Silicon Valley's China syndrome

Hyde, Hunter and Manzullo have successfully pressured the government to begin a review of the sale of IBM's PC business to China's Lenovo on national security grounds. Who knows? Maybe the U.S. market will be flooded with notebooks that default on boot-up to readings from Mao's Little Red Book.

Oddly enough, nobody screamed when the administration relaxed regulations to let chipmakers sell 130-nanometer equipment to the Chinese. But no matter. The gang of three is just playing politics. (They score points with the folks back in the home district by making a big stink about the Red Menace and lost jobs. Nobody pays a political price because there's no way Uncle Sam will scupper this deal.)

The episode was more remarkable for the stony silence with which Silicon Valley received the news. Normally, you could expect an outpouring of criticism about unnecessary interference in its affairs. But this time, not a peep--and that spoke volumes about the technology industry's frustrations.

American software executives have been trekking across the Pacific to parlay with top government officials for years, but 92 percent of software installed on computers in China is still pirated. Estimates vary, but the accumulated loss reaches into the billions of dollars. Years of negotiations were supposed to have remedied the situation, but instead, things are getting worse all the time.

"There is a startling lack of progress," I was told by a lawyer who participated in several meetings with Chinese officials over piracy issues. "In Italy, by contrast, they were able to take piracy down from the 90 percent level to around 60 percent. The fact that in China, (piracy) is still that high, is incredibly frustrating."

What's more, Beijing may adopt new regulations that block American software firms from doing business with government buyers. We're not talking about chump change, either. The market for packaged software in China will reach $5 billion by 2007, in large part because of government IT purchases, according to IDC. If U.S. firms get elbowed away from that gravy train, I guarantee that you'll hear a collective howl in Northern California that'll shake the foundation of the Golden Gate Bridge.

Software executives are also fed up because of a perceived double-cross. In 2001, the industry went to bat for China's entry into the World Trade Organization. In return, China promised to respect patents, fight piracy and open their market. So much for that bargain.

But while the industry is united about the need to change the status quo with China, there's a basic split between hawks and doves about what to do about it.

Microsoft tried to entice the Chinese a few years ago with a vaguely worded "memorandum of understanding" about patents and piracy. The company also threw in $750 million as part of the deal. The idea was to help China develop its own proprietary-software industry. In doing so, the locals, acting out of self-interest to protect intellectual property, would rid themselves of these nasty habits.

Tough guys in suits
The Americans last year complained to the World Trade Organization about China's failure to create a fair and level playing field. Why not make an even bigger media splash and haul China up on charges of violating a treaty to which it is a signatory? The WTO means everything to the Chinese, and threatening to drum them out of the club for bad behavior is the best way to get real, measurable results.

Sounds fine on paper, but either-or approaches don't fit the more complicated reality. Bribes won't do much to change years of ingrained, widespread behavior. Neither will open intimidation. China's government doesn't respond very well to over-the-top threats, Lou Dobbs and his mighty cohorts notwithstanding.

The only way piracy will stop is if the Chinese government is convinced that the proliferation of illegal software goes against the vital interests of the state. So why not split the difference, using a carefully calibrated carrot-and-stick approach that rewards good behavior? One suggestion being mulled over by the software industry is to ask Congress to pass legislation that ties local piracy to a country's access to U.S. markets. If a company is not protecting intellectual property, then that nation's exporters would need to get licenses specifying that their use of software is legal.

And if the Chinese do go ahead and freeze out U.S. software companies, then the U.S. government would raise a ruckus at the WTO about free trade and all that. At that point, government negotiators could quietly step in to steer a compromise without anyone losing face.

It's a crapshoot, but it's still better than accepting the status quo. The challenge is to find a way to protect intellectual-property rights in the digital age--a way all sides can live with. In a world of competitive, commerce-hungry states, that's indeed a tall order.