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How to catch a pirate

The fight against global trade in fake goods is not just China’s problem

BusienssChina-27Feb2006.jpg

This story originally appeared in the February 27, 2006 edition of Business China, published by The Economist. Download a PDF version of this story here.

by DAN WASHBURN

In January when the Shanghai municipal government announced its plans to shut down Xiangyang Market—known simply as the “fake market” to locals—officials trumpeted the decision as a major victory in China’s battle against the rampant trade in pirated goods. Vice Mayor Zhou Taitong emphasised that the market was not just being “removed” but was being “abolished”. And the state media reminded readers that the Shanghai Industrial and Commercial Administrative Bureau handled 1,227 cases of trademark violation in 2005, confiscating 1.6m fake items from markets, including Xiangyang.

Another property deal?
But the government’s crackdown-on-counterfeits spin seems simply to have been a convenient byproduct of what the manoeuvre was really about: property. A few days after the Xiangyang announcement, local papers reported that Sun Hung Kai Properties, one of Hong Kong’s largest developers, was in “final talks” to purchase the market site—a prime plot on bustling Huaihai Road, in the heart of Shanghai’s commercial district—for US$450m.

A Xiangyang salesperson says the merchants have been asked to leave the market before June 30, adding that many shopkeepers will be happy with a change of venue because rents at Xiangyang are expensive, averaging about US$5,000 per month per stall. “We will continue to sell the same products, but in a different part of the city,” says the 22-year-old, who specialises in fake luxury handbags. “The government is already telling some shops to move to the Longhua area. The market will not go away.” And what if it did? Fake goods can be found stocking storefronts on nearly every street in Shanghai.

Although international scrutiny of China’s piracy has intensified and several high-profile Chinese court rulings have gone against counterfeiters in recent months, those monitoring the problem from within the country say the situation is actually getting worse. The potential profits from manufacturing and selling fake goods are huge, but the penalties for those who get caught are minimal. According to David Fernyhough, executive vice president of Hill & Associates, a Hong Kong-based risk-management firm that investigates intellectual-property violations throughout Asia, counterfeit goods account for an estimated 5-7%—roughly US$450bn—of global trade. And some 60-70% of such items worldwide are believed to have their origin in China.

Basically, that means any company with even the slightest name recognition should assume that its products are being counterfeited somewhere in the world. Mr Fernyhough ticks them off with ease: “Batteries, toothpaste, razorblades. Everything from widgets to entire motor vehicles and engines.” Plane parts, too. And pharmaceuticals—60% of medicines found in developing countries are thought to be fakes.

But it is the pirated Chinese handbags, DVDs, CDs and software that grab most of the international headlines, with their legitimate producers claiming hundreds of millions of dollars in losses each year (for software, it is billions) due to Chinese counterfeits. Of course, this assumes that every person who buys a pirated item would have purchased the genuine article had a fake not been available—an assumption that is “absurd,” according to Paul French, a director with Access Asia, a business intelligence company based in Shanghai. “That just doesn’t stand up,” he says. “If every fake bag was moved off the market tomorrow, Prada wouldn’t sell one more bag in China.”

Court victories
Even if famous Western brands indulge in a fair amount of exaggeration, it cannot be denied that pirates are their public enemy No. 1 in China. In January Starbucks won its lawsuit against a local imitator which was using the Chinese translation of the US coffee-shop chain’s name. And it was Prada, along with fellow luxury brands Gucci, Louis Vuitton, Chanel and Burberry, which in December won a Beijing court ruling aimed at stopping the sale of knockoff handbags at Beijing’s equivalent to Xiangyang, the famed Silk Market.

What made this verdict unique is that it did not penalise those who sold the illegal items, rather it targeted the market’s landlord. But the fine levied was minimal—US$24,800, which Mr Fernyhough says is less than what most counterfeiters pay in bribes to authorities responsible for enforcing intellectual-property rights every week—and the fake handbags were back out on the shelves in the following days. “This is a basic problem in the Chinese legal system,” says Access Asia’s Mr French. “You can win the case. You can win the decision. But you can’t get enforcement. Without enforcement, the legal system doesn’t work.”

Most observers agree that at the state level, China seems to be aware of the importance of trying to tackle its pervasive piracy problem. Officials realise that the issue has the potential to hamper trade relations and could convince some companies to stay out of China altogether. But, as is the case with so many problems in China, the farther you get from Beijing, the more difficult it is to police. Intellectual property is still a very foreign concept in China, and many insiders believe targeting such violations domestically will intensify only when China has intellectual property of its own to protect.

This lack of awareness, coupled with widespread corruption and under-staffed forces, places piracy pretty low on the list of priorities for local police. Some of their hesitation is understandable, when the social and economic implications of enforcement are considered. By some accounts, millions of Chinese—sometimes entire villages—rely on the counterfeit trade for their livelihood. Authorities must be asking themselves: does China need more unemployed and rural unrest?

Piracy cases in China can be handled criminally if the value of the goods involved is more than US$30,000, but inspectors must rely on the whims of the local authorities to pursue them. Most cases are dealt with administratively, and many counterfeiters consider the fines handed down the price of doing business. Mr Fernyhough says it is easier to get police co-operation for cases that involve health and safety, like pharmaceuticals and car parts, or those that deal with dutiable items such as cigarettes and alcohol. But even then it is difficult, because the largest counterfeiting crime syndicates are well organised and managed, at times rivalling the ability of legitimate brands to produce and distribute goods. The syndicates are also very well protected within China—some can be traced back to former state-owned-enterprises or businesses that laid-off military officials got hold of through their political connections—so it is often easier to go after them abroad, where their protection does not extend, according to both Messrs Fernyhough and French.

All about money
At least that is the theory. But to get the attention of law-enforcement officials and agencies in the US, Europe and Australia, cases must be framed as more than simply counterfeiting. There are also border-integrity, tax-evasion and money-laundering charges involved. “It’s about the money,” Mr Fernyhough says. “It’s not about a handbag or a cigarette or a car part or a pill. It’s about the money. I think that is the key to understanding and unlocking the problem.”

The money trail, of course, snakes far beyond China. There is great demand worldwide for counterfeit products, the quality of which can now rival that of authentic items, and the market dictates that they be manufactured in a place like China with plenty of cheap labour. The problem, therefore, needs to be addressed along the entire slippery, serpentine global supply chain, through every jurisdictional loophole from manufacturing to retail sale—which often occurs outside China. As the Xiangyang Market knockoff handbag salesperson says, “I know morally it is wrong to sell fake things. But so many people want these products—and mainly, it’s foreigners.”

06.20.2006, 10:02 AM · Business, Politics, Stories

3 Comments


  1. Great article.

    As Pogo said so many years ago, “We have met the enemy, and they are us” (Poor quoting job, I’m sure, maybe more of poor paraphrasing!)

    It’s all over China, and our friends back home love to get the copies when we get home. How does an authentic Rolex dealer in HK or Shanghai survive? And WHO CAN TELL the difference with a lot of the copies these days? Although, I am pretty sure that the copies of ProE at the local supermarket that are selling for 120 RMB are probably NOT legit. Just guessing….


  2. I read your article in Budget Travel the other day - and it is true - your Shanghai is a LOT better than mine. I was a Red Cross girl in 1947 staying in the Park Hotel - across from the race track - neither of these two places seemed to have survived. As you remember your history you know that I was there before Mao - infaltion was wild. I thought every man was an attorney - they carred briefcases - but for their cash! My hotel bill was 3 million dollars - a newspaper was 5,000 dollars - the dollar word was used - as in Chinese National dollars. I still have some. I guess the Cathay Hotel is long gone too. And the white Russian stores, and hopefully the people who lived on the streets, pathetically without hope. And the rickshaws - are there no more of those? I enjoyed your article but it showed me no - zip - zero memory of the Shanghai I once saw.


  3. Long Hua, Qi Pu Lu, and in Pu Dong; these are the new Xiang Yang Markets of 2006. On my block there are five music/DVD stores selling MI:3 and The Da Vinci Code for RMB 8-10 (USD 1-1.50) a pop.

    China’s government kills two birds with one stone by eliminating the market and becoming a champion of IPR while making business with Hong Kong developers. China is gaining “mian zi” (face) with all international companies threatned by IPR, and grabbing some pocket change for a possible new parking lot or obscenely huge sky scraper on Huai Hai Road.

    The Chinese government is smart.

    I agree, counterfeit products will go on forever. The general salary for a Shanghaiese is RMB 800 a month (approx. USD 100). Most Shanghai residents cannot afford a genuine Prada bag with that, and if they want to look good and not burn a whole in your pocket for a real bag worth your salary, a RMB 30 bag that looks good is they way to go.

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Shanghai Diaries is a website about Shanghai, China ... and lots of other stuff. Voted Best Mainland China Blog in the 2004 Asia Blog Awards.

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