Are OEMs Putting Intellectual Property Protections At Risk With China Ventures?

 - June 1, 2012, 3:50 AM
Scott Ernest, Cessna Aircraft president and CEO; Wang Yawei, Avic Aviation Techniques president; and Shi Lei, head of the Chengdu investment promotion commission; explained Cessna’s plan to manufacture aircraft in China at ABACE earlier this year. (Photo: David McIntosh)

For the uninitiated, China can be a scary place to consider establishing a manufacturing operation. Tales abound of product designs being copied, many well documented and ranging from high-end golf clubs to industrial fittings, movies, books and even electronic components. So when Cessna Aircraft announced at the March ABACE in Shanghai that it plans to manufacture two existing jets in China and cooperate with Chinese partners to develop a new business jet, questions arose about how aerospace manufacturers can protect their valuable intellectual property (IP) in such circumstances. There is also the separate issue of quality control in outsourced manufacturing, but that’s grist for a different story.

That question of protecting IP in distant lands is interesting also because it doesn’t seem to come up in discussions of outsourcing aerospace manufacturing to other countries. For example, dozens of major aerospace manufacturers have built their own facilities or are contracting with partners to make key components in Mexico, yet the issue of the risk of intellectual property loss doesn’t come up in discussions about Mexico manufacturing.

Aerospace is such a resource-intensive activity that its engineering and manufacturing processes have been spread around the world to a variety of capable companies. Some manufacturers, Bombardier for example, tend to build their own facilities away from the company’s home country (Canada in Bombardier’s case). Bombardier’s Mexico operation, which is building large composite structural components for the Learjet 85, is entirely company-owned, as is its composites manufacturing branch in Belfast, Northern Ireland. Gulfstream Aerospace owns an avionics subassembly plant in Mexico.

In China, perhaps one reason that there are more concerns about IP protection is that setting up a plant there requires that companies partner with a Chinese firm. And many of the Chinese partners are partially owned by the Chinese government. But another factor in the IP issue may be the spreading of vague concerns by public figures. In an op-ed piece published in the Los Angeles Times on May 9, former Chicago mayor Richard Daley and Brookings Institution vice president Bruce Katz wrote about how U.S. companies are rediscovering the benefits of manufacturing in the U.S. instead of outsourcing to countries where labor is less expensive. “Yet labor costs are rising in China,” they wrote, “and concerns persist about the protection of American intellectual property.” The authors offered no data to back up this statement.

Built-in Property Protections

The issue of protection of Cessna’s IP assets was raised during Cessna parent company Textron’s earnings conference call on April 18. Cessna plans to build Citation Sovereigns and Latitudes in China, in partnership with Aviation Industry Corp. of China’s Avic Aviation Techniques (AAT) division and the Chengdu provincial government, using components manufactured in Wichita and shipped to China. The move into China “Is not about cost; it’s about market access and fostering the development of business aviation,” senior vice president for business jets Brad Thress told AIN during the ABACE show. Cessna also plans to develop with AAT a new large-cabin business jet that will be sold globally, and recently announced that it plans to build Caravan turboprops in partnership with China Aviation Industry General Aircraft and the Shijiazhuang Municipal Government.

When asked during the earnings call about protecting Cessna’s IP, Textron chairman, president and CEO Scott Donnelly said, “People talk a lot about intellectual property protection, and if you’re a consumer goods kind of guy you’re likely to worry about that. On the other hand, as you get into more sophisticated technology there are natural protections. What we’re doing is more akin to what’s happening in the automotive market. Go to China, whether Shanghai, Beijing or small cities, it’s VWs and Audis and Buicks. These are the guys that were first movers and they still have powerful brand presence.

“People make a lot about the so-called knock-off car companies. The reality is, they haven’t done that well. When you look at our business in aviation, it’s even further down that continuum. If you’re in the country and do finishing and final assembly on the Sovereign, you’re not going to see a company down the street all of a sudden with a Sovereign lookalike. Aviation is a global industry. You have to have certifications, so if anybody is going to try and take our intellectual property and do a knockoff of our products, that’s going to be a public thing. It’s years and years of development, a difficult certification process.

“I think that in our case, our industry, our kind of products, this is not an issue to worry about. You’re much better off being in the market and participating in the market than thinking you can avoid that market and somehow not worry about IP by taking that strategy. You’re more susceptible to having intellectual property issues if you’re not there and participating in the market.”

Turbomeca engines have been manufactured under license in China since the early 1980s, and many products made by Turbomeca parent Safran are manufactured in China, including avionics and key components for larger engines.

There is a French saying, “Fear doesn’t protect from danger,” Pierre Fabre, now chairman and CEO of Snecma, told AIN in early 2011 (when he was CEO of Turbomeca). “Yes, there is risk. Of course we try to protect what we have. And the best [plan] is to continue to invest in research and technology to make sure that what we have protected and that is copied is going to be obsolete. We’re lucky to be in an industry where huge technical progress is made every year. By continuing to invest we have the best protection. We spend 10 percent of sales on research and technology. And we do that because we are convinced that the world needs more efficient aircraft. This is a chance to limit the consequences of lack of property control.”

For Bombardier, which has collaboration agreements with Chinese partners for both the Bombardier C Series and Comac’s C919 airliner, IP protection is important on any of the products it develops, with any partner in any country, according to a company spokeswoman. “We’re sharing knowledge and training,” she said. “We discuss intellectual property as it evolves. That includes means to safeguard both our intellectual property.”

Bombardier’s rail division has been working in China for more than 30 years, and the aerospace division has been collaborating with China’s Avic since 2007. On the C Series and C919 programs, she said, “There will be some sharing of information and technology, but we look at it more as collaboration instead of knowledge transfer. In any development program with anyone outside your company, there’s always a risk. For us the benefits outweigh the risks. We’ve been in the business of developing aircraft for more than 25 years. We know how to safeguard our intellectual property when doing this.”

David Donoghue, trial attorney at Chicago-based Holland & Knight, is an aerospace engineer and has been working on China IP and patent issues for many years. “It’s not necessarily as big a risk as many people think,” he told AIN. “The Chinese intellectual property system has become much more robust.” While he acknowledges that there are “dangers that products get knocked off, and some danger that the Chinese government tries to get rights to the technology itself for other purposes including to compete,” he doesn’t believe that’s an issue for aviation. “Most companies of the size and complexity of Cessna are going to protect what they believe to be their new and inventive technologies. There are enough examples of companies that did not and lost their competitive edge when some other entity or an upstart did a copy.”

For manufacturers building products in China, Donoghue advises filing counterpart patent applications in China for existing patents. He also suggests seeking trademark protection in China. “And I would make sure that the company walked through its security and secrecy plan and regulations to make sure it is properly implemented and changed to fit the Chinese business. To the extent that trade secrets are not patented, it’s critical you make sure you have [trade secrets] protected in China. You’ve got to work with Chinese counsel and closely follow what the laws are and how they are changing. That’s true in any jurisdiction.”