Chinese-made counterfeits of bestselling tennis shoes, watches, CDs and DVDs have long been a multibillion-dollar headache for the world’s leading brand names.
Now, as China’s pirates grow more sophisticated, they are taking on new challenges with potentially grave consequences. By moving into medicines and auto parts, the bootleggers are creating safety and liability concerns for manufacturers of the genuine articles.
“It’s all profit-driven,” said Patrick Wang, Nike Inc.'s chief representative in China and vice chairman of the Quality Brands Protection Committee, an antipiracy group in Beijing whose 81 members include Procter & Gamble Co., Microsoft Corp., Johnson & Johnson and Caterpillar Inc. “If the profits are too huge, they can’t resist.”
Last fall, Chinese officials destroyed 57,600 cases of counterfeit antimalarial and antibiotic drugs manufactured in China and seized by customs officials in Belgium en route to Nigeria. Four Chinese employees of a medical exporting firm were found guilty of producing forgeries of more than 17 foreign-branded drugs in at least six factories around the country.
Leading vehicle manufacturers, including Volvo, Caterpillar and Yamaha Engine Co., have discovered fake parts, and even engines, for sale in China as well as in export markets.
Nineteen months after China signed a global trade pact requiring it to strengthen its intellectual property protections, the country’s counterfeiting record hasn’t improved and in many areas has gotten worse, say frustrated executives of U.S. and Japanese companies.
China is by far the world’s biggest producer of pirated goods. Copycat products account for as much as 15% to 20% of China’s total production, according to the U.S.-China Business Council, a Washington trade group.
The Development Research Center, a Chinese government think tank, recently estimated that $20 billion to $25 billion of fake products were sold in China in 2002, costing the government at least $24 billion in tax revenue.
Bogus brands of cigarettes alone are big business: According to government and industry estimates, at least 100 billion counterfeit smokes are manufactured annually, both domestic and international brands, such as Marlboro, Winston and Benson & Hedges. The packaging is so good that they’re dead ringers for the real thing.
Fast and Efficient
Although China has strengthened its intellectual property laws and launched high-profile anticounterfeiting campaigns, it has been outsmarted and outgunned by the pirates. Many are members of criminal gangs that copy new products and have them on the streets before the authentic items have made it onto store shelves.
Chinese-made forgeries have surfaced around the world, particularly in Eastern Europe, Africa and Southeast Asia.
“When you fight against a company, they move their production base to another place and the next day they are making the copied product again,” said Kunihisa Nakai, director of the Beijing office of the Japan External Trade Organization, a government trade agency. “It never ends.”
Foreign executives say China’s spotty progress on intellectual property protection highlights the challenges facing the government as it tries to push forward with economic reforms required by the World Trade Organization. Even when the central government makes a commitment to attack a problem such as piracy, it lacks the enforcement firepower and legal tools to keep the counterfeiters off the streets. Often, government decisions are ignored by local officials who may benefit from the counterfeiting trade through kickbacks or other payoffs.
Joe Simone, a Hong Kong attorney who represents multinational companies, including Caterpillar, said counterfeiters’ increasing skill and cunning make it difficult to pinpoint how much fake product is being sold or exported, though foreign firms routinely find that 5% to 30% of their branded products sold in China are bogus.
“The quality of the fakes is getting to the point where a lot of companies have great difficulty distinguishing them from their own products,” he said.
Foreign automakers, pharmaceutical companies and food processors are concerned particularly about the potential dangers created by shoddy imitations, Wang said. Companies aren’t worried just about losing sales but about the potential damage to their reputation. A manufacturer can’t afford to have its name stamped on medicines containing dangerous or contaminated ingredients or on auto parts that disintegrate on the highway. Wang said automakers have warned the Chinese government that “if you allow these fake products or spare parts to be used, it will be a big risk for all the potential customers.”
Companies are reluctant to discuss counterfeit cases because they don’t want to alarm consumers. But the International Federation of Pharmaceutical Manufacturers Assns., a Geneva-based trade group, estimates that at least 50% of the drugs on the market in China are counterfeit and calls Chinese copycat drugs a serious problem in the developing world. The federation says they pose a health threat because they often contain dangerous substances or ingredients that are ineffective, giving users the false impression that they are treating their illnesses. Several years ago, Cambodian officials blamed counterfeit malarial drugs for the deaths of at least 30 people.
Trade attorneys in China and Hong Kong said they weren’t aware of any cases in China in which foreign companies have been successfully sued for harm resulting from fake products.
James Zimmerman, a trade attorney based in Beijing, said pharmaceutical companies have been the most successful in getting the Chinese government to crack down on counterfeiters because of the health and safety risk. During the recent outbreak of severe acute respiratory syndrome, or SARS, the government went after companies claiming to have medicines that cured the highly infectious virus.
“We have been successful in getting the Public Safety Bureau to crack down on illegal copycat drugs,” Zimmerman said. “But in other areas, it is much more difficult because there is a lack of political will.”
In a recent review of China’s performance since it joined the WTO, the U.S.-China Business Council praised improvements in Chinese trademark and patent protection laws. New laws raised the amount of damages that can be awarded to companies harmed by counterfeiters and increased the fines for those found guilty of making fake products.
But the council warned that China continued to “fail massively” in enforcement of intellectual property violations because of inadequate policing resources, a weak judicial system and penalties too light to serve as a deterrent.
Not an Easy Fight
Frustrated foreign firms are fighting the battle on several fronts. Through the Quality Brands Protection Committee, leading brand names are helping the government develop antipiracy consumer campaigns and are providing advice on strengthening intellectual protection laws. They also are helping the government identify potential counterfeiters and lobbying for stiffer penalties.
U.S. companies have tried to recruit help from Chinese firms that are victims of piracy. For example, half of the alcohol served at top Chinese hotels and restaurants, and touted as domestic brand-name spirits, is counterfeit, according to a survey by the government.
But Chinese companies have been reluctant to publicly join foreign firms in the antipiracy battle, said Christian Murck, managing director of the China office of APCO Worldwide Inc., a global public affairs firm.
Murck said foreign executives are worried that the exports of fake products will accelerate as Beijing loosens its controls over the economy. As a member of the WTO, China has agreed to liberalize its trading sector, which will make it easier for firms to get into the trading business.
Wang, the Nike executive, knows only too well the frustrations of battling copycats. Just a few blocks away from the U.S. Embassy in Beijing, the merchants of Silk Road do a brisk trade in counterfeit Nikes and Adidas tennis shoes, North Face parkas and Prada handbags.
In May of last year, the Chinese government conducted a high-profile raid of Silk Alley, clearing the popular tourist site of five top foreign brands including Nike and Adidas. A week later, Wang took a tour of the crowded market and found knockoffs of his company’s products back on display.
“Yes, after China entered the WTO we did see some changes and progress,” he said. “But on the other hand, out there in the streets, in the consumer goods distribution centers, in these street-peddler gathering places, things are still serious.”