SEMA News - September 2010

By Alysha Webb

Benefit From the Growing Market While Managing the Risks 

    SEMA News-September 2010-International 
   

For SEMA members whose products have a market in China, being in there is a must for future success, said Anthony Lance, Asia Pacific sales and marketing for car care products manufacturer Meguiar’s Inc. Pictured here are SEMA members in 2009 touring the showroom of a Beijing-based distributor.  

     
The allure of China is undeniable. Its rising incomes, growing middle class and fast-growing vehicle market all frequently make the news in the United States. Not all the news out of China is positive, however. Almost weekly, there are stories about counterfeit goods with ties to China. Counterfeit goods cost companies in the United States billions of dollars a year.  There is no denying that intellectual property rights (IPR) protection is a problem for companies doing business in China, be it sourcing products there or selling in the market. But that doesn’t mean you should stay away from doing business in China. SEMA-member companies that have done business in China have some advice for fellow SEMA members eyeing the China market with anticipation but also trepidation: Your products will almost certainly be copied, so take steps to protect yourself.

The Lowdown

“If you have a market presence and any recognition, it is a sure deal that you will have counterfeit products,” said Anthony Lance, Asia Pacific sales and marketing for car care products manufacturer Meguiar’s Inc., which sells products in China. “You have to do the right preparations beforehand.”

If you manufacture in China, copies of your product may show up in the United States or other markets. That is part of doing business internationally.

“There’s probably not a week that goes by that I don’t warranty fake parts [though, not necessarily just from China],” said Scooter Brothers of Comp Performance Group. Comp includes companies that produce high-performance camshafts and valvetrains as well as transmission, torque convertor and driveline components, such as clutches, gears and starters.

“We’ve sent letters and threats [to the counterfeiters], but they don’t care,” said Brothers. Sooner or later, it all fixes itself, he said, because those kinds of companies don’t have much staying power. “If you’re not willing to do the whole journey, it is not going to work.”

Copying is not unique to China, but it is perhaps more prevalent there. Having someone on the ground watching out for you is important, but it won’t end the copying.

“We’ve always had the problem of copying; we had it even in the United States,” said Gary Neumann, president of Neuspeed/Neumann Distributing. Neuspeed sells aftermarket performance equipment, including suspension and turbo parts and wheels. “We own our name [in China],” he said. “We see kits with our name on the packaging. Our guy in China keeps a watch out and goes after them himself. Usually, he can’t stop it. Once you get rid of one guy, another one pops up. There’s always going to be somebody out there who is going to copy.”

Warn Industries manufactures premium winches and hubs for off-road vehicles and has been doing business in China for 20 years, said Randy Norris, managing director of international. Warn has had problems with counterfeit products manufactured in China being sold in the United States. Nonetheless, Warn stayed in China. “You are selling into a market because people want to buy a premium product,” said Norris. If Warn didn’t sell it under controlled distribution, someone else in North America would likely sell it to a Chinese distributor, said Norris, and Warn would have no control over it.

Meguiar’s has faced problems with counterfeit products in Korea, Thailand and China, said the company’s international business development manager, Lisa Daniels. “It was almost instant,” she said. “The minute we had any brand recognition, copies started showing up.”

Being copied is the price for having a successful product.

“I think it is inevitable that no matter what country you are in, once you become successful, someone will copy [your product],” said John Reynolds, director of product management for performance lighting manufacturer Anzo USA. Another foreign company he worked for in China had its logo registered illegally by a Chinese company, said Reynolds. The company got its logo back—eventually. “I spent the better part of a year working to get that back, working through the China legal system,” said Reynolds. “It was a massive cost. We had to hire an international law firm to help us fight it.” 

  SEMA News-September 2010-International 
 

Pictured here: Kenneth Merritt (right) of Bushwacker talks with a Chinese firm during a SEMA event in China in 2009.   

   

But the costs—in both time and money—aren’t always that massive compared to the potential sales. Fighting counterfeiting in China cost Meguiar’s less than 1% of its annual sales in China, said Lance. Meguiar’s works with specialized enforcement companies in China to fight counterfeiting. “I have handled everything so far,” Lance said. “It takes a meeting once a month, answering e-mails, etc.”

Not all products are created equal where counterfeiting is concerned.

“If a product is a very specialized, small-market product, it probably won’t be copied,” said former SEMA Chairman Jim Cozzie of RTM Productions. Cozzie previously worked for Zoom Performance Products, which sourced parts in China.

“The real risk is when you have a very high-volume item,” he said. “If a company makes a popular product, all anyone has to do is go buy one and knock it off.”

If your product is high tech or requires a big initial investment of capital to manufacture, the chances of being copied in China are slimmer.

“We’re probably in a better position than some because of the high technology in our products,” said Brothers. “In the high-performance market, the small details do make a difference. People who can afford to modify their cars pay attention to details, and the counterfeiters miss the boat on a lot of the metallurgical things.”

AEM Performance Electronics hasn’t faced a big counterfeiting problem so far—likely because of the complexity and cost of its technology, said Kirk Miller, vice president of sales and marketing. AEM produces gauges, engine-management systems, sensors and fuel-delivery systems. Its China sales volume is still small and is partly through distributors and partly direct.

“A lot of our product requires software, code, programming, a support mechanism and hundreds of factory-trained tuners,” Miller said. “It also needs constant software upgrades every couple of months. For somebody offshore to copy our products would be a massive undertaking.”

Producing Anzo products requires several million dollars in up-front investment, so the barrier to entry is difficult for some to overcome, said Reynolds. Anzo’s products are extremely difficult to duplicate because of the capital required to build the mold.

If the Situation Is so Bad, Why Should I Even Sell in China?

For many SEMA members, China is a great business opportunity. Said Anzo’s Reynolds: “Long term, the market is going to be a huge one. It will be comparable to the United States. For a small company, that means a lot of opportunity in a country that has a growing enthusiast interest. Given the potential of the market, you could establish a name for yourself by being there early.”

Still, Reynolds recommended that a company consider carefully before taking the China plunge. “The key is to figure out if you have product for the market,” he said. “There are vehicles in China that we don’t have in the United States. Identify what is there, what you can sell, why you want to enter.” Only then, he said, should you figure out if it is worth the expense of registering your trademark and taking other steps to protect your intellectual property.

For SEMA members whose products have a market in China, being there is a must for future success, added Meguiar’s Lance.

“If you want to have another 100 years of success, you have to be in the China market,” he said. “You have to get over there as soon as possible. A lot of the brands that are very successful in China are not the brands that are successful in the United States. They are successful in China because they got to the market early.”

Additional information and resources on the mechanics of how to protect the ideas, names, logos and inventions of your company is available online at www.sema.org/ipr.  

6 Steps to Protecting Your Intellectual Property in China

You may not be able to prevent your products from being copied, but here are six steps you can take to limit the damage.

  1. Before you start selling your products in China, register your patents, copyrights and trademarks in the United States and China.
  2. Chose the right partner. This is the number-one recommendation from SEMA members active in China, whether sourcing products there or selling into the market. Finding the right local partner requires more than just looking on the Internet and exchanging some e-mails, sources emphasized. “You have to find a true, trusted partner,” said RPM Productions’ Cozzie. “Part of finding good partners is that you have to meet them face to face. There is a relationship element to all of this. You have to look a guy in the eye and see if you can trust him.” Going thorough due diligence on a potential partner in China is crucial.
  3. Have a good attorney, one familiar with China’s intellectual property issues, recommended AEM’s Miller. AEM also studied what steps other companies were taking to protect their intellectual property in China, including, Rolex and Sony.
  4. Deal with your distributor or manufacturer directly, if possible. “I don’t do business with any middle men,” said Brothers. “Most of our unwanted distribution has come from a middle man.” When Comp Performance Group considers a company in China as a partner, company officers visit the factory to set up the relationship and ensure that they are dealing with the right people. “I have three or four vendors over there,” Brothers said. “I went to the factory and sat down with them. I have a good relationship with them. I can’t overstate how important I think that is.”
  5. Don’t let the language barrier scare you away or be duped because a vendor speaks good English, Brothers emphasized. “One of the best vendors I’ve got doesn’t speak any English,” he said.
  6. Budget for enforcement of your intellectual property in China. “You need to have a budget set aside for an enforcement action, an action by a legal third party to find out what company is counterfeiting your products,” said Meguiar’s Lance. But choosing the right enforcement agent is also very important, he emphasized. Lance advised that companies new to the market find an agent through recommendations from other foreign companies. The agent will research the market, put together a report and work with local officials to schedule a raid, if necessary. There are hundreds of such agents, but not all are effective or even legal. 

 

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