CRACKING DOWN ON COUNTERFEITING IN CHINA

EFFORTS TO CRACKDOWN ON COUNTERFEITING IN CHINA

China has anti-piracy and anti-counterfeiting laws and regulations. Chinese law protects trademarks and prohibits companies from copying the “look and feel” of other companies’ stores. As of 2006, there were criminal penalties on producing or selling counterfeit goods if the total value of the confiscated products was less than a certain amount. The United States and other countries want China to impose harsher penalties on crimes linked with counterfeit goods.

The penalty for importing pirated discs is up to four years in prison and a fine of $1,290 for each imported disc. Signs warn violators in large markets in Shanghai and Beijing of these penalties. In April 2005, two U.S. citizens were imprisoned for DVD piracy. One man was given was give a 2½ sentence; the other one year. Neither was Chinese-American.

But enforcement is spotty, and the United States and other Western countries have often complained China is woefully behind in its effort to stamp out intellectual property (IP) theft.The American Chamber of Commerce in China says 70 percent of its member companies consider Chinese enforcement of intellectual property ineffective.

China’s government has pledged to crack down, and it faces increasing pressure to show progress. Periodic crackdowns against counterfeiting have been launched but they often seem motivated more by politically appeasing the United States and other countries than a sincere effort to combat the problem. Pirated material has been crushed by earthmovers and other heavy machines and destroyed by soldiers with flamethrowers in public displays. Sometimes factories producing pirated tapes, discs and software are closed down. In one display in 1995, 400,000 pirated audio and video discs were crushed or burned near Guangzhou to publicize China's commitment to cracking down on counterfeiters. But some doubt much will change until China graduates from manufacturing goods to designing them, and has more to lose than gain.

In 2006, Chinese courts heard 769 criminal intellectual property rights cases, a 52 percent increase from 2005, and sentenced 1,212 people, a 62 percent increase. The total number of cases related to protecting intellectual property rights increased from 13,000 in 2005 to 20,000 in 2006.

A primary motivator for China will be when its brands are more widely recognized and it realized the importance of intellectual property rights. If anything is going to defeat the piracy of music, movies and software in China it will be other pirates working on the Internet that work on a global basis from anywhere and reduce the need for physical counterfeiting like that done in China.

In 1998, Hong Kong theaters closed for one day and 1,600 actors and entertainers marched through the streets of Hong Kong to protest film piracy.

A survey of 164 multinational corporations operating China in 2007 found that 70 percent of them felt that the pirating situation was worse of the same as before. The general feeling is that the courts and the national government are doing more but obstacles in the local level, often with collusion of local authorities, have been too difficult to undermine.

In August 2009, four people were jailed for spreading their bootleg “Tomato Garden” version of Microsoft’s Windows’ XP. Two received 3½ year sentences. Two received two year sentences. The “Tomato Garden” software skirted XP’s authorization and certification barriers, allowing users unrestricted use. Millions gained free access to it on a website which made money from advertisements on the site. In July 2010, a Beijing court said it would hear the case of a man named Zhou Shaompu who was seeking $147 million in compensation from director James Cameron, claiming that he stole the idea for the film Avatar from a sci-fi novel that Zhou wrote.

Zachary Karabbell, author of Superfusion: How China and America Become one Economy wrote in the Washington Post, “Give up on intellectual property rights. The United States spends and inordinate amount of time staging a rear-guard action against China’s infringement on patents and other intellectual property. Successful American businesses operating in China, however, have learned that trying to protect intellectual property wastes time and energy, and they’re better off reinvesting in research and developing new products.”

Perhaps the biggest threat to the fake market is coming from Chinese shoppers, especially those with money who thumb their noses at fakes and want the genuine articles, See Gucci.

China Vows Better Anti-Piracy Enforcement

Before Hu Jintao visited the United States in 2010, China promised to buy legal software (not pirated versions) for government computers.

In January 2011, China's commerce minister Chen Deming promised dozens of global executives that its latest in a string of crackdowns on product piracy will deliver lasting results. "We take it very seriously," Deng said."The Chinese government will not allow such a campaign to disappear after the first six months." But businesspeople said they were optimistic about the latest effort because a top economic official and rising Communist Party star, Vice Premier Wang Qishan, has been put in charge and an enforcement office has been created in Chen's ministry. [Source: Joe McDonald, AP, January 14, 2011]

In addition Beijing is making progress in an effort to compel government offices to use only licensed software. Government inspectors have been sent to regions throughout the country to enforce the orders, he said.

Foreign executives have appealed to China to bring more criminal cases instead of fining violators and to crack down on what they said is growing use of the Internet to sell copied and phony goods.

Raids and Seizures

In April 2004, China promised to crackdown on the pirating and copying if goods and products. Beijing promised to carry out “a series of raids” against pirates and counterfeiters and “lower the threshold of what constitutes a criminal violation.” In the first six months of that year the government said it seized 2 million CDs and raided 8,000 CD and software dealers, fining violators around $3.6 million. Even so pirated CDs and DVD were widely available for $1 a piece. One black market DVD store in Beijing---Beijing Yongsheng Century International Cultural Co.”was raided 14 times between 2005 and 2007---but manged to stay in business.

In a campaign against piracy in 2007, United States claimed 42 million pirated copies of videos, albums, computer programs and publications were destroyed.

In July 2007, the FBI said that it had worked with Chinese police to bust up two piracy gangs in Shenzhen, in process seizing a $500 million worth of pirated software, mostly copies of stuff released by Microsoft and Norton destined for sales in the United States. Twenty-five suspects were arrested and 350,000 pieces of software was seized. The government also announced it cracked down on criminal rings that ran huge manufacturing centers that produced everything from fake Viagra to counterfeit Tamiflu and anti-malaria drugs to imitation Crest toothpaste.

Four thousand people were detained in a crackdown on counterfeiting and piracy carried out between November 2010 and January 2011. Police said they uncovered more than 2,000 cases of intellectual property rights violations worth $350 million. The crackdowns are believed to have taken placed to win some brownie points before a visit by Chinese President Hu Jintao to the United States.

In September 2011, AP reported: “China says it seized about 13 million illegal video, music and print products over the past year in a campaign to tackle fakes and copyright theft. The official Xinhua News Agency reported Sunday that 663 shops producing pirated products, including movies, music CDs, software and books, were shut down from late last year to June.

The raids have put a few people out of business and behind bars but has had little effect on availability and price of piarted DVDs sold on the streets.

Crackdown on Silk Street Vendors That Sell Pirated Goods

In February 2009, market managers at the Silk Street Market in Beijing temporarily shut down 29 stalls for selling counterfeit goods. They didn’t o quietly. The object of much of their fury was IntellecPro, a Beijing firm specializing in intellectual property rights, who represents five foreign luxury-brand manufacturers that have sued the market for trademark violations. “We expected trouble,” Zhao Tianying, a legal consultant with IntellecPro, told the New York Times. “But we never imagined this.”[Source: Sharon Lafranier, New York Times, March 1, 2009]

The Silk Street Market crackdown had been a long time coming. It had been four years since Burberry, Gucci, Chanel, Louis Vuitton and Prada first sued the market’s operator, the Beijing Silk Street Company, and individual vendors for trademark violations. As part of a court-mediated agreement, the market’s managers agreed to punish offending vendors, shutting down six to eight at a time for up to a week. [Ibid]

Xu Shengzhong, the vendors’ lawyer, tries to portray his clients as too ignorant to distinguish fake goods from real or to recognize brand names. What is worrisome to government officials is the threat of social unrest.

George Wang, manager of Silk Street market, said that while he sympathized with the vendors, the Silk Market must fundamentally change and shift its focus from counterfeit goods to genuine pearls, silks, homegrown brands and tailoring services. Last year, the market began its own line of products, warning counterfeiters to stay clear. Wang said he hoped that shoppers changed their habits, too. At present, they want the knockoffs, he said ruefully. You can see it in their eyes. That is the brutal reality. [Ibid]

Protests by Silk Street Vendors

Sharon Lafranier wrote in the New York Times, “The vendors... responded with the same ferocity with which they nail down a sale. Dozens of them have staged weekly protests against IntellecPro lawyers who are pursuing the trademark case, mocking them as bourgeois puppets of foreigners. The vendors confronted witnesses who provided evidence of trademark violations and filed a countersuit asserting that only the government can shutter a business...A few characters scrawled in pencil on the wall outside IntellecPro’s office sums up the vendors’ message: We want to eat!” [Source: Sharon Lafranier, New York Times, March 1, 2009]

Dozens of vendors began by their protest by descending on IntellecPro’s office, occupying the reception area for hours while the police tried to mediate. The next day they stormed past the receptionist, banged on the walls and swore at the staff. The firm’s senior partner, Hu Qi, was afraid to go home and slept in a hotel for three nights. On the sixth day of their protest, more than 50 vendors waved signs and chanted slogans outside the firm’s building while IntellecPro lawyers, with 12 hired guards on hand, had their lunch delivered. [Ibid]

We are trying to run businesses here, one 37-year-old vendor in a red coat, a fake Dolce & Gabbana handbag on her arm, told the New York Times. They don’t have any proof. Asked about her handbag, she insisted: We don’t read English. We don’t know what the letters mean. We just think it is pretty. Another vendor, 24, who gave her last name as He, said: We want to be compensated for our losses. And we want a public apology. [Ibid]

George Wang, the market’s 43-year-old manager, told the New York Times, he was stuck in a terrible position. The five brands are saying, “You are not doing a good enough job in protecting our intellectual property rights,” he said. And the vendors are saying, :You are going overboard in protecting intellectual property rights.” [Ibid]

The police, saying their first priority is to maintain order, organized a meeting between some vendors and Hu, IntellecPro’s senior partner, according to the firm’s spokeswoman. It went poorly. The merchants lectured Hu on the need for intellectuals like him to respect workers, while Hu tried to defend his patriotism. These ordinary people work for decades, to their deaths! one vendor said. How can you say you are patriotic? [Ibid]

Efforts to Crackdown on Shops and Counterfeiting Factories

China has been given some credit by the U.S. for cracking down on illegal factories. There are periodic reports of factories being raided, assembly lines shut down and thousands of illegal goods confiscated. Employees and managers often manage to flee out the back and avoid arrest.

At the Silk Market in Beijing, police routinely check for fake Louis Vuitton, Chanel and Burberry bags because those companies have issued protest but do not check for Dolce & Gabbana and Ralph Lauren because they haven’t issued protests. People who want fake Louis Vuitton, Chanel and Burberry items pick out what they want from catalogs and have them delivered in a few minutes.

The Chinese government has set up a hotline for tips on illegal factories. One anonymous caller received $36,000 for information on an illegal factory behind a duckling hatchery that was producing pirated compact disks.

The Chinese government has closed down dozens of factories that produced pirated software and CDs but has also refused to enforce its own laws against dozens of others. Those that are closed often reopen. In 1995, less than four months after seven compact disc factories were shut down Guangzhou six were reopened. If they can’t reopen in the same spot they can easily be moved to a new location.

In 2003, when detectives from Shanghai tried to gather evidence from a factory producing counterfeit parker pens in the pen-making town of Wengang they made into the factory but were surrounded by a mob and only managed to escape with the help of local police. When detectives returned in 2007---after toughter anti-piracy laws had been imposed---they received roughly the same treatment.

In April 2008, a Beijing man was given a one year prison sentence for selling fake DVDs. The police found 10,000 prated discs in his shop. Even so shop owners say they are not very worried about authorities, saying the raids are rare and they usually have a 10 minute head ups if they occur, giving them enough time to hide their stuff so it isn’t confiscated. One owner of a stall that sold fake luxury goods told the International Herald Tribune, “If I get caught I’d lose my merchandise and I’d probably be fined, but when business is good, the profits are quite high, so it is absolutely worth the risk.”

In November 2007, outdoor apparel make North face won a lawsuit against the manager of the popular Silk Market in Beijing. The market was ordered to pay $5,330 in fines and sop infringment practices.

Authorities don’t want to create unhappy customers who buy counterfeit good nor do want alienate merchants who rely in the trade for income. If a raid occurs, not only is the owner out of business, so are his employees and suppliers.

In December 2005, 17 production lines of compact discs were shut down.

Making Money Off the Counterfeiters

In 1995, China passed a law that allowed customers to get double their money back from falsely labeled products. The law also allowed retailers to demand their money back from suppliers and wholesalers and they in turn could demand money back from manufacturers.

Some people have made a living by ferreting out fake brands and demanding compensation from the stores that sell them. Wang Hai is one such person. He has returned fake Sony headphones, designer label belts and leather jackets and luggage. He made a $1,500 profit when he bought up 100 "Casio" calculators for $15.60 each and brought them back three days later, demanding a refund. On another occasion he made $10,000 in a single day buying hundreds of counterfeit fax machines, cordless phones and earphones. He said he could have made more had he had more money to buy products.

Wang told the New York Times, "The first reason I did this was that I was skeptical that the new law would be carried out. The second was for financial gain." Since getting involved deeper he said, he "likes the idea of doing something to help society.”

Wang became a minor celebrity after writing a book called I Am a Rogue. He said he was not against street hawkers who sell counterfeit goods because people who buy stuff from them know what they are buying is not genuine. What irked him were major stores who sold counterfeit goods, claiming they were the real thing. For obvious reasons he is not popular with retailers. He has been threatened with physical violence by managers, some of whom have his picture posted in their offices.

Copyright Laws and China

China is one of nine nations on a U.S. copyright watch list. In 2010, China was again placed on a priority watch list for failing to fight piracy and counterfeiting. The website for the American Embassy in Beijing warns: “Any successful product is likely to be illegally copied in China.

The copyrights laws in China are weak and poorly enforced. Foreign companies want to see them shored up as a way of protecting their interests and combating counterfeiting and piracy

As China has developed its own products and property---intellectual and otherwise---it is more interested in protecting them. In January 2007 a Chinese newspaper---The Beijing News’sued an Internet site---Tom.cat---for copyright infringement.

Pirating and the WTO

Pirating goods was one of the main reasons why China was not admitted into the WTO earlier than it was. China’s promise to do more to stop piracy was one of the main reason it was finally let in. After China was admitted to the WTO, the government threatened to confiscate fake items and fine the sellers. At first vendors took them seriously, but a few weeks later the vendors found loopholes to exploit and before long were selling everything they selling were before.

A representative with Christian Dior told the New York Times, “It hasn’t changed at all. It’s getting worse and worse. Each time we succeed in one place, the next day another opens up. Before, the best copies, were made in Korea and Italy. Now the best copies all come from China.”

As evidence that China could do more, before the arrival of U.S. President George Bush at the Asian -Pacific Economic Conference in 2001, police managed to clean pirated and counterfeit goods off the streets of Shanghai, where the conference was held.

The United States, the E.U., Canada and Japan have taken action through the WTO against China to crack down illegally copied and pirated products.

In April 2007, the United States filed a complaint against China in the WTO for lax enforcement of intellectual property rights in regard to DVDs and CDs. It was the first time a complaint had been filed against China in the WTO. The United States was particularly angry that criminal charged failed to be filed against those caught of pirating, Japan and the European Union sided with the United States as observers.

China cried foul, saying it was doing a lot to combat piracy and that countries such as Canada were worse offenders than it was. One trade official warned that the complaint could hurt ties between China and the United States.

Industrial Espionage

See Industrial Spying, CHINESE MILITARY, HACKERS AND SPIES

See International United States.

Fake Phones Losing Their Appeal in China

Reporting from Beijing, David Pierson wrote in the Los Angeles Times, “Xiong Mingjian is often crushed into a corner during his tedious subway commutes, but passing the time has been easy since he bought a nifty new cellphone. The 27-year-old store clerk surfs the Internet and taps away at games on his Motorola Defy, one of an increasing number of popular high-end mobile phones that are helping China shed its label as a knockoff haven. [Source: David Pierson, Los Angeles Times, October 4, 2011]

For years, copycat cellphones have thrived in a country famed for counterfeiting many things, such as Gucci handbags, Hollywood DVDs and, most recently, Apple retail stores. It's a market fed by shadowy factories turning out low-cost models bearing names such as BlockBerry and HiPhone 4. But Chinese bootleggers are now losing ground to the iPhones and other high-end gadgets they once copied. "People want the real thing," said Guo Feilong, a vendor at a massive electronics market in northwest Beijing where hundreds of closet-size stalls sell genuine and pirated phones. "Prices have gone down so much, why would anyone need to buy a fake?"

Factory orders for unlicensed phones, better known in China as shanzhai, or outlawed, phones, have been declining rapidly over the last few years, according to market researcher IHS iSuppli. Slightly more than 24 million shanzhai phones were ordered in China last year; that's down about half from the peak in 2007 when the devices accounted for 20 percent of all shipments. Today, shanzhai handsets represent just 7 percent of new factory orders for phones and could be half that within a few years. Meanwhile, smartphone sales are soaring. More than 131 million are in use in China, up from 52 million in 2009, according to Analysys International, a Beijing research firm. The average price has dropped below $300, putting them within reach of white-collar workers.

The trend bodes well for brands such as Apple, Finland's Nokia and South Korea's Samsung, which are battling Chinese makers to capture a greater share of the world's largest cellphone market. "We're looking at a billion [Chinese] cellphone users in the next couple of years," said David Wolf, chief executive of Wolf Group Asia, a Beijing consulting firm. "As important as North America and Europe has been for mobile devices, soon we'll see the tail wagging the dog. Chinese consumers will eventually dictate what the rest of the world will use."

Indeed, major parts manufacturers are developing their own smartphones for the Chinese market that will be significantly cheaper than current offerings. Apple reportedly is working on a lower-cost, mass-market Chinese iPhone; the company did not respond to requests for comment.

Reasons Why Fake Phones Are Losing Their Appeal in China

David Pierson wrote in the Los Angeles Times, “Falling prices for brand-name models are just one reason crude clones are becoming passe. International pressure led to periodic crackdowns by Chinese authorities. Bad press about exploding batteries and high radiation in some flimsy phones scared off some customers as well. Chinese consumers increasingly want devices that allow them to surf the Web, play games and download apps, a level of sophistication that's tough for some low-rent producers to deliver. Some upwardly mobile city dwellers wouldn't dare risk losing face by carrying a knockoff phone. [Source: David Pierson, Los Angeles Times, October 4, 2011]

"After playing with my friends' smartphones, I had to get one of my own," said Xiong, gripping a $275 touch-screen Motorola handset outside a Beijing subway station. "I would never buy a fake one because it wouldn't be able to do the same things."

Still, demand for shanzhai phones remains strong in rural areas and among migrant workers earning only a few hundred dollars a month. "People in China are practical," said CK Lu, an analyst with research firm Gartner Inc. "It's not shameful to use fake phones any more than it is to carry a fake Louis Vuitton bag."

Trend Away from Fake Phones and Shanzai Producers

David Pierson wrote in the Los Angeles Times, The trend away from fake phones “spells trouble for cellphone counterfeiters, whose hub is the southern industrial city of Shenzhen. Aided by China's weak protection of intellectual property and an abundant supply of low-cost semiconductors, hundreds of factories sprouted over the last decade, churning out knockoff handsets. These manufacturers found buyers not only in China but also in emerging markets in Africa and the Middle East. [Source: David Pierson, Los Angeles Times, October 4, 2011]

Declining profits spurred some counterfeiters to turn to making knockoff tablet computers instead. But others have decided to go legitimate by developing their own high-end cellphones. Wanxiang, a Shenzhen company that makes and sells shanzhai handsets such as the iPhome A8, is planning to release a trademarked 3G smartphone this year that sells for $230. The manufacturer has gone so far as to develop an online app store, hoping that users will get hooked on the firm's software.

"Everyone can use the same hardware and offer the same prices, but to stay competitive you need your own applications and R&D," said Nuo Long, a Wanxiang manager. "So we decided to invest. This year alone, at least 60 or 70 phone makers registered new brands and trademarks." Nuo said the company was inspired by two upstart Chinese phone makers generating buzz for their surprisingly capable devices. Meizu and Xiaomi have both developed phones aimed to compete with Apple.The Xiaomi phone, which is priced at $312 and uses Google Android software, is half the price of an iPhone sold in China and boasts the most powerful processor ever installed on a mobile handset.

Oded Shenkar, a China specialist at Ohio State University and author of "Copycats: How Smart Companies Use Imitation to Gain a Strategic Edge," said none of this is especially odd. Chinese manufacturers are now poised to begin innovating after years of replicating foreign products and business models, he said. "Chinese phone makers are learning to play the game by putting a twist on existing technology and putting a patent on it," Shenkar said. "Being able to take a blueprint and turn it into a product in a very quick time will serve you very well when you eventually have your own concept," he said. "China is not the first or only imitator, but it's the first imitator that has tremendous capability."

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated March 2012


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