China Piracy Crackdown Targets U.S.-Linked Firms

Chinese officials have taken a surprising tack in their crackdown on copyright pirates who churn out millions of dollars’ worth of bogus compact discs and CD-ROMs, often under the protection of powerful local officials and untouchable gang bosses.

In response to Washington’s pressure to shut down the factories or allow more U.S. partners to monitor production, the Chinese appear to have put most of the heat on firms here with any American ties, including three with California links.

This has put a spotlight on foreigners’ little-known roles--passive and active--in the very issue over which the United States has threatened to impose $2 billion in sanctions against China.

The firms’ varying experiences may also provide lessons to entrepreneurs about doing business here.

Of the 34 CD plants on a Chinese “watch list,” several turn out to have U.S. partners--and the U.S.-linked factories have come under special scrutiny. It could be because they are the worst offenders or have the least local protection--or it might merely be a way to send a message to U.S. authorities, analysts say.

Despite intense U.S. pressure, only seven factories have been closed, some of them just in the last month or two; five of those shut have American partners. The other 27 churn on, U.S. trade officials complain.

Stephanie Mitchell, a vice president of the Business Software Alliance, says the focus on American partners is probably an attempt to shift the blame for continued piracy off the Chinese government’s shoulders and back onto the U.S.

But after months of apparent stalling by Beijing, Mitchell said, she welcomes any moves toward shutting down rogue factories, no matter how pointed. “We don’t care if the violators are from Mars,” she said. “They’re still breaking Chinese law and should be punished for it. We’re happy to see that there’s action.”

The fact that some American firms may be profiting from China’s blatant piracy of foreign CDs raises questions about whether a proposal by the U.S. recording industry--that it establish joint ventures with the factories to legitimize their production--would work.

“Personally, I think it is impossible,” one Chinese copyright official said after U.S. Sen. Dianne Feinstein (D.-Calif) first presented Beijing leaders with the recording industry proposal for more partnerships during her January visit to the Chinese capital. “We probably can’t stop them from pirating, even if they all become Sino-U.S. joint ventures.”

Or perhaps especially if they become Sino-U.S. joint ventures, some officials suggest. The American partners tend to have the best technology and deepest pockets--and thus potentially the highest production. They also are ripe for exploitation, if the overseas owners aren’t paying close attention.

The experience of Henry Fai, who runs Los Angeles-based Datalink Computer Systems Inc., exemplifies the quandary foreign investors can face. Fai says he has been grappling with problems since his Chinese partner notified him in July that their factory, Zhuhai Jinlei Compact Disc Production Co., was under investigation for producing illicit CDs.

The plant is one of six stamping facilities in China that can make a master for copying discs. Clients must provide certification that they own the copyright. But Fai said they were fooled by fake certification documents.

“Maybe our management was lax, but there’s really no way to check out a counterfeit certificate in China the way you can in the U.S.” he said.

Fai said the U.S. Consulate in Guangzhou advised him to file a lawsuit against his Chinese partner. But he said he finds this an unappealing option because of China’s costly, unwieldy court system and the connections of his partner, the state-backed Science and Technology Commission.

His partner won’t buy him out, he said, because it would lose the special tax breaks that accompany joint-venture status.

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Fai said he is reluctant to abandon his investment--the equipment alone cost $4 million. He is flying back to China this month to monitor the situation. “I’m trying to find a way out of this mess,” he said.

Nanjing Dali Laser Disc Factory is another facility that has been closed by Chinese officials for violating copyright regulations. The factory lists in official Chinese documents a California partner: a San Ramon-based subsidiary of Tyco Financial Co. of Los Angeles.

Those who answered more than a dozen telephone calls from The Times to the subsidiary identified on the Chinese joint-venture agreement hung up without comment.

But a concerned Terry Chow, who owns Tyco Financial, said Tyco never gave permission for the San Ramon firm to be involved in the Nanjing Dali deal and that the documents were signed by a person without Tyco’s authority.

A third plant listing a U.S. partner, Suzhou Baodie Laser Electronics Co., has been closed for breaches of copyright and pornography laws. It is partially backed by California-based Microlink Systems Inc., according to Chinese officials.

A Microlink Systems executive, who declined to identify himself, said the firm’s partner produced legitimate CDs by day at the Suzhou Baodie factory, then--without Microlink’s knowledge--ran off bootlegs at night. Zhang Xunning, a Chinese official, confirmed that Microlink did not participate in the copyright violation.

Two other U.S.-linked companies have been closed and had their registration suspended for copyright violation, Chinese and American officials say: Hainan Anmei Compact Disc Co. and Shenzhen Zhongqiao Compact Disc Co.

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Nor are such problems limited to smaller foreign firms unaccustomed to the perils of doing business in China.

Philips Electronics, the European music giant, owned half a plant identified by U.S. officials as a leading “pirate.” But when Philips tried to quietly withdraw, it was blocked by its Chinese partners, who feared losing benefits accorded only to joint ventures. It retains a small share of the plant.

Undaunted by such scenarios, six international music companies continue to push their joint-venture proposal, arguing that it would foster relationships that would result in authentic music and films for a legitimate market in China.

The firms are Sony Music Entertainment International, EMI Music Worldwide, BMG Entertainment International, MCA Music Entertainment Group, PolyGram Holding Inc. and WEA International Services Ltd.

They propose to do more than just stamp out CDs. The firms would market home-grown and international recording artists directly to China’s huge audience. Frustrated by being locked out of China’s growing market, they hope to help set pirates on the straight and narrow while filling store shelves with bona fide music in the process.

Beijing has resisted, worrying that China’s fledgling markets would be overrun by powerful concerns that may also be envoys of “cultural pollution.”

While the international firms’ ultimate goal is to set up wholly owned production companies in China to nurture and market Chinese talent, as well as sell international music, they are willing to join the factories to oversee the technical reproduction, if that is what it takes to create a clean market.

“It’s not our goal to shut down CD plants,” said Jay Berman of the Recording Industries Assn. of America, the umbrella group that helped craft the joint-venture proposal. “We just want to have legitimate products in the marketplace.”

Bao Lei of The Times’ Shanghai Bureau contributed to this report.