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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.

For years, Chinese authorities neglected the counterfeiting problem; after all, it was foreign companies' products that were being faked. That attitude has since changed. Thousands die every year from ingesting fake medicines, which has helped awaken the authorities to the sometimes deadly consequences of the crime. (See "Drug Busters," November 2005, for a profile of how pharmaceutical giant Novartis takes on the counterfeit drug problem.)

Another factor spurring the central government into action: Chinese companies are watching their own brands get ripped off. For example, Li-Ning, the country's biggest indigenous footwear and apparel manufacturer, has assigned three full-time people to investigate counterfeiting.

China's membership in the World Trade Organization also forced the country to beef up its observance of intellectual property rights. Last December, China hardened its anticounterfeiting laws by lowering the thresholds for criminal prosecutions. Now, an individual can be prosecuted for having $6,100 worth of counterfeit goods on hand; for companies, the amount is $18,000. Those are drops of 50 percent and 70 percent, respectively, over the previous standards. The government also increased fines and toughened prison sentences for offenders. In addition, Chinese authorities are working more cooperatively with other countries on intellectual property issues.

However, while the stepped-up enforcement is encouraging, it sometimes seems like the government is shooting arrows at a Bradley fighting vehicle. For the counterfeiters, "usually the fine is just a cost of doing business," says Simone. "Administration authorities are active, but the problem is getting bigger and bigger."

And local authorities are in no hurry to lend a hand. This is a great paradox of counterfeiting. Simone believes it's the small and midsize company brands that suffer the worst from the growth in counterfeiting, both in China and abroad.

"The sales of counterfeits of famous brands mainly displace sales of local brands made by small and medium-sized entities," Simone says. "Small and medium brands and fakes normally compete on price, with the fakes normally winning out, since consumers would rather buy a cheap famous brand than a small or medium company brand for the same price."

And yet, while local brands can be victims of counterfeiting, experts say that a big obstacle national authorities face is that counterfeiting contributes to local economies.

"Counterfeit manufacturing operations at the local level provide jobs, and so [local officials] have an economic incentive not to crack down on counterfeiters," says Jack Holleran, who led the brand integrity department at Philip Morris USA from 2002 to 2005, and is now the company's senior VP of compliance and brand integrity. Local officials may also have financial ties with these operations. "You have the challenge that you're basically taking money out of the pocket of the local official who's involved in this process, so why would she or he be incentivized to stop making boxes of software or T-shirts or whatever the products may be?" asks Unger.