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A day at the knock-off market

Thanks to an unexpected computer crash, I’ve spent the majority of my day trolling around one of Shanghai’s infamous technology marketplaces, where just about everything you see is a knock-off.From my condo in Shanghai’s Pudong district, it’s about a 15 minute metro ride to “Pacific Digital Plaza,” which ironically is just a stone’s throw from Best Buy.  The building is five floors of wall-to-wall electronics– if it has an on/off switch, you can buy it at Pacific Digital Plaza.

The first thing you notice is the smell… there are no smoking bans in Chinese public areas, and as the government is heavily invested in the tobacco industry through a state-owned monopoly, it’s unlikely that they’ll be rolling out an anti-smoking campaign until an acceptable substitute is found.

The general rule of thumb is, the more ‘Chinese’ a location, the more people you will find smoking indoors. This includes restaurants, and it’s quite shocking to westerners who are accustomed to being able to eat a steak without sucking down someone else’s exhaust fumes.

On the other hand, if you are a smoker and tired of the endless battle against your personal vice, China is probably your paradise.The second thing you notice about the ‘fake’ technology market is the bustle… even in the middle of day during the workweek, the floors are packed with patrons wheeling and dealing their way to a new LCD television, espresso machine, or Macbook Pro.

Like all governments, I’m sure the Chinese lie about their macroeconomic indicators– but when you witness the sheer volume of transactions that take place in black and gray markets like this one, 8% GDP growth does not seem so far-fetched.

Wandering around the maze of vendors (which included several stunning women bearing loads of mobile phone accessories), you can’t help but contemplate the nature of intellectual property rights.

Chinese factories are responsible for a huge chunk of global technology manufacturing, which includes both internal components and finished goods… consequently these ‘knock-offs’ are generally comprised of exactly the same parts and labor as the name brand.

Thus, the general reputation that these products are all of poor quality and design is an inaccurate stereotype. Sure, there are a lot of low quality manufacturers out there– though I would argue that there are poorly manufactured goods in legitimate retail outlets all over the world.

Chinese knock-off producers are, at the end of the day, businessmen trying to turn a profit. After all, the vast majority of their customers are locals (I was one of 3 westerners in the building today out of thousands of other patrons).  Producers who routinely manufacture products of questionable quality develop that reputation and soon go out of business.

On the contrary, many producers have ingeniously reverse-engineered popular electronics and redesigned them to include a host of fantastic features– like the new $90 iPhone look-alike that comes with dual SIM cards and a built-in TV tuner.

For these manufacturers, their approach towards intellectual property rights is similar to the software industry’s “open source” movement, in which source code is freely available for anyone to improve upon.  Google is a strong proponent of open source projects and has released over 1 million lines of code under this free license.

Chinese technology manufacturers know that they must constantly be innovating in order to create value and stay competitive; they view it as rather stodgy for western companies to build a business model around sitting on their existing patents.

Benjamin Franklin, who never patented any of his inventions, said in his autobiography, “… as we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours; and this we should do freely and generously.”

While Franklin’s tone is a bit altruistic, his statement is practical and true; after all, the greatest discoveries and advances of modern science are based upon the works of great minds from the past… and last time I checked, no one is paying any royalties to the estates of Isaac Newton and Pythagoras.

To be clear, I am against outright theft in which a manufacturer or vendor adds no value; I am also (naturally) unopposed to those who profit from their ideas and information. 

I believe, however, that ideas are the greatest endowment of mankind; they should be set free to be improved upon by others, not locked away in a government bureaucracy.

I think these Chinese innovators have the right concept.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Buck

    Absolutely right on. Most of the protection added by or through Gov’t is nothing but a ripoff by the likes of Microsoft, etc.

    Keep up the good work.

  • ben r

    Simon,
    Great commentary today. One comment on IP and Patents.

    Here is an interesting thought experiment. What would happen if there had been zero intellectual property rights the last 200 yrs? Would we have the explosion of new ideas and technology we have had?

    Let’s start near the beginning of Intellectual Property in 1802 with the creation of the United States Patent and Trademark Office (USPTO). A little known fact about the USPTO is that it was originally conceived as a means by which to capture, catalog, and share information to the betterment of mankind. It also, of course, provided the inventor of this new art with the opportunity to lay claim to and profit from their ideas for a very limited period of time (14 yrs in most cases). After the claim expires, anyone has access to use it freely (a la Nike Air, ). Before that time period, other persons may study the disclosed art (patent) and figure out ways to build upon or change the implementation in such a way that the original idea literally gives birth to a myriad of others that did not exist prior to this art being disclosed to the world. Patents are required to be written so someone skilled in art (engineering, tech, etc.) can study the patent and reproduce the art it teaches exactly. Intellectual Property catalogs human knowledge. There are numerous problems with the USPTO (I am no fan), but in concept it has been very useful to mankind.

    A very strong argument can be made that the very existence of intellectual property has spawned more new ideas and benefits to mankind than than any other mechanism we have designed thus far. The right to intellectual property actually encourages innovation and improvement. How many entrepreneurs and inventors would put in the long hours and sleepless nights required to produce a truly novel idea with no hope of being able to enjoy the fruits of their labors? Further, who would put in the effort to create a new idea when one could just use one from someone else?

    In theory, IP protects the inventors who create the innovations we enjoy today and it forces competition via innovation, the end result of the last 200 years has been absolutely staggering.

    It is easy to assume that IP encourages companies to sit on their laurels. In some cases it does, but we can also see that if they do, they are toast. Remember, it only gives the inventor rights to their idea for the short period of 14 years.

    There is nothing easier than to reverse engineer something and IP protects against this. I am for property rights.

    Simon, I’m surprised you are not taking a firmer stand on the side of person property…

    Until next time,
    Ben R

  • Marquelle

    Nobody is paying any royalties to the Chinese for the invention and use of
    the Four Great Inventions of ancient China: paper, printing, the compass and gunpowder.

  • Jatin Bhardwaj

    Simon – i understand you are a China bull. SInce you are in CHina these days why dont you cover real estate market in China wherein there are non mainstream reports as well as my sources tell me – bubble being formed???

    cheers

  • http://rauschenbach.us Möpsi

    A dual-sim iPhone sounds like my dream phone. As for Apple’s “property rights” having been violated, well, remember the movie The Pirates of Silicon Valley? The title says it all.

    Ben, what is your definition of property rights anyways? If some group of thugs kills a bunch of Mexicans and native North American indians, steals their land, and resells it to you, is your right to hold that stolen property the “inalienable property rights” you are referring to?

    Microsoft always lived by the motto “embrace and extend”. They way I see it, if the east is going to dominate the next century, and if their way is the way of The Pirates of Silicon Valley (ie Apple’s way, or Microsoft’s way), then we ought to warm up to the idea of getting used to it (embrace), and finding a way to add value (extend). Why go against the flow, if you already know the east has you outsmarted, outnumbered, and strategically & economically outflanked?

    The eastern way is not the end of the world. They were always the real pioneers in holistic medicine, biodynamic gardening, informatica (the paper & printing mentioned by Marquelle), etc.

    If you have the ability to add value, then you have nothing to fear, and I think you will accumulate good karma currency. You would be in good company on this website, in Casey circles, or in Ayn’s Gault’s Gulch. But if, on the other hand, you are sitting on a bunch of stolen or derivative property, and are hoping to retire on the licensing fees or extortionists revenues, then I think your personal strategy will not fare as well in the next century as it might have in the last.

  • pat

    The sham of patent protection is that any product knock off destroys the organized market by rewarding the thief with easy profits, able to be sold in alternative markets, at cheaper prices. Companies (or their employees) knocking off their own lines is the equivalent of embezzlement – though too expensive to litigate.

    By the time management gets wind of the “unanticipated competition,” especially by their own employees, the market opportunity is lost, along with all of the potential profits that could have been made if the patent process worked as planned.

    When product manufacturing profits can only occur through litigation to retrieve illicit and unjust enrichment from competitors, there is no longer a manufacturing and sales market; there is only a litigation market, and streamlining the costs of retrieval rather than the costs of manufacturing is the critical test of “profits.”

    When the Chinese are knocking off products before they leave the manufacuturing facility to be shipped, why would manufacturers use those facilities where they have no control over ripoffs?

    Suing in China is impractical – so at the end of the day, being a manufacturer doesn’t pay at all.

    Therefore, the American patent process is useless to prevent knockoffs, and becomes a sham process for the ignorant believers who think it will.

  • http://virusremovalhelps.com/help-system-fix-virus-removal/ remove system fix virus

    wanted to thank you for this great read!! I definitely enjoying every little bit of it I have you bookmarked to check out new stuff you post.

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