliance, 92% of all software in China was counterfeit in 2001, the most recent year for which the BSA has statistics. That's higher than Russia's 87%, India's 70%, Taiwan's 53%, Japan's 37%, and America's 25%. The only country worse than China, says the BSA, is Vietnam, at 94%.

With Beijing's leaders trying to make China more of a high-tech economy, that's not the sort of comparison the government wants. "The piracy rate is intolerably high," Hardee admits. Still, he's optimistic that the pirates are on the defensive. After all, that 92% figure may be bad, but it's still better than the previous year's 94%, so China seems to be moving in the right direction.

Don't laugh. Hardee is quite serious. He points to a whole series of measures that Beijing has taken to crack down on software counterfeiting. "We are convinced that the Chinese government recognizes the value of the software industry to the overall economy," says Hardee. As a result, "we're optimistic that piracy rates will improve."

PIRATE RAID. Worries about intellectual-property rights in China made headlines recently, following the announcement that Cisco Systems (CSCO) was launching a lawsuit against Chinese network-equipment manufacturer Huawei Technologies. Cisco sued in a U.S. federal court in Texas, alleging widespread infringement of its intellectual property, a charge that Huawei denies (see BW, 2/10/03, "Cisco: Making a Federal Case Out of It", and BW Online, 2/03/03, "China: Too Fast a Learner?").

While the two companies fight in the U.S., back in Asia, industry experts like Hardee see China making more of an effort to stamp out piracy. The BSA, which includes Apple (AAPL), Cisco, Dell (DELL), HP (HPQ), IBM (IBM), Intel (INTC), and Microsoft (MSFT) among its members, has been lobbying for years to get China to crack down.

What steps has Beijing taken lately? Hardee points to a series of legal and administrative reforms:

In 2001, China amended its copyright law, setting the ground rules to follow international standards of copyright protection. The amendments also help China get closer to full implementation of treaties that provide the minimum level of protection for copyright works on the Internet.

Last year, the government implemented copyright-law regulations and amended others concerning software to boost intellectual property right protection.

On October 12, 2002, the Supreme People's Court issued an interpretation making companies that use pirated software liable for civil penalties. That makes it easier for the BSA to sue. "Now we have a means to protect our rights," he says.

HEFTY FINES. These changes, while just a start, are beginning to pay off, says Hardee. In late 2002 action was taken in Shanghai against two corporate end users of pirated software. After a government raid of the companies' offices, the BSA was able to reach a settlement with them. Hardee won't reveal the exact amount, but he says the companies "paid in the tens of thousands of U.S. dollars." That's considerable money in China. Now, Hardee says, the BSA is applying for "preservation orders" -- similar to search warrants -- to initiate civil actions in several other cities.

In another recent crackdown against a company using pirated software, a Shanghai court ruled on Nov. 14 in favor of U.S. company Autodesk (ADSK) in a civil action against a corporate end user, awarding damages of $60,000 (the maximum amount under the copyright law).

Morgan Stanley economist Andy Xie agrees that China's piracy situation is improving. "The enforcement of [intellectual property] rights by the Chinese government is clearly having an impact on the revenue of IP providers there," wrote Hong Kong-based Xie in a report released last week. "Companies in China have become big enough that they don't want to risk their businesses to use pirated software. They also try to use licensed technologies as a competitive advantage and become vigilant in defending IP rights as a result."

IN CHINA'S INTEREST. No doubt, the country still has a long way to go. Moreover, the government is acting largely out of self-interest. Beijing wants to foster the development of a local software industry that can challenge Indian outfits like Infosys (INFY) and Wipro (WIT), which have become successful doing outsourcing work for Western multinationals. That means the Chinese government can't afford to be seen as coddling software scofflaws. IP rights protection is suddenly in China's interest, not just Microsoft's or IBM's.

Regardless of motivation, Hardee recognizes the steps Chinese officials have taken. "They have joined the [World Trade Organization]. They've amended regulations. The Supreme Court has issued its interpretation. We are seeing more willingness [by the government] to take administrative action. We are having better success in the courts getting preservation orders," he says. "So the system is working for us." That's welcome news for U.S. companies -- and for China's efforts to become more of a player in the global economy. Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

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