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What’s the Real Cost of Outsourcing Your Company’s IP to Low-Cost Countries?


What’s the Real Cost of Outsourcing Your Company’s IP to Low-Cost Countries?

While many companies only use offshore factories for the manufacture of low-tech products which are based upon commonly understood technology, that doesn’t mean that those are the only things which are manufactured overseas.  A wide variety of products are currently being manufactured in these low-cost countries, some of which contain proprietary technology, processes and of course designs. 

While there are many manufacturing companies in the Pacific Rim and worldwide who have fine reputations and protect the intellectual property of their clients, there is no guarantee that all of them do.

In fact, on a worldwide basis, there’s a good chance that there are almost as many manufacturers who are stealing intellectual property as there are who aren’t. Since this isn’t something that manufacturer’s brag about or put into their quarterly earnings statements, there’s no real way of knowing for sure.

The Plague of IP Theft

This theft of intellectual property can take many forms. The simplest for the manufacturer is to operate a “shadow shift” in which they are operating a third shift of workers to manufacture a product, but not allowing it to appear on the books of the company they are manufacturing for. The products manufactured by this third shift can be exact copies, using the same materials, or a reduced-cost copy of the original, where the materials have been replaced with lower cost ones. In either case, the products manufactured by the shadow shift compete directly with the ones manufactured for the U.S. customer.

Some offshore manufactures have taken this to the logical next step and made shadow factories. These factories are an exact copy of the one which is manufacturing the product for the U.S. company, with the exception of putting their own name on the box. The products might be exact copies, “knockoffs” that are sold on the international black market, or they might be copies in everything but name. Both Nike and Reebok have had problems with Chinese companies producing and selling “unauthorized” knockoffs of their products since the 1990s. Who hasn’t heard of designer handbags and shoes that “fell off the back of the truck?”

While clothing designs have the longest history of being copied in these offshore factories, they are by no means the only products that are manufactured without license and sold around the world. These unethical manufacturers have gone far beyond just stealing designer items to stealing technology and even complete designs. In some cases, entire products are copied and reproduced, with only the name being changed.

Some Examples of High-Tech IP Theft

The Liabao, a Chinese manufactured and supposedly designed SUV is an exact copy of the Honda CR-V. The only difference is the name. Likewise, the Chinese Cherry QQ is a direct copy of the Chevy Spark or the Daewoo Matiz (the car was developed as a joint venture between these two companies). The copies are so close to the original, that the parts are totally interchangeable. Body panels, doors and engine components can all be taken off of one and put on the other, without any problem. If you have any understanding of the tolerances required for internal combustion engine components, you’ll see that this isn’t a coincidence.

Another great example is the miniOne cell phone. This is a knockoff of the popular iPhone from Apple. In this case, they took the iPhone design and added the ability to run standard mobile software on it, packaging it under the new name. However, it looks, acts and feels like an iPhone. While there are so many apps today for the iPhone that this wouldn’t be necessary, when it first came out, that was a true marketing advantage for the miniOne.

Granted, there are many companies today who are making cell phones which use the same technological breakthroughs as the iPhone. The big difference is that these are totally new designs, even though they use some of the same technology. The miniOne was a copy, right down to the sleek case that the iPhone is so well known for.

These aren’t by any means the only examples; just a couple of obvious ones. The truly scary part of this is that these knockoffs and others sell for one-quarter of the price of the original, or less. What that means is that the owner of those designs is competing with their own design, manufactured by another company who has an incredible price advantage. That makes for some rough competition.

China, the King of IP Theft

While China is the undisputed world leader in stealing designs and creating knockoffs, they aren’t the only country where this is happening. If you do a simple search on the internet for “Chinese patent infringement” will provide you with multiple examples. Likewise, replacing “Chinese” with other countries that are known for offshore manufacturing will yield an abundance of results. This isn’t a problem which is just limited to one country, it’s a worldwide phenomenon.

These unethical manufacturers are not only taking advantage of the lower labor rates available in their countries (a perfectly fair business practice) but also saving money on the research, development and design of the products which they are selling. Since they are producing knockoffs of well-known products, designed by companies who have a reputation for quality, they are assured of the quality of their own products, without having to invest in an engineering design team.

Think it Through, Is it Worth the Risk?

Obviously, the companies who are competing with their own products in the marketplace had no intention or desire to find themselves in that position. This raises the obvious question of whether or not the management of those companies thought of that risk, before making the decision to offshore.

The other question that immediately comes to mind is to wonder how much it is costing those companies to compete with their own designs. I’m not referring to the legal costs of fighting the law suit, but rather the cost in lost sales that they encounter by these other products competing with their own.

One way that these companies “legally” manufacture their copied wares is that there is no universally recognized international regulatory board for patents. While there are treaties which deal with patents on the international level, the protection which they offer is limited. So, a product designed by a U.S. company and patented in the U.S. isn’t protected in China, for example. To be protected in China, it must also be patented in China. According to Chinese law, that must happen within a year of the original patent.

Some of these manufacturers, knowing the law in China, keep track of American patents and file for Chinese patents on items, as soon as they are patented in the United States. Since any country recognizes the first patent filer as the original, these companies succeed in beating out the American companies.

As a manufacturer, part of the decision process in moving manufacturing offshore has to be a thorough analysis of the risk in allowing your intellectual property to move to another country. Can you afford to have someone else producing products using your designs? If not, maybe moving offshore isn’t all that good an idea.

Key Takeaways:

  • Theft of intellectual property is a way of life in some countries; don’t think that you company is exempt.
  • The cost of having your designs stolen is probably higher than you think.
  • If you are going to offshore, make sure that the manufacturer you are dealing with is reputable and won’t steal your design.

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