Heated Dispute Over Piracy Puts South China Factory Under Fire : Trade: U.S. wants Shenfei Optical closed for copyright infringement. The company denies wrongdoing.

BEIJING — Viewed from the outside, Shenfei Laser Optical Systems Co. in Shenzhen doesn’t look much different than dozens of other modern factory-offices in the south China manufacturing boom town.

The company offices, festooned with red lanterns in honor of the approaching Chinese new year, are in a white, 10-story building connected to a factory on one of Shenzhen’s main streets.

But as U.S. and Chinese officials square off in Beijing hoping to avoid a trade war over copyright and trademark violations, the Shenfei factory has emerged as the symbol of China’s failure to crack down on widespread piracy of American films, music and software.

“The Shenfei factory is like a giant elephant hunkered down in the middle of a highway. If you go to Shenzhen, you can’t avoid it,” said Jack Valenti, president of the Motion Picture Assn. of America and leader of a delegation of U.S. trade executives to Beijing that is offering support to the U.S. side in the ongoing talks.

Washington has warned China that unless it takes concrete action to close down Shenfei and some of the 28 other factories that allegedly produce pirated compact discs, laser discs and computer software, it will impose tariffs of 100% on up to $2.8 billion worth of Chinese imports. Beijing, in turn, has threatened to retaliate with its own sanctions against U.S. goods.

The current round of negotiations enters its fourth and final day in Beijing today. If no agreement is reached, negotiators are set to resume talks in Washington at the end of the month. U.S. Trade Representative Mickey Kantor set a Feb. 4 deadline for China to demonstrate progress in observing and enforcing international copyrights.

Meeting with reporters in Beijing on Friday, Valenti and other trade representatives displayed stacks of music CDs, computer software and other pirated materials they said were purchased during their visit.

Washington attorney Timothy P. Trainer, who represents the U.S. video game industry, displayed a pirated game cartridge he said he bought at a major department store near his hotel on his way to the news conference.

On the single cartridge, Trainer said, were 18 games that carry U.S. copyrights. “Stronger action has to be taken,” he said.

The Shenfei factory is just across the border with Hong Kong, far from the reaches of central control in Beijing--yet its ties to China’s most powerful leaders are reputedly close. According to one report, the factory’s president, Ye Huanming, grew up with Chinese Premier Li Peng and is now related to Li by marriage.

Paramount leader Deng Xiaoping once visited the factory on a tour of southern China that symbolically launched the country’s economic reform program; photographs of Deng and Li at the factory adorn the company’s walls.

“It’s only fair to ask the question, ‘Why is this factory still open?’ ” a senior trade official said. “It is clearly and successfully flouting laws.”

On a recent visit to the factory, a Motion Picture Assn. of America representative noticed a stack of laser discs of Walt Disney Co.’s “The Lion King.” A surprised Disney spokesman said the movie has yet to be released on video in the United States and is definitely not licensed in China.

At the Shenfei company store in another section of Shenzhen, the laser disc bins are empty of Western hits.

But when a foreign visitor asked recently, store employees opened padlocked cupboards and produced a stack of American favorites, including Warner Bros.’ “Batman” and Universal Pictures’ animated “The Land Before Time,” with Shenfei’s name on the packaging.

The films’ first frames carry a copyright protection warning, but the movies have been dubbed in Chinese. The title printed on one of the discs dispels any hopes that it is genuine. It reads, “The Land Bofore Time.” Despite the typos, the speed with which new discs arrive in stores and the professional redubbing reveals pirates’ marketing savvy.

“They turn out good products,” said Mike Connors, director of the MPAA’s Asia branch. “They just happen to be stolen products.”

But factory officials deny U.S. government claims that they are illegally copying discs and even suggest that other companies are pirating their logo. They are acutely aware, however, of mounting pressure to close their factory, as the newspaper articles neatly placed on the general manager’s desk attest.

The factory was originally a joint venture between Xianke, a Chinese company, and Philips Electronics, the European conglomerate that co-invented the optical disc. Although Philips began as a full partner and supplied the equipment, sources say it has quietly reduced its ownership from half to just 5%.

“The factory still carries Philips’ name, so they are very concerned,” said a source close to the company. Philips would not respond to queries.

The U.S. government, some Chinese officials and the company’s banks share that concern.

“The bank would not finance anyone who is breaking the law,” said a representative from one of the four banks financing Philips’ $40-million share in the factory. “If that is the case, we will seriously reconsider the loan.”

But employees seem relatively unworried by the international attention focused on their factory and the pressure to shut it down.

“We’re closing for Chinese new year,” one engineer said. “But we will be open again soon.”

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Times staff writer Tempest reported from Beijing and special correspondent Farley from Hong Kong.