counterfeit products in China

Behind the industry of counterfeit products in China and lawsuit success cases

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Forgeries of luxury-brand products are more prevalent in China 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. But much deadlier than casual counterfeits are the “real fakes”– counterfeit goods so similar to the real thing that differences are nearly imperceptible. The impact of counterfeit products in China can be seen in the loss of sales, damage to brand integrity, trademark dilution, and the high costs of enforcing intellectual property rights. For the world’s luxury brands, counterfeit goods from China represent a major threat.  

Counterfeit good industry in China
Source: Reuters, Counterfeit handbags seized in Hong Kong

Two drivers of China’s counterfeit production

The counterfeits 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. For the first time, foreign investments were encouraged. Many companies wanted to relocate to China because of low wages and domestic potential.  As China’s industrial power grew, the country was quickly known as ‘the world’s factory’ due to its international production process. Global brands like Nike or Adidas have parts of their production there. In many sectors, the country started to adopt new technologies.

While China’s living standards improved greatly, the new industrial power led to counterfeits, as factories could cheaply re-create brand products. The counterfeit industry in China seems like a minor symptom of industrialization. Hence, even if it is necessary to tackle counterfeits, it was just the result of a growing Chinese industry.

China counterfeiting is linked with brand culture

Since the early 1990’s, the counterfeit phenomenon has increased quickly in China. During this decade, brand culture emerged as the opening of Western luxury stores in the country. Fashion brands became hyped, and counterfeits were means to obtain luxury goods without spending years’ worth wages. The popularity of counterfeit goods quickly caused an increase in the supply of fake luxury products to the domestic Chinese market.

According to Europol, 86% of all counterfeits worldwide originated from Mainland China and Hong Kong in 2015. This added up to a total value of almost 400 billion USD in counterfeit goods. Thanks to years of relocating for foreign companies, Chinese factories now have the skills needed to copy almost everything. Some counterfeit stores are well recognizable, however, others are more difficult to identify. For instance, a fake Supreme store opened in Shanghai advertising an indistinguishable Supreme logo and designs. The counterfeit phenomenon highly increased the number of followers of the luxury market in China.

Size of the market for counterfeit products in China

In 2016 the global counterfeit trade for all items, from purses to electronics to software, is worth USD 461 billion, about 2.5% of all trade worldwide. That is more than the global drug trade. Despite the enactment of intellectual property (IP) regulations, the worldwide trade of counterfeit goods has almost doubled since 2008.

According to the 2018 Global Brand Counterfeiting Report, worldwide losses suffered due to counterfeiting amounted to USD 323 billion in 2017. Handbags alone accounted for $20 billion.

80% of the world’s counterfeits originate in China, where the consumer demand for fake products is high.  

Chinese counterfeit industry

The market for fake goods in China

There are several distinct market segments of consumers who purchase fake goods in China. The primary segment is buyers unaware that they are purchasing fake products. This deceptive counterfeiting is rampant, but the market for fake goods in China is largely driven by consumers who actively search for and purchase counterfeit products. 

Counterfeit goods from China

Middle-class shoppers who value brand prestige make up a large segment of the non-deceptive counterfeit market. They can afford the occasional $500-$1000 bag, but not the luxurious $15,000 Louis Vuitton or Birkin. These aspirational Chinese shoppers purchase fake goods for the same reason the wealthy buy real products: to emulate their high-class idols, impress peers, and enhance social status. Fake goods allow shoppers to “consume” prestigious brands without actually buying the high-quality goods.

Some consumers knowingly buy counterfeit goods even though they could afford a genuine product. They have ample funds but believe that the high prices of authentic products are unwarranted, especially when they can get a similar version at a much cheaper price.

Chinese Fashionistas chasing the trends

Some wealthy buyers of counterfeit goods in China are known as “fashionistas.” These fashionistas want to buy the hottest new products, but know that another trend will replace it next season and are thus unwilling to invest the money to stay on trend season after season. Furthermore, they see counterfeit purchases as low risk, because limited-edition or recently released products are less familiar to the general public, making it more difficult to call out a fake.  

Buyers of counterfeit goods impose a hidden cost on the brand and people who buy the real thing: they make the brand less exclusive. All non-deceptive counterfeit market shoppers share one attribute: they are willing to pay for visual attributes and functions, but not willing to pay for genuine 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 of the 1,910 cases of suspected counterfeiting they passed on to authorities, 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 fail to protect the rights of consumers and trademark owners, or that do not actively cooperate with market regulatory authorities.

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They 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 called out offending platforms such as Pinduoduo.

The new China’s 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 addressed 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 sites like Taobao, and vendors with their own websites or who sell on social media. Merchants who sell exclusively on social media platforms had been previously unregulated, but now these sellers will need to register their businesses and pay relevant taxes.

To fight the distribution of counterfeits, the newly introduced law holds e-commerce platform operators and merchants jointly liable for selling fake products. Previously, only the individual merchants were liable. Platform operators can now be fined up to 2 million RMB (USD 290,000) for the property infringement that comes with selling counterfeit goods in China.

Officers in Gansu destroy seized counterfeit goods

Source: Pei Qiang and Niu Jing for China Daily, Officers in Gansu destroy seized counterfeit goods

E-commerce platforms crackdown on the sale of counterfeit goods in China

Taobao and fake goods

In 2015, Alibaba was subject to intense state scrutiny. The State Administration of Industry and Commerce unveiled that only 37% of the luxury goods examined on the Taobao platform were genuine. The state authorities criticized Taobao for lax internal controls, declaring that many of the products sold on the site were substandard, violated trademarks, or were just plain illegal. Chinese consumers agreed and called on the government to tighten supervision over Taobao. Alibaba declared a zero-tolerance policy towards counterfeits, and created a new 300-person team to ramp up the fight against fake goods in the Chinese market.

In response to the investigations luxury brands, such as Gucci, Balenciaga and YSL, filed a lawsuit against Alibaba. The luxury brands accused Alibaba of negligence that encouraged the sale of fake goods on its sites. A US federal court dismissed the suit, but Alibaba’s reputation as a haven for counterfeiters persisted.

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. To assay consumer anger and protect investor relations, Taobao in mid-2017 launched an initiative to crack down on the fake goods being funneled through their site. That initiative has led to 95% of takedown requests and red-flagged listings being processed within 24 hours, a significant improvement in processing times. 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 investigated Pinduoduo and announced that Pinduoduo should strengthen platform management and better regulate activities of third-party vendors. Pinduoduo collaborates with over 400 luxury brands to fight counterfeiters and it has created a 150 million RMB account to refund consumers who were unwittingly sold fake products. 

Supreme Tees on sale for $2.75 on PinDuoDuo

Source: Pinduoduo, Supreme Tees on sale for $2.75 on PinDuoDuo

How counterfeiters in China get around AI controls online

There are many intricate ways in which sellers of fake goods in China have evaded regulation online. One common trick is to redirect clients to separate sales websites. Another method is to label items as “haute couture,” which consumers are aware implies ‘high-quality’ Aside from this label, Taobao sellers can modify the brand name. One seller of copycat Zara clothes lists his items as ZA or Z*ra, which allows him to sneak past the filters set by Taobao.

Taobao’s AI tools are constantly improving in performance, such as implementing filters against luxury products priced below a certain point. Accordingly, the prices of some fake goods are consistent with the high prices of the original products. When interested customers use  Taobao’s private chat function, sellers then reveal the real, much lower price.

Zara items, sold as Z*ra Photo: Zigor Aldama

Counterfeit Zara items, sold as Z*ra Photo: Zigor Aldama

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, however, the actual law enforcement is questionable . Regulators let small stalls selling fake goods slide, instead they 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.

Aside from avoiding government regulations, counterfeiters in China work hard to stay under the real company’s radar. One fake good vendor in Beijing explains: “We [are] careful. Louis Vuitton. They send spies and they sue. So we hide.”

Handbag stalls in Beijing’s famous Silk Alley market

Source: PETER PARKS/AFP/Getty Images. Handbag stalls in Beijing’s famous Silk Alley market

The emerging authentication industry in China

The rise of fake goods in China and consumers’ subsequent fears of being scammed into accidentally purchasing knockoffs has created a new sector: product authentication.

There are dozens of apps on the Chinese Apple iOS app store that offer to verify luxury goods. 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. Often, the process only takes a few minutes.

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. The only surefire way to shrink the market for counterfeit products in China is to deter consumers 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.

Whereas buying knockoffs is a punishable crime in other countries, in China consumers are not liable for their counterfeit purchases. Hence, the discouragement of counterfeit purchases in China cannot then be fear-based.

There are two main deterrence strategies that luxury brands can adopt to dampen Chinese consumer demand for fake goods: the ethics emphasis, and the psychosocial emphasis.

Anti-counterfeiting in China: The ethical approach

Counterfeiting is not a victimless crime, and luxury brands should educate consumers on who gets hurt.

Most counterfeit goods in China are made in sweatshops by children and slave laborers who are often the victims of human trafficking. These sweatshops are overwhelmingly in low-tier Chinese cities. As the child workers are often Chinese, it creates a higher emotional response among the Chinese knock-off consumers.

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 beare held 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 manufacturers their handbags.

Reuters, Child laborers in a Chinese sweatshop

Source: Reuters, Child laborers in a Chinese sweatshop

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

Youtube JPO’s campaign video titled “buying fake products just isn’t cool

Source: Youtube JPO’s campaign video titled “buying fake products just isn’t cool

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.

Across the board, the most effective strategies to deter Chinese consumers from buying counterfeit products are shame-based.

Who is benefiting from the counterfeits industry in China?

China is responsible for more than 70% of counterfeiting according to the World Customs Organization. Where all the money from this industry is going? In his book: The Triads: the hidden threat, Alain Rodier indicates that the counterfeiting industry is linked to Chinese triads. In fact, the triads invest the counterfeiting revenues into other illegal activities. However, the money can also be legally re-injected into the country. Alain Rodier argues: “As far as the Chinese triads are concerned, they would have a worldwide turnover of 200 billion dollars. Much of this money is reinvested in the legal economy”. For instance, it is assumed that the Sun Yee On triad largely participated in the development of Shenzhen.

Three counterfeit lawsuit success stories

New Balance

Chinese company New Burlun copys New balance’s logo

Source: Chinese company New Burlun copys New balance’s logo, athletic apparel is one industry with a lot of counterfeit products in China

In January 2021, the American sportswear giant New Balance won a major trademark battle against China’s knockoff brand named New Burlun and its distributor Shiyi Trade Co. Ltd. In the lawsuit lasted 4.5 years, Shanghai Huangpu District Court eventually ordered infringers to pay RMB 25 million in damages to New Balance. The judgment is described as one of the biggest successes  of a foreign brand in Chinese trademark cases.

The slanting “N” logo is a widely-known mark of New Balance’s design. In recent years, many local Chinese sportswear companies use the slanting “N” on their sneakers’ to benefit from New Balance’s positive brand image. In essence, these companies sell fake New Balance sneakers for less than half the price, especially in China’s smaller cities. The low-quality of these fake products resulted in the lower reputation of real goods huge losses for  New Balance.

New Balance states“it is very encouraging that the court has once again recognized the legitimacy of New Balance’s IP rights, which will help ensure that our brand is safeguarded and protect our consumers’ interests.”

Burberry

Around the same time, on February 19, 2021, the well-known luxury brand Burberry also won the first preliminary injunction against its copycat Baneberry for trademark infringement at Chinese courts.

Even though, Baneberry legally owned the trademarks for its name and logo since 2009 and 2011 respectively, the Intermediate People’s Court of Suzhou decided in Burberry’s favor. The court explained that Burberry’s name and logo was more recognized internationally is known to Chinese consumers for its fame.

Over the past years, Xinboli Trading, the owner of Baneberry, has opened 40 physical stores across China and many online sales channels. The court noted that the infringing products widely used the same or similar patterns, resulting in confusion among consumers.These behaviors were also deemed to constitute unfair competition.

For Burberry, which is expanding its sales channels in the Chinese luxury market, the court’s preliminary injunction decision is certainly an important victory.

Lego

Chinese copycat LEPIN looks no different with LEGO  an example of copy and paste counterfeit products in China

Source: brickfanatics.com; Chinese copycat LEPIN looks no different with LEGO, an example of copy and paste counterfeit products in China

LEGO, the globally popular construction toy brand, has been the target of counterfeiters.Replicating the plastic toy blocks did not require any technical know-how for the uncertificed manufacturers. In fact, China is the biggest manufacturing and selling market of fake LEGO toys.

In April 2019, the Chinese police raided a toymaker that was allegedly manufacturing fake LEGO products and arrested four people. In September 2020, Shanghai No.3 Intermediate People’s Court sentenced nine people to up to six years in prison for infringing on  LEGO’s copyright.

Replicas made by LEPIN (乐拼) were similar to LEGO’s packaging, design, and color. From 2017 to 2019, LEPIN had produced and sold nearly 4.25 million counterfeit LEGO products which were valued at more than 300 million yuan.

The Shanghai court stated that this case not only caused significant losses to LEGO, but also disrupted the order of the market economy, with serious social harm.

Did COVID-19 boost counterfeit products in China?

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. Counterfeits continue selling on e-commerce platforms such as Taobao. However, the recent lawsuits show that China has been improving its IP rights and has taken actions against fake products.

Rethinking the fashion industry

One way of tackling the fake industry is to change customers’ perspectives. Trends should focus quality rather than brand names. Fast fashion might emerge into a big consumption issue as its negative impact on the environment. If the fashion industry evolves to its simplest form, people would not be sensitive to brand image. Without the importance of brand image, there is no demand for counterfeit luxury goods anymore. With her book “no logo” Naomie Klein led this movement towards the end of the 1990s. One way to wipe out counterfeits is to educate people to consume goods differently, without being obsessed with brands.

To conclude, the counterfeit industry is a direct consequence of the industrial growth combined with the value placed on brand image. As the counterfeit industry generates billions each year, it is a complex topic to tackle.Both production and consumption of counterfeit goods must be addressed. The counterfeit goods industry is harms companies because it negatively impacts their brand image. Consumers of luxury products are at risk to lose faith that what they are buying is authentic. Luxury brands can distance themselves from counterfeits through brand independence, or direct to consumers strategy in China.


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