Global Trend

The Product Piracy Nightmare

When you slip into a pair of jeans that you bought at The Gap, it probably never occurs to you that they might not really be Gap jeans. Neither does it occur to you when you swallow a cholesterol-lowering medicine that it might be a fake ? or even dangerous. And if you¡¯ve ever driven a Chevrolet, it has probably never crossed your mind that it might not be a real Chevy.

Yet all these things have been counterfeited ? and much, much more besides. In fact, counterfeiting products, even life-saving prescription drugs, is a trillion-dollar global business. According to a recent cover story in Business Week, it is costing an estimated $512 billion in losses to global merchandise trade. And so far, there aren¡¯t too many brilliant ideas about how to fight it ? though trying is in itself a burgeoning industry.

Just a year and a half ago, Pfizer had to yank some 16.5 million doses of its cholesterol drug, Lipitor, off the shelves after they were discovered to be fake pills that at best could be worthless ? and at worst could be dangerous.

Last October, Hewlett-Packard discovered a million dollars¡¯ worth of bogus inkjet cartridges in a Brazilian warehouse. French customs seized more than 11,000 fake Nokia cell phone parts last June. Buick windshields, Kiwi shoe polish, Callaway golf clubs, Intel computer chips, Bosch power drills, and BP motor oil ? have all been counterfeited.

Unilever sees fake versions of its shampoos, soaps, and teas growing at a rate of 30 percent annually. Fake pharmaceuticals are costing the industry $46 billion each year. Fake car parts are a $12 billion business. And in fact, the next step may be fake cars: General Motors has already sued a Chinese car maker for counterfeiting its Chevrolet Spark minicar, according to The Financial Times.

And that doesn¡¯t even get into the billions and billions of dollars¡¯ worth of counterfeiting going on in fashion, accessories, watches, music, software, and movies.

As a result, an arms race is on between the legitimate manufacturers, aided by customs officers and police, and the counterfeiters, often armed with the latest high-tech manufacturing equipment. Some companies are deploying hordes of detectives around the world to unmask fraudulent manufacturing operations. Others are resorting to high-tech strategies such as electronic tagging of products. Still others are using aggressive pricing to thwart counterfeiters. But no one is very optimistic about putting a stop to it.

Most believe that China is the key to putting any significant dent in the trade. That country is believed to account for two-thirds of all counterfeiting. For example, Chinese counterfeiters are believed to have captured a full 30 percent of the market for Daimler auto parts in China, Taiwan, and Korea. They have a booming business in making knockoffs of Honda motorcycles. And the Chinese government has been slow to take action against counterfeiters, handing out light sentences ? or no sentences at all ? to offenders, even when they are caught.

How did this all get started?

The answer is that it¡¯s an unintended side-effect of globalization. Globalization has spread capital, expertise, and knowledge to new markets. Those markets contribute cheap labor for an ideal export system, such as China¡¯s. Those economies begin by manufacturing cheap and easy-to-make items like plastic toys. Then they work their way up the value chain, making more and more complex products as they learn and expand their capabilities.

As this process unfolds, it becomes easier and easier to reverse-engineer products of greater and greater sophistication. What started as a market in which a visitor could get cheap tailored suits has grown into one in which an international distribution system can get you anything from fake golf clubs to imitation Cisco Systems router interface cards.

The Chinese technologists have become so adept that they can copy a new golf club model in less than a week, using three-dimensional computer-aided design software. They can do it largely because they have experience building the real thing for the American manufacturer. They can even duplicate holograms and smart chips used in identifying the real products. More sophisticated technology, like a Sony PlayStation, can take a few months to knock off, but there appears to be nothing that¡¯s outside their reach.

Mitsubishi even discovered that its elevators were being counterfeited after a building owner asked for a maintenance contract. The fake elevator looked the part, but it had the unfortunate habit of stopping between floors. Some counterfeits actually are the same as the real thing ? except that they may have been rejected by quality control. Semiconductor distributors have been burned buying chips that Intel or AMD rejected and that were resold as originals. The defective chips had serial numbers and logos applied just like the approved chips.

Other pirates are going in the other direction, toward low-tech, collecting used beer and soft drink bottles and refilling them, according to an article in The Age. Anheuser-Busch had to resort to using expensive foil on its bottles to keep bogus Budweiser off the market in China.

Not all companies succeed in their attempts to foil fakers. Some counterfeiters mix copycat products in with the real ones to confuse distributors, putting knock-off Levis in with the genuine ones, for example. In that way, they end up on shelves in American stores.

The president of the International AntiCounterfeiting Coalition in Washington, D.C. once found counterfeit Duracell batteries for sale in a local supermarket. He said the word ¡°China¡± was misspelled on the back of the package ? a clear tip-off that they were fake, according to an article in The Washington Post. In fact, Gillette Co., which owns Duracell, turns up hundreds of thousands of imitation batteries every week.

According to an article in The Philadelphia Inquirer, the Chinese government has a long history of ignoring this type of illegal trade, much to the irritation of American, Japanese, and European companies that are trying to protect their intellectual property ? as well as their profits.

China has long been known as a place where you can get a look-alike Louis Vuitton purse or Gucci shoes for a song. But a number of factors have served to push the Chinese into a more proactive role in this battle for brand protection. The first was an incident last year in which 15 infants died from drinking phony milk powder. The perpetrator was sentenced to eight years in prison. Another is increasing pressure from the United States and Europe, who are big importers of Chinese goods, and who operate many factories in China.

One big problem with a systemic solution in China is that local governments often provide protection for the criminals. While Chinese government officials are trying to cooperate, they have seen their efforts thwarted at the local level. Several planned raids were unsuccessful because local officials tipped off the counterfeiters. Last August, police found a cave beneath a building where Marlboro cigarettes were being counterfeited, but the criminals had fled, taking the cigarettes with them. Only the packaging equipment remained.

In the future, this worldwide problem is going to provide the setting for long, drawn-out battles. In some African countries, fake medicines account for nearly half the drugs on the market. This can be a life-threatening situation when alleged antibiotics don¡¯t have any active ingredients in them, as was true in more than one case.

Even in the United States, the Food and Drug Administration conducted 58 fake drug investigations in 2004, up from 22 in 2003. Pfizer uncovered more than a million-and-a-half doses of fake Norvase, a drug for hypertension. People who need that drug can die without it. Pakistan and Russia are two of the biggest producers of counterfeit pharmaceuticals.

Today, there is literally nothing that can¡¯t be counterfeited. Based on this disturbing, yet growing, trend, we offer the following four forecasts for your consideration:

First, in the short term, the product-piracy problem is going to get worse. Consumers will need to be on their guard against counterfeit products, especially drugs. The Internet trade in fake drugs is booming, according to a report on the Associated Press Newswires. And the Internet is already a hotbed for the sale of counterfeit products. In fact, many people purchase fake products in China and then put them up for auction on eBay as if they were authentic. As consumers become more aware of the tainted product pipeline, a movement will develop, with such organizations as the International Anti-Counterfeiting Coalition in Washington, D.C., to fight back. Even if the bogus product is just an automobile air filter that lasts half as long, consumers will run out of patience and demand protection.

Second, American and European business will bring intense pressure to bear on China to crack down on illegal trade. China¡¯s economy depends on its ability to function as a member of the World Trade Organization. That organization will eventually exert its own pressure. While this is a global problem, getting China under control ? with convincing penalties for counterfeiters ? would go a long way toward stemming the tide of imitation goods.

Third, the business of fighting counterfeiting will itself become a booming business. Security and investigative firms will reap big profits from consulting with companies plagued by counterfeiting, and from scouring overseas markets for fake products. Meanwhile, high-tech firms that can devise tamper-proof identification schemes for legitimate products will reap huge rewards. This will be an escalating high-tech arms race, but those companies that can establish a credible foothold will win big.

Fourth, in the long run of 10 to 20 years, product counterfeiting will become a lower-level ? but persistent ? problem, as all legitimate governments seek to fight it in concert with business. A set of international treaties outlining the penalties for counterfeiting will no doubt be required. Companies will incorporate an anti-counterfeiting arm into brand protection systems they already have in place. And in combination with the efforts of consumers to protect themselves, they will contain the problem at a manageable level. High-tech solutions, such as ¡°smart dust¡± and ¡°nano-bots¡± to authenticate products, will make counterfeiting so expensive that it will no longer carry the same allure. Eventually, like piracy on the high seas, counterfeiting will become virtually non-existent. Entrepreneurs who might be engaged in it will realize they can create more value by engaging in free global trade based on trust and the delivery of authentic, high-quality products.

References List :
1. BusinessWeek, February 7, 2005, ¡°Fakes,¡± by Frederik Balfour, Carol Matlack, Amy Barrett, Kerry Capell, Dexter Roberts, Jonathan Wheatley, William C. Symonds, Paul Magnusson, and Diane Brady. ¨Ï Copyright 2005 by The McGraw-Hill Companies , Inc. All rights reserved.2. The Financial Times, September 22, 2004, ¡°China Rife with Counterfeits: Even Cars Can Be Fakes,¡± by Mure Dickie. ¨Ï Copyright 2004 by The Financial Times, Ltd. All rights reserved.3. The Washington Post, January 4, 2005, ¡°Counterfeit Goods That Trigger the False Alarm,¡± by Don Oldenburg. ¨Ï Copyright 2005 The Washington Post Co. All rights reserved.4. The Philadelphia Inquirer, September 17, 2004, ¡°China Faulted for Rampant Product Piracy,¡± by Joe McDonald. ¨Ï Copyright 2004 by The Philadelphia Inquirer. All rights reserved.5. Associated Press Newswires, May 25, 2004, Drug Makers Get Chinese Help in Targeting Counterfeit Drugs,¡± by Mark Jewell. ¨Ï Copyright 2004 The Associated Press. All rights reserved.