Who's Afraid of Chinese Pirates?

Xybernaut's Edward Newman explains why he's doing business in China, despite the country's reputation for stealing intellectual property

By Bruce Einhorn

If you were the head of a small American company that had invested heavily in research and development for new products, chances are you'd think twice before jumping into partnership with Chinese partners. But then you wouldn't be Edward Newman, founder, chairman, and chief executive officer of Xybernaut Corp. (XYBR ) in Fairfax, Va. Newman was in Hong Kong recently to announce that his company, which makes computer hardware that users can actually wear, was forming a joint venture with Hong Kong and Chinese companies.

Newman is no Pollyanna when it comes to concerns about piracy of intellectual-property rights (IPR) in China. The Business Software Alliance, an industry group that represents the leading American software companies, regularly puts China at the top of its list of offenders, estimating that more than 90% of the software sold there is counterfeit. The entertainment industry suffers, too, with counterfeit titles of Hollywood movies easily available for purchase across the Middle Kingdom.


  And it's not just foreign companies that suffer from China's pirates. Kingsoft, a software developer in the southern city of Zhuhai (adjacent to Macao and across the Pearl River Delta from Hong Kong) makes some of the most popular software in China, but it can barely make any money because of the pirates. IPR thieves are good at what they do.

Until recently, such tales kept Xybernaut's Newman away from China. The 60-year-old entrepreneur, a former CIA officer and Xerox veteran, founded the company back in 1990. The focus is on developing hardware and software that allow people to use computers while on the go -- everything from portable tablet PC-like machines to eyeglasses that have little display screens, like a teleprompter.

All this takes a lot of research and development. So, Newman naturally resisted calls from one of his investors to look at China. "He kept trying to convince me that China was ready for our technology," says Newman. "But given China's reputation, the last thing I wanted was compromise our 600 patents. We had spent $250 million building up our intellectual property over six or seven years."


  Last July, though, Newman decided to give China a look. He hooked up with Softbank Investment International (Strategic) Ltd., a Hong Kong-listed venture-capital group that got its start as an offshoot of Japanese group Softbank. Then the Softbank people took Newman to Beijing to convince him that "our intellectual property would be in safe hands," he says.

In the Chinese capital, Newman says he met with top government officials from various science and technology offices, one of whom offered Newman a pledge that the government was intent on doing away with the country's notoriety as an IPR rogue state. One official told him, "I can guarantee you that those days are gone," recalls Newman, who heard that Chinese leaders want to protect IPR not only to reassure foreigners but also to develop China's high-tech industry.

That was good enough for Newman. "Legislation doesn't really matter," he says. "It's whether you trust them. You just have to go on faith." But even the Business Software Alliance and American software industry officials now praise China's progress in developing IPR legislation and enforcement mechanisms.


  While executives from multinationals have long told nightmare tales of erstwhile Chinese partners running off with their technology and selling products on their own, Newman says he's not too worried. "Let's say someone knocks it off. I've lost that part of the market. But then I don't bring any more of the innovation [to China]," he says. "They can knock off one product, but that's where it stays."

And he points out that because Xybernaut has patents worldwide, products purloined from him couldn't be sold legitimately elsewhere. "If they try, I can close them in a heartbeat."

When it comes to doing high-tech business in China, "there's risk, no doubt about it," says Newman. "But I've decided who I'm going to bed with." For him, it's a bet on the future.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

Edited by Patricia O'Connell

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