Ford motors and counterfeiting in the chinese automotive industry

crossway motors and formulateing in the chinese carmotive persistence fording Motor Company ( cut across) is an gondolamobile company that manufactures and addresss simple machines and split globally. akin(predicate) to many other corporations, hybridization has invested manufacturing efforts in mainland chinaw ar, because chinaware is now the worlds largest auto manufacturer and auto trade. Given this huge opport unity, there ar numerous companies feel to reap financial profits by producing counterfeit parts. The global counterfeit auto parts food market was estimated at $16 billion in 2008i. For crossbreeding, counterfeiting not only represents lost financial gross sales but alike grime degradation and harvesting indebtedness risks.While robust growth in auto sales whitethorn be fueling the fake components market, the battle against manufacturers and distributors of counterfeit auto parts, specifically carrefour auto parts is not new. traverse has been wagin g an current aggressive campaign against counterfeiters since the early 1980s. Despite its efforts, there acts to be a battle as according to the automaker, counterfeit and pirated auto parts remains a bother that is putting the publics safety at risk and existing about $1 billion US annually. Since joining the WTO, the Chinese establishment has been placing increasing dialect on intellectual property rights (IPR) to help encourage foreign investment in the coarse. However the strength of these IP laws and enforcement has not been robust as penalties are purposeless and do not deter counterfeiters.As Ford continues to invest and grow within mainland mainland chinaware, we propose the following recommendations to address the counterfeiting issue. First, Ford should refine its innate firm strategies through with(predicate) security packaging innovations and a certification process, increasing education to consumers, aligning employee incentives through benefits and penalties , and continuing with the inspections. Next, Ford needs to pursue away political and healthy-grounded strategies with key stakeholders, much(prenominal)(prenominal) as the industry coalition, insurance partners, the Chinese government, and the WTO. These strategies should focus on aligning incentives to develop more robust policies rough counterfeiting penalties and enforcement.2 Overview of the Counterfeit Automotive Industry in ChinaFor decades, piracy and counterfeiting riddles have affected the economy. The global market for counterfeit car parts is estimated to be worth approximately $16 billion USD in 2008 (which accounts for roughly 3.2% of the global counterfeit market) and is growing roughly 9-11% per division.iiAs the counterfeiting and piracy market is becoming more and more attractive to organized crime (it offers similar profits with a signifi atomic number 50tly lower probability of prosecution and penalties), criminals are making significant investments in cou nterfeiting.Counterfeiting and piracy activities have flourished in evolution economies and gradually diminish as emerging markets achieve higher levels of prosperity and global integration. Today, industrial counterfeiting and piracy concord rampant passim emerging markets such as China. It is in fact, the worlds largest offender of IP larceny and industrial piracy. According to MEMA, China is responsible for(p) for the exportation of 80% of the counterfeit goods seized at U.S. borders.iiiThe E.U. also estimates that 5-10% of all replacement auto parts in circulation are counterfeit.ivFurthermore, a recent canvas by the Commercial generation found that 56% of auto exploiters in China have found counterfeit parts on their vehicles.Several unique characteristics make the Chinese market distinct from other counterfeiting regions. With Chinas sheer size and growing integration into the global supply chain, counterfeiting and piracy issues originating from this region have becom e a global problem (affecting not only local Chinese companies but also multi-nationals). Given significant socio frugal disparities among different regions within China, the progression and convergence towards a center of attention income willing likely be slower, fostering an environment in which counterfeiting and piracy will thrive for the foreseeable future(a). Furthermore, Chinas customs and traditions have historically accepted industrial piracy further stimulating growth.As the counterfeit market in China grows, increased investment has allowed counterfeiters to strengthen the sophistication of their operation. Counterfeiters now have at heart information on new vehicles and specification changes before the new car is even on the market. Counterfeiters can produce exact copies of products, packaging and documentation and sell it downstairs a competing brand name. In 2004, General Motors (GM) filed a lawsuit against Chinas Chery Automobile Company for the alleged piracy of its Spark vehicle to create a replica branded Cherys QQ. GM showed that the two vehicles were nearly identical with respect to exterior body, interior design and key components. (See Exhibit 1).In a study by the U.S. Chamber of Commerce and the Coalition against Counterfeiting and Piracy, counterfeit part sales are costing Ford about $1 billion per year. However, it is the physical dangers and risks associated with utilize or installing counterfeit parts that may be the most costly. Counterfeit auto parts are a huge consumer safety problem with serious potential to injure auto technicians and end-consumers. In auxiliary to severe financial and safety implications, counterfeiting destroys the brand reputation of legitimate companies. Legitimate companies are oft blamed or brought to court to take responsibility for the negative repercussions of counterfeit products.With China surpassing the U.S. to become the worlds largest auto market (achieving sales growth of 46% to 13.6 m illion), it will be difficult for auto real equipment manufacturers (OEMs) to ignore the Chinese market particularly since by introduction the Chinese market, significant advantages may be leveraged (e.g. inexpensive labor, rapidly growing emerging market).vCurrently, roughly 800 foreign auto parts suppliers operate in China, including most of the top 50 multi-nationals. And as the Chinese auto market continues to grow, instances of IP theft are likely to increase as well. It will become even more important for large multi-nationals such as Ford to take action and to protect itself from IP risks.3 Impact of Counterfeiting and Piracy on Ford Motor Company in ChinaA Background on Ford Motor Company in ChinaFord began manufacturing autos in the early 20th century. With $146.3 billion in revenues in 2008, Ford is now one of the worlds largest makers of cars and trucks. Its brands include Ford, Lincoln and Mercury and Ford receives more than half of its sales outside of North America.v iIn the Asia-Pacific region, Ford operates under several investment holding companies including Ford Motor (China) Co., Ltd., Ford Motor Research Engineering (Nanjing) Co., Ltd., Ford Automotive Finance (China) Co., Ltd., Changan Ford Mazda Automobile Co., Ltd., Changan Ford Mazda Engine Co., Company and Jiangling Motor (Stock) Co., Ltd.Roughly 9% of 2008 global sales may be attributed to the Asia-Pacific region which includes China. Ford sold slightly more than 300,000 units in China in 2008 and 2009 sales exceeded 440,000 vehicles (annual growth of 32%).viiIn China, Ford has several joint ventures including joint ventures with Jiangling Motors Corp and Changan Ford Mazda Automobile Co. These joint ventures submit it with three shared business platforms in China and also share factories in Nanjing and Chongqing. With China overtaking the U.S. as the worlds largest auto market last year, Chinese auto factories are running at full capacity. According to Ford, the two facilities it has with Changan Automobile Co. will not be able to accommodate expected future demand based on current growth expectations. Accordingly, it plans to open a $490 million factory in Chongqing in 2012, producing up to 150,000 vehicles per year and increasing tally capacity to 600,000.viiiB Detailed Assessment of the Political and Legal Issues Relating to the Counterfeit Auto IndustryI Overview of the Political Landscape in ChinaAlthough China has moved from a centrally planned economy to a market-oriented one, the Communist Party of China (CPC) hushed maintains political power. Having a one-party system makes the CPC pliable to civil unrest that could threaten its power and, as a result, the CPC has been hesitant to take action that threatens local economies for fear of unrest. But as an emerging country with the worlds third largest economy on the frontier, China is struggling to balance the need to support local economies with a growing need to protect IP rights for both multina tionals and domestic firms. Yet despite a reputation for considerable corruption, demonstrated by its 2009 corruption perception index score of 3.6, and a ruling CPC that often ignores counterfeiting since it supports many local economies, China still manages to attract multinationals such as Ford due to its potential for new customers and windfall profits.ixChina and the World trade Organization (WTO)Admitted to the WTO in 2001, China agreed to implement various measures that would liberalize its trade regime. Among these measures was the WTOs Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement). This agreement guards against counterfeit products by addressing minimum standards of IPRs protection, domestic procedures and remedies for enforcement of these rights, and dispute settlement procedures among WTO members.xHowever, despite these IPR protections, counterfeiting still represents about 8% of Chinas $10 trillion economy.xiTo address this gro wing problem, in 2007 the U.S. packed the WTO to intervene, claiming that Chinas enforcement of IPR laws was so weak that it failed to limit the yield of counterfeit products. Specifically, the U.S. argued that weak penalties for infringers and Chinas practice of allowing counterfeiters to sell goods seized by Chinese customs officials, bring home the bacond that the fake labels were removed, provided little financial incentive for counterfeiters to cease production.xiiIn 2009 the WTO ruled that China breached trade rules by ignoring piracy and counterfeiting, yet it upheld Chinas criminal law on IPR without strengthening Chinas criminal law and enforcement of IPR, it is likely that counterfeiting will continue to be problematic.xiiiConflicting Incentives for the Chinese GovernmentDespite Chinas laws that aim to protect IPR, the Chinese government compositors cases opposing incentives in cracking down on counterfeiters. Specifically, China must balance the economic benefits local economies enjoy from counterfeit products with the growing need to protect the IPR of foreign and domestic companies.xivBecause counterfeiting supports many local economies and millions of people, any crackdown on counterfeiting could result in serious economic losses. As this action would not be well-received, Chinese politicians are even less apt to prosecute counterfeiters or focus on strengthening enforcement of IPR laws. On the other hand, China must strengthen these laws and enforcement mechanisms if it hopes to continue attracting multinationals.xvHowever, many multinationals are so intent on entering the Chinese market, given its sheer size and potential profitability, that they are willing to operate in an environment with little IPR protection. As a result, the Chinese government has very little incentive to crack down on counterfeiters or greatly strengthen enforcement of IPR laws.Fords Risks in China and its Current StrategiesGiven this political landscape, Ford faces c onsiderable risk in China. With three assembly plants in China, Ford has already encountered problems with counterfeit parts, claiming that counterfeiting costs the company $2 billion a year in sales.xviExhibit 2Despite some multinationals willingness to live with Chinas lax IP protection, Ford has taken steps to protect against the growing problem of counterfeit auto parts and vehicles. Specifically, Ford has been using undercover intelligence to identify counterfeit producers and raid Chinese factories.xviiWhile these raids have cloged thousands of counterfeit products from entering the market, penalties still remain weak the few offenders sentenced to prison can reduce their terms for $30 a day.xviiiDespite Fords efforts and committal to protecting its brand, this weak enforcement discourages any significant lawsuits and provides little deterrence to counterfeiters. Ford must develop strategies to work with the U.S. and Chinese governments to better protect against counterfeit products.II Overview of Intellectual Property Rights in ChinaChinas Current IP EnvironmentSince joining the WTO, the Chinese government has been placing increasing emphasis on IPR to help encourage foreign investment in the country. intimately recently, the Chinese State Council established a task force known as the Intellectual Property Executive Conference to look into IP-related issues. Chinas new auto policy released this year stresses the need to protect the intellectual rights of auto companies and bans the sale of auto products that violate these protections. China is also a party to many worldwide agreements to protect IP (including the World Intellectual Property Organization and Paris Convention, among others). For example, China joined the Madrid Protocol in 1995, which requires reciprocal trademark modification for member countries, which now include the United States.xixThe Chinese government has also established special IP courts to handle cases of IPR usurpation more efficiently. In addition to having these specialized courts in some cities and provinces, Beijing, Shanghai and Tianjin have also established IP courts within the Intermediate Peoples Court. In 1992, the Supreme Peoples Court established an IP division as well. This increase in the legal systems capacity to handle alleged IP theft has been used to facilitate highly publicized campaigns, including activities such as raids and educational programs.Enforceability of IP LawsChina has made significant progress on the legal and regulatory front, but despite stronger statutory protections, IP theft remains a major problem, as evidenced by the widespread existence of counterfeit products.xxIn reality, IP laws are rarely enforced, and it is even rarer that those who are caught stealing, cheating, counterfeiting and pirating go to jail. Because China is a large country with some political decentralization, enforcing IP laws and regulations in China is a major challenge.xxiSeveral institu tional factors soften the enforcement of IP laws, including Chinas reliance on administrative instead of criminal measures to combat IPR violations, corruption, local protectionism, limited resources and training available to enforcement officials, and lack of public education regarding the economic and social impact of counterfeiting and piracy. At the most basic level, without adequate education with regard to IPR, there is little awareness that infringement is a crime. Furthermore, the fragmented temperament of political authority in China and, more specifically, decentralized corruption exacerbates the lack of enforcement. For example, when counterfeiters have connections with local government or law enforcement officials, this may provide an easy cover for their counterfeiting activity. Local officials may create obstacles during investigations and assist local counterfeiters by letting them hide their production lines in safe places.Chinas fragmented legal system contributes to the problem as well. Protection of IP in China follows a two-track system. The first and most prevalent is the administrative track, whereby an IPR holder files a commission at the local administrative office. The second is the judicial track, whereby complaints are filed through the court system. However, determining which IP agency has jurisdiction over an act of infringement can be confusing. Jurisdiction of IP protection is diffused throughout a number of government agencies and offices, with each typically responsible for the protection afforded by one statute or one specific area of IP-related law. There may be geographical limits or conflicts posed by one administrative agency taking a case, involving piracy or counterfeiting that also occurs in another region. Chinas courts also have rules regarding the scope of potential orders. In most cases, administrative agencies cannot award compensation to a rights holder. They can, however, fine the infringer, seize goods or equ ipment used in manufacturing products, and/or obtain information about the source of goods being distributed.China was also required to provide IP remedies through criminal enforcement for commercial scale piracy and counterfeiting, under the enforcement provisions of TRIPs. Chinas laws and regulations stipulate that IP administrative government and Customs may transfer egregious IP infringement cases to police and prosecutors for initiating criminal investigation. However, despite these criminal provisions, most IP cases continued to be handled through the administrative system. Foreign rights holders have considerably less success in encouraging criminal prosecution of IPR violations. When jail sentences are handed down, Ford officials in Taiwan say that those few offenders sentenced to prison can reduce their terms for $30 per day. Lawsuits are also often a waste of time, due to local protectionism. In 2003, Toyota lost a closely watched case in China against the countrys bigges t private carmaker whose brand logo was nearly identical to Toyotas.xxiiIn the end, although transnational pressure may have succeeded in getting Beijing to establish IPR laws and regulations, the enforcement of IP, as with most policy in China, falls within the domain of Chinas convoluted bureaucracies and local government officials.Outsourcing vs. Ford manufacturingTo operate in China, Ford had to form a joint venture with a quasi-governmental partner Changan Ford Mazda Automobile Co. in China.xxiiiFords other partner in China, Jiangling Motors Corp., makes commercial vehicles, including the popular Ford Transit van.xxivThese joint ventures are one of the biggest risks automakers face as they expand in China due to the danger of IPRs violations. The Chinese made no secret that part of their strategy in forming joint ventures was to begin to learn about the auto industry and how they can produce cars.Ford produces all of their vehicles in their own three plants in the country. Ho wever, they now source many of their component parts, which increases the risk of counterfeiting since the company has transferred production of certain parts from their own plants to third-party trading operations in China and India.xxvThere are other issues that come with operating in a rapidly developing country. In China, factories are at risk of unscheduled shutdowns because of power shortages. Ford also faces political risk. Although the danger of nationalization or outright confiscation of Fords assets may not be high, China may not always have the best interests of foreign multinationals at heart.Despite these concerns, Ford is not shying away from the invasive Chinese auto market. Ford currently operates two plants in China, and it broke ground for a $490 million plant in September of 2009. The factory will make the next-generation Focus compact car, which Ford plans to sell globally. Its current plant in Chongqing makes the Ford Focus, Ford Mondeo and Ford S-MAX. Its pla nt in Nanjing, in east China, makes the Ford Fiesta.xxviIn order to set up operations in China, Ford was also required to establish research and development facilities on board its manufacturing operations to help build the countrys technical know-how. Ford has taken steps to boost their Chinese design capabilities, which also benefits domestic Chinese companies. For example, Fords China design police squad is putting its own spin on the upcoming Ford Fiesta (tailored for the Chinese market).Fords Current StrategiesFighting counterfeiters is a key priority at Ford, and it has stepped up countermeasures worldwide. Ford, GM, and DaimlerChrysler formed a global industry network in 2001 to work with law enforcement agencies and governments to strengthen patent and trademark protection laws and impose criminal penalties to prevent counterfeiting.xxviiThe problem is especially acute in the Middle East, where many counterfeit Ford parts made in China are shipped and sold alongside genuin e parts.xxviiiFord admits it was late in its efforts to protect its IPR abroad. However, the company is now very active and has even established its own brand protection team. The unit has led a number of raids, which have led to prosecutions. Ford recently raided a Chinese factory and turned up 7,000 sets of counterfeit brake pads fate for Egypt, each stamped with a replica of Fords blue oval. A legitimate set of pads would cost the equivalent of $47 in Egypt the phony ones might cost $30.xxixFurthermore, as a brand Ford is trying to make everything as sophisticated as possible. It has security features in the parts packaging itself and spends time on brand awareness and training exercises so people can better identify fakes. The company says this is critical to long term public awareness and stopping sales of counterfeit products.xxxIII Overview of Product financial obligationProduct LiabilityAll auto manufacturers, including Ford, are exposed to product liability lawsuits relat ed to the sale of autos or parts to the public, especially in litigious countries. Ford has the most exposure in the U.S. given the extremely litigious environment and its large sales. According to the Restatement (Third) of Torts Products Liability a user or bystander in the U.S. can sue for injuries related to a defect or malfunction of the product, and, in some instances, a big design or a failure to warn.Even though Ford does not manufacture and sell the counterfeit Ford parts it increases its exposure if the parts are believed to be manufactured by Ford and then cause accidents and injuries. Ford could be sued and incur substantial attorneys fees and possibly even settlement costs. Ford would then have to prove that the product was not manufactured or sold by them, and even if Ford is successful it will still face attorneys fees, damage to its brand, and wasted corporate resources.Product Liability History and SeverityProduct liability lawsuits can take years to defend, result in millions of dollars of fees and settlements, and soberly damage a brand. Ford has faced product liability lawsuits in the past such as the Ford Pinto case in the 1970s that cost it millions and the Ford Explorer rollover related lawsuits in the 2000s. Ford manufactured the Pinto throughout the 70s and due to a faulty gas tank the cars often caught fire during nooky collisions. The most notable Ford Pinto case (versus Grimshaw) cost Ford $6.5 million in 1981.xxxiFord has faced many other product liability lawsuits throughout its history.Fords Current StrategiesFord recognizes its exposure to insurable risks including product liability related to the manufacture and sale of autos and parts. Given the critical nature of risk management Ford maintains a Global Risk Management Committee (GRMC) that makes risk related decisions and is headed by the Chief Financial Officer. Ford chooses to manage and protect against product liability risks through a combination of self-insurance and product liability insurance.xxxiiThe self-insurance is typically in the form of a calculated monetary fund setup to may attorneys and claims. The product liability insurance would provide Ford with attorney support and claims/settlement payments in the event of an insurable claim.Ford also has a Sustainability, Environment gumshoe Engineering (SESE) Team that works to prevent faulty products from being sold and to ensure Ford complies with safety and environmental regulations. They also provide technical analytic thinking to corporate counsel on product liability lawsuits when needed.xxxiiiFinally, Ford has created a Global Brand Protection group to protect consumers from counterfeit products threatening user safety. This group is tasked with preventing the distribution of and removing counterfeit parts from the marketplace, ensuring that the companys trademarks are used appropriately, and maintaining the integrity of the sale and distribution of original equipment parts.xxxiv4 R ecommendationsChina has quickly become the worlds largest auto maker, surpassing the US in 2009xxxv. Due to its immense scale and rapid growth rates, China is an important strategic market for Ford from a production and sales perspective. Despite the political and legal issues and risks Ford faces in China, the company cannot simply withdraw its operations from China. Ford must engage in market and non-market strategies to help manage the counterfeit problem in this market.Recommendation 1 Refine Internal Firm StrategiesAs mentioned previously Ford has started to invest in internal strategies, such as raids and setting up the Brand Protection Group, to help address counterfeiting. We recommend that Ford continue to refine these strategies as well as incorporate additional internal firm tactics.From a product perspective, Ford has noted that there are security features in the packaging of the auto parts and that consumers should use reputable dealers and repairers, inspect parts and packaging closely in case they spot something and if they are concerned to ask that only original parts are used or call the auto maker.xxxviWe recommend that Ford continue to invest in its packaging to help dealers, repair shops, and consumers retrieve fake products. The company could consider implementing a certification program where only legitimate Ford plants and OEMs are able to put a Pre-Approved by Ford label on its products. Additionally Ford needs to employ efforts to minimize spare factory capacity in these production facilities and to increase monitoring from U.S. Ford managers.In conjunction with product-related tactics, Ford needs to educate its customers (e.g. dealers, auto-body shops) and end-consumers and bring this issue to light. Because counterfeiting auto and auto parts drastically affects consumer safety, Fords customers and consumers should have a strong commitment to help prevent counterfeiting once they are aware of the issue. These educational efforts can be spearheaded by the Global Branding Team and be implemented in various public relations and marketing efforts. Most consumers may not be aware that counterfeit autos and auto parts exist and are responsible for associated safety risks. One campaign can highlight how counterfeit auto parts can lead to injuries and fatalities. The campaign can then empower consumers to ask for Ford parts only when having their autos repaired. This will encourage customers to seek out Fords legitimate replacement parts and be wary of counterfeit products.Ford also should implement tactics to educate and incent their employees, critical stakeholders. In conjunction with educating consumers, the Global Branding Team can utilize the same resources to educate its employees. This knowledge can help increase employees commitment to prevent counterfeiting and can also create a culture of pride related to high quality production and safety. Ford ca