Asia Intelligence Briefing : June 2008

While We Were Sleeping: A New Taiwan President Ushers in a New Era of Cooperation in Asia

Amidst all the hoopla of the U.S. democratic process in the past weeks, as the U.S. tried to determine who would represent the Democratic Party in November’s general election, another major political event was playing itself out in Asia that appears, to all intents and purposes, to have gone unnoticed in the U.S.

This event was the change in power in Taiwan last month from the Democratic Progressive Party (DPP) back to the Kuomintang (KMT) party. Taiwan’s new president, who took power on May 20, was at pains to point out to the world that this is the first time that a Chinese community has transferred its political allegiances twice under a democratically elected process.

The new leader of Taiwan, Ma Ying-jeou, is a Harvard-educated lawyer, who clearly has a new vision of how Taiwan and China should interact, and Beijing welcomed the change enthusiastically. The KMT won by a landslide, handing Ma a clear mandate for change, and little wonder as the Taiwan economy has struggled under the DPP leadership for several years.  

In his inaugural speech, Ma reaffirmed what is known as the “1992 consensus,” which states that both sides accepted that there was one China, but differed as to how that was to be defined. He urged China to “seize the historic opportunity to achieve peace and co-prosperity,” thereby avoiding the need to address anything that would cause anguish on either side. In response, a major Chinese official confirmed two days later that Ma’s speech was a “major positive change,” thereby signaling their agreement with both Ma’s speech and the change of power.        

So why was this event so important to Western interests? In the 70’s and 80’s, even after the 1972 accord signed by President Nixon and Zhou Enlai, the U.S. still sided strongly with Taiwan against mainland China, and in our enthusiasm to support a democracy against a communist dominated country,  we made significant commitments to defend Taiwan in the event of an attack from mainland China.

Depending on whom you believe, the U.S. has continued to honor this defense agreement by monitoring the skies and the seas in the area. Indeed, the collision between the U.S. Navy EP-3 and A Chinese F-8 and the subsequent forced landing of the aircraft and its 24 crew in Hainan Island in 2001 appear to support this view. Additionally, there is little doubt that until recently diplomatic and military support from the U.S. towards Taiwan has played a significant role in continuing to stoke tension between the U.S. and China. In the last eight years, while Taiwan’s former President Chen Shui-bian continually needled mainland China by proclaiming the eminent declaration of Taiwan as an independent country, the U.S. stood somewhat helplessly by, knowing that it would have difficulty justifying any major military intervention against China in support of Taiwan.

The Taiwan people have elected a president in convincing fashion with a more conciliatory approach towards relationships with the mainland. The reason for this overwhelming electoral mandate was that Taiwan’s economy continued to be hammered under the leadership of Chen because foreign investments into Taiwan and support for Taiwanese companies eroded every time he beat on the independence drum. The risk of either outright war or military intervention from the Chinese has been one major tension in the region. Many U.S. companies have questioned what would happen if Taiwan declared independence, and undoubtedly it has been of enough concern for many to stay out of the Asian market.

With this change in command in Taiwan all this should change. Now that the risk is significantly reduced, it will allow Taiwan to again be a major recipient of foreign direct investment and for additional interaction between Taiwan and China to lead to more technology transfer and more interaction. This will inevitably lead to more opportunities for U.S. businesses to access Taiwan for technology and to then build that technology in China -- a win-win for all three sides. By Ma taking office and by this overwhelming declaration of the Taiwanese people, the risk of aggression, social dislocation, and business interruptions has been dramatically reduced. We can now fully expect both an improvement in Taiwan’s economy and the resultant stimulation of China and Taiwan trade, as well a new benefits to global business opportunities in the region.

While we have been immersed in our own Democratic process, Taiwan has made a major public statement about their willingness to eventually be recognized as part of China. This is a monumental event which neither our media nor our politicians appeared to have noticed.

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If You Thought the Benefits of Low-Cost Production in China Have Gone Away … Think Again

But There are New Threats on the Asian Horizon for Western Businesses

In the early 2000’s the Chinese business imperative was: “China has low labor costs so, go to China.”

In just a few short years that story has changed, and all you seem to hear in the news today is, “higher wages in China are driving up production costs,”  leading to the speculation that China has lost its competitive edge and its days as a chosen source of U.S. business production and sourcing are, if not over, at least waning.

However, if you talk to U.S. companies operating in China, you quickly realize that those low labor costs are only one piece of the competitive business puzzle. As a matter of fact, you will be challenged to find even one U.S. operator in China who expects their business to be seriously impacted by the reported “salary increases” over the next three years. There is one major exception to all of this, and that is the very low-cost manufacturers who employ large numbers of employees in the manually intensive manufacture of clothing, shoe and toy markets; they are being impacted by rising labor costs.

Meanwhile, what U.S. companies are far more concerned about today is the increasing competitiveness of Chinese companies as they learn better manufacturing methods and as they improve the quality of their sales, marketing and export processes, and the Chinese government’s lack of commitment to policing businesses regarding patents and copyright protection, and the unfair advantage Chinese companies enjoy while penetrating Asian markets with other people’s technologies.

Interestingly enough, when you talk to major Chinese companies, they are also less concerned with their cost base as they push aggressively out of China and into the international marketplace to become true global competitors. Their biggest concern is their lack of available managerial talent to support their expected growth trends.  These Chinese companies are initially focusing on penetration into the easier local Asia markets, instead of the U.S. or EU, and it is only the high-tech telecom and IT industries (which India still dominates) that the Chinese are not aggressively pursuing.

Moreover, Chinese companies, while finding considerable success in Asia, continue to hit a seemingly impenetrable wall in attempting to penetrate the U.S. and EU markets. The lack of home-grown managerial experience and skill is resulting in Chinese products that still lack Western standards of innovation and quality. A lack of brand strength and recognition, and poor marketing skills, are critical components that even today still allow Western companies to consistently out-market and out-sell their Chinese competition. In a word, “lower labor cost” is only one piece in a complex business jigsaw puzzle, and for both Chinese and US companies, moving up the value chain is more important than selling the lowest priced goods.

But beware America; how often in the past have US companies rested on their laurels mocking the inadequacy of foreign products and marketing only to find that those competitors quickly make huge strides in improving both their products and their marketing skills? We have seen in the past, and continue to see today, that foreign companies can and do purchase the brains behind new technologies and then hire Western businessmen to help them penetrate the market on their behalf. Just because Chinese-owned companies are not demonstrating these skills today doesn’t mean that they don’t understand the problem and are not doing anything about it! I noted with interest in Performance Racing magazine last month in an article launching Toyota’s new racing engine. It featured a photograph of Toyota executives launching the new product and every one of them were Americans; no sign of an Asian face or Japanese script.

PRA forecasted at the keynote speech at the Society of Automotive Engineers (SAE) in Detroit this spring that more and more American businessmen who could not find jobs in traditional U.S. businesses would be welcomed with open arms by some of these foreign-owned companies, and I fully expect to see that continuing to happen. If Western companies don’t alert themselves to these issues, Chinese companies could well be setting up a major competitive surprise in the very near future. Complacency could be our biggest vulnerability as global markets develop rapidly, yet we hope for things to be as they used to be rather than accepting current realties for what they are. Plan for the Chinese to get much better -- quickly -- and the U.S. will still understand how to succeed in the global marketplace.

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Don’t Fear for Your Intellectual Property; Do Something Practical to Protect it!

Part Two

In this  installment, the second of two,  we will address practical methods to manage physical IP and discuss how you can  protect materials, parts and product, process IP while  disguising how you undertake specialist processes as well as  protection of specialty metallurgical and chemical IP.

Physical IP in the Form of Physical Structures
Materials protection is one of the most straight forward ways to protect your IP. There are a series of steps that will maximize your control while limiting the ability of your staff or others to interfere with quality, volumes and availability of materials.

To start with, manage the ordering of raw materials from outside the plant, and only deliver sufficient materials for the next two days. Once they arrive, lock them up and have them released on a shift-by-shift basis. Unless you are 100 percent confident of their honesty, change the inventory manager in your facility on a regular basis, and even then use outside (maybe even US-based) audit support.  Regularly measure and validate the correct levels of scrap against the production rate. Scrap is V&A (Valuable and Attractive) in China, and unless it is managed, it evaporates.  Ensure there are clear and public displays of “no notice” checking and materials management to dissuade any thoughts of material shrinkage.

One major concern is how to protect your end client from being end run by your supplier when sourcing complete assemblies.  First, accept that to accomplish this, you will likely need to split up the assembly to stop any one company from having all of the end user information. Assume you have a five-unit assembly, such as a wheel brake assembly. Source two non-interconnected pieces from one location and two others from another remotely located source. Then source the final assembly from yet another location or make it in-house. Do not have part numbers stamped onto the third party assemblies. Have them shipped to your assembly location, maybe your facility in the USA or your location in China but through PO Box addresses. It helps if there are two different addresses but the same end location. On arrival inspection, have the part numbers stamped onto them and then assemble these four parts to the final assembly, package and deliver.  

Yes, I know that it sounds like a lot of work, but what price is it to protect your IP, your job, your company? Ask yourself what would you be prepared to do once you find out that your client is now buying direct from your supplier?  Once this system is set up and running, it just becomes the normal way of doing business. However, beware, you may need to institute this process with a fresh crew of workers as it can be hard to re-teach the old dogs!

Protecting Process IP in the Form of how you Undertake an Action or Activity.
Most of you will have specialty processes that are critical to your manufacturing processes. Assuming that you have a production line with critical times, temperatures and chemistry, how do you protect this data?
Firstly, operate strictly on the “need to know” principle; namely the only people that need to know the detail are the original design team and the setup and maintenance personnel. Do not advertise temperature or off-gassing rates or any other data on open display gauges. Instead, feed the data remotely to a secure control station in a local office, or maybe even back to the USA and manage the process from there. Assume nothing and protect the differentiating data from everyone else’s access.

Chemical IP in the Form of the Chemistry
If the chemistry in your process is your Achilles heel, you can again usually protect it, but not if you just leave the data or the formula lying around.

As we stated last month, you can only protect a certain amount of information, so chose carefully what you protect. If the formula is, for example, a rubber-based solution, then there will likely be many different chemicals in the final mix, some of which will be standard, i.e. synthetic rubber, but others will be critical. Identify the critical elements, such as the setting agent, usually a very small percentage of the overall volume, and do everything to protect that information.  It is important that the chemicals chosen are non-interactive, non-volatile and, preferably, not time-critical. Now ensure that these elements of the final mix are known by only the key manager or delivered in an unmarked container and locked up until the time they are mixed into the final batch.  You may elect to mix those off-shore or in a third-party location, and then ensure that your pre-packed Mixture A is only delivered in the required quantities on a pre-defined schedule.

When batch mixing, the normal products, such as synthetic rubber, oils and clays, can all be openly identified, but at the critical point in the process, Mixture A is called for and introduced to the master mix. Ideally Mixture A will be a setting compound, and once added to the mix, will create a usable but short batch shelf life.

Operational reality needs to prevail, but ideally, only two people in the plant should have access to the secured canisters of Mixture A. Once the required amount of Mixture A has been added into the batch, we incinerate the container to further obscure, and hopefully destroy, all traces of the chemistry. All empty incinerated canisters should then be flattened and returned to the main company office.

The Best and Most Fundamental Way to Protect IP
The best way to protect your IP is to continuously make it redundant by advancing the state of your technology and art. Get out in front of the competition, improve, modify, and make the competition chase you. Copying this year’s technology is no use to them if you render it last year’s product. The U.S. has brightest and most fertile minds in the world when it comes to reinvention and innovation and that IP is our industrial and innovation magic.

So, what can you now do with this information? What are your next steps?
I recommend you take the essence of what we have discussed in both this paper and article one, analyze from an IP perspective what you are doing well, what you are doing poorly, and recognize what you are not doing at all. Now put together your “I triple P” -- your Intellectual Property Protection Plan -- and then systematically implement your IPPP.

As we said earlier, it sounds like a lot of work, but how much work will you have to undertake to recapture your market or redefine your company after you have lost control of your IP.  Once instituted, these processes just become normal day-to-day operations, but they will dramatically improve your chances of protecting your IP.

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