Tiny Upstart Accuses Multinational of Industrial Espionage
The man knew too much.
And something else was wrong, too.
As Joseph Wu talked to his guest, he wracked his brain. Wu was sure he had met this man before.
Sitting in Wu’s office, the two men continued to talk business. His guest was very well informed. In fact, he asked questions most customers, even industry veterans, would not ask. With each query, Wu grew more uncomfortable.
Then he remembered.
Wu realized he had met the man at a trade show a couple of years ago. His real name was Mr. Seitz, not Mr. Wells, as he had introduced himself. And he wasn’t a representative of K&R Supplies, either.
The man was a spy. The only question was who had employed him.
Wu made an excuse and ended the meeting. After his guest left, Wu closed the door and closed his eyes. There were tough competitors in this business, he mused. But undercover corporate espionage? He opened his eyes and opened the door. His secretary looked at him quizzically.
“Get the lawyers,” he said, and went back into his office.
That’s not the opening for the latest thriller at the multiplex, it’s the true story of pending lawsuits in an Oregon federal court involving an upstart ink-cartridge company and a massive Japanese manufacturer.
You might not have heard of Joseph Wu’s company, Green Project, which ships salvaged ink cartridges from the United States to China to be refilled, then sends them back to be resold. But you’ve probably heard of Seiko Epson. You may well have an Epson printer on your desk.
Seiko Epson is accused of sending a spy to lift trade secrets from Green Project — one of several allegations the two sides are making against each other in a barrage of lawsuits. Seiko Epson says Green Project is violating its patents. Green Project says Seiko committed trespassing and theft. A Seiko Epson lawyer said the company routinely uses “investigators” to protect its patents. Green Project alleges the patents aren’t valid anyway.
Why all the fuss?
As anyone who has ever replaced a printer cartridge knows, they’re expensive little buggers. So it’s no surprise that ink cartridges are a huge business — more than $70 billion a year — and a major source of profits for manufacturers like Hewlett-Packard (NYSE: HPQ), Lexmark International (NYSE: LXK) and Canon (NYSE: CAJ). At Best Buy (NYSE: BBY), home-office sales accounted for 34% of the chain’s $45 billion in revenue last year. HP’s printer division brings in 25% of revenue but fully 36% of operating profit. At Seiko Epson, the stakes are even higher: Printers are its main business. And the company has lost ground in all of the four markets it does business in — Japan, Europe, Asia and the Americas — and posted a net loss in three of the past five years.
Newcomers to the market are threatening a major profit center. So-called “remanufacturers” take empty cartridges made by companies like HP or Epson, refill them with ink and sell them at a steep discount. Salvage companies collect used cartridges from schools and offices and sell them in bulk to remanufacturers, such as Mr. Wu’s company, Green Project, for resale. Other stores like Cartridge World or even Walgreen’s (NYSE: WAG) will refill customers’ ink cartridges while they wait.
It’s clear why Seiko Epson is resorting to dirty tricks and legal pettifoggery — it can’t compete. That’s clearly aP/Eidenced by its declining sales, mounting losses and its stock performance. Its shares, which trade in Toyko, have returned +4.3% year-to-date, about a third of the +11.8% return posted by the benchmark Topix index in that time. It is the clear laggard in the electronics industry: That group is up +33.7% so far this year, eight times Seiko Epson’s return.
The key takeaway here is to ask yourself which company you would rather own. The opportunity here is to invest in an industry leader with a wide moat or an insecure player that has resorted to guerilla tactics.
When a tech company puts its creative energy into designing products consumers can’t live without, it’s bound to be more successful than a company that spins its wheels trying to infiltrate a teeny competitor with a ham-fisted attempt at corporate espionage. In the end, not only are customers more pleased with the creative company’s products, its investors are pleased with their shares.
HP, for instance, the world’s dominant printer manufacturer, has gained +120.9% in the past five years. That’s nearly ten times the Nasdaq’s anemic return in that period. Seiko Epson, for its part, is down -65% in that time.