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Case Analysis: Foxconn V BYD

Alok Parikh
Foxconn, a Taiwanese multinational electronics manufacturing company took a legal
action against its Chinese competitor, BYD by accusing them of stealing their trade secrets in
May !!"# This case depicts how BYD$s learning by hiring strategy turned into a
commercial espionage# %t also portrays the challenges that foreign companies and their
managers face to protect their trade secrets in countries with high employee mobility like
China# %n countries with less intellectual property protection, companies can protect their
research in&estments by making their employees sign a confidentiality agreement, and also
by increasing security in their information management systems#
ocial! Cultural! and Political Factors " IP Pro#le$s in China
Countries engage in international trade to gain more wealth through competiti&e
ad&antage# Competiti&e ad&antage as described by C'(, gi&es nations more benefits
compared to other nations, by producing products in which they ha&e expertise in# )Ca&usgil,
'night, (iesenberger, !*+,
%nsufficient protection and a lack of respect towards intellectual property in China has
created a headache for foreign corporations# Multinational companies expect some sort of
protection o&er their trade secrets# Chinese go&ernment should le&y tough laws to prohibit
local companies from stealing intellectual property of foreign corporations# They need to
ha&e greater transparency on intellectual property and trade laws#
Country risk as defined by C'( is a loss incurred by foreign corporations either due
to an unstable go&ernment or a dysfunctional -udicial system )Ca&usgil, 'night,
(iesenberger, !*+,# Corporations doing business in China face many challenges in their
socialist market economy# .ccording to D/(, China$s political and legal systems deter
foreign businesses from doing trade with China# 0olicies and laws set by the Chinese
go&ernment and their -udicial system, ha&e not yield any positi&e impact on fabricating goods
and intellectual property protection# %ntellectual property gi&es companies a competiti&e
ad&antage and thus they are &aluable assets deri&ed from inno&ation#
Foreign corporations in China face big challenges such as learning by hiring strategy
followed by local companies, trade secret thefts, lack of intellectual property law
enforcement, -udicial and political corruption, and go&ernment protection for local
companies# The Chinese Communist 0arty holds political power and thus they set most of
the economic policies# %n the Foxconn & BYD case, one can assert that Foxconn faced many
challenges as a result of being a foreign corporation operating in China# Due to lack of
stringent commercial laws in China, BYD, a domestic Chinese company hired Foxconn$s
experienced and talented employees, a strategy known as learning by hiring )1i, 1u, Tao,
2ei, !!3,# %n May !!", Foxconn disco&ered that their trade secrets were stolen and gi&en
to BYD by their current and former employees# BYD failed to recogni4e and respect the
boundary between learning by hiring and commercial espionage#
China has experienced higher than normal infringement of intellectual property rights
compared to other de&eloping nations# This is partly due to its enormous population5 di&erse
subcultures and languages which made it harder to identify thefts )1i, 1u, Tao, 2ei, !!3,#
/enior go&ernment officials, political party members and their relati&es owned big businesses
and therefore they had local protection from their law enforcement officials# %n addition,
local economy prospered from producing counterfeit goods and thus local officials supported
the cause# 1ocal go&ernments financed local courts and also appointed -udges who had to
rule in proportion with the bureaucrats$ wishes# There are laws to protect intellectual
property rights in China, but they are worthless without proper implementation# 2idespread
corruption by politicians and -udges curbs any progress in law enforcement# 0redilection for
foreign brands and low purchasing power has gi&en rise to fake and pirated products in
Chinese markets# Chinese managers with low salaries are lured into trading secrets for high
paying -obs offered by competitors )1i, 1u, Tao, 2ei, !!3,#
tren%ths and &eaknesses o' Foxconn(s )iti%ation trate%y
Foreign companies in China hesitate to pursue a litigation that in&ol&es resol&ing
intellectual property thefts# Companies ha&e to re&eal more trade secrets in this type of
litigations and thus they prefer to stay away from legal actions# Furthermore, filing any sort
of patent in China is not a guaranteed protection and they are filed on a first6come, first6
ser&ed basis, as opposed to the first6to6in&ent procedure in the 7/ )1i, 1u, Tao, 2ei, !!3,#
/o if a company is late in filing patent for their in&ention, their competitor can still sue them#
/trengths of the litigation pursued by Foxconn
/upporting e&idence found during in&estigation6 2ang 2ei, a former engineer of Foxconn
had sent + confidential documents about mobile phone production to a BYD employee,
8hang 9ian# %n December !!:, Bei-ing 98/C 9udicature .ppraisal Center for %ntellectual
0roperty &erified that BYD possessed massi&e non6public information pertaining to Foxconn#
Foxconn$s internal in&estigation disco&ered that BYD had been steadily stealing its trade
secrets# Foxconn lost a competiti&e ad&antage o&er BYD due to these thefts and as such
BYD saw substantial profits from !!; to !!< )1i, 1u, Tao, 2ei, !!3,# This type of
e&idence can help Foxconn win this litigation#
BYD spent &ery less amount of money on research and de&elopment compared to Foxconn,
but saw noticeably high profits within a short time frame# BYD started in&esting in !!", but
they saw substantial profits with -ust little inno&ation# This disparity between spending on
(=D and its >uick growth in the electronics manufacturing industry also raises concerns of
trade secret thefts#
%n !!<, Foxconn published ad&ertisements in ma-or Taiwanese newspapers stating that the
delay in prosecution of BYD by the Chinese authorities was done on purpose# They blamed
the head of 0eople$s Congress, the one who has power to change -udicial decisions in
delaying the process#
2eaknesses of the litigation pursued by Foxconn
The need to re&eal more trade secrets in court and local protectionism6 0laintiffs in an
intellectual property litigation suit ha&e to re&eal more trade secrets during the process and
are also responsible to find the e&idence to pro&e their case# %n addition, protection of
domestic companies from local go&ernment and -udicial corruption rigged the outcome in
most cases# 1ocal courts in China fa&or local companies, to promote their growth and
de&elopment# %t is important for Foxconn to maintain its relations with the go&ernment in a
socialist market economy, where the ruling party has tremendous influence on foreign policy#
.lso, the fines for intellectual property thefts were &ery low and plaintiffs were not
compensated fairly# .ll these practices reduced incenti&e for international corporations to
combat their intellectual property infringements in China#
.ccording to ?esteland$s rules of international business, a foreign company is
expected to learn, adapt and assimilate within the local culture and obey their norms and
rituals )?esteland, !*,# Foxconn has a &alid case against BYD for stealing their trade
secrets, but they would ha&e to consider future conse>uences of this lawsuit, if they want to
continue manufacturing in China# /o e&en if Foxconn wins this suit, they would still need to
maintain a good relationship with the ruling party# But since the Chinese go&ernment fa&ors
domestic companies, Foxconn shouldn$t try too hard to win this litigation and -eopardi4e
their future business# They would still need local Chinese employees to run their operations#
%n a relationship6based society, as seen in China, the better solution for intellectual property
infringements is constant inno&ation to outstrip competitors who imitate their intelligence#
?esteland also points out an important distinction that differentiates business beha&ior
pre&alent in different nations# .ccording to him, the 7/ en-oys a deal6focused beha&ior
where people in&ol&ed in business are -ob oriented, as opposed to China$s relationship6
focused beha&ior where relationships in business are more important )?esteland, !*,#
China$s and most .sian nations$ relationship6focused beha&ior arose from their culture# .s
described by @ofstede, culture is a set of principles that one learns from their surrounding,
which sets them apart from others )@ofstede, !*+,# Foxconn would ha&e to learn and accept
that in Chinese culture, stealing intellectual property or producing counterfeit goods is not a
serious crime# Ane would describe Chinese culture as a normati&e society in which social
customs and congregation possesses a great deal of &alue# 2hile the western culture is more
of a pragmatic society in which truth depends on setting and the pre&ailing conditions at that
moment )@ofstede, !*+,#
Mana%e$ent trate%ies that M*+s includin% Foxconn should ado,t in China
Foxconn enforced se&eral information systems management security measures after
they caught the leak of their trade secrets in May !!"# They prohibited the use of 7/B
dri&es on their desktops and limited the si4e of files on all outgoing mails within their
network# %n addition, they restricted employees from bringing their personal laptops to work#
They e&en pro&ided crash courses on ethics and intellectual property rights, and started filing
more patents to sa&e their research in&estments# Foxconn failed to monitor transfer of data
that occurred at their facilities# They should ha&e implemented real6time monitoring of data
and all the electronic files to detect any leakages# They should set up an %T forensic
department and ha&e them assess potential risks to any particular asset within the company#
. comprehensi&e report for all network operations should be made and re&iewed by senior
managers# %n the e&ent of a security breach, they should swiftly change their designs to a&oid
competitors from gaining a competiti&e ad&antage# Foxconn can also a&oid any research and
de&elopment in China or any emerging nations with high intellectual property thefts# Ane
way to impede their employees from lea&ing their company is by offering them higher
salaries and better perks than BYD#
Foreign corporations cannot expect to en-oy the same le&el of intellectual property
protection in emerging economies# Therefore they will ha&e to in&est some of their profits in
securing their trade secrets and inno&ations# Foxconn would ha&e to impose controls on how
much their employees can access within their database# They should restrict access of
confidential patents and secrets to higher management# Further, they will ha&e to install
licensed security software within their network to inhibit security breaches or unknown
Foxconn and other multinational corporations should also look into cloud computing,
a computing technology that uses network of data centers located at ma-or sites to process
email and other %nternet acti&ities# This ser&ice doesn$t re>uire any extra hardware or
software and can be >uickly modified to fit the needs of their clients# . web6based portal
pro&ides management information, real time reports, and stats on network acti&ities# .ny
updates can be made through the data center and all threats can be administered without any
additional in&estment# This is a fast growing technology that doesn$t re>uire huge
in&estment, as opposed to traditional software tools# Cloud6based ser&ices doesn$t re>uire on
site hardware or software, which cuts down on6site maintenance re>uirement# Cloud ser&ices
can also scan for &iruses, spams and any ma-or threat to corporate networks# %t can also
block unnecessary social networking websites to enhance worker producti&ity at work# Ane
of the greatest ad&antages of cloud ser&ices is its flexibility to access company database
anytime and from anywhere in the world# Foxconn needs to ha&e a more secured storage
place for their trade secrets# .ccording to .biodun, cloud computing is a &iable alternati&e
for companies seeking a low cost storage site ).biodun, !*B,# %t$s easy to maintain cloud6
computing applications, as they don$t need to be installed on all computers# Flexible
characteristic of cloud computing would allow managers of multinational corporations to
spend more time on protecting intellectual property# Foxconn and any foreign company that
is &ulnerable to trade thefts in emerging economies can store and access data from their cloud
accounts# This would allow them to get rid of hard copies of their trade secrets, which would
inhibit certain employees from photocopying any confidential documents# .ccording to
.biodun, the companies that embrace the cloud technology now will ha&e access to huge
range of abilities due to the ongoing research and de&elopment in this field ).biodun, !*B,#
Cloud implementation across the world is on the rise, as a result of its di&erse capabilities
that are possible through &irtual networking# Foxconn is a multinational company with
facilities in .sia, Curope, Dorth and /outh .merica# Cloud ser&ices can help Foxconn
connect all their facilities to one network through which they can communicate and share
important documents# These documents can be tracked and thus ha&e a minimum risk of
getting leaked to their competitor# .lso, flexible resource scaling for multitenant computing
supports sharing of resources, which lowers the o&erall infrastructure cost and makes it more
efficient ).biodun, !*B,#
Conclusions and -e'lection
Managers from 7/6based companies should expect to face political and country risks
when working in a foreign subsidiary# .ccording to D(/, totalitarian societies are
fundamentally different than the democratic systems, and thus managers working in these
types of en&ironments ha&e to make decisions to facilitate the needs of entity in power
)Daniels, (adebaugh, /ulli&an, !*B,# 7/ managers in China would ha&e to make decisions
to fit the intricate needs of their ruling party, the Chinese Communist 0arty# They hold
ma-ority of the power and make most of the decisions, so it would be better to respect their
needs# %f any of my staff members confronts e&idence of intellectual property theft, my
ad&ice to them would be to sa&e the proof and bring it to me# From here, % would take it to
the senior management in the 7#/#, and in the absence of guidance, % would contact a
corporate lawyer in .merica#
Multinational corporation managers from indi&idualist and democratic societies ha&e
to change their managing approach in a collecti&ist and totalitarian society# They will need to
ad-ust themsel&es within the new culture by accepting their laws and practices# @igh
employee mobility leads to intricate issues such as theft of intellectual property by their
.biodun, .# )!*B,# . Framework for %mplementation of (isk Management /ystem in third
0arty managed Cloud# Journal Of Information Technology & Economic Development,
4),, *36B!#
Ca&usgil /# T#, 'night, ?#, = (iesenberger, 9# (# )!*+,# International Business The New
Realities Thir! E!ition Boston, M.E 0earson#
Daniels 9# D#, (adebaugh, 1# @#, = /ulli&an, D# 0# )!*B,# ?lobali4ation and %nternational
Business# International "usiness# Environments & operations )*+th ed#,#
?esteland, (# (#, )!*,# Cross6Cultural Business Beha&ior6 . ?uide for ?lobal
Management# $openhagen Business %chool &ress (etrie&ed fromE
@ofstede, ?#, )!*+,# Dational Cultural Dimensions# The 'ofste!e $entre (etrie&ed fromE
1i, Y#, 1u, 9#, Tao, 8#, 2ei, /# )!!3,# Foxconn I BYD )B,E /trategic .pproach To
%ntellectual 0roperty Management %n Cmerging Markets# The (sia $ase Research
$enter) The *niversity of 'ong +ong (etrie&ed from @ar&ard Business
0ublishingE httpEFFcb#hbsp#har&ard#eduFcbFcopyF;;+3+*+