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China's counterfeit industry holding its ground.

Thursday, 01 July 2010 00:00

EVERY time a US trade delegation comes to Beijing or the city holds a major international event, it is noticeable how many of the city's pirated DVDs get whisked away by shopkeepers to a back cupboard, leaving only black and white movies from the 1940s and local TV show box sets on suddenly bare selves. But wait a short while for the officials to go back home or the spotlight to dim, and Hollywood's latest films are back on display at Chinese Yuan Renminbi CNY13 (US dollars USD1.91) a disc--complete with bonus tracks.

China is no doubt one of the world's most prolific producers of counterfeit products. But how did it get so good at making knock-offs, and as the nation becomes wealthier what's in the future for these counterfeiters?

According to a June 2010 report by the United Nations Office on Drugs and Crime (UNODC), in 2008 more than two-thirds of counterfeit products seized across the globe originated from China. Its report 'The globalisation of crime: a transnational organised crime threat assessment' report also stated that in 2009, USD205 million's worth of pirated goods seized in the US came from China. That was equivalent to 79% of all counterfeit products seized that year.

And it is not just DVDs. China's pirate kings are copying everything from condoms to car parts and software to socks. The International Intellectual Property Alliance (IIPA) even claims China's top universities stock pirated books in their libraries.

Microsoft chief Steve Ballmer summed up the dire situation for software piracy in China. "China is in a class by itself: there is no software market to speak of," he told Bloomberg in June. "We do seven times better in India. China can't get a lot worse." But it is unfair to say China's government is doing nothing. On paper at least, the country has been improving its copyright and anti-fraud laws. The government also launches annual publicity crackdowns against pirated goods, and copyright cases are often won. Last year, Microsoft won a landmark case when a Chinese court jailed four people for spreading a bootleg version of Microsoft's Windows XP online, called 'Tomato Garden'. At the time, it was hailed as the country's biggest software piracy case.

But the counterfeiters remain in business, and it begs the question why.

The IIPA points the blames squarely at the government. Beijing, it said, has "chosen not to take truly effective action to reduce the levels of online piracy, just as it has not for years taken effective and deterrent actions against physical piracy."

The bootleg business, which mostly targets foreign products, is at best tolerated or at worst encouraged because it helps the Chinese economy.

Professor Daniel Chow, a law professor at the USA's Ohio State University, (NOTE SPELLING IS CORRECT) came straight to the point.

"Counterfeiting benefits local economies," he said. "It may be illegal but it provides jobs and revenue for local governments."

The central government is sincere about combating counterfeiting, said marketing research company Access Asia's co-founder Matthew Crabbe. Instead, he blames lower level officials. "I don't think it is fair to say the central government has turned a blind eye, but their efforts have been hobbled from within their own party," Crabbe explained. "Despite creating good legislation to outlaw piracy ... central government cannot be at the forefront of the execution of such policy, and has to rely on local provincial and county governments. We all know how there is a legion of local government lords across China with their grubby fingers in the till that are helping dodgy companies to make more dodgy money."

But there are many other Chinese officials that take copyright protection seriously, said Professor Peter Yu, director of the Intellectual Property Law Center at Drake University in the USA (NOTE--SPELLING IS CORRECT). The problem they have is a lack of resources. "The difficulty is they cannot increase their enforcement capacity as quickly as the growth of the counterfeiting problem," he said.

And because penalties for counterfeiting are based on the value of the goods, traffickers tend to break their hauls up into small shipments so even if they are caught they just pay the fine. In the long-run they can still make a profit.

And the counterfeiters have been doing so well simply because China has been doing so well. The country's extraordinary economic ascent over the past few decades has helped the pirate industry.

"With the expanding economy, manufacturing production, and increase in quality, the quantity and quality of legitimate and illegitimate products are growing," noted Dr John Spink of the Anti-Counterfeiting and Product Protection Program at Michigan State University, also in the USA (NOTE--SPELLING IS CORRECT).

And with such a sustained and meteoric rise--GDP has increased by an annual average of 10% over the past three decades--the counterfeiters have simply kept pace. They have also benefited from the way that China's economy has developed--mainly based on low-cost manufacturing that is fragmented across the country and fuelled by investments and technology from overseas.

"China is the recipient of the world's most advanced technology that is being brought in with the billions of dollars of foreign direct investment by multinational enterprises," said Chow. "China also has a weak legal system. This combination has led to a counterfeiting problem that is the worst in world history."

This fragmentation of production is perhaps the real problem. "Both the scale and the nature of Chinese manufacturing--which often involves a large number of small firms collaborating to produce a single product--leave the country vulnerable to this abuse," explained the UNDOC.

Multinationals trying to make cheap goods and outsourcing their products to many low cost suppliers has created this piracy problem, said Crabbe.

"Where you get increased problems also tends to be in sectors where outsourcing to huge numbers of subcontracted parts or ingredients contractors," he said. "This goes for faulty brakes in Mercedes Benz cars as much as it does for melamine in milk, and is basically part of the same issue. The reliance on such cheap suppliers, by big companies that are cutting corners to make more profit, is what creates the opportunity for corruption." He said it might not be that small suppliers set out to fake or make shoddy goods, "but when they realise that nobody is really checking what they are doing--and therefore if they can get away with making low grade parts, bulked-out milk or selling branded handbags out the back door, and can make their extra profit--then they would almost be stupid not to."

As China's middle classes expand, these pirated goods are not just destined for overseas. Many of them are now consumed in local malls and markets. At Bainaohui, a popular electronics supermall in Beijing (NOTE--SPELLING IS CORRECT), legitimate, smuggled and fake mobile phones are all equally available. The fake models are only identifiable by their cheap price or by closely examining their functions; they tend to run more slowly and have different applications than the genuine model. Of course, many customers prefer a fake phone because they are cheaper but still look like the real thing.

Because branded electronics products are relatively expensive in China, many consumers prefer to buy cheaper copies. For example, a 32GB iTouch is priced USD299 on Apple's website in the US, and 20% higher on the China Apple store at RMB2,398 (USD354). If multinationals were to rethink their market prices they would see a lot less counterfeiting because Chinese consumers would prefer to buy the original model, said Yu.

"Given the different costs of living, it is unlikely that many Chinese outside the major cities will be able to afford legitimate products at western prices. Those companies that insist on selling products at a much higher price than they would sell in the US or Europe are literally shooting themselves in the foot."

But the rise of the middle class and homegrown brands could finally give bootleggers the boot. "As the ranks of China's middle class expand and their spending power increases, consumers will reject fakes and buy more genuine products not only because they want to buy a better quality product but because having the real thing becomes a status symbol," said Jianqiang Nie, a professor of law at Wuhan University in central China (NOTE--SPELLING IS CORRECT). "Also as the number of domestic brands increase in China, domestic manufacturers will focus on protecting their brand and get actively involved in protecting copyright activities."

It's all about awareness, added John Anderson, the chairman of the London-based Global Anti-Counterfeiting Network. The growth of domestic brands will help reduce piracy not because they won't be copied--Chinese brands are already being copied--but Chinese copyright holders will put pressure on the government to police better. This would "raise acceptability by a growing section of the public (lead by the developers of the new brands and their employees) of enforcement by the public authorities, and acceptability of deterrent measures such as criminal prosecutions for counterfeiters and pirates generally," he said.

But, warned Yu, while the growth of the middle class may kill off demand for counterfeits to an extent, China is such a large country with such an uneven growth that the day when the government gets a handle on piracy is a long way away.

"The geographical distribution of counterfeits will be different, but the problem will stay in China," he predicted.
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Author:Gardner, Dinah
Publication:International News
Article Type:Company overview
Date:Jul 1, 2010
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