Amidst ongoing concerns about an undervalued yuan, growing Chinese military presence in the Pacific, and suspicions about Beijing-sponsored hacking into western computer networks, add this one to the list: China has been confirmed in its position as the world’s leading counterfeiting superpower.
According to a report recently released by the UN Office on Drugs and Crime entitled “Transnational organised Crime in East Asia and the Pacific,” from 2008 to 2010 almost 70% of all counterfeits seized globally come from China.
For the US, the figure is higher: US Customs say that in the same period 87% of the value of counterfeits seized originated in China. Since the WTO estimates that 2% of all world trade is incounterfeit goods, the value of counterfeit goods imported into the US and EU from East Asia (the bulk of which come from China) is thought to be on the order of $25 billion annually.
Why China? The answer is intuitive.
China has become the world’s workshop: it is now the world’s leading exporter with approximately 70% of Chinese exports consisting of manufactured goods. Supply chains for most western companies now stretch into and throughout China, encompassing hundreds and thousands of suppliers who provide the necessary ecosystem for this scale of manufacturing.
The same ecosystem also supports counterfeiters, whether directly (leakage of product out of a legitimate supply chain), or indirectly (drawing on local manufacturing expertise and suppliers to set up illegitimate manufacturing sites). The reality is that by outsourcing to China many companies lose control of their own supply chains.
Add to this the burgeoning trade in counterfeits on the internet, where a quick search of alibaba.com, tradekey.com, and a myriad of other websites reveal suppliers offering to counterfeit brands on an industrial scale, and retailers selling counterfeit goods direct to consumers around the world. The pieces then fall into place.
It’s not hard to see this firsthand on any visit to China. Legions of tourists and business people have visited the new Silk Street Market in Beijing and marveled at the plethora ofcounterfeit goods on sale—many of a quality that matches the original product. Most large Chinese cities have their version of this market, which for the most part are conducted in the open without much embarrassment—they have become in a sense a tourist destinations in their own right. On a recent flight from Beijing the flight attendants discussed their purchases of high-priced branded merchandise at knock-down prices: “and the quality looks good!”
The Chinese authorities are aware of the problem, and periodically stage raids, seizures, and shut down illicit factories. In 2011 the Chinese government conducted a year-long enforcement drive, arresting thousands of suspected counterfeiters and closing numerous factories. This was followed by a similar effort in 2012.
But the scale of the central government enforcement efforts pales before the loose control the central government in Beijing has over regional and city governments, and the fact remains that many counterfeitershave successfully bribed or otherwise coopted local law officials into allowing them to continue to operate. In some cities in China, counterfeiters number amongst the larger employers as well. Meanwhile, the Chinese government itself is fighting the use of counterfeit software by its own bureaucracy, a fact openly discussed in the Chinese press.
The US and the EU continue to view counterfeiting as a “soft crime,”, relatively low on the list of law enforcement or trade policy priorities. Against the $25 billion in estimatedcounterfeit products imported into those countries in 2010, the EU seized a paltry $161 million in counterfeit goods, and the US seized $155 million. Counterfeiters who are caught infrequently face jail time, and as a criminal enterprise it is thought to be relatively low risk enterprise. Against real criminal penalties for drug and human trafficking (also covered in the UN report), counterfeiting looks a good bet—if you caught at all.
Addressing this issue will require a renewed focus by the US government on counterfeiting as a priority. Trade policy needs to account for the scale of the problem with China in particular, and the fact that in spite of enforcement efforts by the Chinese central government, counterfeiting persists on an epic scale. US customs efforts to seize counterfeit products need to be smarter, and better funded. More sustained efforts need to be made to address online sales of counterfeit goods direct to Western consumers. And yes, criminal penalties need to be strengthened to make counterfeiting pay.
Companies who manufacture goods in China also need to take note: the loss of control over your supply chain can be disastrous. The UN report specifically highlights the need for companies to introduce better and more secure technology to protect products and monitor the supply chain; the need for better consumer awareness and education; and the need to better police the online sales of consumer branded goods. Some companies do this very well; others ignore it at their peril.
Amidst the gloom there are signs that things can and will improve. Perhaps the most promising is the fact that large Chinese brands themselves are worried about counterfeitingand have introduced sophisticated supply chain tracking and customer awareness programs. They see themselves battling the same enemy as western brands that are counterfeited in their own country.
Legal enforcement of IP rights in China, while spotty, is also growing—recently Nokero, a small US startup manufacturing solar powered lights—won several court judgments and collected monetary damages from Chinese counterfeiters. Uncorrupted police and law enforcement officials in many cities and regions in China are aggressively pursuing counterfeiters. Meanwhile Hong Kong as well as many US and European cities are crowded with Chinese tourists looking for authentic Western luxury goods, well aware that the products they buy at home may be counterfeits.
When the perpetrators of the crime begin to worry about its consequences, there may be hope after all.
Mark Turnage is the CEO of OpSec Security Group, a global provider of anti-counterfeiting technologies and services. He is also the author of Counterfeiting Exposed (John Wiley & Sons, 2003).