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U.S.-CHINA TRADE STANDOFF | Economic Brinkmanship

U.S. May Have Doubts on Piracy Crackdown, but to One Businessman, It's Real


ZHUHAI, China — Don't tell Henry Fai the Chinese government isn't cracking down on piracy.

His compact disc factory in this fast-rising south China boomtown had the highest-tech equipment in China, respectable state partners and impressive production credentials: It even pressed the video disc of the Russian Revolution that President Jiang Zemin recently presented to Russian President Boris N. Yeltsin.

But in December, provincial authorities confiscated the factory's laser equipment and sealed its doors. The charge? That three of the several thousand master discs the factory produced last year contained "illicit materials."

For domestic political reasons, the Chinese government insisted that it was pornography, not product piracy, that prompted them to act.

"We may have been a bit lax," Fai, the shuttered factory's Los Angeles partner, conceded as he walked down its empty halls Tuesday. "But the penalty is so severe for such a small slip-up."

That the authorities would close down Fai's plant--the Zhuhai Gold Laser Mastering Factory--for these reasons lends some credence to a long-standing argument of U.S. negotiators in the current flap with Beijing: If China's strict political culture were under threat the same way that U.S. software and music interests say they are, Beijing would be perfectly capable of clamping down.

At the same time, though, China is holding up the Zhuhai Gold factory--one of seven that have been closed for copyright violations in the year since China promised to crack down on illegal copying of U.S. music, software and movies--to show that it has been taking action. The U.S. says 24 other targeted offenders are still open for business, though, and argues that central government officials are unable to deliver on their promises, particularly in the areas where most thrive, shielded by the protection of local governments.

"It's not that Beijing won't shut them down," said a Western diplomat, "it's that they can't."

Washington announced $3 billion in proposed trade sanctions Wednesday, saying China has not lived up to its pledge. But Beijing says it has been making sincere efforts to clean up the market. Chinese trade officials offer statistics: 550 cases of copyright infringement were uncovered last year, and 1.8 million pirated products were confiscated.

Proof that the bootleg business is feeling a pinch can be found in the market. With the closure of plants such as Zhuhai Gold, the cost of making a master disc has shot up from $500 apiece to $1,000. Entire street markets where bootleg CDs used to be sold openly for a dollar or two each have been closed or forced underground, and the prices have jumped.

The closure of mastering factories such as Fai's pleases U.S. officials, who have been urging that the Chinese government lop off the top of the production pyramid rather than chase street vendors and small retailers. But Chinese authorities seem to have put factories with American ties at the top of the closure list--five of the seven shut down have U.S. investors.

That's not to say that they weren't part of the problem. In China, there are only seven mastering plants; the Zhuhai Gold factory had the country's most modern equipment, Fai says, and perhaps the highest production rate. Fai says he never knowingly broke any copyright laws, but a quick tour of the site shows how easy it could be for an illicit producer to churn out pirate copies of music compact discs or software on CD-ROMs.

It was here, in a sterile laboratory the size of a small apartment, that the mother discs for thousands of CDs were made. A lingering chemical smell is now all that accompanies the remaining, disabled equipment in the empty lab, but when it was in full swing, a small number of workers created 20 or 30 masters a day. Each master, in turn, could make as many as 50,000 perfect copies.

Replicating lines--copying machines about the size of a double bed--require even simpler equipment and fewer people, making them easy to move and hard to monitor, Chinese officials say.

One of Washington's gripes is that a raft of new underground CD factories have opened in the last year--despite China's pledges to register and control all factories.

Because it's so easy, and profitable, to produce pirate CDs, Fai said he took pains to set up a legitimate business in China. Fai is a former engineer for Bell Labs and Boeing who runs Datalink Computer Systems Inc., a $15-million computer company in Los Angeles.

Fai chose his partners from the state Nanxia Science and Technology Commission, and the central government deemed the high-tech factory a National Torch Project--that is, one designated to light the way for the rest of the industry.

The production quality was so good that the factory was selected to make commemorative discs for the government, including the disc Jiang gave to Yeltsin.

"We do very politically correct stuff," said Fai, displaying the CD cover of a Russian woman and child in a patriotic pose.

"Even if they shut all of the factories, master discs will still get into China," says Fai. "From Taiwan or Hong Kong or even the States. Chinese are a very resourceful people."

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