Asian companies, especially Chinese, are constantly being accused by Western manufacturers and media of stealing and copying ideas, and infringing patent rights. But Professor Kwaku Atuahene-Gima argues that this is not the case. Reverse engineering is perfectly legal and, indeed, the most efficient method of adapting products to emerging market needs.
No one likes to be called a thief or a cheat. Indeed, the easiest way to break the spirit and confidence of someone in any competitive activity such as sport, music, research, and other such endeavours is to charge them with being is a thief and a cheat for having stolen, copied and used someone else’s ideas.
So it is in the corporate world where the battle for the use of ideas to create products and services, business models and technologies has multi-billion dollars of market revenues at stake. In this world of high stakes, a key weapon to break competitors’ spirit and confidence is to charge one with stealing ideas, patents, designs and technologies. Witness the running patent litigation war between Apple and Samsung in recent times and the billions of dollars at stake. This is scary stuff and only the strongest companies can withstand such charges on theft and the associated litigation wars.
The ‘thief’ or ‘cheat’ label is also frequently used in an attempt to stymie the emergence of new competitors, particularly from emerging countries. In the latter game, it is not only individual companies making these derogatory charges, the cheerleaders are the print and electronic media with outlets such as BBC, CNN and The Economist serving as the conductors.
For example, products and services made by Chinese companies are frequently branded by Western companies and their media cohorts as imitations, knock-offs, counterfeits and copies. This is done for two purposes, both of which are aimed at stifling competition. The first is to instil in the subconscious of the world’s consumers that Chinese-made products are of inferior quality and therefore not worth buying. The second purpose is to kill the spirit and confidence of Chinese companies as innovators and to brand them as companies incapable of coming up with original ideas in creating products and services. An implicit charge which you can spot without much effort is the one that says – Chinese people are not creative. If you think all this sounds like a conspiracy theory, just go back a few decades and hear what was being said about the Japanese, the Koreans and Taiwanese. Or wait a few decades from now to turn on your TV and read The Economist at a time when indigenous companies in Africa start to innovate the way the Chinese have.
Charges that companies in emerging economies are thieves and cheats are not only disingenuous, they are outright lies. Those who make those charges would like you to believe that to innovate you have to start from scratch with an original patentable idea.
Yet they know from history and the relevant laws and business research that reverse engineering, whereby a company disassembles a product or service, measures and analyses it in order to copy and imitate, is not only a better route to innovation for emergent firms, it is also legitimate and legal.
Listen to this: the US Supreme court in a case in 1974 ruled that patent and trade secret laws do not offer protection against discovery by fair and honest means such as by reverse engineering when a company starts with the known product and works backward to define and understand the process which aided the development and manufacture of the subject product or service.
Ralph Hanson in Motor Authority reports the story of Chery QQ, a compact city car produced by Chery Automotive in China. GM charged that the QQ infringed its design patent and was an illegal copy of Chevy Spark. A GM official stated that if both brand names were removed, one could not tell the two cars apart and that you can pull a door of the GM Chevy Spark and fit it on the QQ so well would the seals on the door hold. Yet the burden of proof of infringement was on GM to demonstrate how Chery got information about the Spark by illegal means, because reverse engineering is not illegal.
Patent law and copying
Indeed, one of the pillars of patent law is that once a patent has expired, copies can be made by anyone who so desires to do so. Copying and imitation through reverse engineering has a long history of being an accepted innovation practice and is generally viewed as a best way to acquire know-how.
This process has been adopted by many Chinese companies to make competing products and adapt foreign-made products to local needs and preferences. Since many Chinese companies started as distributors of foreign products, reverse engineering also helped them to understand how to provide repair, maintenance and modification services.
Copying and imitation through reverse engineering must be differentiated from false representation through copying and imitation of trademarks, brand names and designs that mislead consumers as to the source of products and services – which is illegal – a practice prevalent not only in Shanghai or Beijing but also in Milan, London and New York. When charges are made that companies in China copy Western technologies and products, few in the West take the time to disclose whether, and if the copied product or design has an expired or unexpired patent or how the copying firms gained the product information by illegal means.
The fact that emerging companies tend to copy and learn from expired patents through a legitimate process of reverse engineering is expediently ignored because it is politically correct to do so. Companies which copy, reverse-engineer and learn to innovate for the non-consumers and underserved consumers in emerging countries must be celebrated as national or continental heroes rather than be branded as thieves and cheats.
Few people in Africa may have heard of or understand the word Shanzhai. This word describes literally a mountain village ruled by a Robin Hood-bandit type of person who rebels against officialdom in the interest of the public. Most companies in China’s emerging economy operated as Shanzhai companies – meaning that they rebelled against official regulations and expensive Western products and services. Rather, their strategy was to copy and imitate Western products and services and offer them at reasonable prices for the mass markets in China and elsewhere who could not afford expensive, over-engineered foreign brands.
In 1992, at a time when hardly any Chinese household owned the appliance, when only the richest few could afford an imported microwave, and many households had small kitchens with no room to accommodate Western microwaves, Galanz decided to produce small, basic, good enough, affordable microwaves with just the key features needed by the Chinese consumer. Through a process of learning and adaptation, Galanz has develop innovations in microwave technology to cater for the special cooking needs of the Chinese consumer such as stir-frying, deep-frying and steam cooking. Galanz has become a success story in this product category worldwide with substantial quantity of its products exported worldwide.
Tianyu is the classic example of Shanzhai company turned mainstream company. Affectionately called the King of Shanzhai, Tianyu, a mobile handset maker, was founded in April 2002 by Rong Xiuli, a graduate of the China Europe International Business School. Tianyu, first, understood the limitations of the traditional process on new product development in the industry. The traditional development process began with conceptual design, based on market research and the vision of the design team. A prototype was developed, tested, and refined before the company finalised the design. The production process was then tested in-house, or at a contract electronics manufacturing services’ company. Before it was launched, the manufacturer sought approvals to sell the handset in China. All these processes took roughly 4-6 months to complete. Tianyu’s original strategy was to follow this traditional process but abandoned it due to the long product development process and high R&D costs.
Its new business model that propelled its rapid growth is a classic case study. The model was built on using MediaTek turnkey chipsets with a simpler and faster development process as short as 45 days from conceptual design to mass production. This allowed Tianyu to cut costs by running a lean, quick-turnover business that produced a large variety of handsets that were sold at low prices.
Like all Shanzhai companies, Tianyu focused initially on non-traditional low tier markets ignored by mainstream foreign companies. Mindful of costs in sales and distribution, Tianyu used local sales channels and small distributors rather than major retail chains. Today, Tianyu has its own brand, KTouch, has become the largest Chinese mobile phone maker, eclipsing major global brands such as Nokia, and has revenues in the billions of dollars. Its key advantages have been the ability to enter markets neglected as unprofitable by Western companies, strong relationships with distributors, deep understanding of the needs of customers and ability to produce products at affordable prices.
To Chinese companies like Galanz and Tianyu, being labelled as thieves and cheats in the early stages of their development by Western companies and their press cohorts was like water off a duck’s back. Through a process of copying, reverse engineering and learning, Shanzhai companies have developed and continue to develop and build their innovation capabilities to challenge foreign companies at their own game. Corporate Africa must follow the same true and tried path in developing its innovation capabilities.