This is Part II of my response to an Op/Ed written by Robert Holleyman, head of the Business Software Alliance. Part I dealt with the overall context and most of the article’s (limited) use of statistics.

Holleyman capped off his statistical argument with this statement:

Stealing gives Chinese companies an unfair cost advantage over their paying American counterparts.

With this strange statement, the Op/Ed leaves the software industry behind and journeys into the realm of international trade and investment. If I understand this correctly, he is making a distinction between Chinese and American companies with respect to software purchases, saying that Chinese companies steal software, but American companies do not (or at least at lower rates), and therefore American firms are at a competitive disadvantage.

I’m not sure how that sentence was slipped into Holleyman’s Op/Ed, but I hope the explanation lies with an eager intern, because the statement is utterly ridiculous. The idea that the cost of software is such a large percentage of a company’s costs that it would significantly alter its competitive advantage in international trade is preposterous, except for some specific industries.

I seriously doubt that very many American manufacturers are spending sleepless nights worrying about whether those pirated copies of Windows will give their Chinese competitors that extra edge sufficient to price them out of the market.

Holleyman’s final bit of negativity was a shout out to the current intellectual property hot topic: indigenous innovation.

Beijing late last year compounded matters for the software industry and several others — from makers of clean-energy technology to producers of telecommunications equipment — by instituting a heavy-handed “indigenous innovation” strategy that excludes foreign companies from important segments of the Chinese market, such as government procurement, and tries to compel transfers of intellectual property rights for key technologies as the price of market access. This squeezes us at both ends — shutting many of our innovative products out of the market and stealing the rest.

This is a complicated topic, so let me unpack some of Holleyman’s language:

1. The “strategy” Holleyman is talking about is actually a draft law that has already been redrafted by Beijing in part to respond to concerns of foreign enterprises. The latest version is not what I would refer to as “heavy-handed,” at least not compared to what we started with.

2. I’m not sure which “important segments” of the Chinese market Holleyman is referencing. To my knowledge, government procurement is the big one here. I suspect this was his way of suggesting, in a nebulous fashion, that the problem is worse than it is.

3. The law does not operate to “steal” any technology. A foreign company wishing to get into the procurement market as part of the indigenous innovation program must have local IP. For existing technology, this might include an assignment of a patent right to a local subsidiary. It would not force an American company to give that patent away somehow to an unaffiliated Chinese company. To use the word “stealing” is either accidental, due to ignorance, or a deliberate attempt to mislead.

4. Generally speaking, although the indigenous innovation law would have an effect on the software industry, it’s really not that important compared to the other major challenges facing the industry in China with respect to piracy. The danger of transferring technology, including trade secrets, onshore is a problem for companies with valuable patents, not copyrights. For many commercial software applications, that copyrighted material is out there and available for would-be pirates just as soon as it hits the market. Holleyman appears to be bandwagoning on an IP topic that is on the minds of a lot of people at the moment.

Holleyman ends with a policy solution:

[T]he software industry believes it is time for a new strategy to guide the bilateral economic relationship, a strategy that focuses on achieving results — measured in increased U.S. exports — instead of never-ending negotiations about discrete issues.

Very clever. By using a metric like U.S. exports, Holleyman does not have to deal with market realities. If China’s economic growth has an effect on the market, it won’t matter. If China’s domestic industries come up with solutions that prove to be attractive to Chinese enterprises, the BSA will still complain.

In other words, if this policy were to be adopted, any shift in China’s domestic software market that results in flat or reduced revenue for U.S. firms will be blamed on piracy, even if the explanation lies elsewhere.

Let me end on a positive note. I’m ultimately on Holleyman’s team. I’ve helped some of his member companies with their IP issues in China and well understand the problems they face. I’m very sympathetic and understand they need the assistance of the U.S. government. However, Holleyman’s approach is unwise for three reasons.

First, it is inherently dishonest, as I hope I’ve clearly shown above. That speaks for itself, even if such moralizing doesn’t get one very far in Washington, D.C. these days.

Second, the U.S. government obtains a great deal of information from trade associations. In fact, the lazier a staffer in Congress or at an agency, the more likely that bogus arguments like Holleyman’s will be used in toto and not questioned. To the extent that this mindset is carried forward into discussions with Chinese negotiators, that’s a recipe for difficult bilateral talks.

Third, Holleyman’s doom and gloom discourse fails to give credit to the excellent work done by member firms like Microsoft, as well as some very productive bilateral breakthroughs in which the BSA itself played an integral role. One of the reasons why those piracy rates have gone down over the past few years is that the BSA, American software companies, and the U.S. government have talked to their Chinese counterparts and have been successful on issues ranging from pre-installation of computer operating systems and other software, government use of software, and partnerships with municipal governments (Microsoft in particular has been leading the charge with the latter).

In the end, Holleyman’s article not only exaggerates the problem of software piracy in China, but it also fails to acknowledge the progress made by the Chinese and American governments, American software companies, and the BSA itself.