Great Walls No Longer Block Deals With China

Growth Industries There Seen as a Good Fit Here

San Diego businesses can reap big rewards in China, despite growing concerns in the United States over piracy and patent infringement. But they’d better be careful about covering their bottom lines.

“We feel there is a tremendous opportunity for our service sectors in China, and for Chinese companies who want to come to the U.S.,” said Scott Wang, director of the Asia Desk for the San Diego World Trade Center.

He’s now recruiting businesses from San Diego’s service sector for a trade mission to China in September called “Doing Business in America.”

“The momentum is clear,” he said. “Many Chinese companies want to establish a presence here, but they don’t know how to do it.”

Wang said he’s casting a wide net for San Diego businesses in law, public relations, sales, logistics support, immigration and banking, among other sectors.

“It’s across the board,” he said. “The Chinese market is so hard for us to penetrate. It’s the same for Chinese companies coming here. They have very good quality products, and tremendous financial capacity, but they need expertise and service. This is a good match.”

There are advantages in bringing a diversified group to China to make its pitches, said Wang.

“It makes sense in terms of cost,” he said. “An individual company can present its services, but the costs are high, but if five to seven companies go, they can share the marketing costs.”

Wang also intends to bypass the usual hot spots — Beijing, Hong Kong and Shanghai — in favor of less-tapped, but still major Chinese markets: Shenzhen, in the Pearl River Delta; Yangtze River Delta, Nanjing; and Western China, Chongqing, which, he said, are among the most developed or promising.

Wang also is planning an export-oriented “Asia Desk Business Series” to train San Diego business executives about how to tap markets in China, India and Japan.

It could be a win-win situation for everyone involved, said S. Elizabeth Foster, a partner in the San Diego law office of Luce Forward and co-chairwoman of the San Diego World Trade Center.

“It’s a rising tide that floats all boats, that will ultimately overcome protectionist policy,” she said. “Whatever helps businesses do business.”

Broken China

On the federal level, there has been much sword-rattling over what is perceived as China’s unfair trade practices, copyright infringement and huge trade deficits. But Donald R. Forest, who co-chairs the public policy committee of the American Chamber of Commerce in China, worries about overkill.

“There is a lot of venom right now — misplaced,” said Forest during a visit to San Diego last week. “You have this politician or that, threatening some legislation, because they don’t like the exchange rate. I have never been a big believer in threatening everything to gain an objective.

“We’ve got to get beyond threatening this trade relationship and manage it as we do other bilateral relationships,” said Forest. “I think that San Diego’s small and medium companies have an incredible opportunity right now, even if they think it’s too complicated and too expensive. If they have doubts, they need to go and see what the competition is doing.”

San Diego is especially attractive to foreign markets, because of its reputation as a hub of the high-tech and bioscience industries, as well as having a large concentration of small businesses capable of supplying such foreign ports as China with much-needed support services.

“Many small and medium-sized businesses are suppliers for the multinationals, and they are being drawn into the market,” said Forest. “The multinationals want the same things in China, and they are big magnets.”

Teaming up with multinationals also can be a boon for smaller business, agreed John Wetherell, a partner with the San Diego office of Pillsbury Winthrop Shaw Pittman, LLP and head of its intellectual property group.

“If you’re a small company, there is a good chance you won’t even have a marketing or a sales force,” he said. “You might find yourself in a position that is more economical and more efficient by entering into an agreement with a multinational.”

Partnering Up

China’s growing industries — pharmaceuticals, information technology, cell phones and aircraft components — make a good fit for San Diego businesses, said Forest.

“These are the kinds of things that San Diego offers — cutting-edge technology, info tech, biotech and communications, software development,” he said. “I think there are lots of opportunities for San Diego firms to look for collaborative opportunities.”

In his role as executive director and senior adviser for Sierra Asia Partners, an advisory and financial services company that helps businesses navigate the China market, Forest said he’s been doing his part.

“I have suggested to the Chinese government to focus their visits on San Diego,” he said. “It’s really the crown jewel of small and medium-sized high-tech, and it offers so much. It’s a model that is highly effective in developing new products, and bringing them to market, creating jobs and revenues.

“The Chinese are very keen to learn about research and development and how to ensure that their small and medium enterprises can also innovate and introduce products.”

But before U.S. companies plunge into the China market, they should know the turf, said Jacob C. Reinbolt, a partner at the San Diego law firm Procopio, and head of its intellectual property team.

“Vetting is very important — having full and complete knowledge of the location where you’re going to set up opportunities, and the people who you are going to do business with,” he said. “Western people are easier to assess, but over there, everyone is so polite and diplomatic. You never know for sure. The best thing is prevention.”

But you still need to be a player.

“Despite how bad it is over there, people are forced to go over there, because it’s such a big market,” said Reinbolt. “As much as they are complaining about the money that’s lost, you have to be there to grow your company and sell products there.”

For the past two years, Procopio has engaged the services of Sierra Asia Partners, with Procopio lawyers sharing space with Sierra Asia when they’re doing business in China, while Sierra Asia consultants use Procopio offices when they’re in town.

“It’s working out extremely well,” said Reinbolt.

Other San Diego law firms doing business in China have different methods of smoothing the way for their clients. For instance, Foster’s firm, Luce Forward, is a founding member of the Pacific Rim Advisory Council, an invitation-only network of prominent law firms around the globe.

“We put our clients in touch with our affiliated firms in China,” she explained. “I have Chinese lawyers who I have met at conferences, and I feel comfortable referring my clients to them and know they will be taken care of.”

The Wild West

The China market is maturing — to a degree, say insiders, but players still need to tread carefully.

“San Diego is seeing a dramatic growth in software, biotech and telecommunications, and they are at the head of cutting-edge technology,” observed Jon W. Dudas, the U.S. undersecretary of commerce for intellectual property, and director of the U.S. Patent and Trademark Office, in a recent interview. “The biggest problem that small businesses face is knowing how to protect their intellectual property from the beginning.”

Dudas was in San Diego on Feb. 27, addressing small businesses at the Conference on the Global Intellectual Property Marketplace, held at the Westin Horton Plaza Hotel. According to Dudas, in 2004, California exported almost $110 billion in products, with the top four destinations being Mexico, Japan, Canada and China.

His warning: “Piracy and counterfeiting around the world are on the rise, and intellectual property-based companies — and those with widely recognized names or products — are especially vulnerable to intellectual property theft abroad.”

Wetherell compares China these days to the “Wild West,” a land of opportunities, as well as risks.

“We have to be very careful when we counsel our clients about operating in China,” he said. “We encourage clients to try to establish some type of relationship with Chinese companies, as opposed to just going it on their own.

“A Chinese company will be more sophisticated about how the system works over there, and understand the culture and how the court system works, and how to protect the goods. Then, you have a Chinese partner with a vested interest in protecting their relationship with the American company.”

Progress is being made, said Foster.

“We are seeing more and more Chinese companies concerned about protecting their own intellectual property,” she said. “These are good trends. The more certainty that U.S. and other foreign companies have about their IP being protected in China, the more business will be generated for everyone.”

But Forest acknowledged that the market is far from perfect.

“If your pharmaceuticals get pirated in China, they can get into a mix of what’s exported,” he said. “There is not only concern about the potential harmful effects, but your brand image has been harmed. These challenges are enormous, but things are improving. China is taking lots of steps.”

But just because the system isn’t perfect there yet, doesn’t mean that U.S. companies should take a “why bother” approach to protecting their intellectual properties, said Forest.

“You can’t gripe if you’re not willing to make sure you are complying with the laws and regulations of China,” he said.

Wetherell agreed.

“Obtaining patent protection is very expensive,” he said. “If you are going to get patent rights in China, you want to feel that those rights mean something. The ‘why bother’ undermines this whole process.”

Peng Chen, a partner in the San Diego office of Morrison Foerster, regularly works with clients in the firm’s offices in China, Hong Kong, Beijing and Shanghai.

A big difference between intellectual property laws in China and the United States, he said, involves “willful infringement” — whether the defendant intentionally infringed on someone else’s patent. In the United States, knowingly infringing could triple damages, and leave the loser holding the bag for the patent holder’s legal fees. Not so in China.

“All the loser has to do is pay the actual damages,” said Chen, a specialist in patent prosecution and litigation involving the biotech and pharmaceutical industries. “Willful infringement is unique in the United States. The damages are pretty low, compared to the U.S., and there’s not much deterrence.”

Chen noted that, “The situation won’t change due to outside pressure, but due to internal pressures. I have been observing, and I’m seeing companies in China now spending more money in R&D, and doing more inventions. They are being quite aggressive in protecting their IP. It’s a growing trend; more and more companies will have a bigger stake in the enforcement scheme of things, as they are getting more patent rights for themselves. I see a big increase in terms of applications being filed outside China, by Chinese entities.”