If anything the problem is worse than in Taiwan

Monday, February 6, 2006

Bike inventor is winning the war against pirates
David Hon has learned bitter lessons over many years on how to protect
intellectual property

NEIL GOUGH in Shenzhen

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It's a common tale among foreign firms struggling to protect
intellectual property on the mainland. About 10 years ago, Dahon, a
global leader in the production and design of folding bicycles, saw its
market share devoured almost overnight by copycat manufacturers.

The firm's ordeal began when several key local staff left to set up a
rival factory. They took patented technologies and the customer lists
with them.

David Hon, Dahon's founder and chief executive, sued. But after several
years of moving from court to court in different cities, his case
seemed increasingly hopeless. "It seemed like the whole country
was against me," he said.

But that unhappy episode took place in Taiwan, back in the early 1990s.
By 1995, when Dahon began shifting operations to Shenzhen, it had
already learned the painful lessons that await so many new entrants to
the China market.

"If anything the problem is worse than in Taiwan," said Mr
Hon. "Sometimes enforcers [themselves] can be quite ignorant of
intellectual property rights... But we are now much more experienced in
dealing with this sort of thing."

A physicist by training, innovative ideas have long been at the core of
the business for the 64-year-old Mr Hon. Born in Guangdong province
during the Japanese occupation, his father once served as the chief tax
official in the provincial capital of Guangzhou under the Kuomintang

After the communists came to power, the family fled to Hong Kong. They
moved from place to place, sometimes squatting in rooftop hovels, and
as a child Mr Hon helped the family to scratch out a living by hawking
T-shirts from streetside stalls.

A twist of fate landed him a spot in the prestigious Diocesan Boys'
School, where he discovered a passion for learning. He went on to earn
a degree in Physics from the University of California at Berkeley, and
by the age of 25 found himself in front of the classroom at a branch of
the California State University as an associate professor of Physics.

After earning his PhD, Mr Hon took a position at Hughes Research Labs
in California, where he did groundbreaking work in high-powered laser
technology. His research caught the attention of the National Science
Federation and Nasa, and his work was soon classified. Some of his
innovations in laser technology are still employed in present-day
missile defence.

But there was a war on in Vietnam, and Mr Hon became distraught by the
thought that his work in the lab might be contributing to the
destruction. At the same time, the oil crises of the early 1970s were
pushing petrol prices in the US to unheard-of levels and creating
uncertainty among ordinary people about their future energy and
transport needs.

Something clicked for Mr Hon, and away from the lab he began spending
his evenings and weekends in his garage, tinkering with an idea he had
for a foldable bicycle. After going through a series of prototypes he
ironed out the design flaws, and it wasn't long before he started to
think about finding a market. He spent several years trying
unsuccessfully to sell the idea to bicycle companies before deciding to
go it alone. By 1982 he had quit his job at the lab, pooled together
several investors and around US$2 million in capital, and moved to
Taiwan to set up the business. The first folding bike came off the
production line two years later.

Throughout the design and manufacturing processes, Mr Hon was careful
to put as much emphasis on the intellectual assets as on the bikes
themselves. He secured patents in major markets such as the US, Japan
and Europe for key design features in the hope that, should the bikes
prove popular, he could license the technology to other manufacturers.

What he didn't plan on was his own staff running off with the company's

Up until 1992, Dahon was practically the only company in the world
making folding bicycles and was selling nearly 200,000 bikes annually.
But within a year, senior staff had made off with Dahon's newest
designs, patents and customer lists. They set up a competing facility
in Taiwan and started selling cut-rate copycat bikes into the market.
"They took the latest ideas that weren't in production yet and
they were selling for less," said Mr Hon. "Our business in
Taiwan basically went under."

Mr Hon's lawsuit against the former employees dragged on for years, and
eventually involved formal action by the US Trade Representative. After
nearly a decade, the case resulted in the former staff paying fines of
around US$30,000 each in lieu of jail time.

Meanwhile, Mr Hon relocated the bulk of operations to the mainland,
beginning with an R&D facility in Shenzhen in 1995. To avoid a
repeat of the Taiwan ordeal, he has adopted greater security measures
and a new strategic tack. He is an active proponent of intellectual
property issues and tries to stay as high profile as possible. Aside
from sitting on several industry associations, he is a governor of the
local American Chamber of Commerce and an adviser to an intellectual
property rights committee under Vice-premier Wu Yi. "My higher
visibility has helped our company to enforce IPR [intellectual property
rights]," said Mr Hon.

In addition to the PR campaign, Dahon now employs two in-house lawyers
to take patent infringers to court. Unlike the experiences of many
foreign plaintiffs, he says the results so far have been encouraging.
"I have filed lawsuits against different people and mostly won in
China," said Mr Hon.

Those successes are becoming increasingly important as the firm eyes
expansion in the mainland market. It now has a network of several
hundred distributors to put its bikes on the shelves at more than 2,000
retail stores nationwide. In addition to launching 20 new models of
bikes a year, Dahon is looking into new markets like electric bicycles,
a niche market elsewhere but big business on the mainland.

Security remains a top priority. Entry to Dahon's research lab in
Shenzhen is restricted only to R&D employees. On exit, even a
reporter's notebook is held up in front of a security camera to verify
he wasn't taking the wrong kind of notes.