Key China IP Infringement Case Back in Spotlight

The infamous case of AMSC vs. Sinovel is back in the news.

One of the most important international IP theft / copyright infringement cases in China is in the

AMSC stock price
AMSC was flying high – until its main China partner became an international competitor,

spotlight again, as China’s Supreme People’s Court was due to hear arguments last Friday from a Chinese firm Sinovel why the court should dismiss a case of copyright infringement brought against it by US-based AMSC , a maker of sophisticated software for controlling wind turbines. Sinovel was once AMSC’s biggest client and is now a bitter rival and adversary over charges and counter-charges of theft, conspiracy and failure to honor contracts. You can read more about the latest developments of the case in Oct 25’s  WSJ article –China Court to Weigh Corporate-Spy Case  and in ReCharge News – a trade journal for the renewable energy sector.

While we’re waiting for the results of the case to be publicized, let’s take a look at the background of AMSC’s rise and fall in the China market. The following is an excerpt from The Fragile Bridge- Conflict Management in Chinese Business :

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Picking the right partner is the only effective way to avoid destructive conflict. Ask Daniel McGahn, CEO of AMSC, a Massachusetts maker of hi-tech control systems for wind turbines — or rather ask their shareholders. The stock went from high-flyer to road kill in a matter of months because of an ugly encounter with a strategic Chinese partner. Their technology was stolen (allegedly), their China market access cut off, and their largest customer transformed into their biggest potential competitor — all because they got involved with the wrong partner.

In 2006 AMSC began what it termed as a “symbiotic relationship” with Sinovel, a Chinese firm that would quickly grow into the mainland’s largest producer of sophisticated wind turbines. Sinovel was also growing to become AMSC’s largest customer – accounting for two thirds of its revenue by 2010. But in the spring of 2011, AMSC was forced to drop a bombshell of an announcement. Not only had Sinovel (allegedly) stolen AMSC’s source code for the technology that runs a modern wind turbine generator, but Sinovel’s CEO Han Junliang had set up a Chinese competitor to AMSC called Dalian Guotong Electric which produced power converters which seemed to be direct copies of AMSC’s. Too make matters worse, Sinovel still owed AMSC $70 million, and was reneging on contracts to take delivery on another $70 million worth of inventory.

When the story came to light in 2012, I studied every news reports, company announcement, and commentary to figure out what went wrong and what I could learn about managing conflict. The most chilling aspect of AMSC’s trouble was that management didn’t seem to make any mistakes — other than dealing with a scheming, dishonest partner in China. Senior management thought they knew what they were getting themselves into, and went to great lengths to safeguard their technology and IP. They kept vital information outside of China – storing their source code on highly secured servers in Europe, segregated production of their most sophisticated components to the US, and struck a win-win deal with a well-connected partner in China. I was living in Shanghai at the time, and asked friends and associates what the weak link in AMSC security chain could be? Nothing. The only thing that the US company could have done differently was to avoid the China market altogether. The partner they selected had apparently been planning from the very start to not only to steal AMSC’s technology, but also to set up a competing company that would go after the US firms’ markets in China…and abroad.

The entire story is laid out in the excellent BusinessWeek (March 15, 2012) article by Michael Riley and Ashlee Vance. It should be required reading for every business student or executive considering getting involved with a China partner.  BusinessWeek’s, “China Corporate Espionage Boom Knocks Wind Out of U.S. Companies,” by Michael A. Riley and Ashlee Vance on March 15, 2012

Those interested in the AMSC / Sinovel case should also consult the following sources:
AMSC versus Sinovel showdown reaches China’s highest court … Recharge News Apr 10, 2012
AMSC versus Sinovel showdown reaches China’s highest court.

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AMSC’s IP fight in China viewed as a ‘litmus test’
Boston Business Journal May 4, 2012 by Jay Fitzgerald

AMSC’s copyright infringement claims against two Chinese companies are emerging as a major international test case of China’s ability and willingness to uphold intellectual property rights of foreign firms, business experts and political leaders say.

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Back From the Brink – AMSC tries to rebound after disastrous software theft
Worcester Telegram & Gazette April 22, 2012 by Priyanka Dayal

“Sunday, April 22, 2012 — Last year, the unthinkable happened to American Superconductor Corp. An employee sold its secrets to the Chinese. The company’s proprietary software ended up in the hands of its biggest customer, Sinovel Wind Group Co. American Superconductor, or AMSC, makes the controls that make wind turbines work; it had been selling those parts to Sinovel, a wind turbine manufacturer. Then, suddenly, Sinovel refused to accept the parts it had ordered…”

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American Superconductor Destroyed For A Tiny Bribe
Forbes, September 21, 2011 by Joan Lappin

“When it Comes To China, Seller Beware If You Want To Get Paid. The story about the problems at American Superconductor and its former customer Sinovel keeps getting more and more bizarre. Most amazing so far is the tiny amount of money paid to the AMSC employee who has reportedly pled guilty to the charges that he was bribed to reveal the source code for core electrical components for Sinovel’s wind turbines. The bribe was so small he couldn’t even have bought a low end Mercedes for his troubles…”

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