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Location: Bavaria, Germany

I am a retired US Government analyst, currently residing in Germany. I am also a shareholder in the company called Integral Technologies (OTCBB: ITKG), and have a desire to enlighten and share its great and still emerging story. I am well read, focused and appreciate challenging interactions which spark creativity and develop enlightenment. That is why I created the ElectriPlast Blog, and the reason I am here.

November 03, 2006

ElectriPlast: The China Conundrum




By Vince S.
ElectriPlast Blog Editor

[Blognote: Several times in the past, Integral has made business trips to China. Now that Heatron and JARCO are ready to produce ElectriPlast products, a steady stream of low cost raw materials is needed. China is the best source, but that raises a red flag (no pun intended) for many. Given China’s penchant for intellectual property theft, can we really trust them? Are shareholders’ concerns valid?]

Recent history

Two decades ago, the People’s Republic of China placed a sign on the Great Wall: “Open for business. We have a continuous stream of low-cost labor, a fast-growing industrial base and an increasingly competent high tech manufacturing sector. Inquire within.” With that notice, the Middle Kingdom, as China is sometimes called, put the US, Japan and Europe on notice that it was ready to become the world’s manufacturer of choice.

After the chaos of the Great Leap Forward, the upheavals of the Cultural Revolution and the brutal take down of political dissent in Tiananmen Square, Western governments were eager for a more moderate China, even if it meant dealing with Beijing’s pragmatic brand of capitalism. International corporations, many of which had offices in Hong Kong prior to the British turnover of that former colony to China, expanded into Beijing, Shanghai and Tianjin. By the end of the millennium, China had become the “go-to” source for low cost, quality goods and materials.

Boon or Bane

For a while, it looked like a win-win relationship. Chinese goods flowed across the Pacific turning some US regional retailers into major national players, soon to become global powerhouses. Consumers were happy, retailers thumped their chests and their cash registers and Wall Street crowed about the rising power of the retail sector. Preoccupied with capitalism, modernization and reform, the PRC appeared less militant. Saber-rattling over Taiwan became muted. Then Western economists noticed a shifting dynamic. The first was China’s growing trade surplus, which lead to huge currency reserves. The second was China’s disregard for foreign intellectual property (IP) rights.

Although a member of the World Trade Organization and the World Intellectual Property Organization, China did not feel constrained by treaty obligations to eliminate piracy and counterfeiting. As it opened its doors to allow more foreign companies to compete for the huge China market, those who joined the China gold rush did so at considerable risk. In many cases, what had been seen as a boon for Western business turned into a boomerang as China selectively copied Western IP to benefit the home market.

Legal reform in China is a slow-moving work in progress. While several attempts have been made to amend (1984) and revise (2004) the Chinese constitution, laws protecting intellectual property rights have remained woefully inadequate. In a culture where it has always been easier to copy than innovate, the PRC looked the other way because the hundreds of “unofficial” factories that churn out counterfeit and pirated goods also provide jobs for millions of workers who migrated to the eastern population centers in search of work. Jobs stimulate the economy; unemployment stimulates unrest and civil disorder. To shut down the “unofficial” factories is to invite another, more explosive version of the Tiananmen Square “insurrection.” And clearly, China’s world image and free-wheeling economy could not afford those consequences.

Those Integral Trips to China

Before the advent of ElectriPlast, Integral Technologies sought to develop a business relationship with China. In October 2000, two Integral officers went to China to pitch antennas to the PRC and to sow the seeds for future business relationships.

With the discovery of ElectriPlast, however, Integral has morphed into the conductive polymer field. So far, 111 of a targeted 300 plus patents in nearly every manufacturing sector have been filed. They cover aviation, consumer electronics, automobiles, maritime, general transportation, defense, medical, toys and other sectors, all multi-billion dollar areas. Naturally, this attracted the attention of many national and international interests.

For example, Tom Aisenbrey spoke on Molding an Electric Flexible New Frontier at the National Plastics Exposition in Chicago on June 19, 2006. Attendance at NPE exceeded 65,000, but China fielded the largest foreign contingent with 127 representatives. Several days after NPE ended, the ElectriPlast Blog site indicated a marked increase in inquiries from China. Statistics indicate a continuation of those inquiries. Coincidence? Maybe.

Most Americans know little about the Middle Kingdom other than what they surface on the Internet, see on PBS or read in the print media. In fact, considerably less than one percent of Americans have been to mainland China, although US tourists are going there in increasing numbers. So, it is not surprising that one of the frequently asked questions sent to the ElectriPlast Blog is: Can we trust China to provide the raw material for ElectriPlast?

Beijing Boomerang?

Before I answer that question, the following are just a few examples of how the People’s Republic of China values the intellectual property of others.

The US motion picture, recording, music, software, and book publishing industries, hard hit by Chinese knock off artists, lost $1.85 billion in IP rights in 2002 alone.

Microsoft and others report that 93% of business software sold in China is pirated. (Lenovo, a Chinese computer company recently purchased IBMs PC and laptop business. It will be interesting to see if the Lenovo products sold here in the US come equipped with legitimate business software.)

General Motors and partner Daewoo discovered that an “unofficial” factory in An Hui Province was copying the Chevrolet Spark and selling them all over China.

Among the numerous US companies doing business in China, Cisco Systems, 3M, DuPont, IBM, Kodak and Procter & Gamble are just a few who are concerned about counterfeiters. (Cisco has actually filed litigation.)

Patrick Powers, director of the Beijing office of the US-China Business Council, a trade group, recently said, "If you do business in China, you should assume that your designs and products can and will be copied."

The Bottom Line

The evidence is clear and compelling; the question is relevant. Can we trust China to supply the raw material for ElectriPlast without stealing us blind?

Rest easy, fellow shareholders. We’re only establishing the raw material supply chain with China. They can sell what we need to make ElectriPlast pellets much cheaper than anyone here in the United States. (Besides, the US guys wanted a slice of the pie!) The Chinese will not have the formula for ElectriPlast. So, like the famous Coca-Cola formula (developed in 1886 and stashed in a vault), the ElectriPlast formula is safe.

Now, let's take this puppy to market!

[NB: The author served in Southeast Asia and has traveled to Australia, China, Hong Kong, Japan, Singapore, Taiwan, Thailand and Vietnam.]


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