Secretary of Defense
Corporate Fellows Program

FINAL REPORT

PFIZER, INC.

LTC David J. Clark, USA
April 2003
USAWC CIVILIAN RESEARCH PROJECT

Product Counterfeiting in China and One American Company’s Response

A Case Study and research report on corporate activity relating to national security and strategy

Prepared for the Director of the Secretary of Defense Corporate Fellowship Program

by

David J. Clark
Lieutenant Colonel
United States Army
Secretary of Defense Corporate Fellow

Dr. Clayton Chun
Project Advisor

The views expressed in this academic research paper are those of the author and do not necessarily reflect the official policy or position of the U.S. Government, the Department of Defense, or any of its agencies. It also does not reflect any policy or position of Pfizer Incorporated.

U.S. Army War College
Carlisle Barracks, Pennsylvania 17013

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ABSTRACT

AUTHOR: Lieutenant Colonel David J. Clark

TITLE: Product Counterfeiting in China and One American Company’s Response

FORMAT: Civilian Research Project

DATE: 4 April 2003 PAGES: 36 CLASSIFICATION: Unclassified

When America, the world’s largest economy, interacts with China, the world’s most populated country, matters of strategic and global importance are inevitably raised. Using his fellowship position in a major U.S. corporation as a vantage point, the author describes the impact of counterfeiting of consumer products and how an American corporation is responding. China is a known major market for “knock-off” products and counterfeiting production. Many US manufacturers are involved at various levels in efforts to stem losses emanating from the Pacific Rim Region. The paper looks at some of the implications of this economic issue and how Pfizer Incorporated, as part of the American research-based pharmaceutical industry approached it. The paper examines the history of counterfeiting and reasons why China had become a significant global source for fake products. The author discusses the degree to which illegal counterfeiting of western-made goods is undertaken in China. The paper examines the role of industry, governments and consumers in the trade of goods produced as a result of intellectual property piracy. The author concludes his paper by drawing a parallel between Chinese action in global political matters and its approach to global trade matters.

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TABLE OF CONTENTS

ABSTRACT III

PREFACE vii

PRODUCT COUNTERFEITING IN CHINA AND ONE AMERICAN COMPANY’S RESPONSE 1

Historical synopsis of Chinese – U.S. relations 2

Chinese transition to world economy 3

Pfizer Incorporated 5

The counterfeiting problem 7

Pfizer’s Anti-Counterfeiting Efforts 10

Pfizer’s Road Ahead 14

Other Corporate responses 16

THE Chinese position 18

American governmental efforts 20

chinese intentions 21

ENDNOTES 23

BIBLIOGRAPHY 27

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PREFACE

As one of seven military officers participating in the Secretary of Defense Corporate Fellows Program (SDCFP) during academic year 2002/3, I have had the tremendous opportunity to participate in the daily operations of a successful American company. One of the objectives of this fellowship was to act as an outreach to the civilian business world. In return, the SDCFP Fellows were given great latitude to move about and understand all aspects of their hosting company. We searched for common findings between the seven different companies. We will collect those thoughts into a compilation of ideas that may have applicability to our enterprise, the Department of Defense. We are still formulating the content of what we will report to senior military leaders at the conclusion of this fellowship. However, common issues that are evolving concern innovative personnel practices, organization design, enterprise resource planning, and budgeting. Many of these developing ideas seem applicable to the transformational concepts being explored by the Department of Defense.

In the course of my year in the SDCFP, I have had the opportunity to work with and along side the Corporate Security Division of Pfizer Pharmaceutical Company. The very professional and talented members of this organization have been working energetically towards addressing losses affecting the company as a result of intellectual property piracy – counterfeiting. This paper is a recollection of observations that I have made and research I have conducted while working with this team. The applicability of this paper to matters of national security and strategy lies in the inescapable fact that any American relationship with China, its government or it’s people, may hold keys to understanding what the future holds for our two countries. When the world’s largest economy interacts with the world’s most populated country, matters of strategic importance for global security and international trade are certainly in play.

Both the official and “unofficial” hosts of the secretary of Defense Corporate Fellows Program have been of tremendous assistance to me during the course of this year-long fellowship and my research into numerous aspects of the corporate business. At the invitation of the Chief Executive Officer and Chairman of the Board, Dr. Henry A. “Hank” McKinnell, this is the first year that Pfizer has participated in SDCFP. From the CEO and senior leaders of the company to the newest employee, the welcome mat has been extended to me and to the concept of the program. My host at Pfizer, the Vice President responsible for corporate security, John Theriault, has ensured that all of my academic needs have been fulfilled. John Herbert, Vice President for Human Resource and Strategy has made certain that I had access to the widest spectrum of business units and managers across the enterprise. I also want to give my appreciation to John Barbieri, Terry McCann, Steve Nyman, Bob Monteiro, Bob Pocica, Rich Widup, Ruby Mages, Bill Riggs, Mike Keenan, Jerry Zandman, and John Teehan. Each of them went out of their way in sharing their time, experience, professionalism, and knowledge in this business with me. Thanks also to Michal, Carmen and Yvonne for providing the same great administrative support to me that they provide everyday to the members of the corporate security office. And to all the Pfizer colleagues, with whom I have had the honor to work with and learn from during the past year, Thanks.
PRODUCT COUNTERFEITING IN CHINA AND ONE AMERICAN COMPANY’S RESPONSE

Corporate America has taken a leading role in the world bringing innovative ideas to the marketplace through its heavy investment in research and development. The products resulting from this investment are often times quickly and illegally reproduced and then compete with the genuine product for market share. How American corporations approach this issue can vary upon the industry and upon the source of the counterfeiting. How China responds to the pressures of foreign industry and its accompanying world trade regulations and practices may be predictive of the direction that China will take in approaching other global relationships. While China has apparently made major advances in its efforts to improve the protection of the rights of intellectual property owners, it also has moved slowly in enforcing many of its new laws and policies. Because words and actions often differ, Chinese intentions are difficult to decipher.

For many years and for many reasons the People’s Republic of China has been a major source of production and distribution of counterfeit products. At the same time, their vast market potential and tremendous production capacity beckons investment from industries that are ever searching new ways to grow and seeking new markets in which to sell their products. The government of China too has entertained a peculiar relationship with the United States and the world. While the potential to welcome into a globalized and interconnected world community one-fourth of the planet’s population is very tempting, the human rights abuses and serious questions as to China’s ulterior strategic objectives create a vexing challenge to those who promote increased transparency and trust. When America, the world’s largest economy, interacts with China, the world’s most populated country, matters of strategic and global importance are inevitably raised. China has shown a desire to “straddle the fence” on many of its business decisions with foreign companies. By seeking foreign investment and economic growth opportunities through global trade it has shown an understanding of the tremendous value and opportunity the free market can bring and the subsequent improvement in standard of living that is possible for its people. Yet, it has been less than energetic in its enforcement of laws and policies that protect these investments. This could hamper continued innovation and risk taking by entrepreneurs within its borders and abroad. The challenges and frustrations of conducting business with China are not surprising. In fact, these interactions are in keeping with the suspicious and cautious approach that China has taken in all of its recent relationships as it seeks its place of power in the global community.

Historical synopsis of Chinese – U.S. relations

The United States has always seemed to struggle with defining its relationship with China. For at least the last century an overriding American goal in Asia was arguably to prevent any country from ascending to a dominating position in the region.

Since the end of World War II, the United States has endeavored to maintain a “balance of power” in the region. A defeated Japan was kept from rearming its military and China’s own economic policies kept it weak. The communist accession to power in 1949 would precipitate the stagnation of China’s economic growth under Mao Zedong until his death in 1976. As a superpower the United States was able to oversee and maintain the equilibrium in Asia.

Fear of confrontation with China was evidenced in the Korean and Vietnamese wars. The United States has had difficulty predicting the geopolitical intentions of the Chinese then and continues to struggle with it today.

Russia’s conversion from that of a potential adversary of China following the collapse of the Soviet Union to a strategic partner signaled a change in the landscape for American efforts to maintain balance in the region. An ever-improving relationship between Russia and China was highlighted as recently as last December when Vladimir Putin and Jiang Zemin signed a thirteen-page joint declaration calling for a “multi-polar world. The implication of this strategic partnership is that it expresses both countries’ dissatisfaction with United States global dominance.[i]

Chinese transition to world economy

When President Nixon visited China in 1972 hopes ran high that strategic cooperation between the two countries was forthcoming. Because China had isolated itself for so long, the initial exploration and re-discovery of each other’s culture uncovered many common interests. This return to diplomacy was widely welcomed as an indication of the end of a relatively hostile and suspicious relationship.

When Deng Xiaoping succeeded Mao, China underwent a radical transformation. Deng’s economic policies shed many of the constraints of a pure Marxist system. For more than the past 20 years, China’s economy has grown at an average rate of ten percent a year.[ii] Even in the malaise of today’s current world market environment, China managed estimated real gross domestic product growth of 7.3 percent in 2001.[iii] It was the economic reforms that began in the 1980’s that precipitated the steady double-digit growth of the Chinese economy. Rural per capita real income doubled for most Chinese citizens. China attained self-sufficiency in grain production with rural industry accounting for an increasing percentage of agricultural output. Rural unemployment was reduced and the variety of consumer goods increased. These reforms led to further reforms in “fiscal, financial, banking, price setting and labor systems.” [iv]

Following the Tiananmen Square episode, China’s anti-American rhetoric flared. Deng Xiaoping, fully understanding that if China was to grow its economy and move to an open-market system in such a way as to avoid a Soviet-style collapse, it needed to nurture a relationship with the West. Even more so he knew that backing away from confrontation with the United States may be required since it represented its largest export market and source for foreign investment and infusion of technology. In an effort to bring this about, Deng had declared that while “China and the United States are different in ideology, there is no conflict between their fundamental interests.[v] In the aftermath of the violent suppression of the Tiananmen Square protests in June of 1989, economic reform in China slowed tremendously. During a dramatic visit to southern China in 1992, Deng renewed his push for a market-oriented economy to drive improved standards of living. Receiving official sanction for his proposals from the 14th Party Congress allowed a number of young, reform-minded leaders to begin taking their positions in top-level government posts. These leaders agreed with Deng’s view that managing the economy in such as manner that would lead to increased standards of living for Chinese citizens should be the government’s top priority. This view also reflected the importance of the effort to accomplish the objective even if it meant the adoption of “capitalist” measures in order to implement. All of these efforts were advanced with the endorsement of Deng’s policies by the Communist Party Politburo that publicly supported the need for economic openness.[vi] Despite the many difficulties and uncertainties in conducting trade with China, foreign investors made China the leading recipient of foreign direct investment in 2001 receiving nearly $47 billion dollars.[vii]

By 1996 internal pressure from China’s political left was growing. The military elite demanded that Jiang Zemin take a hard line approach to unpopular American activities such as the sale of F-16 fighter aircraft to Taiwan. The Chinese media accused the United States of attempting to contain China through its actions of strengthening ties with Australia and Japan. Even American objections to the counterfeiting of copyright protected merchandise such as computer software were labeled as an attempt at “containment” of China. They went further in declaring the West was abusing China’s new open door policies by pouring cigarettes and waste material into China in a “second opium war” vein.[viii]

The anti-American treatise China Can Say No was widely popular reading throughout China in the wake of the 1996 confrontation in the Taiwan Strait. It reflected the views of many Chinese youth and apparently had the support of officials including the Chinese Ambassador to the United States, Chai Zemin, who authored the book’s introduction.[ix]

Despite China’s accession into the World Trade Organization in December of 2001, the economic relationship between the United States and China remains saddled with the strain of an increasingly large trade imbalance. Beginning with a relatively small trade surplus with China in 1987, the trade deficit has mushroomed to an enormous figure in excess of $83 billion dollars in 2001.[x]

The Office of the United States Trade Representative held a first annual public hearing to review China’s compliance with its World Trade Organization commitments. Major industry groups presented their observations on China’s compliance. Spokesmen for the International Intellectual Property Alliance and the Pharmaceutical Research and Manufacturers of America cited China’s lack of criminal remedies in enforcement of intellectual property protection laws. They also voiced concern about the spread of potentially dangerous counterfeit pharmaceuticals.[xi]

Today, China seems intent on growing its economy and improving the standard of living for its people. Capitalists in the Chinese legislature are increasing in number and are beginning to speak more forcibly on behalf of property owners and of property rights.[xii]

Pfizer Incorporated

Today the world’s largest researched-based pharmaceutical company, Pfizer is not unique in its desire to reach the tremendous market potential currently locked up in China. Pfizer began its legacy as a small chemical company in Brooklyn, New York in 1849. The entrepreneurial spirit of two German-born immigrants, Charles Pfizer and Charles Erhart precipitated the success and growth of the company that was to come in later years. The Charles Pfizer and Company understood the tremendous potential in the American market in the late 19th century for the introduction of an antiparasitic with a palatable taste. It was Pfizer’s later perfection of the fermentation process, required for producing citric acid that positioned the company to become the world’s largest producer of penicillin by the middle of the 20th century.[xiii] A global approach to research and development, production, and sales, coupled with strategic partnering and good corporate citizenship through such efforts as its philanthropic programs, has placed Pfizer in a very strong position entering into the 21st Century.

With revenues in excess of $32 billion in 2001, Pfizer expects to grow another 20% by the end of 2003. The highly anticipated acquisition of one of its largest competitors, Pharmacia, will bring an anticipated additional $18 billion in revenues and significantly improve the number of compounds in its research, testing, and development pipeline. China’s under developed economy holds great promise for companies like Pfizer that see cost effective production capacity in its factories and work force as well as the tremendous sales potential in its markets.

Pfizer’s research and development budget expenditures for 2001 were an industry leading $4.8 billion dollars.[xiv] At a cost of nearly $800 million dollars to bring just one new medication to market, anything that threatens an intellectual property owner’s right to sole use of its invention can have serious consequences on future research. With its pending acquisition of Pharmacia, Pfizer expects to grow its research and development budget to nearly $7 billion in 2004.

Currently, Pfizer employs less than one thousand people in the Peoples Republic of China outside of Hong Kong. On the mainland it operates factories in Dalian and Guangzhou and has corporate offices in Beijing.

The counterfeiting problem

Counterfeiting directly threatens the ability of companies to fund research and development. Unfortunately, counterfeit consumer products are not uncommon. Some estimates suggest that more than 9% of total world trade today is comprised of counterfeit products.[xv] That number is likely growing. Those involved in world trade have long recognized that producers of certain consumer products such as athletic footwear and electronics have suffered severe losses in revenue from global counterfeit sales. For example, the recording industry has confronted serious hurdles in protecting their intellectual property (IP) for many years now. At the U.S. border in the year 2000 alone, customs seized $7.8 million dollars of pirated DVD’s, videos, and music CDs.[xvi] Yet this figure represents what is certainly only a very small fraction of fake products produced and distributed around the globe each year. China boasts that last year they intercepted and destroyed thirty three million pirated music compact disks and videos. From many perspectives the problem appears immense.

The scope of the counterfeiting problem is tremendous and spans almost every industry. Nearly any type of consumable item can be, and most likely has been counterfeited. The opportunity to make large sums of money selling products without the expense of research and development, safety testing, or adherence to industry standard manufacturing practices leaves plenty of room for profit. If you factor in the generally and relatively minor penalties levied against those engaging in illegal manufacture, distribution, and sale of fake products it is readily understandable why this practice is so widespread and rampant.

Proctor and Gamble estimates that more than 40% of their products found on Chinese store shelves are counterfeit.[xvii] A market survey competed by Pfizer Corporate Security in 2001 revealed that in the seven major Chinese markets tested, 88% of the Viagra products procured through locations other than hospitals were not genuine.[xviii]

Counterfeiting of pharmaceutical products, unlike the counterfeiting of many other consumer goods, presents elevated concerns for consumer health and safety. The producers of illegal counterfeit medications rarely manufacture those drugs under strict procedures and safeguards such as those imposed by the United States Food and Drug Administration. This lack of control may result in the manufacture and distribution of pharmaceutical products that are neither safe nor efficacious and may directly pose a danger to the consumer.

The scope of the loss to business each year as a result of counterfeiting is staggering. Pfizer Corporate Security had shown as a result of its market surveys in China, that various forms of counterfeit product was readily available across the country. Subsequent investigation by the company has shown that counterfeit Pfizer products of Chinese origin have been exported to nearly every corner of the globe. Minimal effort has uncovered Chinese produced counterfeit Viagra in Panama, Mexico, The United States, The Middle East, Russia and Southeast Asia.[xix]

The extent to which the pharmaceutical industry has been affected by counterfeiting is not clear. However, concerned with the quality of drugs in international commerce, the World Health Assembly adopted resolution WHA 41.16 in 1988. This resolution requested the Director-General of the World Health Organization (WHO) to initiate a plan to address counterfeit production and international transport of copied pharmaceutical products. The 1994 adoption of WHA 47.13 further advanced this mandate and produced a number of guidelines published in 1999 to assist in assessing and combating the problem.[xx] The illegal copying of pharmaceuticals has always presented a concern for consumer health. However, prior to the early 1998 introduction of Viagra with its street value and illegal club scene market, counterfeit pharmaceuticals provided little margin for profit for those engaging in the production, distribution and sale of fake products. In 2002, Pfizer country managers in Asia reported that they suffered an annual negative impact of $135 million dollars annually as a result of regional counterfeiting.[xxi]

Adding to the challenge of addressing counterfeiting of pharmaceuticals is that it may take on different forms. Legislation in each country may differ and in many countries such as Russia and the Philippines an enforceable and legal definition of “counterfeit” does not exist. It is generally understood that any product that looks like Viagra for example, with its diamond shape, blue color, stamped Pfizer logo and dosage strength but is not produced in a Pfizer facility or by any authorized or official agent, is counterfeit. A tablet that looks like Viagra, contains a level of its active ingredient, but contains no Pfizer markings can be considered to be a “mimic” of the Pfizer product. Any other form of the product in any shape or color that purports to contain Viagra or its active ingredient is often referred to as an Alternate Dosage Form (ADF) product. In some instances, diverted genuine Pfizer product is illegally brought into a market and may be available to the consumer through unknowing authorized or unauthorized outlets. All of these forms of counterfeiting and diversion complicate the challenge of ensuring integrity of the product from Pfizer plants to the consumer.

As described earlier, China is widely recognized as a significant source of counterfeit production. It is also a world leader in the exportation of nearly every type of counterfeit consumer product. In 2000, the U.S. Customs department reported that China, with more than 15 million dollars worth of product seized, was by far the worst offender of exporting counterfeit products to the United States. Taiwan, at 6 million dollars, was second with less than half the value of illegal goods seized.[xxii] The Chinese economy benefits from this activity with the estimated employment of 3-5 million people bringing in $40 to $80 billion dollars each year. Chinese consumers are accustomed to a market place flooded with fake products. Multinational corporations have reported that at least 20 percent of the value of all sales in China is lost to counterfeits. [xxiii]

The accession of China into the World Trade Organization (WTO) in December of 2001 brought great hope that China would bring its copyright laws into compliance with the provisions of the Berne Convention, Paris Convention, and other international agreements concerning trade. Since then, outward appearance is that the Chinese have in fact tightened their enforcement of intellectual property protection laws. Whether significant progress has been made or whether reports of counterfeiting crack down is merely propaganda attempting to show progress is debatable. Chinese publications frequently report on raids and arrests of counterfeiters and have published photographs of large amounts of counterfeit goods being destroyed under the crushing weight of bulldozers.[xxiv]

Although the central government in China appears to be working to reduce the amount and scope of counterfeiting in the country, the same enthusiasm may not be replicated at regional or local levels. One possible reason for this reluctance is that local unemployment and social instability is averted by the wealth generated by counterfeiting and the supporting business such as packaging, transportation, and sales. Certainly misconduct by the military, police, prosecutors and elected officials through kickbacks, bribes and extortion is also a factor that perpetuates the problem in areas of the country.

Pfizer’s Anti-Counterfeiting Efforts

With Viagra’s popularity and rapidly expanding global market, Pfizer quickly discovered the security and loss prevention challenges it would face. In many areas, counterfeit Viagra reached the market well in advance of legitimate product. China’s endemic counterfeiting problem assured that Viagra would be quickly adopted as a source of revenue for traffickers in illegal goods. By September of 2000, Pfizer’s Vice President for Corporate Security had disseminated a draft plan to address counterfeiting of company products in China. This aggressive plan attacked the problem on several fronts outlining seven specific goals. Each goal was aligned with a business unit or division within Pfizer. First it endeavored to explore the legal protections and avenues of redress available. The plan sought to define the degree to which their products are being counterfeited and offered in the Chinese marketplace and used intelligence gained through investigations to pursue further enforcement and prosecution on ever increasing levels. It recognized the importance of eliciting the assistance of Chinese and US governmental officials capable of influencing the fight against counterfeiting. The plan entailed improving upon anti-counterfeiting measures in the manufacture and packaging of their product as well as educating the consumer to improve public awareness in recognizing genuine Pfizer medicine.

With the draft plan as a guide, each business unit and division with an interest in the plan began to take action. Corporate security managers took the lead in developing a request for proposal to undertake a China market survey. In November 2000 a consulting firm with experience in Asia was commissioned to conduct a limited market survey in seven major cities in China. The survey involved the collection of several Pfizer medications, including Viagra, in the Chinese market. The government of China has restricted the sale and dispensing of Viagra in China to certain larger metropolitan hospitals. The survey selected five of these hospitals in each of the cities to collect samples for analysis. Because other unauthorized outlets for Viagra such as sex shops and small drug store-type retailers are widely known to exist in China, samples were collected from them as well. A significant discovery was that the majority of Viagra procured outside of authorized hospital distribution channels was in fact some form of counterfeit product. A detailed review of the findings of this survey can be found in the final report on file with Pfizer Corporate Security.[xxv]

Following the China Market Survey, which was completed in April 2001, Pfizer continued to investigate and identify sales of counterfeit Pfizer products in China. In the past 18 months dozens of investigations have been conducted resulting in the recovery of hundreds of thousands of dollars worth of counterfeit medications. A large amount of bogus packaging and equipment to manufacture counterfeit product has also been seized. A significant number of people have been arrested and prosecuted for their participation in illegally producing, distributing or selling copied Pfizer products in China. Although this effort has continue to reaffirm the problem it has not been expanded upon as of yet. The logical extension of this “buy and bust” effort is to use critical information gained during raids and develop investigative leads towards identifying and dismantling large production plants, distribution centers and high level operatives in China’s counterfeiting industry.

The Pfizer corporate legal team has engaged the problem by identifying the company’s intellectual property rights and remedies for all key products in China, and vigorously and systematically asserting those rights.

There are many reasons why China finds itself today as the preeminent leader in the manufacture of counterfeit products. Its leadership role in the trade as well as its relatively new and weak governmental approach towards thwarting the practice can be based upon the duplicitous involvement of the Chinese military and powerful governmental officials in the evolution of the industry. What may have had its roots as simply a method of supplementing small central government budgets also provided the communist nation with an outlet for venting its disapproval of capitalist products and the marketplace in which they were sold. Chinese aspirations to join the World Trade Organization and access to world markets in order to grow their economy altered what had previously been accepted as common practice counterfeiting. China, now obligated to enforce and implement procedures for combating counterfeiting, had to change the environment that had previously tolerated this practice. The Chinese enacted new laws in April of 2001 to enhance enforcement and prosecution aimed at its robust counterfeiting industry. The Supreme People’s Procurate and Ministry of Public Security issued the guidelines that would assist in criminal prosecution. Later that year, the State Council issued regulations designed to facilitate the transfer of “serious violations” from regulatory authorities to the police. Also in 2001, China updated and hardened its trademark and copyright laws to meet the stringent requirements of the World Trade Organization. The changes improved both civil and administrative enforcement of trademark infringement by introducing preliminary injunctions, statutory damages, and the recovery of certain enforcement expenses by intellectual property owners. Pressure from lobby groups such as the International Intellectual Property Alliance, the Pharmaceutical Research and Manufacturers Association, the Quality Brand Protection Committee, and the International Trade Association have encouraged China to adopt additional measures in this area. By mid-2003, the Chinese have committed to enact further laws that address criminal liability standards. How much this will further the cause of successful prosecution leading to substantial penalty for violators is unclear.

It is the relative ambiguity of standards for criminal liability that makes prosecution of counterfeiters in China so difficult. Current Chinese law, even considering recent clarification and amendments, still relies heavily on the value of the counterfeit product. It also requires that an undetermined quantity of product that would constitute an “illegal business amount” be detected in order to trigger transfer from regulatory to criminal action. The exception to this, and the likely course of action for Pfizer legal efforts in the near-term to pursue, involves laws that address “well-known trademarks” and the counterfeiting of all pharmaceutical products, including labeling and packaging. These activities were designated as “per se” serious violations and therefore subject to criminal prosecution. Pfizer’s working relationship with local Police Service Bureaus, responsible for investigation of violations of criminal law, will be key to successful detection and eventual prosecution of intellectual property violators.

Pfizer continues to press for improved protection of its intellectual property through improved enforcement of Chinese laws. It is the mission of Pfizer’s “China Country Team” to persuade the government of China to enforce Pfizer’s intellectual property rights through consistently fair regulatory, administrative, and law enforcement actions and establish a program to educate consumers about genuine Pfizer products. Expansion of this team in the near future is anticipated to provide a permanent number of dedicated employees in various areas of the country to work with and influence and educate government officials, industry partners, and consumers.

This effort is further enhanced by the Pfizer Corporate Affairs organization. The purpose of Corporate Affairs efforts are to persuade the US government to enforce Pfizer’s intellectual property rights by cracking down on illicit pharmaceutical manufacturing and distribution operations in China and elsewhere around the world.

Pfizer’s Global Manufacturing Division has undertaken efforts to facilitate product authentication by employing state of the art anti-counterfeiting features on key products including those marketed in the People’s Republic of China. Unfortunately here too, as soon as a manufacturer develops a new method of packaging its merchandise, the counterfeiter is busy replicating and producing the new designs. Holograms, unusual inks and dyes, tamper resistant seals and special bar coding techniques are all subject to illegal reproduction by counterfeiters and subsequent introduction into the marketplace as authentic items.

Pfizer’s Road Ahead

Pfizer’s initial efforts to address counterfeiting globally have far from significantly reduced the problem. Energy and momentum in this area has been diverted in the past two years because of the increased concerns for physical and personal security in the aftermath of the terrorist attacks on America. Senior level attention has been focused on other pressing business matters such as the pending acquisition of Pharmacia. However, the company has recognized that the time has come to refresh their plan and refocus their energy upon the losses and potential losses that the company is subjected to as a result of the counterfeiting of their products.

The goals of the original draft plan have been reassessed and aggressively pursued on all levels. These goals have become integral parts of senior managers’ performance measures and progress towards their attainment is being monitored and analyzed.

Pfizer recognizes that it must compete with other multi-national corporations in other industries for the attention of Chinese and other foreign officials in order to convince them to direct their limited resources at stopping counterfeiting of its products. The only way to nurture this type of relationship is with fulltime, in country, anti-counterfeiting experts that can maintain pressure and exploit investigative leads and intelligence. It is unlikely that progress in combating the production and distribution of counterfeit products in China will continue if sufficient resources are not dedicated to address the problem locally. Currently, Pfizer has few colleagues in the People’s Republic of China and none that are fully dedicated to this cause. Without such an effort, other multinationals and local Chinese businesses may more effectively lobby limited Chinese law enforcement and judicial resources to address their losses as a result of counterfeiting. Pfizer will need the continuous presence of security colleagues to nurture relationships with these officials and to synthesize intelligence gathered from their ongoing investigative program. Gathering information from purchases of counterfeit product should produce a clearer picture of major production and distribution centers. With this information and with the developed relationship with Chinese officials, these larger sources of counterfeit product can be detected, destroyed, and key players arrested and prosecuted.

The Pfizer Corporate Security Division has reorganized itself to ensure that the global anti-counterfeiting effort is synchronized throughout the corporation. This reorganization helps to elevate the effort of anti-counterfeiting within the organization and put it on equal footing with other security and loss prevention measures. This new approach will assist in ensuring the allocation of a proper level of resources to the programs necessary to bring desired results and improve oversight in order to be efficient and effective with the use of these resources.

Pfizer continues to bring to bear effective governmental pressure on this issue. U.S. diplomatic effort through international forums such as the WTO and bilateral discussions with China are being maintained and intensified. Tapping into the experience of governmental affairs and trade representative consultants outside of Pfizer have been instrumental in enhancing and directing their efforts in this area.

Although complete eradication of counterfeiting is not plausible, stemming the degree of losses currently experienced is a most reasonable and attainable goal. Because pharmaceutical products such as Viagra have a tremendous street value and market, focus in this area will remain on preventing non-genuine product from entering into legitimate distribution channels and damaging the quality brand reputation and recognition that Pfizer has with consumers. It is this aspect of counterfeiting, more so than just immediate loss of revenue from legitimate sales, that poses the greatest danger to research-based pharmaceutical companies such as Pfizer. The thought that consumer confidence in the integrity of Pfizer’s product could be shaken by the introduction of an ineffective or worse yet, dangerous counterfeit medication is very alarming. The potential costs to the company and risks it brings to the survivability of the enterprise are significant and real. The Food and Drug Administration has uncovered alarming examples of counterfeit contamination of other companies prescription drugs in the U.S. market very recently.[xxvi]

Other Corporate responses

Some manufacturers can vigorously seek the assistance of their consumers in detecting, reporting, or avoiding counterfeit products as a main initiative in combating this problem. Pharmaceutical companies cannot capitalize on this strategy to the same extent. If the consumer becomes unnecessarily fearful of the safety of the medication they consume, they may fail to seek medical assistance or fully complete their course of treatment. Pharmaceutical companies especially must handle public relations in this area by carefully managing consumer safety while educating the public about the dangers presented by the counterfeit industry.

The software industry has long battled with the effects of piracy on its market and has recognized that China presents both opportunity and challenges. With more than 90% of the application software used in China pirated, including schools and governmental organizations, Microsoft has attempted different approaches toward combating the problem. And the problem is very simple. With 60% of China’s computers running on Microsoft operating systems, the company should realize $400 million in revenue for its software in brand-new computers annually rather than the actual realized revenue of $85 million last year.[xxvii] Microsoft’s initial strategy was to vigorously pursue protection of it’s intellectual property through the Chinese court system. The confrontational approach of suing Chinese computer makers resulted in a bad reputation for Microsoft in China as they were perceived as bullying the smaller Chinese firms. The Chinese response was to turn to open source code systems such as Linux and using free software from Microsoft competitors such as Sun Microsystems’ Star office which runs on Windows or Linux. Microsoft developed a different approach to China recently with the firm intention of making itself more acceptable and less confrontational with the Chinese. They pledged $750 million dollars over the next three years by promising to donate the money towards technology training where China’s state planners deem needed. Microsoft agreed to buy game consoles from Chinese factories and invest in joint ventures with partners picked by Beijing. It sent dozens of its own research and development engineers to China to serve as guest lecturers on college campuses. Microsoft pledged to donate millions of dollars towards basic research in computer science at Chinese universities over the next three years. It has funded teachers’ salaries at universities and created internship positions for China’s best computer science Ph.D. students. When Microsoft does sue those who continue to pirate its property, it now works to portray the effort as necessary to building a stronger Chinese software industry where ideas can thrive when intellectual property is protected.[xxviii]

Recognizing that an illegal market for a product will always entice somebody to produce and distribute to meet the demand, pharmaceuticals primarily appear interested in safeguarding their legitimate distribution chains and authorized product outlets from contamination from counterfeit material. This becomes more and more difficult as fake products become less discernable from the authentic.

Fighting the problem at its source in places like the People’s Republic of China appears to be an attempt to display an overall corporate dissatisfaction with the counterfeiting practice more than a realistic belief that it can be stopped. This effort may also offer the company a better defensive position in the event of future liability claims stemming from injury or death resulting from otherwise unchecked counterfeiting.

As with any other problem, building alliances with other companies or governments and sharing the costs associated with developing a solution, offers enhanced possibilities for addressing counterfeiting. The pharmaceutical industry has come together in this regard and organized a collective team to represent industry concerns with counterfeiting. The Pharmaceutical Security Institute (PSI) is an association of several drug manufacturers including GlaxoSmithCline, Bayer, Bristol-Myers Squibb and Pfizer. It maintains a close affiliation with the International Federation of Pharmaceutical Manufacturers Associations (IFPMA) and works to find ways to leverage other industries and governmental agencies in the global anti-counterfeiting effort.

THE Chinese position

In June of 1996 the United States threatened to impose significant duties on more than $2 billion worth of Chinese goods as a result of prolific and endemic Chinese counterfeiting. China reacted to this action by taking significant steps to protect intellectual property rights and started closing factories producing counterfeit products and punishing those responsible for its manufacture.

Initially, China made what appeared to be substantial progress in some aspects of intellectual property rights protection. This willingness to evolve its practices to meet WTO standards of trade is evidenced in the agreements it signed with the United States in 1992, 1995, and 1996. In 2001, China improved its legal framework considerably, amending its patent, trademark and copyright laws to comply with World Trade Organization Agreement on Trade Related Aspects of intellectual Property Rights (TRIPS). Recently, media reports, governmental announcements, intellectual discussion and writing have highlighted the importance of intellectual property protection to China’s continuing economic growth. [xxix]

In reality, significant problems remain, particularly in enforcement. Although China has revised its laws to provide criminal penalties for certain intellectual property rights violations, poor enforcement, combined with weak punishments has led to continued rampant instances of counterfeiting.[xxx]

The destructive effects of widespread violations of intellectual property rights has discouraged additional direct foreign investment in China and threatened the long-term viability of some U.S. business to conduct operations in China. Having lost more than 135 million dollars as a result of various forms of trademark or copyright infringement in the past year, it may be many years in the future before Pfizer can realize profits from its presence in China.[xxxi]

Even more alarming than the large number of Chinese civilians employed in the counterfeiting trade, certainly many millions, is the participation of governmental agencies. Investigators working for an American lock manufacturer uncovered a factory producing imitation locks inside a Chinese Army compound in a space rented to the counterfeiter by the People’s Liberation Army. The Army is suspected of using its vast transportation and warehousing assets to store and move counterfeit products. It is theorized that some state-owned enterprises have resorted to counterfeiting as a method of maintaining financing in the wake of decreasing subsidies from the central government.[xxxii]

American governmental efforts

Prior to entry into the World Trade Organization, most tension with China over trade involved the difficulty foreign companies faced in accessing China’s closed markets. Soaring trade deficits led then US Commerce Secretary Mickey Kantor to demand that China allow “a level playing field for American Workers and American business”.[xxxiii]

The current United States Trade Representative, Robert Zoellick and his Deputy, John Huntsman, have delivered speeches within the past year where they reiterate the US governments position that it is China’s obligation to adhere to internationally accepted norms to protect intellectual property rights. The United States Trade Representative said that it would be “naive” to think that all commitments under the World Trade Organization rules will be implemented automatically and enforced. He went on to say that, “China has undertaken many impressive obligations through its accession to the WTO. The key, of course, is not whether a commitment exists on paper, but whether it is implemented in practice. That is a challenge we as a government now face, and for which we at the USTR have been gearing up. To help assure full implementation additional personnel have been added to the USTR, the Department of Commerce, the Department of Agriculture, and our mission in China.[xxxiv]

The United States has undertaken many efforts on the behalf of industry to protect intellectual property rights overseas. Its representatives to international trade organizations such as the WTO and the Asian-Pacific Economic Cooperation (APEC) have been instrumental in advancing the interests of American Companies such as Pfizer. The U.S. Trade Representative, the Department of Commerce, the International Trade Commission, U.S. Customs and the Congress all continue to play critical roles in this effort. Together they serve to address intellectual property infringement and a host of other challenges to fair trade including difficulty overcoming market access barriers. China’s trade tariffs remain high, particularly when compared to those of other major participants in the global trading system. Restrictive licensing, investment, and distribution practices make it difficult for exporters to penetrate Chinese markets. China still has significant barriers to importation of many American products especially agriculture. Service exporters such as telecommunications companies, find China’s distribution licensing restrictions so designed as to make entry into China’s markets nearly impossible. In light of all these challenges, the United States government continues to aggressively monitor and enforce bilateral agreements in trade and intellectual property rights.

chinese intentions

How American businesses should approach China is not clear. Pfizer’s chief executive officer described his company’s methodology as being “incremental” in scope and expectations. Expecting too much change too quickly isn’t realistic.[xxxv] Former U.S. Ambassador James R. Lilley said that, “[we] must treat [China] with prudence and respect, hedging against dangers even as [we] seek to promote positive development.” He went on to add that American economic interests and hopes for future positive relationships could be negatively affected should China challenge any of our fundamental interests or those of our friends and allies in the region.[xxxvi]

Bernstein and Monroe put forth a very interesting and provocative theory when they wrote in their book, The Coming Conflict with China, that Chinese intentions may very well not be what they publicly purport them to be. They suggest that the strategic cunningness espoused by Sun Tzu in his Art of War writings may be a guiding direction for Chinese military officers and strategic thinkers. For example, they note that China has maintained an official position that it only wishes to possess a military capability that is defensive in nature, strives to grow its economy for purely domestic purposes, and wishes to refrain from interfering in internal matters of other countries. But they note that one of Sun Tzu’s principles involve denial and deception. When capable, feign incapacity; when active, feign inactivity.[xxxvii] Recently, China has attacked the United States “unilateral” approach towards Iraq as well as its “multilateral” approach to North Korea.[xxxviii] In the realm of geo-politics the Chinese continually claim they have no intention of seeking Asian hegemony. Yet, their words and their actions are not frequently mutually supportive.

Pfizer’s experience in China, like many other foreign companies to date, appears to uncover the dichotomy of Chinese intentions. China wants the prosperity and wealth that comes with an open market but also wants to maintain the control and social stability that a centrally planned government provides. It welcomes foreign investment and access to foreign markets for products, but it has been slow to let go of the socialist practices of the past that threaten the health of these enterprises. As has been the case in the past, Chinese intentions remain difficult to discern. Perhaps China’s true goals and ambitions are masked by a cloak of Sun Tzu style deception.

Word Count = 6,775

ENDNOTES

BIBLIOGRAPHY

Behar, Richard. “Beijing’s Phony War on Fakes.” Fortune Magazine, 30 October 2000. Available from, http://www.fortune.com/fortune/articles/0,15114,373631,00.html. Internet. Accessed 2 April 2003.

Bernstein, Richard, and Ross H. Munro. The Coming Conflict With China. New York: Vintage Books, 1998.

Klitgaard, Thomas and Karen Schiele. “The Growing U.S. Trade Imbalance With China.” Current Issues in Economics and Finance”, Federal Reserve Bank of New York, May 1997.

Lilley, James R. Foreword to China’s Growing Military Power: Perspectives on Security, Ballistic Missiles, and Conventional Capabilities, by Andrew Scobell and Larry M. Wortzel, ed. Carlisle, Pa: Strategic Studies Institute, 2002.

Marquand, Robert. “China’s Pirate Industry Thriving,” The Christian Science Monitor. 9 January 2002. Available from http://www.csmonitor.com/2002/0109/p6s1-wosc.html. Internet. Accessed 16 September 2002.

Meredith, Robyn. “(Microsofts) Long March.” Forbes, 17 February 2003, 78-86.

McKinnell, Dr. Henry A., Jr., Chairman and Chief Executive Officer of Pfizer, Incorporated. Interview discussion with author, 10 March 2003, New York, New York.

Pfizer Annual Report 2001,” New York.

Pfizer Corporate Security. “2001 China Market Survey.” Unpublished. Pfizer Corporate Headquarters, New York, NY.

Pfizer Corporate Security. “ Worldwide Anti-Counterfeiting Team Proposal.” November, 2002. Corporate Headquarters, New York, NY.

Porteous, Samuel D. “China’s Trade Advantage Undermined by Counterfeiting Menace,” World Trade Magazine. 1 November 2001. Available from www.worldtrademag.com. Internet. Accessed 16 September 2002.

Rodengen, Jeffrey L. The Legend of Pfizer. Ft. Lauderdale: Write Stuff Syndicate. 1999.

U.S. Trade Representative. 2002 National Trade Estimate Report on Foreign Trade Barriers. Washington, D.C. U.S. Trade Representative. 2002.

U.S. Trade Representative Robert B. Zoellick. Speech before the U.S.-China Business Council, 31 January 2002. Available from http://www.uschina.org. Internet. Accessed 25 March 2003.

U.S. Department of State. Bureau of East Asian and Pacific Affairs. Background Note: China (January 2002), available from http://www.state.gov/r/pa/ei/bgn/2742.htm; Internet; accessed 10 February 2003.

World Health Organization. Department of Essential Drugs and Other Medicines. Counterfeit Drugs: Guidelines for the Development of Measures to Combat Counterfeit Drugs. Geneva, Switzerland,1999.

----------------------- [i] “Russia, China Forge Alliance,” New York Newsday, 3 December 2002, p. A16.

[ii] Richard Bernstein and Ross H. Munro, The Coming Conflict With China (New York: Vintage Books, 1998), 60.

[iii] U.S. Trade Representative, 2002 National Trade Estimate Report on Foreign Trade Barriers (Washington, D.C. : GPO, 2002), 45.

[iv] Department of State, Bureau of East Asian and Pacific Affairs, Background Note: China (January 2002), 6, available from http://www.state.gov/r/pa/ei/bgn/2742.htm; Internet; accessed 10 February 2003.

[v] Bernstein, The Coming Conflict With China, 45.

[vi] Department of State, Background Note: China, 7.

[vii] U.S. Trade Representative, Report on Foreign Trade Barriers, 67.

[viii] Bernstein, The Coming Conflict With China, 48.

[ix] Ibid., 49.

[x] U.S. Trade Representative, Report on Foreign Trade Barriers, 44.

[xi] Ibid.

[xii] Chris Buckley, “Capitalists in Chinese Legislature Speak Out for Property Rights,” New York Times, 12 March 2003, p. A5.

[xiii] Jeffrey L. Rodengen, The Legend of Pfizer (Ft. Lauderdale: Write Stuff Syndicate, 1999), 59-77.

[xiv] “Pfizer Annual Report 2001,” New York, 16.

[xv] As estimated by Carratu International, an intellectual property investigative firm based in the United Kingdom. www.carratu.com, available from http://www.fraudaid.com/ScamSpeak/conprods.htm; Internet; accessed 16 September 2002.

[xvi] Ibid.

[xvii] Samuel D. Porteous, “China’s Trade Advantage Undermined by Counterfeiting Menace,” World Trade Magazine, 1 November 2001, available from www.worldtrademag.com; Internet, accessed 16 September 2002.

[xviii] Viagra is a medication discovered and developed by Pfizer to treat erectile dysfunction in men. Pfizer Corporate Security’s unpublished “2001 China Market Survey”, on file at Pfizer Corporate Headquarters, New York, NY.

[xix] As quoted in an unpublished Pfizer Corporate Security Worldwide Anti-Counterfeiting Team Proposal presented to corporate leadership in November, 2002.

[xx] World Health Organization, Department of Essential Drugs and Other Medicines, Counterfeit Drugs: Guidelines for the Development of Measures to Combat Counterfeit Drugs, (Geneva, Switzerland,1999), 8.

[xxi] Pfizer Corporate Security Worldwide Anti-Counterfeiting Team Proposal November, 2002.

[xxii] Carratu International.

[xxiii] Robert Marquand, “China’s Pirate Industry Thriving,” The Christian Science Monitor, 9 January 2002, available from http://www.csmonitor.com/2002/0109/p6s1-wosc.html; Internet, accessed 16 September 2002.

[xxiv] People’s Daily Newspaper, December 25th, 2001; “China to Strike Counterfeiting in Eight Aspects Next year”, and March 5th, 2001; “Multinationals Join China’s Fight Against Counterfeiting,” People’s Daily Online, available from http://english.peopledaily.com.cn/home.shtml; Internet, accessed 16 September 2002.

[xxv] Pfizer’s 2001 China Market Survey.

[xxvi] “Fake Drugs Prompts Warning by F.D.A.,” New York Times, 12 March 2003, p. 20. (Three batches of the anemia drug Procrit were discovered to lack the active ingredient and were tainted with bacteria. These fake products presented real health risks to patients especially those with already weakened immune systems. Procrit is manufactured by Amgen, Inc., Thousand Oaks, California and distributed by Ortho Biotech Products, L.P., Raritan, New Jersey).

[xxvii] Robyn Meredith, “(Microsofts) Long March,” Forbes, 17 February 2003, 80.

[xxviii] Ibid., 84.

[xxix] U.S. Trade Representative, Report on Foreign Trade Barriers, 57.

[xxx] Ibid.

[xxxi] Ibid.

[xxxii] Richard Behar, “Beijing’s Phony War on Fakes,” Fortune Magazine, 30 October 2000, available from http://www.fortune.com/fortune/articles/0,15114,373631,00.html; Internet, accessed 2 April 2003.

[xxxiii] Thomas Klitgaard and Karen Schiele, “The Growing U.S. Trade Imbalance With China,” Current Issues in Economics and Finance”, Federal Reserve Bank of New York, May 1997.

[xxxiv] U.S. Trade Representative Robert B. Zoellick, Speech before the U.S.-China Business Council, 31 January 2002, available from http://www.uschina.org; Internet, accessed 25 March 2003.

[xxxv] Dr. Henry A. McKinnell, Jr., interview discussion with author, 10 March 2003.

[xxxvi] James R. Lilley, foreword to China’s Growing Military Power: Perspectives on Security, Ballistic Missiles, and Conventional Capabilities, by Andrew Scobell and Larry M. Wortzel, ed. (Carlisle, Pa: Strategic Studies Institute, 2002), vi.

[xxxvii] Bernstein, The Coming Conflict With China, 53.

[xxxviii] “China’s Abdication,” Wall Street Journal, 13 March 2003.