Global expansion brings counterfeit risks
JAE Nah was wandering through some of the nation’s largest retailers when he noticed some of his company’s fabric patterns on the clothing racks.
It was curious, said Nah, founder of Los Angeles-based fabric maker L.A. Printex Industries Inc. He didn’t do business with the suppliers of those stores. Someone had ripped off his work.
Experts say counterfeited goods cost U.S. companies about $200 billion annually -- roughly four times what they did a decade ago. And estimates are that nearly 70% of illegal products come from Asia, and most of those are from China.
Small companies such as L.A. Printex are particularly vulnerable.
Nah learned that a manufacturer in India with whom he had previously worked was knocking off his designs and selling them to U.S. retailers.
After a flurry of cease-and-desist letters, Nah obtained settlements with the retailers that had sold his copied fabrics. But it was too difficult and costly to go after the Indian counterfeiter.
“We lost a lot of time and money,” said Nah, who now periodically visits department stores such as Wal-Mart and Target to look for copies of his products.
For years, global giants including Nike Inc. and Microsoft Corp. have battled against international piracy and virulent fakes made in emerging markets such as China and Russia, where enforcement of intellectual property laws is especially lax.
As more small and mid-size manufacturers jump into the global economy, they’re also discovering that producing and selling their goods overseas has risks and rewards, says Jon Dudas, the U.S. undersecretary of Commerce for intellectual property.
The U.S. Customs Service seized $172 million worth of Chinese counterfeits in 2005, up from $141 million the previous year. The seizures accounted for two-thirds of all intellectual property right seizures by customs in 2005.
Dudas says he has seen Chinese manufacturers that ignore intellectual property law copy an entire U.S. company’s product line, website and advertising. One recently copied a product down to the packaging with the company president’s signature and photo of his wife.
“An entire market is lost for a small business before they even have a chance to operate there,” Dudas said. “It can be devastating.”
The rise in reports of international intellectual property thefts led the U.S. Patent and Trademark Office in 2005 to launch a national campaign, Strategy Targeting Organized Piracy, to urge small businesses to protect their intellectual property. (The campaign’s website is stopfakes.gov/smallbusiness.)
Small businesses are particularly vulnerable because they often lack the expertise or resources that larger corporations typically have to spot and fight fakes, experts say. And most smaller firms don’t understand the process of protecting intellectual property rights overseas.
Many don’t even realize they must obtain a patent in each country where they operate, a sometimes daunting and expensive process that can nonetheless spare them time and money down the road.
A 2005 report by the U.S. Patent and Trademark Office found that only 15% of small businesses that do business overseas understood that a U.S. patent or trademark did not provide protection outside the country.
Menlo Park, Calif., patent attorney Dennis Fernandez says the first precaution companies should take if they are going to work with overseas partners is to get a patent for each of their products and in each of the markets where they plan to do business.
“It’s not always easy to get these guys, but at least you have something to work with,” Fernandez said of counterfeiters.
Companies also should take other precautions, he says.
Smaller businesses should perform extra due diligence before selling or licensing a product in countries notorious for producing knockoffs, including China, India, Thailand, Venezuela and Colombia. Some overseas manufacturers, he says, may simply make extra runs of a company’s products in their plants, a process that’s referred to as “the third shift,” and sell them at steep discounts.
To be extra cautious, some U.S. companies operating overseas have started splitting their work orders between different manufacturers, thereby making their products harder to copy.
Most of the time counterfeiters export their fakes to countries where the U.S. business does not operate. But the more aggressive ones send them back to the U.S., where they can do a small business the most damage.
“This is where it gets really ugly,” said Bill Primosch, director for international business policy at the National Assn. of Manufacturers.
The companies most at risk are those that rely on a single product for the majority of their revenue and reputation.
“All of the sudden, some knockoff that’s made half as well and selling for 50 cents on the dollar is being sold under their name in their own backyard,” Primosch said.
That’s what happened to Uniweld Products Inc., a Fort Lauderdale, Fla.-based air-conditioning supplier that had spent more than three decades building its business in the U.S. and abroad.
Several years ago, counterfeits of Uniweld’s main product, a refrigeration-testing device, turned up on shelves in air-conditioning-hungry countries such as Saudi Arabia.
David Pearl II, the company’s president, says he learned about the fakes when a customer tried to return a broken one for a replacement.
Pearl had the answer to why Uniweld’s sales were mysteriously falling, causing it to lay off 5% of its staff.
The copycats were selling for 30% below the legitimate product’s normal wholesale price and were costing Uniweld nearly $500,000 in annual sales. Worse, the counterfeit items were of bad quality and had leaks, damaging the company’s once-stellar reputation.
“They even copied the American flag that was on the packaging,” Pearl said.
Although he hired investigators and lawyers to fight the Chinese company that ripped off the design, the damage was done.
Max Gaming Technologies, a 2-year-old video game maker based in Cleveland, recently learned that it also was vulnerable to intellectual property theft. The company sells a downloadable game called “Meck,” which involves blowing up giant robots, for $19.95 and has about $1 million a year in sales.
In February, Max Gaming discovered that a Chinese company had broken into its server and was selling the game for much cheaper overseas.
Max Gaming learned of the threat when its server crashed under the weight of thousands of new unpaid users. The company wasn’t able to track which Chinese firm hacked into its system because the perpetrator used an Internet address that couldn’t be traced.
“What’s really brutal about this is we’re getting ready to enter the Asia market and don’t know what damage this has caused,” said Adrian Wright, Max Gaming’s chief executive.
