China leads the world in counterfeit and pirated products. In fact, 75% of the value of counterfeit and pirated goods seized by U.S. Customs and Border Protection in 2021 was from China and Hong Kong. Within China’s borders, forgeries of luxury-brand products are more prevalent than in any other country in the world. When on the metro or walking down the street, it can seem as if nearly everyone is sporting a flashy brand name product. However, many are counterfeits.
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The world’s luxury brands face a major threat from “real fakes”– counterfeit goods so similar to the real thing that differences are nearly imperceptible—rather than casual counterfeits. The distribution of Chinese counterfeit products has resulted in loss of sales, damage to brand integrity, trademark dilution, and high costs of enforcing intellectual property rights. For the world’s luxury brands, battling Chinese counterfeit products through lawsuits is essential.
Two drivers of China’s counterfeit production
The counterfeit industry in China: a consequence of economic growth
The counterfeit industry in China is seen as a problem, but it should also be studied as a symptom of economic growth. In 1978, Deng Xiaoping started reforming China’s economy to encourage foreign investments. Many global brands like Nike or Adidas relocated to China for its low wages and domestic potential. As a result, China became the world’s workshop: it is now the world’s leading exporter with approximately 70% of Chinese exports consisting of manufactured goods.
While China’s living standards improved greatly, new industrial power led to counterfeits, as factories could cheaply re-create brand products. Many companies consequently lost control of their supply chains. This weakly-regulated ecosystem of suppliers in China enables counterfeiters, even though China does have a system in place to enforce anti-counterfeit regulations, such as a State Intellectual Property Office in major cities (e.g. Beijing, Shanghai, Guangdong, and Tianjin) and laws to guard against the international flow of counterfeit goods. The Chinese counterfeit market and its supply chain are just so expansive that there is varying effectiveness with enforcing national statutes.
Therefore, the Chinese counterfeit market in China is ultimately the result of industrialization and a thriving Chinese industry.
China counterfeiting is linked with brand culture
Since the early 1990’s, brand culture became prominent as Western luxury stores opened throughout the country. Fashion brands became synonymous with style and status, and Chinese counterfeit products made it possible to obtain luxury goods without spending years’ worth of wages. The demand for counterfeit goods quickly increased the popularity of the luxury market in China and caused an increase in the supply of fake luxury products to the domestic Chinese market.
Size of the market for counterfeit products in China
Counterfeiting has grown from a 30 billion USD trade problem in the 1980s to a market worth 600 billion USD in 2021, accounting for 2.1% of all trade worldwide. 80% of the world’s counterfeits originate from China.
Despite the enactment of intellectual property (IP) regulations, trade data trends project the global counterfeit trade to exceed 3 trillion USD in the next few years. The explosion of e-commerce during COVID-19 has also created an ideal market channel for counterfeit goods, as it is easy to shut down an illegal website and replace its domain the next day. According to the 2020 U.S. Intellectual Property and Counterfeit Goods Landscape Review, worldwide losses suffered due to counterfeiting amounted to at least 1.7 trillion USD. Counterfeiting is also responsible for 2.5 million lost jobs globally.
The market for fake goods in China
There are several distinct market segments of consumers who purchase fake goods in China: buyers unaware that they are purchasing fake products and ones who actively seek Chinese counterfeit products out. Deceptive counterfeiting is rampant, but many consumers also actively purchase Chinese counterfeit products. Additionally, some counterfeit stores are well recognizable, while others are more difficult to identify. For instance, a fake Supreme store in Shanghai opened in 2019 advertising an indistinguishable Supreme logo and designs.
Middle-class shoppers who value brand prestige make up a large segment of the non-deceptive Chinese counterfeit market. These aspirational Chinese shoppers purchase fake goods to appear more high class, impress peers, and enhance social status. Fake goods allow these individuals to “consume” prestigious brands without actually buying the high-quality goods.
Other consumers knowingly buy counterfeit goods even though they can afford a genuine product, as they believe that the high prices of authentic products are unwarranted.
Top counterfeit goods from China
- Fake consumer electronics: Consumer electronics are one of the most popular fake products you’ll find in the Chinese counterfeit market. Given the high margins on products such as fake iPhones, it’s no surprise that counterfeiting is so rampant on well-known brands (e.g. Apple, Nokia, Samsung, Android).
- Fake luxury brand bags and purses: Everyone wants a luxury bag, but not everyone can afford one. That’s where counterfeit luxury bags come into play. Some wholesale markets that sell high-end counterfeit bags will go to great lengths to make their bags indistinguishable from their genuine counterparts, providing fake invoices and receipts with the bags (e.g. Prada, Chanel, Burberry, Balenciaga, Louis Vuitton).
- Fake shoes: Mass production of counterfeit shoes began when multinational footwear brands began outsourcing manufacturing to China’s eastern provinces (e.g. Nike, YEEZY, Adidas, New Balance, Converse, Vans).
- Fake athletic attire: Fake sports brands and copies of soccer and American Super Bowl jerseys are very popular.
- Watches: Luxury brand watches are in popular demand (e.g. Rolex, Cartier, Patek Philippe, Omega).
Chinese Fashionistas chasing the trends
Some wealthy buyers of counterfeit goods in China are known as “fashionistas.” These fashionistas follow the trend of buying the hottest new products, but know that another trend will replace it next season. Thus, they are unwilling to invest the money into real products. Furthermore, counterfeit purchases are low risk, since the general public is unable to distinguish fakes of limited-edition or recently released products.
Government regulation of the fake market in China
Affected parties have previously complained that punishments for selling counterfeit goods in China are too light to deter offenders. In February 2017, Alibaba reported that reported 1,910 cases of suspected counterfeiting to authorities, but only 129 people were found guilty.
In August 2018, the State Administration for Market Regulation stepped-up efforts to crack-down on the illegal production and sale of counterfeit goods in China. The regulator announced strict punishments for online trading platforms that do not actively cooperate with market regulatory authorities or fail to protect the rights of consumers and trademark owners. State Administration for Market Regulation also demanded that other regulators such as the Shanghai Administration for Industry and Commerce launch targeted investigations into sales of counterfeit goods in China, and specifically investigated offending platforms such as Pinduoduo.
China’s new e-commerce law, which took effect on January 1st, aims to discourage counterfeiting in China through heavier fines and places more responsibility on digital platforms to remove sellers of fake goods. The law also addresses false-advertising, consumer protection, data protection, and cybersecurity.
The new law targets three groups: e-commerce platform operators like Taobao, merchants who sell goods on e-commerce, and vendors with their own websites or social media. Merchants who sell exclusively on social media platforms had been previously unregulated, but now these sellers are required to register their businesses and pay relevant taxes.
Now, e-commerce platform operators and merchants are jointly liable for selling fake products. Platform operators can now be fined up to 2 million RMB (290,000 USD) for the property infringement that comes with selling counterfeit goods in China.
E-commerce platforms crack down on the sale of counterfeit goods in China
Taobao and fake goods
In 2015, the State Administration of Industry and Commerce revealed that only 37% of the luxury goods examined on Taobao were genuine. State authorities criticized Taobao for lax internal controls, stating that many of the products sold on the site were substandard, violated trademarks, or were just plain illegal. In response, Alibaba declared a zero-tolerance policy towards counterfeits and formed a 300-person team to fight against fake goods in the Chinese market.
In 2017, Alibaba was again under consumer and government pressure when Taobao was found to have over 240,000 vendors selling fake goods, up from 180,000 vendors the previous year. Taobao immediately launched an initiative to expose the fake goods being funneled through their site, which has led to 95% of takedown requests and red-flagged listings being processed within 24 hours. 97% of listings for counterfeit items are now deleted before transactions even take place.
How does Pinduoduo handle counterfeit items?
Pinduoduo, the third-largest e-commerce platform in China, is another site criticized for selling low-priced knockoffs. In August 2018, the State Administration for Market Regulation pushed Pinduoduo to strengthen platform management and regulate activities of third-party vendors. Pinduoduo now collaborates with over 400 luxury brands to fight counterfeiters and has created a 150 million RMB account to refund consumers who were unknowingly sold fake products.
How counterfeiters in China get around AI controls online
Sellers of fake goods in China have evaded regulation online through various methods. Many sellers redirect clients to separate sales websites or mislabel items as “haute couture.” Taobao sellers also modify the brand name; one seller of fake Zara clothes would list his items as ZA or Z*ra, which bypasses online regulations set by Taobao.
Taobao’s AI tools are constantly improving. For example, new technologies filter against luxury products priced below a certain point. However, counterfeiters get around these AI controls by pricing their goods at the same high prices of the original products. When interested customers use Taobao’s private chat function, sellers then reveal the discounted price.
In-person sales of counterfeit goods in Shanghai and Beijing
Counterfeit goods sold online in China work hard to avoid detection, but physical brick-and-mortar ‘fake markets’ in cities like Shanghai and Beijing are out in the open, easy to find and even reviewable on sites like Trip Advisor. Officials routinely inspect physical stores, but regulators routinely overlook small stalls selling fake goods and only target merchants who lead interested buyers to unmarked apartments, back rooms, or closets full of high-quality fake Gucci, Prada, Michael Kors, and Louis Vuitton handbags.
The emerging authentication industry in China
The rise of the Chinese counterfeit market and consumer fear of being scammed into purchasing knockoffs has created a new industry in product authentication.
Dozens of Chinese apps offer to verify luxury goods. For example, authentication company Zhiduoshao has thousands of users who pay a 49 RMB service fee to have a product verified by an expert. Founder and CEO of Zhiduoshao claims that 95% of authentication requests can be answered online via photos. Authenticators tell users what kind of photos to upload, and then carefully inspect the monogram, fabric, and technique.
A similar app called Isheyipai offers an “expert jury” of 12 authenticators. Users upload photographs of the item in question and choose an expert to check their product. Prices range from 49 RMB for a junior authenticator to 99 RMB for senior staff. Appraisers each have areas of expertise, such as bags, jewelry, or shoes.
Private companies offer training courses that teach appraisers-in-training how to inspect a wide range of luxury brands and products, with advice about texture, logos, stitching. A 10-day program can cost up to 40,000 RMB.
Authentication companies in China have an uneasy relationship with the brands whose integrity they claim to protect. Cartier maintains that their products should be bought only from “authorized sellers,” while Audemars Piguet states that it does not endorse any authentication app. In fact, Chinese counterfeiters are now imitating authenticators too. Seemingly authentic sites copy the names, website layouts, and imagery of established authentication platforms like Zhiduoshao in order to scam consumers.
How brands can fight back against Chinese counterfeiting
Anti-counterfeiting strategies must be brand specific taking into account the company’s target market, the types of counterfeits produced, and how the counterfeits are being manufactured, distributed, and sold. An effective strategy combines IP protection, export and customs controls, and retail market controls.
But no matter how sophisticated the anti-counterfeit strategy is, where there is a demand there will be a supply. To shrink the Chinese counterfeit, consumers need to be deterred from purchasing fake goods in the first place. However, typical deterrence strategies that luxury brands have used in the West will not work in the Chinese market.
Most consumers who purchase counterfeits in China are well aware that the quality is not on par with the real product. In fact, the counterfeits in China are often of nearly genuine quality. Thus, highlighting the poor performance quality of counterfeit goods is not an effective deterrence strategy in China.
To decrease Chinese consumer demand for fake goods, luxury brands can take the ethical approach or the psychosocial approach.
Anti-counterfeiting in China: The ethical approach
Counterfeiting is not a victimless crime, and luxury brands should educate consumers on the human trafficking victims who create these counterfeit goods: children in sweatshops and slave laborers.
The Chinese counterfeit industry’s use of child labor is much more damaging than the use of child labor by companies like Walmart and Target. Corporations can beheld accountable for exploiting cheap labor: when labor abuses are exposed, companies face plummeting share prices, lawsuits, and customer boycotts. Counterfeiters face no such risk, because consumers of knock-off goods do not know who manufactured their handbags.
Additionally, brands can educate Chinese consumers about the criminals who benefit from counterfeit goods. Production and distribution of counterfeit goods are heavily controlled by violent Chinese triads, who are also involved in narcotics trafficking and sex slavery. Consumer awareness of the hidden costs associated with their counterfeit purchase can create shame and guilt that might deter some Chinese consumers from buying knock-off goods.
Anti-counterfeiting in China: The psychosocial approach
In the West, there is a shame that comes when one admits to buying counterfeit products, and luxury brands should work hard to foster that stigma in China. For some people, the regular purchase of fake goods is a normal part of life: many Chinese consumers who own fake goods assume that the luxury brands sported by their peers are fake as well.
In 2018, the Japan Patent Office launched an anti-counterfeiting campaign that revolved around embarrassing consumers who buy knock-offs.
It is too early to see the results of Japan’s shame-based anti-counterfeit strategy, but the premise is solid. Luxury brands affected by Chinese counterfeiting could emulate the approach, and work to create a social stigma against knock-offs.
COVID-19’s impact on Chinese counterfeit products and improved enforcement of anticounterfeit measures
During the pandemic, online shopping increased which created growth opportunities for fake products. Online stores make it easier for illegal counterfeiters to hide and evade punishment. However, the Chinese government has responded with strengthened IP policies and stricter border customs control. According to the database of the General Administration of Customs, from January to October 2021, officials detailed 51.06 million infringing goods to protect the integrity of shipping channels.
In the past two years, Guangzhou Customs has also seen success in its crackdown of cross-border infringing goods. Through joint enforcement, data sharing, information exchange, and examinations, the Guangdong government has been able to strengthen enforcement protection and seize more than 700,000 goods.
Luxury brands joining efforts to deal with counterfeits: Aura Consortium and the role of NFTs
Brands are now introducing new NFT and blockchain solutions to fight counterfeit goods. Blockchain is a ledger that can record transactions, track assets, and provide transparency. NFTs, or non-fungible tokens, are digital blockchain assets that represent a unique thing. With such technology, companies have taken steps to leverage blockchain technologies in their fight against counterfeiting.
AURA, a blockchain-based platform, authenticates luxury goods. The way it works is that during manufacturing, each luxury product receives a unique identifier that a customer can access and view its cryptographically signed online certificate.
While blockchain technology seems to be promising in fighting counterfeits, there are a few shortcomings. Blockchain technology cannot ensure the integrity of the information recorded in the first place, and blockchain requires the involvement of all parties to ensure full transparency. The difficulty in getting all involved brands to share information has prevented many brands like Vestiaire Collective from adopting blockchain technology.
Rethinking the fashion industry
For years, the luxury industry has been battling counterfeiters, investing heavily in technology, the internet, and AI to authenticate products. Brands have lobbied governments to seize and destroy fake goods, prosecute buyers and dealers, and managing online traffic to counterfeit platforms. However, legal action does not seem to be enough.
By changing customer perspectives and the fashion industry, trends can focus on authenticity and quality rather than brand names and fast consumption through fast fashion. Although logos are easy to copy, good craftsmanship isn’t. To make fakes less attractive to consumers, luxury brands can reevaluate their purpose and production techniques. By producing products that are tough to replicate and independent of the logo, luxury brands can use traditional craftsmanship, handmade components, and heritage techniques to infuse their brand with authenticity.
Key takeaways from Chinese counterfeit products
- The counterfeit industry is a direct consequence of China’s industrial growth and the consumer’s obsession with brand image and luxury.
- The counterfeit industry continues to grow each year, hurting companies and consumers who hope to buy authentic products.
- Through adopting new technology like blockchain and NFTs, luxury brands can fight Chinese counterfeit products.
- Luxury brands can distance themselves from counterfeits through brand independence, or direct to consumers strategy in China.
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