China's fightback against counterfeit goods

Alysha Webb finds out why counterfeiters have reason to worry in China

I'm pricing LV purses - or what appear to be LV purses - in the Lowu Commercial Center, a glass-fronted building in Lowu, a town in China's Guangdong province just across the border from the Hong Kong Special Administrative Region. These are hard times for the thousands of merchants here. Business from the groups of tourists who flock to the shopping centre just a few steps from the train station is down.

A small LV-like bag starts at RMB320, or US$39, but the price drops quickly as I start to walk away. Absolutely lowest price is RMB150, begs the merchant. Competition is brutal - there are perhaps hundreds of other shops selling similar products. The price isn't bad when a real LV bag would cost me more than US$700. But I don't need a new purse - it's all in the name of journalistic research. So, I'm off to price Rolex watches.

Lowu Commercial Center (pictured left) is a five-story symbol of what has changed, and what remains the same, in the fight to end counterfeiting in China. From shoes to bags to watches, fake products used to rule the building, say investigators and lawyers who have fought for years to get authorities to close it down.

Raids were conducted, but merchants were tipped off beforehand and shops would be closed when inspectors arrived. Some argued that there were legitimate merchants in the centre as well. And whether selling fakes or authentic products, all the shops were a source of tax revenue.

Then, in 2001, China became a member of the World Trade Organisation and a signatory to the Treaty to Respect Intellectual Property Rights (TRIPS). The Lowu Commercial Center became 'too much of an embarrassment,' says Loo Shihyann, a Hong Kong-based attorney with Baker & McKenzie. 'The authorities have really tried in the last year or so to crackdown on the counterfeiting.'

And they did succeed in shutting down some of the more egregious counterfeiters. But instead of leaving, they literally went underground. Many now stash their goods in the subterranean levels of the Commercial Center. Foreign tourists who look like serious shoppers are taken down there. 'Fakes are a way of life in most parts of China now. It's a long-term problem,' Loo sighs.

But as the Chinese saying goes, 'Kill the chicken to scare the monkey'. Those doing battle against counterfeiting are hoping that if enough chickens are killed, at least a few monkeys will be frightened to death.

Legal changes are helping. In the past, most counterfeiting offences were classified as administrative actions and the penalty was just a small fine. But a 2002 Supreme Court decision lowering the monetary value of goods involved to make a case criminal - and thus qualify for bigger fines and jail terms as punishment - has been a big help. 'Before, you had to put an exact value to the harm. Now you just have to prove that they have produced one fake that damages a famous name to prove damages,' says Li Menghong, a Shenzhen-based intellectual property lawyer.

The copyright law was also amended in October 2001 to allow the court to search and seize counterfeit goods in raids, says Clement Ngai, Asia Pacific region legal counsel for software designer Autodesk. His firm poured money into trying to prove a Shanghai company was using its software illegally to make a profit, but failed. Applying the revised law, the court ordered a surprise seizure of the unlicensed software and Autodesk was able to win a RMB500,000 judgment for copyright infringement and actually collect some of the fine. 'Of course, we hoped to recover some of our losses,' says Ngai. 'But we also wanted to see if the legal system has really improved and send out a signal that we are serious about fighting piracy. We will file more cases.'

Self interest is also driving the heightened efforts at IPR enforcement in China. Chinese software companies lose money to counterfeiters too. And counterfeiting isn't limited to software and consumer goods. The automotive industry, for example, which China hopes will be a major contributor to economic growth, is plagued with counterfeit spare parts and even whole counterfeit cars.

Next door to Guangzhou, in Shenzhen, is the Zhiyou Auto Parts Market, a hive of small shops selling every imaginable car part. Motorcycles making deliveries zoom in and out of the open-air market. Not all of the parts sold here are fake, but plenty are. Victor Kho, managing director of Hong Kong's Quest IPR private investigators, says his company has raided this market many times for clients, who include Japanese and German auto manufacturers.

Since China joined WTO, Kho has noticed an improvement in the authority's willingness to fight counterfeiting. The Public Security Bureau isn't just taking action against firms when asked to, he says. 'Their attitude has changed. They conduct proactive sweeps.' Customs has also started detaining items it suspects are counterfeit and contacting Quest for confirmation.

Making the penalties more severe has also made a difference. 'The criminal enforcement is really picking up,' says Stefan Schmitt, head of brand protection management for DaimlerChrysler. 'We have seen since last year the police are getting more and more involved. That is really a deterrent.'

But China still has some way to go before the counterfeiting problem can be considered to have lessened significantly. One look at places like Shanghai's Xiangyang Market, a huge open air bazaar full of counterfeit clothes and shoes in the middle of the city's high-end shopping district, makes that clear.

One issue is mindset. Counterfeiting of consumer goods like purses doesn't strike many authorities as a real crime, says attorney Li. He previously worked in the technical standards bureau, which is one of the bodies charged with protecting intellectual property rights. 'When I was at the TSB,' Li says, 'I would run into this kind of situation. The High Court figured that if a product's poor quality could actually harm the consumer - for example a counterfeit auto part - then the law should come down hard on the perpetrator. If a product was just stealing a brand name, but its quality was OK, then there was no need to strike hard. They only minded actual rights, not trademark rights.'

And with limited resources, even when the authorities are willing to enforce IPR rights, they don't necessarily have time to pursue the counterfeiters. 'A senior provincial police officer told me candidly white collar, IP crimes with no dead bodies and no bombs were not their priority,' says Loo.

Even companies whose brands are being copied sometimes feel pursuing the culprits can be a waste of resources. Shanghai Volkswagen figures two-thirds of the aftermarket parts for its Santana sedans are fakes, says Wu Huihong, head of SVW's legal department. But despite fighting the problem for five years, SVW has only seized $21m in counterfeit parts out of the estimated $242m produced annually, he says. 'It costs tens of thousands of RMB to pursue these cases, then the fine might only be several thousand RMB and maybe several years in prison,' says Wu.

Not being copied can even be a bad sign, says Karl Friedrich Weiss, Vice President of Banza Quality and Design, a German-Taiwanese joint venture that makes handbags and backpacks for most of the top brand names and under its own Unisex brand. 'The problem is that if you don't get counterfeited, you are very bad quality,' he says.

The huge wave of foreign companies moving their manufacturing to China has also helped counterfeiters, who are increasingly turning out higher quality and more sophisticated copies. Many of the factories turning out counterfeits work double shifts, making legitimate goods during the day and fake goods at night. Foreign companies have little choice but to shift their manufacturing operations to China, though, even if it means giving technology and designs away. 'Now everyone produces in China because of labour costs,' says Weiss. 'In Germany, you pay a worker e2,000 a month, maximum 40 hours work per week plus 40% overtime allowed and 35 holidays. In Shenzhen or Guangzhou, you pay RMB580 a month for 7.30am to 9pm workdays. Even with overtime you only pay RMB1,000 a month.'

Counterfeiters are getting craftier, too, says Quest's Kho. A few years ago, his investigators could just pretend to be buyers and nail counterfeiters the first time since many didn't even know they were breaking the law, he says. Now, it often takes several visits to the factory to convince the counterfeiters to bring out the fake goods. 'They are more secretive and alert nowadays,' he says.

If China has the will and devotes the resources to come down hard on counterfeiting, the problem can at least be minimised, figures Loo. He mentions Hong Kong as an example. The Shamshiupo district used to be another Lowu Commercial Center, until the Hong Kong authorities made a concerted crackdown effort. 'The counterfeiting problem is still there, but at least it is smaller,' says Loo.

Alysha Webb is a business journalist based in Shanghai.