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Counterfeiting: Faked in China

The world's biggest factory is also a fake goods hotbed. Here are 13 ways to protect your company. The second in a CSO series on counterfeiting.

Jeffrey Unger, CEO of GenuOne, a brand protection company, says outsourcing has been a huge facilitator. "The cost reduction was great, but companies were sending their IP all over the world to third parties they didn't know or own," he says.

Another factor is China's sheer sizeâ¬it's home to 1.3 billion people (by comparison, the United States has 296 million; the European Union has 457 million. "China now has the technology and capital, and they definitely have the people to produce all kinds of counterfeit products," says Joe Simone, a Beijing-based lawyer at the law firm Baker & McKenzie and the vice chairman of the Quality Brands Protection Committee, a China-based group of more than 130 multinational companies that works with Chinese authorities on anticounterfeiting strategies.

China's economic evolution from communism to free markets has also contributed to a surge in illegal activity. "China is still a developed nation; you go through a period in which a country is in transition from a planned economy to a market economy and everyone's looking for a quick buck," says Phil Yang, who formerly led Gillette's anticounterfeiting efforts in China and is now general manager of paper and packaging company MeadWestvaco in China.

Financially, counterfeiting has proven itself to be a lucrative venture, making it attractive to organized crime. Yang says that in the past, producing fake goods in China was more of a Mom-and-Pop-type cottage industry. He says it now has become a much more organized activity. "Everything you see now is large-scale. You may see in rural areas a whole village involvedâ¬wrapping batteries, packaging razor blades. Whole villages will work on it, or several villages," Young says. "At the end, each person's contribution may be a few hundred goods, but it becomes millions when added up. And they're exported all over the world."

The return on investment can be eye-popping. A 2005 report from the National Chamber Foundation (a think tank affiliated with the U.S. Chamber of Commerce) came up with an interesting comparison between counterfeiting and cocaine dealing. It goes something like this: A kilo of cocaine costs about $47,000, and a dealer can sell it on the street for $94,000; that same $47,000 can purchase 1,500 bootleg versions of Microsoft Office 2000, which can be sold for $423,000. Although an unscientific example, the point is clearâ¬counterfeiting pays well. "There's no marketing overhead, no taxes, and you're not paying workers normal rates," says Simone. Annoying expenses like R&D, advertising and other costs associated with turning an idea into a brand also conveniently disappear.