From copycat cars to copycat parts

IPR issues in China’s automotive industry

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Thirty or more years ago, motorised traffic on Beijing’s roads consisted of little more than public trolley buses, ‘liberation’ trucks and the occasional ‘red flag’ sedan transporting government officials. Traffic noise was largely created by the shrill chorus of bicycle bells as China’s urban population got about mostly on two wheels. Fast forward to the present, and these same thoroughfares are now jammed with cars, and the sound of bicycle bells has long since been covered by a cacophony of car horns.

In 2013, there were more than four million cars in Beijing alone, out of a national total of 93 million. This has led to other negative side effects beyond the obvious traffic congestion and major contributions towards a deterioration in air quality. Ewen Turner of FTI Consulting, looks at how the meteoric growth of China’s automotive industry has also resulted in an increase of IPR violations.

The significance of China’s rapidly expanding consumer class upgrading from two wheels to four has not been lost on either local or foreign automotive manufacturers. Annual growth in China passenger vehicle sales leapt from 6.7 million in 2008 to 19.7 million in 2014.[1]

With this development so China automotive shows have become more prominent, both domestically and internationally. The Beijing and Shanghai automotive shows are now must-see events on the international circuit, and are increasingly being used as platforms for foreign companies to launch global as well as China/Asia-targeted vehicles. The 2015 Shanghai Auto Show saw over 1,300 vehicles on display to 928,000 visitors and 10,000 journalists; 109 of the vehicles were global launches.[2]

While eyebrows have been raised among Chinese government officials at the plethora of provocatively-attired ‘car models’ who are employed to promote new vehicles at these shows,[3] it is the appearance of a rash of Chinese, domestically-produced cars that bear a striking resemblance to foreign-made models that is raising eyebrows among executives of foreign automotive manufacturers. During the 2015 Shanghai Auto Show, the Chinese Beijing Auto Group unveiled their BJ8OC model, which closely resembled the Mercedes G-Wagen—produced by their foreign joint venture partner—to such an extent that it drew widespread comment[4]. Similarly, at the 2014 Guangzhou Auto Show, Chinese automotive manufacturer Landwind debuted its in-the-style-of-a-Range-Rover model[5].

International automotive manufacturers continue to be frustrated by some of their Chinese counterparts’ copy-paste approaches to vehicle design, instead of developing their own designs and design capabilities. What also chafes is the perceived lack of effective legal remedies against what they perceive to be blatant copying. [6]

This phenomenon appeared to peak in the 2000s, with a newly-emerging and relatively unsophisticated market focused more on today’s price than tomorrow’s value. Many Chinese consumers enjoyed the idea of a vehicle with the same ‘look’ at half the price. This consumer attitude, combined with China’s immature legal framework, offered copy-paste Chinese automakers an unfair advantage. While minimalising capital outlay in the research and development stage of product development and reducing the time-to-market, domestic automakers were, in some cases, able to more rapidly and profitably meet the then expanding consumer demand. [7]

Whether these same factors will guide customer decision making when it comes time to trade up to the next round of vehicle purchases some years down the track is another matter entirely.

The aftermarket aftersales counterfeit market

Counterfeiting within the automotive industry goes well beyond the (seemingly) endless parade of copycat vehicles, though. Routine maintenance during the lifetime of a vehicle requires an aftersales market for servicing and replacement parts. The development of China’s automotive market has also had a significant impact on its important, and profitable, aftermarket. [8]

China’s position as the ‘world’s factory’, combined with the growing service expectations of its domestic consumers, provided ample incentive for manufacturers and distributors to boost profits by cutting corners. Now more than two decades old, China’s counterfeit automotive parts industry has passed through many of the same developmental stages as the ‘legitimate’ market.

Production and distribution of counterfeit products, including automotive spare parts and accessories, has never been an independent phenomenon operating outside of the ‘other’ automotive industry. Manufacturing capabilities for automotive parts initially developed in key locations along the eastern seaboard provinces of Zhejiang, Fujian and Guangdong. Both the quality of the counterfeit parts and the brands being counterfeited also had a geographical relation. For example, a customer sourcing counterfeit automotive filters might go to Rui’an, Zhejiang Province, if they needed higher grade counterfeits of an international brand, or alternatively to Qinghe, Hebei Province, if they were looking to source lower price/quality counterfeits of low-end, domestic brands.

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Early on, many of the larger-scale manufacturers investigated for producing counterfeit parts were simultaneously developing their own brands. Once their own brands were sufficiently established these companies moved away from counterfeiting activities. Ironically, these former domestic pirate enterprises found that, once they had achieved a sufficient level of market penetration, they too would often become victims of counterfeiting by less–established rivals.

Increased attention by rights-holders and growing IP awareness and enforcement by relevant enforcement bodies targeting trademark and other infringement has continuously affected the counterfeiting landscape. Responding to increased localised enforcement and increased economic pressures—like rising labour costs—in these same areas, counterfeiting centres have migrated. Both legitimate and counterfeit parts manufacturers have leveraged incentives offered by local governments to boost their economies. Individual counterfeit automotive parts manufacturers in well-known locations such as Wenzhou in Zhejiang have established ‘branch factories’ in cities in Anhui or Jiangxi that were keen to establish their own local automotive parts industry.

The wholesale distribution of automotive parts, including counterfeits, originally focused on servicing domestic demand, conducted through large scale ‘auto parts cities’. Foreign buyers made a yearly visit to China, usually in association with an industry event like the Canton Export Fair, and arranged orders via follow-on factory visits through a local trading contact. Nowadays, China’s automotive parts distributors directly target the export market. Foreign buyers have established bases in key trade cities including Yiwu and Guangzhou.

At the same time Chinese entities have also established their own overseas presence. One investigation by a rights-holder found that a single Chinese automotive parts trading company had expanded its business scope over time, established its own manufacturing entity and set up sales offices in Dubai’s free trade ports to facilitate wider regional distribution and business development.

Infringement of IP within China continually evolves in response to a changing business and regulatory environment, and has embraced globalisation. Counterfeiters readily adapt to opportunities offered by the internet and online business. Over time, they tend to move away from manufacturing 100 per cent counterfeits towards the manufacturing of ‘look-alikes’ and other bad faith trademark and trade dress infringements that pose a much greater enforcement challenge to rights-holders. Rights-holders are strongly advised to constantly appraise their own IPR strategies and take advantage of emerging enforcement opportunities in order to protect their legitimate IP rights.

FTI Consulting is a leading global business advisory firm dedicated to helping organisations protect and enhance enterprise value in an increasingly complex legal, regulatory and economic environment providing advice on issues in the areas of risk, governance, commercial investigations, compliance and liability, finance, and restructuring.

Ewen Turner is a Director in the Global Risk and Investigations practice of FTI Consulting based in Shanghai. He has extensive experience in developing and implementing brand protection strategies and leading and conducting intellectual property-related, corporate and due diligence investigations in Mainland China and across the Asia Pacific region.