Global Economics

China's Fight Against Fakes


With its fake Louis Vuitton (LVMUY) hand bags, Nike (NKE) knock-offs, and bogus NorthFace (VFC) down jackets for sale, Xiangyang market is one of Shanghai's top tourist attractions, ranking right up there with the city's colonial architecture lining the Bund. But not for much longer, it would seem. With China under international pressure to do more to discourage the rip off of foreign brands and designs, the city authorities have finally decided to shut down the sprawling retail area on June 30.

That prospect has left hundreds of stall owners pondering where to ply their trade. "Maybe we'll move to Longhua market, maybe Pudong Road, or maybe we won't sell at all," says Maria Wang, who flogs fake T-shirts by Lacoste, Tommy Hilfiger (TOM), and Ralph Lauren.

No doubt the Xiangyang closure will be cited by Chinese authorities as proof that China is serious about cracking down on counterfeiting when President Hu Jintao makes his inaugural visit to Washington next month. But while it makes good headlines, the more skeptically minded have pointed out that the developer that owns the property at Xiangyang has decided not to renew existing leases because he hopes to develop a far more lucrative commercial complex at the site. It occupies an entire block facing Huaihai Road, the city's premier shopping street.

MARKET MOVERS. In any event, China's problems with counterfeit goods run much deeper than Xiangyang. Owners of foreign and Chinese brands who have seen knock-offs of their goods sold far and wide say the real culprits are the manufacturers and wholesalers, and shutting down retail outlets does not have much of an impact. Counterfeit goods will simply surface elsewhere.

"We applaud such efforts, but I don't think shutting one market down will solve all the problems we are facing," says Patrick Wang, vice-chairman of the Quality Brands Protection Committee, whose 140 members include Coke (K), General Motors (GM) and Procter & Gamble (PG).

And, surprisingly, it is not just big foreign multinationals who are upset about the mainland's thriving counterfeit trade. There are plenty of domestic companies smarting from intellectual-property losses, and they are turning to Chinese courts for redress. Last year, there were some 13,424 such cases filed in China, vs. about 10,905 in the U.S., according to data by the Supreme People's Court of China. What's more, only 2% of those cases were filed by foreign players.

FULL-COURT PRESS. In other words, the Chinese are a very litigious bunch. And, though few in the West realize it, Chinese companies will vigorously defend their trademarks and inventions when they feel they are being treated unfairly. In a first for China last year, Henan Shuaike Pharmaceutical sued a foreign company, Warner Health, for a trademark infringement. (The case is still pending.)

"These statistics show the Chinese companies don't need foreign companies to tell them they need to go to court to enforce IP," says Anthony Chen, an intellectual property rights lawyer at Jones Day in Shanghai. Indeed, it's foreign companies who need to be convinced that the legal route is worth taking.

Increasingly, there is proof that foreign companies can win against the locals in court. Last year, General Motors (GM) and auto maker Chery reached an out-of-court settlement over an alleged design infringement by Chery. And in January, Starbucks (SBUX) won $62,000 in damages from a local chain, also in Shanghai, that was using Starbucks' Chinese name and a logo that strongly resembled the U.S. company's trademark in its shops (see BW Online, 1/10/06, "A Bigger Stick Against Chinese Fakes").

CRIMES OF FASHION. But there's another reason why foreigners are such a small percentage of litigants. It's because they are less interested in seeking compensation, a laborious journey through the civil courts, than they are in putting the culprit behind bars.

"Most people prefer the criminal route," says Alexander Theil, director of investigations at General Motors in Shanghai, which has helped Chinese authorities pursue 15 criminal cases in the past two years. "If the party you are suing is too small, there's no point. You want to arrest him." Until a couple of years ago that wouldn't have been possible. But making intellectual property right infringements a criminal case is one of the big improvements seen since China joined the WTO in December, 2001.

While Central and provincial level governments are serious about cracking down, the biggest challenge is getting local authorities to help, no easy task in areas where counterfeit production is a major source of employment and tax revenues. "We have problems in some local areas," says Bill Wei, brand protection manager for Nike in China (see BW, 2/7/05, "Fakes!").

FAKE OUT. So the next time you read about a high-profile raid by Chinese police or the shutdown of a notorious counterfeiting retail warren, consider the case of Beijing's Silk Market, another retail center known as a great place to pick up fake branded goods. City authorities closed down the open-air stalls flogging counterfeits down a narrow street near the U.S. Embassy with the idea of erecting a shiny new seven-story building that would attract more reputable tenants.

But since it opened last year, business in knockoffs at the new Silk Market is better than ever. Such is the deeply ingrained nature of counterfeiting in China that will take many years of sustained effort to unravel.


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