6.6 Trillion Reasons You Want a Hardline with China

Keith Fitz-Gerald May 22, 2019
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Most Americans have never thought twice about intellectual property. But they should.

The US Patent & Trade Office estimates that the intellectual property associated with 81 industries added $6.6 trillion to global GDP in 2014, the last year there’s data. That same year, IP-intensive industries accounted for a staggering 38% of U.S. GDP, a figure that may approach 50% today thanks to the speed at which technology is advancing.

Our nation depends on it.

So does your investment portfolio.

A recent CNBC poll found that 1 in 5 American companies have reported that the Chinese have stolen intellectual property from them over the past year.

Damages are hard to calculate but estimates range from $225 billion to $600 billion annually.

Not total.

Not over time.

A year.

That’s why this is so critical and why – love him or hate him – the President must be tough on China when it comes to this issue.

Chinese officials don’t see it this way, of course.

They want the party to continue because accessing valuable intellectual property is what’s allowed that nation to come so far and grow so fast over the past 60 years. It’s also why China’s economy now threatens to overtake our own as the world’s most valuable.

Many Americans understand this instinctively because the concept of protecting innovation is as natural to us as watching the sun rise each day. Many Chinese, on the other hand, view the concept of intellectual property as a foreign imposition symbolic of Chinese exploitation in the early part of the 20th century.

Most intellectual property theft occurs in one of two ways – a) via dirty tricks like espionage or spying and b) forced technology transfer via tremendously one-sided partnerships favoring Chinese corporations, especially those acting in concert with the government.

The situation is so bad that more than half of all technology owned by Chinese firms came from or was obtained directly from foreign companies according to a 2015 paper on the matter by the Minneapolis Fed.

I think, incidentally, that’s conservative and the figure may be as high as 70%, especially if we’re talking about military or industrial property used in highly specialized processes and materials.

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Remember Blackberry?

Here’s the “Redberry”, a Chinese knockoff fielded by Unicom on eve of RIM’s long-delayed 2006 Chinese debut there…

Figure 1 China Unicom, RIM, Michael Bissell

Here’s a BMW X5 and the Shuanghuan CEO…

 

What makes this so challenging is that “intellectual property” can be anything from manuscripts to engineering specs, from car parts to electronic parts, from graphic arts to digital code and more.

Some of the funnier knockoffs I’ve seen over the years include Tids laundry detergent, people wearing Mike shoes, Pizza Huh and, one of my personal favorites, Dolce & Banana.

 

Figure 2 Canyouactually.com

Effectively, intellectual property – “IP” for short – broadly includes anything resulting from uniquely applied creativity. It can be tangible – meaning you can touch it – or intangible – meaning you can’t.

Broadly speaking, there are four types of intellectual property:

  1. Trademarks cover everything from logos, words, symbols, names or colors. Walmart, for example, is a trademark. China has ripped off Walmart by opening a chain of superstores,Wumart, that a spokesperson said, will be “the Walmart of China.”
  2. Copyrights include software, graphic arts, architecture, books, videos, and databases. Frequently, Chinese companies will produce cars that look and work almost exactly like American models. The Chinese-made Geely GE looked eerily like a Rolls Royce Phantom, for example.
  3. Patents are another example of intellectual property, and they cover tangible inventions, ornamental designs on manufactured products, and new plant varieties. Chinese companies have famously copied Apple’s iPhone, producing the HiPhone, which looks almost exactly like the older versions of the iPhone.
  4. Trade secrets, the final type of intellectual property, are made up of formulas, patterns, or techniques not readily available to the public.

Interestingly, China is beginning to get the message.

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Beijing issued a memo last year – the first and most detailed on protecting intellectual property to date – highlighting 38 different punishments for companies stealing IP or otherwise appropriating it ranging from a cutoff in government funding to restricted access to foreign companies and even a “blackmark” in official databases.

There’s also the “Rover case.”

This one’s a big deal.

Jaguar Land Rover won a landmark legal decision in Chinese court earlier this year that will force Landwind to stop selling a $22,000 knockoff of Land Rover’s $60,000 Evoque. And, importantly, pay damages.

 

Now for the tough part.

It’s easy to view China as the aggressor here in terms of who stole what from whom but that’s a matter of perspective. Many people are surprised to learn that the Chinese invented paper in 105 AD, gun powder in 1,000 AD, the crossbow as early as 2000 BC, umbrellas from around 2,500 BC, and booze almost 9,000 years ago. Same, too, with the compass, movable type, silk… centuries before that knowledge would show up in the west.

China could’ve easily smeared the West with the same allegations of intellectual theft centuries ago.

What’s next?

I’ve spent decades in the Far East, as a businessman, a father, an investor, and as student of history so I like to think that I’ve got the tiniest bit of insight here.

Confucian thought plays a huge part in Chinese culture. And that, by its very definition includes concepts related to mutual responsibility, natural harmony and moral uprightness.

China is waking up to these things. Perhaps not fast enough for Westerners, but the notion that strong intellectual property protection is essential for China’s ongoing development.

Forget about the government and, instead, concentrate on the rise of Chinese consumerism. My favorite choice – albeit a very controversial one at the moment – is Alibaba Group Holdings Inc. (NYSE:BABA).

Top line revenues are growing by 56% a year on average with cloud computing and digital media coming in at 70%+. Amazon.com Inc. (NasdaqGS:AMZN), by comparison, delivered just 25% fiscal year over year.

China’s Alibaba retail marketplace accounts for 654 million outlets, roughly twice the US population and an increase of more than 102 million. Mobile users are now 721 million and rising.

This is a numbers game pure and simple.

By 2020 – less than a year from now – the Chinese e-commerce market may be worth more than all the e-commerce markets of the United States, France, the United Kingdom, Japan, and Germany combined.

Trade war or not, buying Alibaba now is like getting the best of Twitter Inc. (NYSE:TWTR), Netflix Inc. (NasdaqGS:NFLX), Paypal Holdings Inc. (NasdaqGS:PYPL), Amazon.com Inc. (NasdaqGS:AMZN), Alphabet Inc. (NasdaqGS:GOOG) and even eBay Inc. (NasdaqGS:EBAY) in a single stock worth nearly one-half trillion dollars.

BABA is trading at $164.05 a share as I type Tuesday morning and clearly under trade-related pressure. But I think that’s actually your opening.

I believe shares will rocket higher to $200+ dollars a share when a trade deal ultimately does get announced.

Likely before the ink’s even dry.

Until next time,

Keith

One Response to 6.6 Trillion Reasons You Want a Hardline with China

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