Counterfeiting

[TyroneK(prettypretty)]

http://www.economist.com/displaystory.cfm?...tory_id=1780818

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Imitating property is theft

May 15th 2003 | BEIJING, LONDON AND NEW YORK
From The Economist print edition

Counterfeiting is on the increase. Companies ignore it at their peril

THIS week, the American government unveiled a new $20 bill. Designed to stay one step ahead of counterfeiters, its most notable feature is its colour: the stately green and black of the old bills has been joined by sprightly peach and blue. Alone, this might pose little deterrent to America's digital forgers. Armed with PCs, scanners and laser printers, they account for roughly 40% of all counterfeit currency confiscated in America. Other features, however, will make copying far more difficult than it was: the new bill has enhanced security devices—including a watermark, security thread and special inks.

Thomas Ferguson, director of the Treasury's bureau of engraving and printing, says that keeping counterfeits at bay has as much to do with strict law enforcement and public co-operation as it does with high technology. In any case, it is a combination that seems to be working: fewer than 0.02% of all dollar bills turn out to be fake. Such quality control is something that other industries that are newly at the sharp end of the forgers' skill can only dream of.

The Bureau of Printing and Engraving provides information on America’s “NexGen” currency designs. The 2000 study by the Centre for Economics and Business Research is online. Members of the WTO have signed up to TRIPS. See also Applied Optical Technologies, the International AntiCounterfeiting Coalition, the Counterfeiting Intelligence Bureau and Reconnaissance International.

To most people, counterfeiting means forged currency first and foremost. But counterfeiters are copying an ever widening range of products. For some time they have been churning out imitation designer fashion, software and CDs. Now they are copying medicines, mobile phones, food and drink, car parts and even tobacco.

New technology has broadened the range of goods that are vulnerable to copying. It has dramatically improved their quality, as well as lowering their cost of production. Where once counterfeits were cheap and shoddy imitations of the real thing, today their packaging and contents (especially for digital products such as software, music CDs and film DVDs) often render them almost indistinguishable from the genuine article.

A counterfeit, on a strict definition, is something that is forged, copied or imitated without the perpetrator having the right to do it, and with the purpose of deceiving or defrauding. Such rights are legally enshrined in patents (linked with inventions), copyright (which covers literary, musical and artistic works, and software), trademarks (which include words, pictures and symbols), industrial designs and other forms of intellectual-property protection.

Counterfeits come in many shapes and sizes. Mark Turnage, co-author of a new book* on counterfeiting, groups them into four broad categories, according to the quality of the product and the level of deception. They range from the cheap look-alike Rolex, bought knowingly by a happy customer, to the counterfeit, sub-standard brakes on an unsuspecting driver's car.

The international capital of counterfeiting is undoubtedly China. At least $16 billion-worth of goods sold each year inside the country are counterfeit, according to one conservative estimate. Procter & Gamble reckons that 10-15% of its revenues in China are lost each year to counterfeit products. The International Intellectual Property Alliance claims that 90% of musical recordings sold in the country are pirated.

Most of China's counterfeit bounty stays inside the country, but rising quantities are now destined for foreign markets—as recent customs seizures in America show (see chart). This international trade depends on sophisticated distribution networks. Increasingly run by organised-crime syndicates, these use many of the same routes that have been established for trade in narcotics.

China is by no means the only big exporter of counterfeits. In its annual “Special 301” review, published earlier this month, the office of the US trade representative (USTR) fingered more than 30 countries as counterfeiting and piracy hotspots. Ukraine, for example, is awash in bootleg optical discs; Russia is running on counterfeit software; while Paraguay is rolling in imitation cigarettes. The USTR reckons that American industries lose $200 billion-250 billion a year to counterfeiting.

Nor is such activity restricted to poor places. Milan is a leading producer of counterfeit luxury goods and Florida is an international haven for fake aircraft parts. The Counterfeiting Intelligence Bureau (CIB), part of the International Chamber of Commerce, estimates that 7-9% of all world trade is in counterfeits, their path smoothed by the opening up of markets. Given the clandestine nature of the business, such estimates can be no more than educated guesses. But there is no doubt that counterfeiting, like manufacturing, has gone global.

Counterfeiting is an age-old pursuit. From ancient times people have palmed off fake valuables as the real thing. In the 17th century, Domingo Navarette, a Spanish priest, complained that “the Chinese are very ingenious at imitation. They have imitated to perfection whatsoever they have seen brought out of Europe.”

The past quarter of a century has, however, witnessed a remarkable rise in the counterfeiting of consumer products. Ian Lancaster of Reconnaissance International, an anti-counterfeiting research group, points to several forces behind this. Since the 1970s, technological advances have taken much of the skill out of manufacturing. This has allowed big business to move its manufacturing base to poor countries to take advantage of low labour costs. Unfortunately, many of these businesses paid insufficient attention to the sort of intellectual-property rights (IPR) on offer in such places. Now they are paying the price.

This migration coincided with the growing popularity (and rocketing value) of brands. Through ingenious marketing, a simple designer label can turn a comfy $10 T-shirt into a $100 object of aspiration. So much of a product's worth is now tied up in its brand and intellectual property, rather than its material constituents, that it becomes easy prey for counterfeiters who can exploit consumers' expectations of quality and service without the cost of having to fulfil them (see chart).

Although multinational firms are the loudest complainers about counterfeiting, they are not the only ones to suffer. Because counterfeiters copy popular brands, local firms in counterfeiting hotspots can also be losers. In Thailand, domestic firms such as GMM Grammy, which produces movies and music, and Jim Thompson, an upmarket silk producer, have seen their Thai sales falter because of counterfeiting. The state tobacco monopoly has launched a vigorous campaign to stop counterfeit versions of its Krongthip cigarettes flooding in from abroad.

Counterfeiting is as diverse as any legal business, ranging from back-street sweatshops to full-scale factories. Counterfeiters often get their goods by bribing employees in a company with a valuable brand to hand over manufacturing moulds or master discs for them to copy. One of the most infuriating problems for brand owners is when their licensed suppliers and manufacturers “over-run” production lines without permission and then sell the extra goods on the side.

Distribution networks can be as simple as a stall in the street, or a shop on the other side of the world. The internet has been a boon to counterfeiters, giving them detailed information about which goods to copy and allowing them to link consumers and suppliers with ease and relative anonymity. Peter Lowe, head of the CIB, reckons that some $25 billion-worth of counterfeit goods are traded each year over the internet.

The complex distribution network required by the larger counterfeiters has attracted organised crime. Interpol is well aware of the connection; last year it established a special working group to improve co-ordination of international action against counterfeiters. Of growing concern to authorities, however, is evidence that terrorists too are in on the act. The 1993 bombing of the World Trade Centre was financed, in part, by sales of counterfeit T-shirts in New York; and the CIB maintains that the IRA has funded some of its activities in recent years through video piracy. The World Customs Organisation is now working on new ways of monitoring and controlling international supply chains. Its explicit aim is to clamp down on smuggling by terrorists; but a happy side-effect may be to cut back on counterfeits too.

Counterfeiting is not a victimless crime. For a start, legitimate businesses lose sales because of competition from counterfeiters. If their brand loses value (because it is seen as less exclusive or is confused with shoddy imitations), this poses a long-term threat to profitability. In addition, firms have to bear the cost of anti-counterfeiting measures. Procter & Gamble reckons that it spends $3m a year fighting the copycats.

Another headache is the prospect of legal liability. Last year, Serono, a Swiss biotechnology company, settled a case with two American customers who had sued the firm (and assorted distributors) after taking a fake version of its body-boosting drug Serostim. The plaintiffs claimed that the company should have foreseen the possibility of counterfeits entering the distribution chain and should have taken suitable precautions.

A study in 2000 by the Centre for Economics and Business Research estimated that the counterfeiting of clothing, cosmetics, toys, sports equipment and pharmaceuticals within the European Union cost the region 17,120 jobs, and reduced GDP by euro8 billion ($7.4 billion) a year. As counterfeiters rarely pay duties or taxes, governments lose further revenue. And countries with endemic counterfeiting may sacrifice foreign investment too. Sony, for example, has toned down its music operations in Hungary because of counterfeiting. There is, however, little sign that multinationals are avoiding China: quite the opposite.

Given the costs, big business is keen that consumers should feel as strongly about counterfeiting as it does. But most customers, in the developed world at any rate, are relatively unconcerned. Some argue that counterfeiting benefits consumers, particularly in developing countries, by giving them access to lower-price goods, such as software, that they might not otherwise be able to afford. And they claim that counterfeits occasionally push brand-holders into innovating in their customers' interests. Yamaha, for example, has decided to beat China's counterfeiters at their own game by introducing a new model of motorcycle at roughly the same price as the fake Yamahas on the streets.

Nevertheless, the costs of counterfeiting far outweigh the benefits. The World Health Organisation reckons that 5-7% of pharmaceuticals worldwide may be counterfeit—with too few active ingredients, too many contaminants, fake labels or recycled packaging that covers up expiry dates. The problem is most acute in developing countries. Three years ago, a survey of shops selling artesunate, an anti-malarial drug, in Cambodia, Laos and Thailand, found that more than a third of the samples analysed had no artesunate in them at all. Even in America, counterfeit medicines are not unknown. Last year, the Food and Drug Administration (FDA) launched some 30 investigations into cases of pharmaceutical counterfeiting, involving such popular brands as Combivir (against HIV) and Procrit (for anaemia).

At least as hazardous is the trade in counterfeit car parts, which may account for as much as 10% of the spare parts sold in the EU, according to a 1999 study. Even more worrying is the thriving trade in reconditioned aircraft components, passed off as genuine parts along with fake certificates of authentication. Last year, police raided three aviation-parts manufacturers in Rome, seizing more than $2m-worth of used parts—modified and repackaged to look as good as new.

Dodgy aircraft parts kill. In 1989, a plane belonging to Partnair, a Norwegian charter airline, crashed when its tail assembly fell off because of substandard counterfeit bolts holding it to the rest of the body. The CIB believes that the November 2001 crash of an American Airlines flight over New York may have been caused by the failure of counterfeit parts.

Few big companies are unaffected by counterfeiting somewhere in the world. As Tony Gurka, managing director of Commercial Trademark Services in Hong Kong, notes, “you get corporations saying they don't have problems. Well if they don't, either they have a lousy product or it's being copied so well they don't know about it.”

One tack that companies increasingly take is to load their vulnerable products with anti-counterfeiting features. Some of these, borrowed from pioneering security devices developed for use on dollar bills and the like, are clearly visible and are intended to help consumers distinguish fakes from genuine goods. One approach, used by Telesense in Beijing, is to label each item on sale with a unique 16- to 21-digit number. Consumers can confirm that the item is genuine by calling the company. Telesense reckons it has 8 billion numbers in its database and on products throughout China. But such overt anti-counterfeiting features depend on consumers caring enough to make a call. Other devices, such as holograms, are themselves prone to counterfeiting.

Companies also use covert features, primarily to help them trace their products through the supply chain and to distinguish genuine articles from fakes, especially should they need to take the copycats to court. Molecular tags (such as DNA) are being used in products or on packaging to mark them in such a way that special assays can distinguish the real thing. And there is a raft of encryption methods to stall, if not stymie, would-be software and digital media pirates.

A number of firms have sprung up to provide authenticating technologies. Pira International, a trade organisation, reckons that the markets for these technologies will be growing by more than 10% a year by 2005. But many companies still balk at the cost of some of the more effective technologies, especially in today's economic climate.

Bill Thompson, the Shanghai-based managing director of Pinkertons, a private investigation firm, claims that the key to fighting counterfeiting is the four “Es”: enforcement, education, external pressure, and economic growth. Once firms get a hint that counterfeits are circulating in a particular market—from, say, unexpected fluctuations in sales or angry consumers—many employ the likes of Mr Thompson to watch the market, collect samples, and co-ordinate raids with the local police.

But enforcement in many countries is uneven. To begin with, police or customs officers are often more interested in fighting what they consider to be more serious offences, such as homicide or drug smuggling. There is also a problem of job protection: in many poor places, counterfeiting is the biggest business in town, and local police would rather not be responsible for putting local people, and even their own relatives, out of work.

Two years ago, Russell Lerner, who works for Pinkertons in Bangkok, went on a raid in Photharam district in central Thailand to clear out counterfeiters making stuffed knock-offs of Mickey Mouse and other famous characters. Over 1,000 people turned out to block the raid. It eventually took government intervention to confiscate the furry contraband and shut down the sweatshops. Today, however, Photharam is back in business, “as if nothing ever happened”, says Mr Lerner.

Besides such problems of enforcement, laws on IPR in many countries are still not up to scratch. By 2006, all members of the World Trade Organisation, save the poorest, are supposed to have implemented TRIPS, an international treaty on IPR that lays down basic rules for protection and enforcement. Some countries, notably China, have tidied up their legal codes so that companies can, at least on paper, protect their intellectual-property assets. But, in practice, cases are often hard to bring to trial, and courts are reluctant to prosecute and impose criminal penalties. In America, convicted counterfeiters face fines of up to $2m and 10 years in prison for a first offence. In China, counterfeiters can still get away with a $1,000 fine, which even there provides little deterrence.

In Europe, the European Commission is working on new regulations to beef up customs action against counterfeits. It has proposed new rules to harmonise member states' legislation on IPR enforcement. This is particularly important as the EU prepares to embrace new members, such as Poland, where counterfeiting is a serious problem.

Increasingly, companies are joining together in industry or regional coalitions to deal with the issue. One of the busiest groups is called the Quality Brands Protection Committee. In China, it collects data on the scale of counterfeiting, and lobbies the government for better protection. It also educates police and customs officers on effective enforcement.

In the end, though, growth and home-grown invention are the most effective remedies to counterfeiting. In the 1960s, Japan was a hotspot for copying; in the 1970s, that dubious distinction passed to Hong Kong; in the 1980s, it was Taiwan's and South Korea's turn in the spotlight; and today it is China's. As each of the pioneer countries has developed its own industry, it has introduced laws and penalties to clamp down on counterfeiting. China will, at some point, follow the same route. But no amount of effort will ever completely eradicate the copycats. For as long as there is consumer demand, companies will find that imitation is the severest form of flattery.

[AliBabaIncorporated]

The growth of "counterfeit goods" is just the invisible hand giving a giant bitchslap to fashion designers who think that their name printed on the front should give a t-shirt some value beyond the materials it's made of.

[rakovlam]

I bought some Chinese and Japanese music CD's in China. I swear they could be the real thing if not for the extra songs and the Simplified Chinese. One day, no one could tell what music CD's are real or fake.

[deez nuts]

my label whore cousins and ex-gf's say the japanese made counterfeit louis vuitton handbags are better quality and identical to the originals.

Counterfeits are awesome.

Maybe if greedy corporate white people didn't overprice items so that they can buy their 4th mansion, then HK'ers wouldn't have to counterfeit them for the world.

And counterfeit money...well another reason to use coins for money instead of bills.

[AliBabaIncorporated]

Originally posted by Uncle Tat@Jun 9 2003, 06:32 PM
Maybe if greedy corporate white people didn't overprice items so that they can buy their 4th mansion, then HK'ers wouldn't have to counterfeit them for the world.

greedy-ass Japanese people are even worse. DVD of Hamasaki Ayumi concert, in Japan: around 5000 yen (US$42). Same thing on the streets of Shenzhen: 8 RMB (US$1). Result: I bought 10x more Japanese music and movies while in HK than I ever did in Japan.

[Emperor_Mike]

Eugh. Maybe we shouldn't attempt to justify counterfeiting. :unsure:

[mr. x]

haha, this reminds me of a headline in my The Onion book (think its Finest News Reporting) says like "pat buchannan condemns chinese "imitation americans" " and how he plans to get rid of these imitation americans made in china every year

[mr. x]

it amazes me that the one thing that asia asians excel at universally is not something legit like manufacturing but pirating. i spose it comes with the fact that they cant spend as much money but yeah, its amazing.

[AliBabaIncorporated]

Originally posted by mr. x@Jun 9 2003, 11:26 PM
it amazes me that the one thing that asia asians excel at universally is not something legit like manufacturing but pirating. i spose it comes with the fact that they cant spend as much money but yeah, its amazing.

uh yes, which is why in wealthy, economically developed Hong Kong, which surpassed many European countries in per capita income, we see barely any trace remaining of piracy :P

[MellowDrama]

Originally posted by AliBabaIncorporated@Jun 9 2003, 05:50 PM
greedy-ass Japanese people are even worse. DVD of Hamasaki Ayumi concert, in Japan: around 5000 yen (US$42). Same thing on the streets of Shenzhen: 8 RMB (US$1). Result: I bought 10x more Japanese music and movies while in HK than I ever did in Japan.

Speaking of which, I stocked up like a mothafucka on JPOP CDs when I was in Taiwan a few years back.

This was all before the whole file-sharing phenom caught on. Now, I no longer deal with the shiny plastic discs.

:lol:

[mr. x]

Originally posted by AliBabaIncorporated@Jun 9 2003, 10:47 PM
uh yes, which is why in wealthy, economically developed Hong Kong, which surpassed many European countries in per capita income, we see barely any trace remaining of piracy :P

let me rephrase that

from the most economically adept like japan and HK to developing nations like pakistan, and southeast asia, the one thing we all do and by we i mean ALL of asia (russia included) is pirating

[AliBabaIncorporated]

Originally posted by mr. x@Jun 10 2003, 01:04 PM
let me rephrase that

from the most economically adept like japan and HK to developing nations like pakistan, and southeast asia, the one thing we all do and by we i mean ALL of asia (russia included) is pirating

Actually Japan doesn't seem to have a piracy problem at all. Even Japanese people overseas don't like buying pirated products. Which is why their domestic market can support the sale of $26 CDs in the first place.

Originally posted by MellowDrama@Jun 10 2003, 12:37 PM
Speaking of which, I stocked up like a mothafucka on JPOP CDs when I was in Taiwan a few years back.

This was all before the whole file-sharing phenom caught on. Now, I no longer deal with the shiny plastic discs.

Hmm ... once I started with KaZaA, I just stopped buying CDs and music VCDs. But I still buy ridiculous amounts of TV series, cuz no one ever bothers putting those up online :(

[SunWuKong]

Originally posted by AliBabaIncorporated@Jun 10 2003, 05:55 PM

Actually Japan doesn't seem to have a piracy problem at all. Even Japanese people overseas don't like buying pirated products. Which is why their domestic market can support the sale of $26 CDs in the first place.

yeah seriously. the japanese CDs that are distributed in HK are half the price of the ones that are distributed in japan itself.

[mr. x]

why is japan not as big on pirating? conformity issues? like korea for example is big on pirating...