New Front Opens In Piracy War With Massive Fine

Shenzhen levies massive fine in piracy case

When the history books are written, the month of May 2014 could go down as a watershed in the Chinese battle against piracy. An obscure Shenzhen company could also be part of the story, following reports that the firm Kuaibo Technology has been fined a whopping 260 million yuan ($42 million) by the city government for repeated piracy. Then again, it’s also quite possible and likely that Kuaibo will simply shut its doors to avoid paying the fine, and then re-open nearby using another name and company registration.

I’ve been covering the China tech scene for a decade now, and this is easily the largest fine I’ve ever seen for this kind of case involving the piracy, intellectual property theft and other illegal business practices that are rampant in the industry. Much more typically, companies that engage in rampant piracy or other anti-competitive practices will get caught and fined trivial amounts of money, often in the thousands or perhaps tens of thousands of dollars.

The small amounts of the fines are the result of very low ceilings in Chinese laws, dating back from days when everything was owned by the state and thus this kind of business dispute didn’t exist. But this latest move show the Shenzhen city government believes it has legal grounds to significantly raise the stakes in the war against piracy, in what could become a major new weapon if other municipalities decide to try a similar tack.

Somewhat appropriately, the name of the company at the center of this latest news translates to “quick broadcast”, hinting at its mode of business. The reports say that Shenzhen officials visited Kuaibo’s headquarters in the southern boomtown next to Hong Kong, but that no middle or upper managers were present to actually accept a notice of the massive fine. (Chinese article)

That’s not too surprising, since all of the managers were probably tipped off in advance by their government connections, and hastily left the building before officials arrived with the notice. I would expect the company will be completely abandoned in the next day or two, if it isn’t already, and that Kuaibo will no longer exist in Shenzhen after this week. Of course that doesn’t mean its managers will disappear, and they could easily try to set up a new pirating plant nearby in the next few weeks or months.

Still, this decision to sharply boost the stakes in the piracy game looks like a significant move that could be replicated throughout the country in the months ahead. It does seem appropriate that Shenzhen is at the center of this new approach, since the city that began its life as a special zone for economic reforms has become a leader in promoting China’s technology sector.

Some of the nation’s top tech firms now call the city home, including telecoms giants Huawei and ZTE (HKEx: 763; Shenzhen: 000063), as well as leading Internet firm Tencent (HKEx: 700) and new energy car maker BYD (HKEx: 1211; Shenzhen: 002594). If Shenzhen officials are serious, they will confiscate all the equipment in Kuaibo’s factory and destroy it, and then make concerted moves to impose the fine and make sure the company’s owners don’t open a new factory under another name.

As I’ve said above, it’s still quite possible that Kuaibo’s owners will simply move further away and reopen under a different name and continue their piracy. But at least the move by Shenzhen sends a major new warning signal to these pirates and will make their lives much more risky, which could ultimately force many out of the business if other parts of China take a similar approach.

Bottom line: A major new fine by Shenzhen against a local company for massive piracy could mark a new financial tack in China’s ongoing battle against counterfeiting.

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