Piracy concerns temper B.C. tech’s embrace of Chinese development boom

Every week Techvibes republishes an article from Business in Vancouver newspaper.

This article was originally published in issue #1051 – Dec. 15 – 21, 2009.

Members of B.C.’s forestry and resource sectors are hoping to capitalize on China’s infrastructure-development glut, but technology-driven businesses in the province remain leery about doing business with the Asian giant.

Despite consensus that Prime Minister Stephen Harper’s recent trip to China is a major step toward thawing frosty relations between the two nations, technology companies say they require more protections for their intellectual property before they plant a committed foot in Shanghai.

It can take years for technology firms to build trusting relationships with their Chinese counterparts and to fully realize the opportunities presented by one of the world’s fastest-growing economies.

“If you want to sell in China in five years, you better start to develop the relationships today,” said Pascal Spothelfer, president of the BC Technology Industry Association.

Japan has historically been the largest Asian market for B.C.-made technologies, although that country’s stagnant economy has stalled further relationship development between it and the province.

According to Spothelfer, many B.C. technology firms see more opportunity in South Korea because of that country’s eagerness to reach out to foreign businesses and because of its fully developed intellectual- property (IP) protection laws.

Spothelfer wouldn’t disclose names but said he’s familiar with businesses in B.C. that have been the victim of Chinese piracy.

He experienced it first-hand some years back while he was head of Burnaby’s Spectrum Signal Processing Inc.

The company had shipped a handful of processing boards to a systems integrator in China that was to install them into another product.

Spothelfer suspects that the integrator took the board to a manufacturer who reverse-engineered it.

“Hundreds of them showed up made-in-China a year or two later,” he recalled.

B.C.’s tech sector does a lot of business with China, but the relationship largely results in products flowing in one direction. According to the most recent figures available from BC Stats, mainland China trails only the United States in imports of high-tech merchandise into B.C. Nearly $1 billion in goods entered the province from China in 2007.

Imports from all of China have climbed almost 2,000% in the province in roughly a decade. That has resulted in a B.C. high-tech trade deficit with mainland China that was $903 million in 2007.

At any one time, Carmanah Technologies Corp. (TSX:CMH) is exploring a number of distribution or sales opportunities in China.

It has had sporadic sales in China – its solar-powered lighting illuminates part of the Hong Kong harbour – but the company doesn’t have any distributors in China.

Carmanah’s relationship with China is typical of most North American businesses: it buys components such as LED-lights and circuit boards from the Asian country, and then assembles the parts into Carmanah products at the company’s manufacturing plant in Houston. Carmanah’s discussions with Chinese project leaders will sometimes fizzle over price.

“Sometimes they go for price over quality,” said Dan Ruscheinski, Carmanah’s vice-president of sales and marketing.

He added that China’s development boom still presents a big opportunity, but he echoed Spothelfer’s sentiments: relationship-building in China takes time.

“I believe that some of the historical issues that have plagued Chinese-North American relationships, such as copyright infringement, certainly put North American companies – ourselves included – a bit on the defensive in terms of being very careful about what we do over there and how we interact with Chinese organizations.”

Conversely, Vancouver’s Intrinsyc Software International Inc. (TSX: ICS) has naturally had to train its sights on Asia.

Most of the original end-manufactures (OEMs) of mobile phones and navigation devices that Intrinsyc sells its software to – Intel Corp., Marvell Technology Group, Samsung – have major presences in Asia.

While roughly three-quarters of Intrinsyc’s revenue is generated from North American sales, its business continues to shift to Asia.

It acquired a software-development shop as part of an acquisition of a Canadian company last year.

David Manuel, Intrinsyc’s vice-president and general manager of development solutions, said the success of the company’s Chinese operation is founded on two things: solid trust in the management team on the ground in China and strong communications between that team and headquarters.

Intrinsyc’s lead Chinese liaison is a Chinese national who works nights in Vancouver to co-ordinate with the China-based team during its workday.

Intrinsyc’s business in Vancouver primarily involves “high-touch” engineering with partners in San Francisco and other North American cities.

Because such high-touch work includes plenty of micromanagement and back-and-forth communication between partners, similar time zones and an absence of cultural and language barriers are essential. Much of the work done by Intrinsyc’s Chinese shop is at the lower-end of the value spectrum.

Nonetheless, Manuel said that operating in China is the only way the company could compete on cost with competitors that have planted themselves in Asia.