Mitigating Intellectual Property Risks in the Supply Chain

The manufacturing process these days is very much about mastering complex supply chains. Products are no longer made by a single company but by multiple companies that produce the different components. This is true for cars, personal computers and even for jetliners.

Boeing’s 787 Dreamliner, which the company has just delivered, is a prime example. About 70 percent of the Dreamliner was outsourced to some 900 sub-contractors. Half of it was made by companies and contractors outside the US, primarily in Japan and Italy. However, many components were also made in Asia, in countries such as China. Boeing did the final assembly and owns the overall intellectual property.

This heavy reliance on sub-contractors will not go away. In fact, given the growing sophistication of factories in China and elsewhere in the developing world, more and more components will be made in factories in Asia, where labour costs are significantly lower than in the west.

While this allows companies to produce goods more cheaply and efficiently than ever before, there is a downside. As the supply chain increases in complexity, the risks also increase.

Risk exists all along the supply chain. There are supply risks (a critical component suddenly goes into short supply, such as when floods in Thailand affect hard disk supplies), process risks (where suppliers produce substandard components), national and regulatory compliance risks, intellectual property risks and demand risks.

Mitigating supply chain risks requires that processes have adequate built-in risk control and containment measures from the start, that there is an ongoing process to assess risks, there is the transfer of risks (for example, to an insurance company), and there is avoidance of risks completely (by shuttering high-risk businesses, for example).

A new risk that is emerging for manufacturers is intellectual property compliance, which is growing out of a movement in the US to punish companies that use pirated or unlicensed software.

In his State of the Union speech on 24 January, President Barack Obama said, “I will go anywhere in the world to open new markets for American products. And I will not stand by when our competitors don't play by the rules…. But we need to do more. It's not right when another country lets our movies, music and software be pirated. It's not fair when foreign manufacturers have a leg up on ours only because they're heavily subsidized.” President Obama also announced the creation of the ‘Trade Enforcement Unit’, a federal body that would be charged with investigating unfair trade practices by countries that do business with the US.

Unfair trade practices cover a wide range of issues of course, but one that many companies in Asia should be aware of is that of using copied or pirated software. According to a 2010 Business Software Alliance study, the piracy rate for the Asia Pacific region is 60 percent. In contrast, the same number for North America is 21 percent.

How is this unfair trading? Clearly, all things being equal, a company that pays for legitimate software has higher expenses than a company that uses pirated software, giving those companies an unfair advantage.

Given the gloomy economic situation in the US, there is plenty of political pressure to make sure American companies are competitive. The aim is to ensure that jobs in the US are not lost because American companies pay for software while companies elsewhere do not.

This obviously has a significant impact for companies in Asia where some individual countries have a high rate of pirated software use. The more notorious examples include: Bangladesh – 90 percent; Indonesia - 87 percent; Sri Lanka - 86 percent; Pakistan - 84 percent; Vietnam - 83 percent; and China – 78 percent.

Manufacturing companies in Asia will need to demonstrate to their customers that they are not using pirated software in the making of products. Increasingly, this will be a requirement imposed upon them by their US customers. By using legitimate software, Asian manufacturers will thus be more competitive compared to their counterparts that use pirated software.

Manufacturing companies in Asia using pirated software face possible legal actions, both domestically and internationally, and this will have an impact on their manufacturing process. This risk in the supply chain is one that can be easily avoided by using legitimate software, compared to other risks in the supply chain that may not be so easily mitigated, such as supply risks due to natural disasters. By eliminating this intellectual property risk, manufacturers will have one less risk to manage in its supply chain, and at the same time be more competitive against other infringing manufacturers.

Asian manufacturing companies are typically important institutions in their home countries, responsible for the employment of many thousands of people.  As such, if policy makers in Asia want to keep their domestic manufacturing sectors healthy, encouraging the use of legitimate software is going to be the way to go.

Wendy Lam is a founding partner of V CHONG W LAM (VCWL), a boutique Malaysian law firm specializing in intellectual property law. She is a past president of the Licensing Executives Society of Malaysia (LESM) and has served for many years as the International Delegate to the Licensing Executives Society International. She is also a member of the Asian Patent Attorneys Association (APAA) and the Malaysian Intellectual Property Association (MIPA). She actively serves as a member of the Intellectual Property Committee of the Malaysian Bar Council and has presented papers on intellectual property law both locally and internationally.