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.