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International Counterfeit Marketing: Success Without Risk.

Selling an imitation intending to defraud others into accepting it as the genuine item is a criminal offense. Widespread counterfeit marketing across product categories and geographical regions concerns multinational enterprises. Brand equity erosion and consumer safety are major issues, and strategies are needed to protect against counterfeiters.

Counterfeiting is a worldwide phenomenon that has existed for many years in all sectors of the markets. In particular, the problem affects trademark products that enjoy prestige and acceptance among a vast majority of consumers. This unlawful activity yields serious economic damage and, more important, discredits the commercial image of a trademark.

International trade in counterfeit products is worth $100 billion per year or about three to six percent of overall world merchandise trade. According to a recent International Trade Commission study, a $100 billion counterfeit market translates into a global loss to businesses of $200 billion a year, up from $61 billion in 1986 [10]. Clearly, the counterfeit product market is booming. In less than ten years, the losses to legitimate businesses have tripled in magnitude.

The blatant copying of everything from watches and handbags to auto parts and promotional T-shirts cuts into profits and harms a trademark owner's reputation. A gullible or confused consumer may believe that a knock-off is genuine and then be upset with the trademark owner when the counterfeit proves defective. Trademark infringement cannot be ignored. In addition to harming the reputation of trademark owners, trademark rights become diluted if owners tolerate counterfeits.

International counterfeiting is financially lucrative with very little risk, and as products shift from high margin to low margin, high volume, the financial benefits are even greater. In countries with galloping inflation, currency devaluation and low purchasing power, counterfeited products offer an alternative for the consumer. Unstable governments with frequent policy shifts and widespread corruption allow counterfeiters to operate with impunity. Sometimes government officials own factories and businesses producing counterfeit products, yielding a conflict of interest that supports counterfeiting.

There are many foreign countries like China and Taiwan that have no way to deal with counterfeiters. Very often, counterfeit trade takes place outside a country's jurisdiction. Organized crime in Russia and the U.S. has taken advantage of the easy dollars to be made by counterfeiting and become a primary player in the market. The use of trademarks as generic terms by competitors, retailers and the media make it easy to reproduce products illegally. Given the lucrative incentive, business and industry must take united, firm and comprehensive steps to eliminate counterfeiting globally.

Counterfeit Strategies

Counterfeiting is a problem for manufacturers around the world. Multinational enterprises (MNEs) based in the U.S. appear to be the primary targets. Some reasons why U.S. products are so attractive to counterfeiters are:

* Laws and regulations do not effectively deal with counterfeiting. Most manufacturers, if large enough, initiate their own programs, thereby leaving small manufacturers out in the cold.

* U.S. products are known throughout the world. U.S. businesses use worldwide advertising to launch products and try to differentiate their products from others where competition is fierce.

* Products manufactured in the U.S. have strong customer recognition, and there are often shortages of these products in developing countries.

* U.S. companies use the latest technology and produce advanced products. Foreign consumers perceive U.S. products as prestigious.

There are two direct counterfeiting strategies for stealing or copying a product. The first involves an individual or foreign firm that wants to counterfeit. The counterfeiter purchases the product legally or illegally. He determines where the product is produced and reproduces it in a different country. The counterfeit is sold in the counterfeiter's home country. The benefit of manufacturing in a different country is to decrease the likelihood of detection and legal prosecution.

The second type involves an employee stealing information and selling it to a competitor. The competitor has the product manufactured in the counterfeiter's home country and then sells it in the original market. This type of theft is rarely publicized because of adverse publicity or the company does not know how the information was obtained.

Indirect counterfeiting strategies center on hiring an agent to steal information or the product itself. The product is manufactured in the counterfeiter's home market and sold in other markets. In contrast to the first strategy, the counterfeiter does not purchase the product himself. As an alternative, the product is manufactured in a market other than the counterfeiter's and sold anywhere. The benefits are lower labor wages and relaxed legislation.

Product Counterfeiting

A large proportion of counterfeiting involves consumer products with a prestigious image: Louis Vuitton luggage, Rolex watches and Polo by Ralph Lauren. The goods range from cigarettes (Dakota), precious stones (jade), videotapes (U.S. movies), compact discs (Madonna or Michael Jackson), toys (Barney) and computer software (Windows 95) to credit cards, auto and aircraft parts, baby formulas and antibiotics. No product that can be cheaply reproduced is safe from counterfeiting.

A product counterfeiter looks for projects to pursue the same as MNEs, but the rules of the game are different. When a MNE does a feasibility study, it takes into account many cost factors, such as marketing and R&D. After the cost factors are analyzed, then the potential profitability of a project can he assessed. Counterfeiters, on the other hand, are not constrained by overhead costs. They find established products and decide whether they can copy them at a minimal cost. Since there is no overhead other than production, human resources and transportation, counterfeiters can undercut the MNEs that spend millions on marketing and R&D.

About 50% of counterfeit products come from the Far East, 25% from New York and the remainder from other countries. In the Far East, product counterfeiting takes place on a wide scale in China, Taiwan, South Korea, Singapore, Indonesia and Malaysia, but it is by no means restricted to the Far East. Other offenders include Australia, Brazil, Italy, India and Pakistan [14]. Furthermore, other nations are emerging as product counterfeiters, in particular Eastern European countries once behind the Iron Curtain: Hungary, the Czech Republic, Poland, Romania, Slovakia and C.I.S. [4,7,8].

Counterfeiters constitute a diverse group, including ordinary businessmen and women. They have an entrepreneurial nature and no problems with using another's idea as their own. Furthermore, counterfeiters may not know that there is anything wrong. For example, many Chinese do not understand the notion of intangible assets like brands or copyrighted material. It maybe culturally acceptable to take part in actions that are considered counterfeiting in other cultures.

A second major group of counterfeiters includes criminals, particularly organized crime. Organized crime has found counterfeiting of all types to be extremely profitable. The mob has even been connected to the counterfeiting of the Mighty Morphin Power Rangers toys [15]. Along with the cash and weapons found in raids on organized crime strongholds, counterfeited computer software has been recovered from time to time [13]. A third major group of product counterfeiters includes governments, particularly China. Despite repeated warnings by the U.S. of possible sanctions, China remains an active and prolific product counterfeiter. In many cases, it appears that the government sanctions product counterfeiting.

The Tianzin New Star Electronic Company based in Beijing sells more than 300 video game titles that were "stolen" from Nintendo. It is well known that the company president is a director of the Chinese government's Ministry of Electronics and Machinery [9]. A Shenzhen-based company that produces counterfeit compact discs is run by the son of a general in the People's Liberation Army. The son's wife is thought to be the niece of the Prime Minister [1]. The Chinese government's involvement in product counterfeiting sends a condoning message to everyone in China. Despite many promises and high profile raids, China is still among the leaders in product counterfeiting.

Demand Side of Counterfeiting

The modern counterfeiter copies a product right down to the packaging, making it difficult for consumers to discern between a real and counterfeited item. The surge in product counterfeiting can in part be attributed to the high-tech machinery available to the counterfeiter.

For example, computers are widely used in counterfeiting. One clothing counterfeiter used an electronic scanner to copy the emblem of a prestigious manufacturer. Once in the computer, the counterfeiter manipulated the image according to specific articles of clothing. The computer was used to run two embroidering machines, costing $100,000 each, that stitched intricate emblems on 24 shirts every three minutes. In addition, the images were sent to three silk-screening machines costing $25,000 apiece that imprinted designs in ten colors. Color photocopiers duplicated tags and labels.

Another reason for product counterfeiting is the high cost of certain technological equipment, which may he the main reason that compact disks are counterfeited in China. There are currently about 50 compact disk factories in China that can produce up to 80 million CDs a year in a market which demands about three million a year. Each CD machine costs about $1 million. The large investment in the machine coupled with a tremendous excess capacity leads Chinese firms to look for ways to increase CD production. Unfortunately, the manufacturers turn to counterfeiting CDs to supplement their legitimate production.

Consumers may or may not knowingly be participants in the illegal practice when buying a counterfeit product. In some cases, consumers buy a fake thinking that it is genuine and thus are victims of counterfeiting. With prestige goods, consumers buying counterfeits are more likely to be willing accomplices rather than victims, since they buy counterfeits knowing they are fakes. Consumers who knowingly buy a counterfeit good are willing to trade quality and performance for the faked image purchased at a saving. Consumers buy counterfeits where performance risks are low. A consumer who knowingly buys counterfeit jewelry, for example, would not buy risky counterfeits such as auto parts or drugs.

Prestige, brand image and fashion are important to purchasers of premium brands. Buyers of counterfeit replicas also value image characteristics, and they are trying to gain the image benefits at a bargain price. Several researchers have suggested that individuals buying counterfeits have the tastes of a snob with a low-price acceptability [6,16]. Thus, price is a salient attribute for individuals choosing a counterfeit product Consumers who knowingly choose counterfeits see themselves as less well off financially and less confident than other consumers. If financial reasons motivate the purchase of counterfeits, these same reasons might be used to encourage consumers not to buy the counterfeits.

Costs to International Marketers

A single company can lose millions of dollars to product counterfeiting.

* A counterfeit version of Windows 95 appeared on the Hong Kong market days before it was released, and Microsoft lost approximately $300 million to counterfeit sales in one month [12].

* An estimated ten to 30% of the $4.2 billion sales coupons redeemed in the U.S. are the result of mass cutting and counterfeiting [21.

* The Federal Trade Commission attributes $3 billion per year to the sale of counterfeit auto parts.

* U.S. firms lose $500 million annually to Mexico because of trademark and copyright violations [5].

* Mattel lost millions from counterfeit Barbie dolls made in Russia [18].

In almost all cases, counterfeit goods are inferior, which frequently means a breakdown or malfunction in a short period of time. To further compound the problem, especially in the case of industrial products, consumers do not realize that they purchased a counterfeit They send the product back to the company whose "name" is on it for a replacement. In the interest of customer service, the company may replace the part or the product. They might not publicly announce that they received a counterfeit for fear of bad publicity. This leads to brand equity erosion, which in turn leads to a loss in market share.

Costs to Consumers

When consumers are confronted with widespread counterfeiting, they become distrustful of particular brands for fear of purchasing fakes. It may be more psychological than substantive, but this gives the consumer fewer choices. The customers do not get the products that they really need and want. In the long run, business competitiveness and the consumer quality of life suffer. Consumers accept "lesser" products or are hurt by counterfeit purchases.

In addition to fewer choices, counterfeiting causes a major loss in employment. The U.S. Customs Service estimates that 750,000 jobs are lost to foreign counterfeiting of U.S. products [17]. The Anti-Counterfeiting Group based in the U.K. reports that 100,000 jobs are lost each year in Europe from product counterfeiting [3]. These people would still be employed without the illegal copying of products.

The most important issue for consumers is product safety. If a customer purchases a knock-off Polo shirt, they feel cheated at worst The stakes are much higher for knock-offs such as nuclear reactors, aircraft parts and drugs. If a part fails in an emergency reactor shutdown system at a nuclear plant or a part critical to the operation of an airplane breaks down in midair, there will be a catastrophic loss of lives. Counterfeiters do not have to abide by the strict regulations of bodies like the Federal Drug Administration as legitimate pharmaceutical companies do. The greatest danger associated with counterfeit products is that counterfeiters have no regard for the consumer's personal safety.

Laws and Regulations

The U.S. has strict laws protecting companies against counterfeiting, such as the Federal Copyright Act. If a person is found guilty of copyright infringement, he is subject to fines up to $250,000 plus a maximum of five years in prison. A corporation can receive a $1,000,000 fine. States also have laws against counterfeiting. In California, the imprisonment term for a single count of counterfeiting is six years.

The European Union is proposing to extend a 1986 law to cover products made without consent of copyright owners, including illegally used trademarks, packaging with unauthorized logos and tools for making counterfeit products. EU countries would set their own penalties to deter violations. In France, proposed laws to combat drug counterfeiting include fines up to $80,000, prison terms of up to two years for individuals and the immediate closure of companies found counterfeiting pharmaceuticals. While the U.S. and the EU have tough laws to deal with counterfeiters, other parts of the world have few or no laws. Countries with the fewest laws are the biggest offenders of product counterfeiting.

In Hungary, after pressure from the U.S., the Criminal Code of 1978 was amended to include copyright laws, and fines can range from $11,000 to $55,000. In Indonesia, a new law was passed to eliminate a trademark-approval process whereby the first company to file for a trademark receives it, even if the trademark was used elsewhere by another company. This is a step in the right direction, but the law is not retroactive. Currently, Indonesian companies own the trademarks of companies like Levi Strauss and Pierre Cardin. These companies cannot use their own trademarks in Indonesia. China may bow to U.S. pressure and conduct high profile raids, but when the families of Chinese officials are directly linked to counterfeiting operations, those involved know that the laws "on the book" will not be enforced.

Combating Counterfeiting

In today's world, international marketers must take proactive and aggressive steps to fight product counterfeiting. Trademarks, patents and copyrights allow the owners to take appropriate legal action against counterfeiters. Each country has its own laws, and it is important for international marketers to be intimately familiar with the necessary steps to register with the proper government agencies. A lack of knowledge about foreign markets should not be a contributing factor to product counterfeiting. There are a number of strategies for combating product counterfeiting.

Awareness. Consumers should be educated about counterfeiting and how to detect fakes. If companies made consumers aware of the damage that counterfeiting causes, fewer fakes will be bought and sold. Education will be expensive, but an educated consumer will mean greater profits for a MNE in the long run. Consumer education cannot be ignored.

Prosecution. MNEs need to take an active role to eliminate counterfeiting of their products. Many government agencies are low on resources, and by the time they get to the counterfeiter, it may be too late. It is not enough to pursue counterfeiters; it is equally important to bring them to court. Nintendo is well known for its ferocious dealings with counterfeiters and the legal actions it pursues [11]. Being an active defender of their registered products helps Nintendo deter counterfeiting. Potential counterfeiters will look for easier pickings that offer less resistance.

Monitoring. A MNE's distribution channel is the last line of defense. This is where counterfeit products can be stopped if each channel member takes an active role. A channel member can inspect parts, send samples to the manufacturer for inspection or take direct action when a shipment of goods is of ambiguous or suspect origin. The best way to encourage channel members to participate in anti-counterfeiting measures is to build good relationships. A feeling of active participation will benefit both the vendor and the distributor.

Modification. Companies can add special invisible markings (fingerprints) that can be read by optical scanners. Holograms can prevent counterfeit products from reaching the marketplace. These security measures are very costly and holograms can also be counterfeited. MNEs must continue to search for better anti-counterfeiting measures to protect their products.

Hands-off. The hands-off strategy may initially seem inappropriate but satisfy the bottom-line needs of some managers. They choose to ignore the dangers of counterfeiting. They consider counterfeiting a cost of doing business and write off anti-piracy programming to legal expense.

Consultation. Companies should consult with both government agencies and other industry representatives. Participating in the International Anti-Counterfeiting Coalition and lobbying for stronger domestic and international legislation can benefit a company financially and help curtail counterfeiting.

Anti-counterfeiting strategies are summarized in Exhibit 1. Current ways to detect counterfeiting are listed in Exhibit 2.


There is no easy solution to product counterfeiting, but there are measures to relieve the problems. First, international marketers must register their products with the appropriate governmental agency in every country where they do business. Tracking counterfeiters, prosecuting them, employing anti-counterfeiting measures, educating consumers and building stronger relationships with distributors are necessary measures to fight counterfeiting. With a global market ranging from consumer goods to information technology, it is of paramount importance that MNEs fight product counterfeiting; they are hurt the most. Consumer can always choose another brand, and they will if the company whose product is counterfeited does nothing about it.


(1.) Brauchli, M. "Fake CDs Are a Growth Market in China." Wall Street Journal, Feb. 11, 1994, B:1,4.

(2.) "Coupon Crooks, Sybil Gets Sole, Just Imitate It, etc." Adweek, 36, June 12, 1995, 24.

(3.) Carty, P. "Fakes' Progress." Accountancy, Dec. 1994, 45-46.

(4.) Crisp, W. "Fighting Back Against Counterfeiters." Business Eastern Europe, Nov. 23, 1993, 1-2.

(5.) Green, P.L. "US Firms Join to Stem Mexican Counterfeits." Journal of Commerce and Commercial, 405, July 1995, 3A.

(6.) Higgins, R.S. and P.H. Rubin. "Counterfeit Goods." Journal of Law and Economics, 29, Oct. 1986, 211-230.

(7.) Kraar, L. "The Risks are Rising in China." Fortune, Mar. 6, 1995, 179-180.

(8.) Kranz, P. "Taking on the 'Superpower' of Piracy." Business Week, Nov. 19, 1994, 116B.

(9.) Lincoln, H. "Huge China Market, a Mirage." Wall Street Journal, Mar. 23, 1994, A:14.

(10.) "MNCs Get a New Ally in Their War against Counterfeiters." Business International, Jan. 10, 1996, 11.

(11.) "Nintendo Seeks U.S. Action over Video Counterfeiting." Wall Street Journal, Feb. 15, 1995, B:4.

(12.) Ouellette, T. "Software Pirates Treasure Win 95." Computerworld, 29, Sept. 29, 1995, 28.

(13.) Ramey, J. "Senate Hears Bogus Trade Has Mob Ties." WWD, 170, Oct. 11, 1995,2.

(14.) "U.S. Losses to Copyright Piracy." Wall Street Journal, Feb. 17, 1995, A:6.

(15.) Warrick, P. "Morphin Madness." Los Angeles Times, Nov. 24, 1994, 3.

(16.) Wee, C.H., SJ. Tan and K.H. Cheok. "Non-price Determinants of Intention to Purchase Counterfeit Goods." International Marketing Review, 12(6), 1995, 19-48.

(17.) Weinstein, B. "Cheat on the Street." Washington Post, Sept. 22,1994, D:5.

(18.) Weinstock, G. "Russia's Customs Officers Are Barbie's Odd Dream Date." Journal of Commerce and Commercial, 402, Oct. 10, 1994, 3A.
Strategy Conceptualization
Awareness A firm educates consumers, marketing
 intermediaries and legislators about
 the authenticity of its products.
Prosecution A firm goes all out against takers
 fo save both sales and goodwill.
Monitoring A firm monitors channel members
 used by counterfeiters and offers
 incentives to reject counterfeits.
Modification A firm adds unique identification
 labels to its product.
Hands-off A firm hesitates to prosecute
 because customers may switch to
 other brands if products are faked.
Consultation A firm works with government agencies
 and industry manufacturers to form
 anti-counterfeiting coalitions.
Method Merchandise
Hologram * Credit card
 * CD
Hidden Word * Check
 * Student transcript
 * Credit card
Fluorescent Light * Paper document
Invisible Ink
Safety Paper
Polaproof * Packaging label
DNA Security Maker * Passport
 * Currency
 * CD
 * Software packages
 * Pens
 * Telephone card
Sigma Three Secure * Paper document
Document System
PIN Number * Credit card
 * ATM card
 * Telephone card
COPYRIGHT 2000 St. John's University, College of Business Administration
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2000 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Delener, Nejdet
Publication:Review of Business
Article Type:Statistical Data Included
Geographic Code:00WOR
Date:Mar 22, 2000
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