Fake products in China 2017, Should we be worried?

China is well known on the global stage for producing goods that copy or imitate iconic brands. Take this video for example. Here is a 2017 video taken recently inside an old factory in Dongguan, China. This factory was found to be creating, packaging and selling fake Budweiser for distribution in the mainland.

Here is another interesting video showing the fake egg scandal that surfaced years ago. It appears these fake egg manufacturers possess a great deal of knowledge and creativity when it comes to production. Talent that could be used elsewhere given the opportunity.

Videos surrounding these themes appear frequently in the Chinese mainland, and lead to two very important questions; why does this happen? and What are the solutions? This article will try to answer these questions.

Firstly let’s consider the fundamental reasons why this situation occurs. According to Chinese media outlets, translated from source, there are a 4 main reasons why fake products are so ubiquitous.

1. The rich poor gap

The gap is increasing. In 2017, the top 20% of earners now pulls in nearly half of total income while the poorest 20% of earners account for fewer than 5%. Furthermore, according to trading economics, The 2017 average person’s salary is $750 a month. The expanding rich poor gap means that this figure is highly inflated when considering the average middle to lower class workers take-home pay.

For most citizens, expenditure goes on clothes, rent, food and basic essentials. Buying a $800 Iphone is simply out of the question. This lack of disposable income leads to a requirement for similar products of a lower quality in the market. One that is almost as good as a top brand, but at a fraction of the price. It is undeniable that many people would choose to have $10 beats headphones instead of $400 ones. This is regardless of whether people recognize the brand or not, especially if the quality difference is negligible. This reminds me of Deng Xiao Ping’s famous statement: “It doesn't matter whether a cat is white or black, as long as it catches mice”.

2. Face

Face is an incredibly important concept in Chinese culture, and in many other cultures to some degree. Due to the nature of China rising quickly in the ranks of Economic development, many have began to understand the feeling of prosperity. Like in most societies, people often compare the haves and the have not’s. And in a place that is rapidly developing, these differences become very obvious. So much so that Iphones are not only cool, but they are seen as a sign of wealth, often touted by famous celebs on TV and in movies. Many people wish to portray the same image of wealth and prosperity, regardless of the real situation. If you have nice clothes and expensive items, you have “face”. This further exemplifies the point that there is a clear market for these products.

3. Profit motive and lax regulations

In countries like the USA there are very strict regulations regarding copyright law. Companies are less willing to risk the heavy fines and jail sentences that come from manufacturing fake goods. In China however, this area of the law is still developing. For example, according to the US Trademark and Patent office, Utility model patents don’t transfer easily from America to China. Their convoluted system causes huge barriers, and can be registered by a mainland resident before an American firm gets the chance. The American firm is then forced to purchase this back or give up their brand name. This is known as “bad faith filing” and according China Lawyer Randi Miller, these schemes are rampant across China.

Secondly, even if a copyright violator is found, enforcement of the law can be very difficult as two separate legal systems clash. A prime example of this is Jordan who unsuccessfully filed a lawsuit against 乔丹, the Chinese name for Jordan. He claims they directly copied his name and his brand when they began selling basketball attire. The court claimed that the name Jordan can be attributed to anyone, and not specifically Michael Jordan, therefore his claim was invalid.

There are some success stories however. One in particular refers to Dyson. Dyson hired undercover reporters to go into Chinese factories and film the production of fake products using patented designs. Although the reporting was widespread and the case successful, the fine for the unscrupulous company was just $7500. Furthermore, according to Dyson, the penalized firm simply continued making Dyson products again after the case, costing the company millions in lost revenue. This is shocking because a company that copies patented designs can forego all the associated R&D costs, and focus on manufacture and selling. This leads to prices being much lower than the original producer’s, who must factor in these costs. The potential profits for such a scheme are ridiculous.

4. Mark-up from traditional method of selling

The Chinese market often uses quite traditional methods of sales. The process is as follows:-
1. Products leave factory
2. Received in bulk by provincial supplier
3. Sold to city supplier
4. Sold to city area supplier
5. Sold to store
6. Customer purchases

Each sale procedure adds an extra layer of costs to the final consumer. In some cases, this can cause prices to escalate beyond a level in which a consumer is willing to pay. In which case the manufacturer will make serious losses. This creates an incentive for suppliers to produce at a much lower cost using cheaper materials.

5. Other growing costs

Furthermore, advertising is expensive. The cost of advertising on a section of CCTV for 30 seconds is 243,000,000RMB. A company in China who copied another’s brand name from the US could simply forego all advertising costs. There is a strong profit incentive to ride on another companies’ accumulated goodwill from advertising.
Secondly, according to PEW wages in manufacturing are increasing at 6% a year. This increase in costs will only hurt suppliers more. Not only this, inflation will cause the price of materials to increase as well, pushing up costs.

Thirdly, aside from the recent bump, exports have been steadily declining in the last few years. As international sales have been steadily slowing, firms have been hard pressed to stay afloat. Competition is fiercer than ever. These cost based factors make it very hard for a firm to survive in the current climate.
In essence, the lack of regulation, the complicated patent process difficulty of suing and collecting evidence, weak punishments for offenders, rising competition and huge cost savings all contribute to the rationality for creating counterfeit goods.

What are the solutions to this problem?

 

I propose four solutions:
1.Cutting costs through MTC sales (manufacturer to customer)
2. Encouraging innovation
3. Simplifying the patent process and
4. punish rule-breakers more harshly

1. Cutting costs through MTC sales

If the manufacturer can learn how to directly sell products to the customer, both can benefit from savings. On the one side the manufacturer can charge a higher price, on the other side the customer will pay a lower price by skipping out the wholesalers. This would boost a firms competitivity and their bottom line. This is a trend that is slowly starting to occur in the online space through Taobao and Alibaba. However some wholesalers may refuse to buy from a factory that engages in MTC sales and it may damage their own bottom line. Clearing out the middle man while maintaining a strong sales ratio is a very important way to start reaping greater rewards for manufacture.

2. Encourage Innovation

Innovation is the future. While China has a history of imitating famous brands, the time is coming where firms are starting to focus inwards. The government outlined clear goals to encourage Chinese mainlanders to innovate. Relying on mainland talent to design new and exciting products is the way forward. Focusing on R&D and turning from an imitator to innovator can guarantee profits for years to come, not just in the near distant future.

3. Simplify the patent process

Simplifying the process and allowing foreigners to submit claims, that get looked at within 5 years is very important. Dyson claims that Chinese mainlanders only require a few months to submit a successful patent application, while foreign firm’s applications take up to five years. It is argued that these should all be given equal priority without any bias.

4. Punish rule breakers more harshly

If a firm is found to producing knock-off goods, a more severe punishment may be necessary. In Chinese they have a phrase that reads “杀鸡儆猴”, it translates as “Kill the chicken to scare the monkey”. This essentially means to make an example of one to scare the others. This method may be the way forward to stop copyright infringement and make others refrain from pursuing these goals. This may also have a knock on effect of encouraging innovation through necessity, making innovation a product of survival.

In conclusion. Innovation is the solution. If China wishes to have a stronger hold of global markets for years to come, internal innovation is the way forward. It’s time to look inwards rather than outwards.

 

Sources (In Mandarin and English)

1) Mandarin news blog- http://bbs.tianya.cn/post-develop-2061567-1.shtml

2)Economic Statistics - https://tradingeconomics.com/china/wages

3) Gini coefficient data - http://foreignpolicynews.org/2016/05/17/gap-chinas-rich-poor-growing/

4) CPI information- http://www.chinaeconomicreview.com/reverse-engineering-chinas-dependably-stable-consumer-price-index

5) China’s Patent Legal Regime - https://www.uspto.gov/ip/global/China_Report_on_Patent_Enforcement_%28FullRprt%29FINAL.pdf

6) China Law Blog on Bad faith filings - http://www.chinalawblog.com/2013/10/having-china-ip-problems-whose-fault-is-that.html

7) Dysons Disaster- https://www.theguardian.com/business/2011/dec/04/dyson-intellectual-property-rights-china

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