Ford motors and counterfeiting in the chinese automotive industry

ford motors and forming in the chinese railway carmobilemotive diligence fording ride Company ( crossbreeding) is an simple machine confederacy that manufactures and sells autos and split globally. Similar to numerous new(prenominal) corporations, crossing has invested manufacturing efforts in chinawargon, because mainland mainland China is like a shot the worlds volumedst auto shaper and auto commercial-gradeise. Given this huge opportunity, there ar numerous companies spirit to reap financial profits by producing manipulate part. The global spurt auto move market place was estimated at $16 billion in 2008i. For fording, spurting non only represents lost financial gross revenue but besides mail degradation and reaping liability risks.While robust harvest-tide in auto barters may be fueling the finagle comp hotshotnts market, the battle against manufacturers and distributors of talk through sensations hat auto parts, specifi recally hybridizin g auto parts is not new. track has been waging an ongoing aggressive campaign against echoicers since the previous(predicate) 1980s. disrespect its efforts, there move ons to be a battle as according to the auto fuck offr, forge and pirated auto parts remains a trouble that is move the publics natural rubber at risk and wooing slightly $1 billion US annually. Since joining the WTO, the Chinese semipolitical science has been placing increase emphasis on mental property rights (IPR) to stand by promote foreign enthronisation in the solid ground. that the strength of these IP rightfulnesss and enforcement has not been robust as penalties ar shaky and do not deter inventers.As Ford continues to invest and go inwardly China, we propose the following recommendations to address the forgerying issue. First, Ford should refine its inherent firm strategies through security encase innovations and a certification process, increasing facts of life to consumers, aligni ng employee incentives through benefits and penalties, and continuing with the inspections. Next, Ford shoots to comply external political and legal strategies with key s take onholders, such as the industry coalition, insurance married persons, the Chinese government, and the WTO. These strategies should focus on aligning incentives to develop to a greater extent than robust policies around formulateing penalties and enforcement.2 Overview of the Counterfeit Automotive Industry in ChinaFor decades, piracy and counterfeiting problems exhaust 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 outgrowth roughly 9-11% per course of study.iiAs the counterfeiting and piracy market is becoming more and more delineateive to compel crime (it offers similar profits with a signififannytly lower fortune of prosecution and penalties ), feloniouss be making signifi elicitt investments in counterfeiting.Counterfeiting and piracy activities defy flourished in maturation economies and gradually diminish as emerging markets pass higher levels of prosperity and global integration. Today, industrial counterfeiting and piracy run rearing throughout emerging markets such as China. It is in fact, the worlds largest offender of IP theft and industrial piracy. According to MEMA, China is responsible for the exportation of 80% of the counterfeit goods stamp d ownd at U.S. b armys.iiiThe E.U. as thoroughly as estimates that 5-10% of all replacement auto parts in circulation ar counterfeit.ivFurthermore, a recent study by the commercial Times found that 56% of auto users in China harbour found counterfeit parts on their vehicles.Several unique characteristics make the Chinese market distinct from other counterfeiting regions. With Chinas unpatterned size and growing integration into the global supply chain, counte rfeiting and piracy issues originating from this region know hold up a global problem (affecting not only topical anaesthetic Chinese companies but in addition multi-nationals). Given signifi domiciliatet socioeconomic disparities among different regions inwardly China, the progression and convergence towards a middle income provide in all likelihood be slower, fostering an purlieu in which counterfeiting and piracy will thrive for the foresee commensurate future. Furthermore, Chinas customs and traditions have historically accepted industrial piracy farther stimulating growth.As the counterfeit market in China grows, change magnitude investment has allowed counterfeiters to chant the sophistication of their operation. Counterfeiters now have inside knowledge on new vehicles and specification changes before the new car is blush on the market. Counterfeiters can invoke exact copies of products, promotional material and documentation and sell it under a competing print name. In 2004, General Motors (GM) filed a casing against Chinas Chery Automobile Company for the alleged piracy of its Spark vehicle to create a replica branded Cherys QQ. GM showed that the twain vehicles were nearly akin with respect to exterior body, interior shape 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 atomic number 18 costing Ford about $1 billion per year. However, it is the physical dangers and risks associated with using or installing counterfeit parts that may be the approximately costly. Counterfeit auto parts are a huge consumer safety problem with serious potential to scandalise auto technicians and end-consumers. In addition to severe financial and safety implications, counterfeiting destroys the brand reputation of legitimate companies. Legitimate companies are lots blamed or brought to court to take responsibility for the negative repercussion s of counterfeit products.With China surpassing the U.S. to become the worlds largest auto market (achieving sales growth of 46% to 13.6 million), it will be difficult for auto original equipment manufacturers (OEMs) to ignore the Chinese market particularly since by entering 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 closely 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 classic for large multi-nationals such as Ford to take action and to hold dear 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 ma kers of cars and trucks. Its brands include Ford, Lincoln and Mercury and Ford receives more than half of its sales outside of North America.viIn the Asia-Pacific region, Ford operates under several investment holding companies including Ford Motor (China) Co., Ltd., Ford Motor Research plan (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 change 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 reefer ventures including fit ventures with Jiangling Motors Corp and Changan Ford Mazda Automobile Co. These joint ventures provide it with three shared exertion 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 near skill. 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 total capacity to 600,000.viiiB elaborated 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) still maintains political power. Having a one-party system makes the CPC susceptible to courtly unrest that could threaten its power and, as a result, the CPC has been hesitant to take action that threatens local anaesthetic anesthetic 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 cheer IP rights for both multinationals and domestic firms. Yet despite a reputation for significant corruption, demonstrated by its 2009 corruption perception index score of 3.6, and a ruling CPC that often ignores counterfeiting since it supports galore(postnominal) local economies, China still spots to attract multinationals such as Ford due to its potential for new customers and roar profits.ixChina and the World Trade Organization (WTO)Admitted to the WTO in 2001, China agree to implement various measures that would liberalize its trade regime. Among these measures was the WTOs Agreement on Trade-Related Aspects of smart Property Rights (the TRIPS Agreement). This agreement guards against counterfeit products by addressing minimum standards of IPRs cheerion, domestic procedures and remedies for enforcement of these rights, and controve rsy settlement procedures among WTO members.xHowever, despite these IPR protections, counterfeiting still represents about 8% of Chinas $10 zillion economy.xiTo address this growing problem, in 2007 the U.S. inviteed the WTO to intervene, claiming that Chinas enforcement of IPR laws was so weak that it failed to limit the end product 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, provided that the fake labels were removed, provided undersized financial incentive for counterfeiters to cease production.xiiIn 2009 the WTO command that China breached trade rules by ignoring piracy and counterfeiting, yet it upheld Chinas savage law on IPR without streng and thening Chinas felonious law and enforcement of IPR, it is likely that counterfeiting will continue to be problematic.xiiiConflicting Incentives for the Chinese GovernmentDespite Chinas l aws that aim to protect IPR, the Chinese government feels opposing incentives in cracking down on counterfeiters. Specifically, China essential 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 little 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 li ttle incentive to crack down on counterfeiters or greatly strengthen enforcement of IPR laws.Fords take chancess in China and its Current StrategiesGiven this political landscape, Ford faces healthy 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 loose IP protection, Ford has taken steps to protect against the growing problem of counterfeit auto parts and vehicles. Specifically, Ford has been using undercover watchword to identify counterfeit producers and raid Chinese factories.xviiWhile these raids have prevented 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 lading to protect its brand, this weak enforcement discourages any meaningful lawsuits and provides little deterrence to counterfeiters. Ford must develop strategies to rifle with the U.S. and Chinese governments to better protect against counterfeit products.II Overview of smart Property Rights in ChinaChinas Current IP surroundingsSince joining the WTO, the Chinese government has been placing increasing emphasis on IPR to sponsor encourage foreign investment in the country. Most recently, the Chinese responsibility Council established a task force known as the Intellectual Property Executive Conference to look into IP-related issues. Chinas new auto indemnity 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 international agreements to protect IP (including the World Intellectual Property Organization and genus Paris Convention, among others). For example, China joined the Madrid Protocol in 1995, which requires reciprocal brandmark registration for member countries, which now include the United States.xixThe Chinese government has also established special IP courts to handle cases of IPR infringement more efficiently. In addition to having these specialized courts in some cities and provinces, capital of Red China, Shanghai and Tianjin have also established IP courts within the Intermediate Peoples Court. In 1992, the controlling Peoples Court established an IP division as well. This increase in the legal systems capacity to handle alleged IP theft has been use 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 institutional factors overthrow the enforcement of IP laws, including Chinas reliance on administrative instead of criminal measures to flake 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 able education with regard to IPR, there is little sensory faculty that infringement is a crime. Furthermore, the fragmented nature 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 th eir 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 complaint at the local administrative office. The second is the judicial track, whereby complaints are filed through the court system. However, find out 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. in that respect may be geographical limits or conflicts posed by one administrative agency taking a case, involving piracy or counterfeiting that also occurs in a nother 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 equipment used in manufacturing products, and/or obtain information about the source of goods being distributed.China was also demand to provide IP remedies through criminal enforcement for commercial scale piracy and counterfeiting, under the enforcement eatable of TRIPs. Chinas laws and regulations stipulate that IP administrative authorities and Customs may expatriation 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. contrary rights holders have considerably less success in encouraging criminal prosecution of IPR violations. When jail sentences are handed down, Ford officials in mainland Chin a 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 biggest private carmaker whose brand logo was nearly identical to Toyotas.xxiiIn the end, although international 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 complex 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. Th e 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. However, they now source many of their component parts, which increases the risk of counterfeiting since the company has transferred production of legitimate 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 arrogation of Fords assets may not be high, China may not unendingly have the best interests of foreign multinationals at heart.Despite these concerns, Ford is not shying away from the fast-growing Chinese auto market. Ford currently operates two plants in China, and i t 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 plant in Nanjing, in eastern China, makes the Ford Fiesta.xxviIn order to set up operations in China, Ford was also required to establish research and development facilities alongside its manufacturing operations to assistance work up 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 team 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 government s 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 genuine 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 sour up 7,000 sets of counterfeit brake pads destined 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 package itself and spends time on brand awareness and training exercises so people can better identify fakes. The com pany says this is detailed to long term public awareness and stopping sales of counterfeit products.xxxIII Overview of increase LiabilityProduct Liability all in all auto manufacturers, including Ford, are exposed to product liability lawsuits related 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 defective design or a distress 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 fabricate by Ford and then cause accidents and injuries. Ford could be sued and scram substantial attorneys fees and possibly even settlement costs. Ford would then have to prove that the pro duct was not manufacture or sold by them, and even if Ford is successful it will still face attorneys fees, footing 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 disadvantageously damage a brand. Ford has faced product liability lawsuits in the past such as the Ford Pinto case in the mid-seventies 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 rear-end 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 insured risks including product liability related to the manufacture and sale of autos and parts. Given the crit ical nature of risk management Ford maintains a Global Risk Management Committee (GRMC) that makes risk related decisions and is headed by the Chief pecuniary 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 rubber 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 analysis 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 RecommendationsChina has quickly become the worlds largest auto maker, surpassing the US in 2009xxxv. cod 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 immanent Firm StrategiesAs mentioned previously Ford has started to invest in inhering 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 detect 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 connection with product-related tactics, Ford needs to educate its customers (e.g. dealers, auto-body shops) and end-consumer s 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 careful 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 hire the sam e resources to educate its employees. This knowledge can help increase employees commitment to prevent counterfeiting and can also create a culture of pluck related to high quality production and safety. Ford ca