BEIJING — In a gleaming high-rise complex in the heart of this city’s
downtown, an oasis of leather goods sits behind an unassuming,
peepholed door. Inside — after careful scrutiny and the loud click of
heavy locks — is a label lovers’ paradise: Row upon row of high-quality
counterfeit designer bags, many indistinguishable from the pricy
originals.
The
shop is a carefully kept secret among foreigners and wealthy locals who
are more than eager to pony up $60 for a bag that could cost hundreds,
or even thousands, of dollars at the real Prada, Louis Vuitton or Dior
boutiques just across the street. But the speakeasy style of the store
also demonstrates a long-standing problem in China: fighting — and
finding — fakes.
Luxury brands have been waging a lengthy war
against local merchants and manufacturers that make a living on pirated
products and, judging by the brisk business in the secret shop alone,
the legitimate brands may be winning some battles but not the war.
China
is in the midst of its debut into the world economy — a carefully
coordinated coming-out party that brings with it a flood of foreign
companies eager to take advantage of the country’s cost-effective
manufacturing and secure a presence in its growing consumer luxury
market. The increasing openness, however, has been marred by a big
blemish: the country’s out-of-control counterfeiting problem. China has
become the center of a multibillion-dollar industry focused on making a
buck off of someone else’s brand — from software to pharmaceuticals,
luxury goods to jeans — and, despite years of promises from the Chinese
government and plenty of active opposition, business is booming.
“The
question on everyone’s minds is, ‘Is piracy in China getting better?’”
said Peter Humphrey, managing director of ChinaWhys, a China-based risk
management firm. “The answer is simple: no. And the more foreign
investment and brand awareness that come into China, the more piracy
there will continue to be.”
The statistics confirm a growing
epidemic. In its midyear report in May, U.S. Customs reported that 58
percent of all counterfeit goods seized this year came from China. (The
next biggest offender was South Africa, which contributed just 7
percent of the total goods.) Of more than 100 companies in the Quality
Brands Protection Committee — a Beijing-based coalition whose members
include Nike, Chanel and Burberry — only 30 percent claimed to have a
serious problem with counterfeit exports from China three years ago. By
last year, it had risen to 70 percent. Counterfeiting has been
estimated by the International Chamber of Commerce to be a worldwide
business of more than $600 billion, and China is seen as the major
player in the problem.
“Companies that say they don’t have a
problem [with counterfeiting] in China either aren’t paying attention
or it’s not something they’re able to deal with at this time,” said
Barbara Kaplan, senior counsel for VF Corp., which owns brands such as
The North Face, Nautica and Earl Jean.
Copycatting has been an
increasingly serious issue in China for nearly two decades — migrating
to the mainland from Hong Kong and Taiwan — but it moved to center
stage when the country joined the World Trade Organization in 2001 and
became required to adopt the international intellectual property rights
standards that came with membership. Since then, the Chinese government
has made obligatory reforms to bring its legislation up to
international code, but with little real-life action.
“There
has been a lot of progress on paper in terms of the Chinese authorities
meeting the appropriate international standards,” said Patrick Norton,
a Beijing-based partner in the law firm of O’Melveny & Myers LLP.
“But there’s a big gap between [the government] efforts and the reality
on the ground.”
That may be changing. Last month, officials in
the State Council, the highest level of the Chinese government,
announced the start of a yearlong crackdown conducted by a new
counterfeiting task force, with special attention paid to — among other
areas — luxury fashion products. It’s a welcome change in policy
priority, as fashion items often have been pushed aside in favor of
those posing serious safety threats, like food, pharmaceuticals or
electrical products. Similar government initiatives in the past fizzled
after there was no real follow-up, but there is hope that this campaign
is more than just a show to ease pressure from foreign governments,
particularly the U.S.
“The Chinese government at the national
level is under real pressure to deal with the problem and they do want
to see something positive come out of this,” said Joseph Simone, a
partner at the Hong Kong office of the law firm Baker & McKenzie
and the vice chairman of the QBPC. “We will just have to wait and see
if this is just another enforcement campaign with temporary results, or
if this will bring structural changes on a permanent basis.”
It’s
hard to envision a significant crackdown occurring in Beijing, where
fake fashion goods have permeated everyday life. The famous Silk Alley,
a one-stop shopping spot for knockoffs, has arguably become as big a
tourist attraction as Tiananmen Square. In the Muxiyuan fabric market
in the south of the city, merchants make a living off of fake label
sales (a bag of 500 Diesel tags costs the equivalent of $6, while ones
for Prada or Burberry are only sold in batches of 10,000 or more). Even
small brands haven’t been spared: In recent months, markets around town
have been stocking candy-colored Catherine Malandrino dresses and tops.
Such
rampant copying is the result of many long-ignored problems in China,
some of which the new campaign vows to correct. The most pressing issue
most brands would like to see addressed is the lack of criminal
penalties in counterfeiting cases. Currently, most counterfeiting
violations are handled administratively and any punishments (usually
seizures of goods or low fines) don’t amount to much more than a slap
on the wrist, according to experts. Under current law, only violators
with extremely high monetary amounts of counterfeit activity are
punished in criminal courts — a difficult case for police and brand
owners to prove since records are rarely kept by piraters. To make
matters worse, the monetary thresholds are currently calculated on the
infringer’s prices, almost always much lower than the legitimate
product.
There is some hope, however. As part of the new
initiative, the Chinese government reconfirmed its plan to follow up on
promises made in April’s U.S.-China Joint Commission on Commerce and
Trade and lower the monetary threshold needed for criminal prosecution.
If handled correctly, it could help deter a large number of piraters
who only dabble in fakes. “There will always be professional criminals
who engage in piracy, but the majority of violations in China tend to
be opportunistic because penalties are relatively light,” said Patrick
Powers, director of China relations for the U.S.-China Business
Council. If the current timeline holds, a new judicial interpretation
to the Chinese criminal code could be issued by the end of the year.
But
the lowering of thresholds, however necessary, won’t substantially
reduce the counterfeiting crisis by itself. Other needed measures
include more training for local judges and lawyers, as well as an
increase in education of the general public on why counterfeiting is a
serious problem — a particular necessity in China, where IPR issues are
still relatively new. “You have to remember that this is a country
that, until comparatively recently, did not have tangible property
rights,” said Charlene Barshefsky, senior international partner at the
law firm of Wilmer Cutler Pickering Hale and Dorr LLP and the former
U.S. Trade Representative who negotiated China’s admission into the
WTO. “Now, we’re talking about intangible property rights. For many
Chinese, this is a very difficult concept, let alone that there should
be criminal or civil penalties attached to it.”
The area of
policing has its own troubles, a situation that the new task force has
pledged to address. Enforcement agencies, particularly on local levels,
don’t have the personnel or resources (and sometimes the desire) to
deal with such a large-scale problem, leaving companies to do the work
on their own. Currently, it’s only after brand-funded private
investigators have acquired enough evidence of a serious counterfeiting
problem that they pass it on to the authorities to take action. The
agencies are generally cooperative to accept such cases, but not
always. “We tried to work with [a local enforcement agency] on a raid
in Beijing,” said Kaplan of VF Corp. “They didn’t want to act because
it would have caused civil unrest among the vendors and they didn’t
want to make a scene. It’s very frustrating when the law says one thing
and the reality is very different.”
Such stories are nothing
new. Investigators and brand representatives tell of instances of local
protectionism where authorities have tipped off the counterfeiters to a
planned raid or fabricated reports to cover up a suspected problem.
Though corruption and bribery are common, many local officials truly
believe that by shielding pirates they are protecting their area’s main
source of jobs and income. “There are entire communities dependent on
unauthorized products,” said Humphrey of ChinaWhys. “To eradicate that
means taking away the rice bowls of many, many people.”
The
end result is that companies that want to take action against
counterfeiting in China will have to continue to rely on their own
resources to do so. The most effective use private investigators,
lawyers and the lobbying power of coalitions in the fight against fakes
— a multifaceted approach that is often too costly for many smaller
companies to sustain. It can be hard to believe that even the most
coordinated efforts make a difference. Nike, for instance, has
full-time anticounterfeiting officers in Beijing, Shanghai and
Guangzhou, and initiates about 300 raids in China a year. Yet Nike
knockoffs are easily found in market stalls around the country. Still,
“if we did nothing, it would be really disastrous,” said a Nike
representative. “It would open the door to counterfeiters.”
For
companies that have struggled to protect their brands with little
results, the glimmers of change spark a very small hope. For now, it
will have to do. Few expect a major revolution against counterfeiting
until Chinese companies begin to develop large amounts of their own
luxury products. “As the market develops, more Chinese companies will
become significant victims of the counterfeiting culture,” said Steve
Vickers, president and chief executive officer of risk management firm
International Risk. “Until then, the situation won’t improve.”
Editor’s note: This is the first in a two-part series on China and counterfeiting.
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