A troubling report about China

The latest automaker to report that its technology has been pilfered by its Chinese partner is none other than Volkswagen AG, one of the first global car companies to set up joint production ventures in China in the 1980s. Those were China’s terms: foreign automakers could have a crack at its big — now huge — market, but in turn, they’d have to produce cars in China with local partners who would see and learn how it’s done.

These partnerships were inherently awkward because while everyone benefits in the short- and medium-term, what happens in the long-term isn’t clear. VW’s first partner, Shanghai Automotive Industry Corp. formed another partnership years later with General Motors, a rival of VW.

Even more worrisome, reports of intellectual property theft from Japanese, U.S. and European manufacturers were common, and carmakers found little relief from Chinese courts. Lately, though, some auto executives have been saying that, as China’s industry matures and its carmakers develop their own technology, they’re starting to view patent and trademark protection and other intellectual property rights in a different light.

So the report in the German newspaper Handelsblatt that VW’s Northern Chinese partner, FAW, allegedly copied an engine design was very disturbing. FAW isn’t some fly-by-night provincial upstart. It’s an old, established, state-owned carmaker; FAW stands for First Automotive Works. Handelsblatt’s unidentified sources described “systematic and planned” industrial espionage since 2010 by FAW, which plans to sell a model equipped with the engines in Russia, in direct competition with VW and Skoda models. “It’s quite simply a catastrophe,” the report quoted a VW manager as saying.

It may or may not be a catastrophe for VW, but it’s not good for anyone. Many industry sources say they believe this kind of intellectual property theft is still widespread in China. Others say the perceptions of the situation are vastly different. “What the Germans might view as purloining, the Chinese might call sharing,” says Mike Dunne, author of “American Dreams, Chinese Roads,” a book about GM in China, and president of Dunne & Co., an investment advisory firm in Hong Kong.

It’s not clear how global automakers can push back, given their eagerness to play in the world’s biggest market. FAW “understands that VW has become highly reliant on the China market for global growth and profits,” says Dunne. “Bottom line: FAW enjoys tremendous leverage because it is the conduit to Audi and VW’s lucrative sales in China.”

China has the upper hand, but it’s difficult to believe that nurturing or just allowing this kind of piracy in one of the country’s pillar industries won’t backfire someday.