One week after the apparent suicide of a Chinese factory worker accused of stealing a carefully guarded Apple iPhone prototype, one question remains unanswered: what happened to the missing phone?

Sun Danyong, the 25-year-old suicide victim who worked at Foxconn International's massive gray and white factory complex in Dongguan, had 16 prototypes of Apple's new fourth-generation iPhone in his possession, according to the company. When one went missing, Foxconn's security guards raided his apartment. The phone didn't turn up.

A likely answer, according to security experts, is that the device ended up in the hands of Shenzhen's notoriously entrepreneurial counterfeiters. The copying of prototypes certainly happens a lot in the electronics and IT industries, said Dane Chamorro, a regional general manager with consultancy Control Risks. You don't have to steal them, you just have to borrow one for a day.

In an earlier interview with the New York Times, Foxconn's general manager for China said that Mr. Sun had previously lost products several times before getting them back again.

Apple computer, whose popular iPhone is widely copied in China, isn't the only foreign handset maker to suffer at the hands of counterfeiters. Knock-offs of Samsung, Nokia and Motorola products are all sold openly throughout China.

It's not a new problem, but there are few signs of improvement. According to U.S. Customs and Border Protection, 81 percent of all counterfeit goods seized at the U.S. border were from China. The value of those goods rose 40 percent in 2008, to US$221.7 million.

Mainland China is the riskiest place for foreign firms to introduce their leading-edge technologies, said Steve Vickers, president of Hong Kong-based FTI-International Risk. It remains a major problem.

A recent visit to the Golconda Cyber Plaza, a sprawling electronics mall in Shenzhen, suggests the scale of the challenge. Hundreds of vendors were showing off their knock-off mobile phones, including counterfeit Nokia and Samsung handsets, and the latest Apple iPhone, which was selling for about US$63, far cheaper than the US$579 charged on Apple's Hong Kong online store.

The iPhone quality is good and quite steady, said Li Jinhui, a salesperson at Shenzhen Guanghui Communication, pointing at one of the counterfeit phones on display. The real phone price is too expensive, so many people buy this instead.

The copying takes several forms. In some cases, companies copy phones already on the market. In others, local suppliers of foreign companies run extra shifts and sell the surplus goods on the side. Then there are the designs that get stolen even before production.

This last form may be the most damaging, since it undermines costly efforts to build anticipation about upcoming products.

Thieves have become adept at exploiting weak points in companies' security arrangements. According to Nicholas Blank, an associate managing director with security firm Kroll, the typical Chinese factory is protected only by guards who check the IDs of employees entering the facility.

Unfortunately, in most of these schemes where intellectual property is stolen from a factory, it's not someone breaking in, said Blank. It's usually an employee or a contractor who already has access to the facility.

Even where internal security is more elaborate, counterfeiters may be able to identify which employees have access to product samples and bribe them.

If you wanted to know what a company's next design would be, you can pretty well target those in the OEM organizations who are holding the prototypes, said Chamorro. It's not rocket science to throw money at them.

China's legal system hasn't helped matters. Intellectual property cases are hard to bring and even harder to enforce, according to attorneys. One problem is that China's criminal code specifies a minimum value for seized goods in order to trigger criminal action -- seizures worth less than RMB50,000 (US$7330) aren't prosecuted by the police. Counterfeiters have responded by limiting the size and value of their shipments.

Another worry is that anti-piracy enforcement may have weakened during China's economic slowdown. According to a February report by the International Anticounterfeiting Coalition, coalition members have been told local police that they were under instructions not to pursue criminal cases against counterfeiters.

Overall, we've seen a deterioration, said one Hong Kong-based lawyer who declined to be named. There's a lot of concern that the government has openly told local forces not to pursue as many cases because of the impact it might have on jobs and social stability.

At least two speeches posted on Chinese government websites appear to substantiate this concern. In one, an official with the Zhejiang provincial Administration for Industry and Commerce, the agency charged with enforcing trademark and other rules, said that local officials should avoid imposing fines in cases not related to food safety.

There is another risk: that suppliers, under intense pressure from their foreign customers to guard intellectual property, will go overboard. The Foxconn employee, Mr. Sun, claimed to his friends that he was beaten by the company's security personnel. The guard involved denied this in an interview with a local newspaper, saying that he had merely grabbed Mr. Sun's shoulder.

Foxconn has been accused by labor rights groups of having an aggressive, militaristic culture. But seven interviews on Wednesday morning with employees leaving the factory revealed little dissatisfaction. Working here is better than at other companies, said Huang Shijun, a 20-year old factory employee from Jiangxi province. We won't be cheated here.

(Reporting by Don Durfee and James Pomfret)

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