Three Kinds of Counterfeit Operations in China
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Three Kinds of Counterfeit Operations
According to Yang, there are three major types of counterfeit operations in China. The first is legitimate factories that have licenses to produce goods on behalf of brand-name companies. Some of those, particularly in remote areas, will produce fakes as well. It might be a handbag or battery or footwear factory that cranks out the genuine products for one or more labels, then runs a shift that turns sneakers into a counterfeit brand by slapping, say, a Nike logo on products that aren't really Nike sneakers. "The workers have no idea; they may not even know what a Nike logo is," says Yang.
The second involves joint ventures between a multinational and a Chinese partner. The multinational may contract with the joint venture partner to make 100 widgets; instead, the manufacturer makes 200 and illegally sells the extras.
The third kind of operation is the underground facilities that make items such as cigarettes?and in some cases, investigators find they are literally underground facilities. Authorities can raid a building, squeeze their way through a 3-by-3-foot opening and come upon a large piece of equipment used to manufacture cigarettes located in the basement. How could that machine possibly have been moved into the building? "Sometimes they build a house around the equipment," says Simone. Dig a hole, pour some concrete, install the machine, then build the walls?it's a David Copperfield?worthy illusion. Simone also mentions fake doors, access points through cabinets and even times when authorities have had to follow electric wires in order to find a hidden factory.
Counterfeiters working underground also can make their fakes on the road. Yang says that some criminals put a 40-foot container on a truck to house a small piece of manufacturing equipment. "If you're mobile, who can track you down?" he asks.
National Action, Local Inaction
For years, Chinese authorities neglected the counterfeiting problem; after all, it was foreign companies' products that were being faked. That attitude has since changed. Thousands die every year from ingesting fake medicines, which has helped awaken the authorities to the sometimes deadly consequences of the crime. (See "Drug Busters," November 2005, for a profile of how pharmaceutical giant Novartis takes on the counterfeit drug problem.)
Another factor spurring the central government into action: Chinese companies are watching their own brands get ripped off. For example, Li-Ning, the country's biggest indigenous footwear and apparel manufacturer, has assigned three full-time people to investigate counterfeiting.
China's membership in the World Trade Organization also forced the country to beef up its observance of intellectual property rights. Last December, China hardened its anticounterfeiting laws by lowering the thresholds for criminal prosecutions. Now, an individual can be prosecuted for having $6,100 worth of counterfeit goods on hand; for companies, the amount is $18,000. Those are drops of 50 percent and 70 percent, respectively, over the previous standards. The government also increased fines and toughened prison sentences for offenders. In addition, Chinese authorities are working more cooperatively with other countries on intellectual property issues.
However, while the stepped-up enforcement is encouraging, it sometimes seems like the government is shooting arrows at a Bradley fighting vehicle. For the counterfeiters, "usually the fine is just a cost of doing business," says Simone. "Administration authorities are active, but the problem is getting bigger and bigger."
And local authorities are in no hurry to lend a hand. This is a great paradox of counterfeiting. Simone believes it's the small and midsize company brands that suffer the worst from the growth in counterfeiting, both in China and abroad.
"The sales of counterfeits of famous brands mainly displace sales of local brands made by small and medium-sized entities," Simone says. "Small and medium brands and fakes normally compete on price, with the fakes normally winning out, since consumers would rather buy a cheap famous brand than a small or medium company brand for the same price."
And yet, while local brands can be victims of counterfeiting, experts say that a big obstacle national authorities face is that counterfeiting contributes to local economies.
"Counterfeit manufacturing operations at the local level provide jobs, and so [local officials] have an economic incentive not to crack down on counterfeiters," says Jack Holleran, who led the brand integrity department at Philip Morris USA from 2002 to 2005, and is now the company's senior VP of compliance and brand integrity. Local officials may also have financial ties with these operations. "You have the challenge that you're basically taking money out of the pocket of the local official who's involved in this process, so why would she or he be incentivized to stop making boxes of software or T-shirts or whatever the products may be?" asks Unger.
According to Yang, there are three major types of counterfeit operations in China. The first is legitimate factories that have licenses to produce goods on behalf of brand-name companies. Some of those, particularly in remote areas, will produce fakes as well. It might be a handbag or battery or footwear factory that cranks out the genuine products for one or more labels, then runs a shift that turns sneakers into a counterfeit brand by slapping, say, a Nike logo on products that aren't really Nike sneakers. "The workers have no idea; they may not even know what a Nike logo is," says Yang.
The second involves joint ventures between a multinational and a Chinese partner. The multinational may contract with the joint venture partner to make 100 widgets; instead, the manufacturer makes 200 and illegally sells the extras.
The third kind of operation is the underground facilities that make items such as cigarettes?and in some cases, investigators find they are literally underground facilities. Authorities can raid a building, squeeze their way through a 3-by-3-foot opening and come upon a large piece of equipment used to manufacture cigarettes located in the basement. How could that machine possibly have been moved into the building? "Sometimes they build a house around the equipment," says Simone. Dig a hole, pour some concrete, install the machine, then build the walls?it's a David Copperfield?worthy illusion. Simone also mentions fake doors, access points through cabinets and even times when authorities have had to follow electric wires in order to find a hidden factory.
Counterfeiters working underground also can make their fakes on the road. Yang says that some criminals put a 40-foot container on a truck to house a small piece of manufacturing equipment. "If you're mobile, who can track you down?" he asks.
National Action, Local Inaction
For years, Chinese authorities neglected the counterfeiting problem; after all, it was foreign companies' products that were being faked. That attitude has since changed. Thousands die every year from ingesting fake medicines, which has helped awaken the authorities to the sometimes deadly consequences of the crime. (See "Drug Busters," November 2005, for a profile of how pharmaceutical giant Novartis takes on the counterfeit drug problem.)
Another factor spurring the central government into action: Chinese companies are watching their own brands get ripped off. For example, Li-Ning, the country's biggest indigenous footwear and apparel manufacturer, has assigned three full-time people to investigate counterfeiting.
China's membership in the World Trade Organization also forced the country to beef up its observance of intellectual property rights. Last December, China hardened its anticounterfeiting laws by lowering the thresholds for criminal prosecutions. Now, an individual can be prosecuted for having $6,100 worth of counterfeit goods on hand; for companies, the amount is $18,000. Those are drops of 50 percent and 70 percent, respectively, over the previous standards. The government also increased fines and toughened prison sentences for offenders. In addition, Chinese authorities are working more cooperatively with other countries on intellectual property issues.
However, while the stepped-up enforcement is encouraging, it sometimes seems like the government is shooting arrows at a Bradley fighting vehicle. For the counterfeiters, "usually the fine is just a cost of doing business," says Simone. "Administration authorities are active, but the problem is getting bigger and bigger."
And local authorities are in no hurry to lend a hand. This is a great paradox of counterfeiting. Simone believes it's the small and midsize company brands that suffer the worst from the growth in counterfeiting, both in China and abroad.
"The sales of counterfeits of famous brands mainly displace sales of local brands made by small and medium-sized entities," Simone says. "Small and medium brands and fakes normally compete on price, with the fakes normally winning out, since consumers would rather buy a cheap famous brand than a small or medium company brand for the same price."
And yet, while local brands can be victims of counterfeiting, experts say that a big obstacle national authorities face is that counterfeiting contributes to local economies.
"Counterfeit manufacturing operations at the local level provide jobs, and so [local officials] have an economic incentive not to crack down on counterfeiters," says Jack Holleran, who led the brand integrity department at Philip Morris USA from 2002 to 2005, and is now the company's senior VP of compliance and brand integrity. Local officials may also have financial ties with these operations. "You have the challenge that you're basically taking money out of the pocket of the local official who's involved in this process, so why would she or he be incentivized to stop making boxes of software or T-shirts or whatever the products may be?" asks Unger.
31 Mar 2006 06:08
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