US warns China over intellectual property risks

China's weak intellectual property protections and selective application of the law are hampering foreign investment in the country, the US secretary of commerce warned, in spite of a push by Beijing to reassure investors that their technology is safe.

Penny Pritzker said that although China's drive to have an innovation economy meant the country was genuine in its desire to protect IP, "the real conversation needs to be not just about the laws on the books but also about the court system and the broad and consistent application of these rules".

IP theft has been a perennial grievance of international companies in China. In recent years Beijing has moved to reassure investors but critics say violations of rules are still rife.

Last week Premier Li Keqiang received Ms Pritzker and a delegation of US clean tech companies seeking a windfall from China's drive to reduce pollution, where he highlighted China's plans to set up a new IP tribunal.

Meanwhile, lawyers in China say foreign companies are already increasingly willing to turn to the country's arbitration courts, particularly in Shanghai and the Yangtze valley, where they say courts are becoming more professional.

But Ms Pritzker said that doubts over fair treatment in the country's legal system acted as a barrier to foreign companies, which did not want to risk committing their best technology to the Chinese market.

This highlights a problem facing Chinese climate change negotiators, who are pushing for transfer of cutting-edge technology from companies such as General Electric of the US as part of richer countries' commitments at a climate change summit this year in Paris.

China's national plan to address water pollution released on Thursday included provisions for lower import tariffs on water treatment equipment. Foreign companies see the new drive as a business opportunity.

Ms Pritzker advises smaller companies to seek advice from businesses already in China - but their typical experience is not likely to reassure.

Large multinationals have tended to make an initial sale of equipment produced overseas, then ramped up manufacturing in China with a Chinese partner to which they finally transfer the rights to the technology. That has worked as long as the rapid expansion of the Chinese economy has created new markets for the foreign company to develop and sell the next generation of its product.

But some companies have fallen foul of the model.

UK-based petrochemical producer Ineos last year launched a lawsuit against joint venture partner Sinopec, China's largest oil refiner. Ineos says Sinopec replicated its processes in a new petrochemical complex without paying licence fees. The case is still under way.

Ineos is unusual because it was open about its dispute. More typical is the case of Knowles, a US supplier of tiny microphones to Apple and Samsung. It only went public about its civil case against a Chinese competitor and a web of countersuits after its lawyers were locked out of a hearing at a Shandong court.

Multinationals tend to have the "teams on the ground to navigate the system", says Luke Minford, chief executive of IP enforcement group Rouse. "For the midsize investor with limited access to resources we are finding it a huge challenge to convince them that the opportunities [versus the] risks make it worthwhile."

While debate in Washington focuses on the threat posed by hacking and cyber security breaches, companies already operating in China have learnt to be more careful of their own employees and joint venture partners.

Dan Harris, a lawyer specialising in Chinese business at Seattle-based Harris Moure, says that in most cases, the foreign company's IP is stolen by an insider.

In one case, Boston-based AMSC sued its former client, state-owned wind turbine manufacturer Sinovel, for expropriating its turbine operating software after bribing a former AMSC contractor in Austria.

AMV's case and a countersuit by Sinovel has been working its way through Chinese courts for three years. Chinese wind industry sources say the government has quietly sidelined Sinovel from participating in new tenders.

Few companies will publicly discuss such breaches for fear of damaging their share price - but many executives in China privately admit to firing employees who seemed too nosy.

"Hack attacks are usually not even necessary," says Mr Harris. "Why go to all the trouble of trying to bust in a barn door when so many American companies still just leave it open."

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