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Ulf Kramer
Counterfeiting in the People´s Republic of China
Analysis of Impact, Drivers and Containment Options concerning increased
Counterfeiting
ISBN-10: 3-8324-9859-1
ISBN-13: 978-3-8324-9859-7
Druck Diplomica® GmbH, Hamburg, 2006
Zugl. Friedrich-Schiller-Universität Jena, Jena, Deutschland, Diplomarbeit, 2006
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Lebenslauf und Autorenprofil
-
Ulf Kramer
Persönliche Daten:
Name
- Kramer
Vorname - Ulf
Geburtstag
- 16.09.1980
Nationalität -
deutsch
Adresse
- Dornburger
Str.
151
07743
Jena
Deutschland
Telefon
- (+49)
03641
357660
(+49)
0163
2896890
E-mail
- kramer.ulf@web.de
Berufliche Tätigkeiten und Ausbildung:
Zeit
10.2006
-
Abschluss ,,Dipl. Kaufmann f. interkulturelles Management"
an der Friedrich Schiller Universität Jena - Prädikatsexamen
1.2005
-
School of Business and Economics, University of
Jyväskylä, Finnland
·
Knowledge Management, Cultural Studies,
int. Management
·
Dauer ein Semester
8.2004
-
Shanghai Volkswagen Ltd. After Sales Department
·
Dauer 5 Monate
·
Praktikum
·
After Sales Training Center
2. 2004
-
Ocean University of China (), Qingdao
·
wissenschaftl. Mitarbeiter
·
Language Department
·
Dauer 4 Monate
2.2004
-
Ocean University of China, (), Qingdao
·
Sprachseminare Chinesisch
·
Dauer ein Semester
8.2001
-
POLO Expressversand GmbH & Co. KG, Düsseldorf
·
Praktikum Marketing/ PR Abteilung
·
Dauer 3 Monate
POLO einer der größten Motorradvollsortimenter
·
www.polo-motorrad.de
9.2000
-
Studium an der Friedrich Schiller Universität Jena
·
Betriebswirtschaftslehre für interkulturelles Management
·
internationales Management , interkulturelle
Wirtschaftskommunikation, Marketing
·
www.uni-jena.de
6.2000
- Praktikum Ingenieur und Vermessungsbüro Kramer
·
fester Arbeitsvertrag neben dem Studium
·
Außendienst und Webdesign
·
www.ivk-gera.de
9.1999
-
Wehrdienst
7.1999
- Praktikum UGN Umwelconsult Gera
·
www.ugn-umweltconsult.de
6.1999
- Abitur ,,Albert Schweitzer Gymnasium" Gera
Sprach- und Computerkenntnisse:
Sprachen: - Deutsch
- Muttersprache
-
Englisch
- Cambridge Advanced Business English
-
Chinesisch
- Grundkenntnisse
Computer: - sehr
gute
Kenntnisse
-
Microsoft Office
-
Adope Photoshop and Macromedia Dreamweaver
-
Webdesign and Internet
Kurz zu meiner Person:
Ich habe in Qingdao (China), Jyväskulä (Finnland) und Jena studiert und werde im Oktober diesen Jahres mein
Studium mit dem Abschluss: Dipl. Betriebswirt für interkulturelles Management abschließen. Mein aktueller
Notendurchschnitt beträgt 2,0 (Prädikatsabschluss).
Internationale und viele praktische Erfahrungen konnte ich bisher bei Volkswagen Shanghai, POLO Düsseldorf
und einigen mittelständigen Ingenieurbüros sammeln. An der Ocean University of China war ich ein Semester
lang als wissenschaftlicher Mitarbeiter tätig und habe chinesische Studenten unterrichtet.
Meine Sprachkenntnisse sind sehr umfangreich. Meine Diplomarbeit über habe ich über ,,Counterfeiting in the
People's Republic in China" geschrieben. Darüber hinaus habe ich ein Jahr in China gelebt und habe sehr solide
Grundkenntnisse in Chinesisch.
Meine Stärken und Vorteile:
·
sehr gute Studienleistungen und Fachkenntnisse
·
international flexibel und mobil
·
spezialisierte Kenntnisse: intercultural business communication (Asia/China)
·
analytisches aber auch kreatives Denken
·
interkulturelle Kompetenz und chinesische Sprachkenntnisse
·
Schwerpunkte: int. Management, interkulturelle Wirtschaftskommunikation, Marketing
·
freundschaftlicher und offener Charakter
Wie ich mich selber charakterisieren würde:
·
Fröhlich und Leistungsbereit,
·
Analytisch und Kreativ
·
Pragmatisch und Ziel-Orientiert
Meine Ziele:
·
einen internationalen Arbeitsplatz mit Perspektive
·
Erfahrungen sammeln, Neues lernen und die Möglichkeit etwas zu bewegen
Contents
List of Tables... iv
List of Figures ... v
List of Abbreviations... vi
1 Introduction and Preliminary Remarks ... 1
2 Definition and Delimitation of Relevant Terminology... 4
3 Impact of China's Counterfeiting Problem ... 8
3.1 Negative Impacts of Counterfeiting in China ... 8
3.1.1 Introductory Remarks... 8
3.1.2 Costs to the Right Holder ... 8
3.1.3 Costs to Consumers and Potential Users... 11
3.1.4 Social Costs ... 12
3.2 Positive Impacts of Counterfeiting... 14
3.2.1 Positive Impacts to Consumers and Local Economies... 14
3.2.2 Positive Impacts for Development and Innovation ... 16
3.2.3 Positive Impacts for China's Political Environment ... 17
3.3 Summary of Main Impacts and Evaluation... 17
4 Analysis of economic, legal and political environment ... 18
4.1 Insights of Contemporary China ... 18
4.2 Drivers for Counterfeiting... 19
4.2.1 China's Transition Process and Economic Framework ... 19
4.2.2 China's Enforcement Institutions and Legal framework ... 20
4.2.2.1 Enforcement Institutions ... 20
4.2.2.2 Legal Framework ... 25
4.2.3 China's Political Framework... 28
4.2.3.1 Attitudes of the People's Government of PRC ... 28
4.2.3.2 Local Protectionism and Development ... 30
4.2.4 Summary ... 32
Contents
ii
4.3 Containment Options concerning Environmental Determinants ... 32
4.3.1 Extensive Legal Protection... 33
4.3.2 Reforming China's IPR Enforcement System ... 33
4.3.3 Improving China's IPR Legislation ... 35
4.3.4 Lobbying and Encouraging Political Commitment... 35
4.3.5 Summary ... 37
5 Analysis of Suppliers on the Counterfeiting Market ... 38
5.1 Attributes of China's Counterfeiters ... 38
5.2 Drivers for Counterfeiting... 40
5.2.1 Unawareness of Statutory Provisions... 40
5.2.2 Financial Incentives... 41
5.2.3 Enabling Resources and Technical Knowledge ... 41
5.2.4 Historic Insights and their Influence on the Perception of IPRs ... 43
5.2.4.1 Attitude towards the "West" ... 43
5.2.4.2 The Communist Era and the Perception of IPR ... 44
5.2.5 Cultural Traits and their Impact on Contemporary Counterfeiting... 45
5.2.5.1 Confucianism ... 45
5.2.5.2 Collectivism and other Cultural Dimensions ... 47
5.2.6 Summary ... 50
5.3 Containment Options... 51
5.3.1 Innovation and Constant Change of Product Attributes... 51
5.3.2 Anti-Counterfeiting Technologies... 51
5.3.3 Education and Deterrence of Counterfeiters ... 53
5.3.4 Securing the Value Chain... 54
5.3.5 Co-Opting Preeminent Offenders... 55
5.3.6 Passive Measures... 56
5.3.7 Summary ... 57
Contents
iii
6 Analysis of Consumers on the Counterfeiting Market ... 58
6.1 The Consumer of Counterfeited Goods ... 58
6.1.1 Introductory Remarks... 58
6.1.2 Attributes of Chinese Consumers who Buy Counterfeits ... 58
6.2 Drivers for Counterfeiting... 61
6.2.1 Increased Consumer Rent... 61
6.2.2 Impact of Availability of Counterfeits on Purchase Intention ... 62
6.2.3 Cultural Traits and Consumer Behaviour... 62
6.2.4 Sophistication of Chinese Consumers ... 65
6.2.5 Perception of Wrongdoing and Unethical Behavior ... 66
6.2.6 Anti-Big-Business Attitude ... 67
6.2.7 Novelty Seeking and Risk Avoidance... 68
6.2.8 Summary ... 69
6.3 Containment Options... 70
6.3.1 Matching Consumers' Needs ... 70
6.3.2 Communication and Education ... 72
6.3.3 Summary ... 75
7 Conclusions and Outlook... 76
7.1 Conclusions ... 76
7.1.1 Recommendations for Companies ... 76
7.1.2 Recommendations for the People's Government of PRC... 78
7.1.3 Recommendations for Chinese Consumers... 78
7.2 Outlook... 79
7.3 Concluding Remark... 80
8 Bibliography ... 81
9 Appendix ... 96
A - Tables ... 96
B - Figures... 102
D - Short interview concerning counterfeiting in the PRC ... 105
E - Table of Chinese terms used in the paper... 108
Contents
iv
List of Tables
Tab. 1:
Overview of counterfeiting concepts ... 6
Tab. 2:
Estimated trade losses due to piracy (in millions of U.S. dollars) and levels of
piracy in the PRC (1999-2002) ... 9
Tab. 3:
China's IPR legislation... 26
Tab. 4:
Famous distribution and manufacturing centers of counterfeit goods in China . 39
Tab. 5:
Overview about anti-counterfeiting technologies ... 52
Tab. 6:
Frequency of buying pirated or counterfeit goods bivariate analysis ... 60
Tab. 7:
Methods for identifying pirated clothing and accessories... 66
Tab. 8-A: Trademark enforcement activity, 1997 2000 ... 96
Tab. 9-A: Domestic and global anti-Counterfeiting organizations... 96
Tab. 10-A: List of industrial organizations engaged in anti-counterfeiting work ... 97
Tab. 11-A: Foreign Direct Investment in Selected Non-Member Countries in billion ... 97
Tab. 12-A: Gender and attitude toward piracy ... 97
Tab. 13-A: Seizures of counterfeits of Chinese origin by U.S. costumes from 2001
to 2004 (excluding Hong Kong)... 98
Tab. 14-A: Seizures of counterfeits of Chinese origin by U.S. costumes from 2001
to 2004 (including Hong Kong) ... 98
Tab. 15-A: Results of regressing intention to buy pirated CDs on attitude toward
piracy and demographics... 98
Tab. 16-A: Evaluation of government actions and market environment changes... 99
Tab. 17-A: Overview of affected industries and losses due to counterfeiting in China
and the World ... 100
Tab. 18-A: Overview of China's anti-counterfeiting enforcement institutions and its
competencies ... 101
Contents
v
List of Figures
Fig. 1:
Methodological structure of the present study ... 3
Fig. 2:
Drivers for counterfeiting within the political, economic and legal
environment... 32
Fig. 3:
Drivers and containment options within the political, economic and legal
environment... 37
Fig. 4:
Drivers for supply based counterfeiting ... 50
Fig. 5:
Drivers and containment options for supply based counterfeiting... 57
Fig. 6:
Drivers for demand based counterfeiting ... 70
Fig. 7:
Drivers and containment options for demand based counterfeiting... 75
Fig. 8:
Corporate strategies against counterfeiting ... 76
Fig. 9-A: Relationship between Software piracy and Income ... 102
Fig. 10-A: Relationship between Software piracy and Education... 102
Fig. 11-A: Geographical position of counterfeiting hot-spots in China ... 103
Contents
vi
List of Abbreviations
A
see
Appendix
ACG
The
Anti-Counterfeiting
Group
AIC
Administration of Industry and Commerce
AmCham
American Chamber of Commerce
BTK
"Born to Kill" - Vietnamese Gang
CIB
Counterfeiting
Intelligence
Bureau
CIPR
Commission
on
Intellectual Property Rights
EC
European
Commission
EU
European
Union
FBI
Federal Bureau of Investigation
GATT
General Agreement on Tariffs and Trade
GDI
Gross
domestic
income
GDP
Gross
domestic
product
IACC International
Anti Counterfeiting Coalition
ICC
The International Chamber of Commerce
IFPI
International
Federation of the Phonographic Industries
IHK
Industrie- und Handelskammer
IIPA
International
Intellectual
Property
Alliance
INTA
International Trademark Association
IP
Intellectual
property
IPR
Intellectual
property
right
IRA
Irish Republican Army
ITA
International Trademark Association
MNC
Multi national corporation
MSA
Mercado Solutions Associates
NBS
National Bureau of Statistics of China
OECD
Organisation for Economic Co-operation and Development
PR
Public
relation
PRC
People's Republic of China
PSB
Public
Security
Bureau
R&D
Research and development
Contents
vii
SID
Source
Identification
Code
SIPO
State Intellectual Property Office
SME
Small and medium sized enterprise
TRIPS
Agreement on Trade-Related Aspects of IP Rights
TSB
Technical
Supervision
Bureau
US
United
States
WIPO World
Intellectual Property Organization
WTO
World Trade Organization
1 Introduction and Preliminary Remarks
1
1 Introduction and Preliminary Remarks
Since the proclamation of the opening up policy (gaige kaifang) in the 1980's by Deng
Xiaoping and the present economic growth, Chinas economy is expected to become the
world's number one within the next 20 years. With the focus on surpassing growth rates, trade
surpluses and an increasing domestic demand from 1.3 billion consumers, many decision
makers ignore the fact that China has already become one of the worlds leading country:
China is the number one of global counterfeiting.
Observers and researchers agree upon the fact that the scope, magnitude and impact of Chinas
counterfeiting is unique in world history. The range of imitated products has no limits;
China's counterfeiters copy everything from sunglasses and sport shoes to elevators and
aircraft parts. At a visit in February 2006, Germany's foreign minister Steinmeier broached
the issue of German maglev technology which is assumed to be used in the new Chinese
maglev train (Wetzel, Muscat, 2006). This and other examples show that there is scarcely any
industry or technology which is not threatened by China's counterfeiters.
The impact is alarming. Chinese official sources estimate the damages due to Chinas
counterfeiting to exceed 16 billion U.S. Dollars a year. They admit that in the Chinese market,
three genuine products oppose seven counterfeits (Mocek, 2005, p. 30). Eight percent of
China's gross domestic resort to counterfeiting (Chow, 2004, p.1).
The negative consequences are concerning: tax revenues vanquish, legal businesses are
disrupted, consumer safety is threatened, genuine producers are confronted with loss and
shrinking credibility, innovation and investments are constricted and organized crime is
promoted.
Problem Formulation and Delimitation
Although Chinas counterfeiting issue makes headlines in the economic world, only few
research examined the problem in a comprehensive way. Many journalists focus on legal
issues and thus mainly on the supply side of counterfeiting. Other researchers simply blame
Chinas cultural heritage to be the main cause. Most papers lack a broad approach, which is
inadequate regarding the magnitude and scope of Chinas counterfeiting.
The objective of the present paper is to give a comprehensive overview about counterfeiting
in the People's Republic of China. Comprehensive shall mean that all aspects of
counterfeiting are subject to analysis. In the following, supportive drivers for counterfeiting
1 Introduction and Preliminary Remarks
2
and possible enforcement strategies against counterfeiting are identified and discussed. Since,
the paper focuses on China, cross border counterfeiting, impacts in other countries or global
approaches are only mentioned in few cases to highlight similar issues in China. The final
objective is, to introduce possible strategies against: Counterfeiting in China.
A closer definition for the term "counterfeiting" is given in chapter two. "China" in this case
refers to "Mainland China", which excludes Taiwan as well as the former colonies Hong
Kong and Macau. The expressions: "China" and "People's Republic of China" are used
interchangeable although there is no question that Hong Kong and Macau are part of the PRC.
The reasons for this introductory delimitation are legal and economic differences
1
with the
former colonies as well as the political debates and differences with Taiwan.
Methodology and Structure
Since counterfeiting is an illicit business, quantitative approaches are limited. Additionally
comprehensive quantitative research faces problems such as the high level of heterogeneity
within the Chinese environment or political restrictions. Most counterfeiting research is based
on personal interviews, observations, official records and data as well as publications of
interest groups. Qualitative evaluation therefore seems the more effective methodological
approach. Although the present study shows the results of quantitative research, the general
methodology follows qualitative trajectories.
The structure is divided into five main parts (Chapter 3 to Chapter 7) which combine
descriptive and in the following, normative research. Chapter three introduces the impact of
counterfeiting to highlight the up-to-date facts and importance of the issue. Chapter 4 to 6
represent the common market structure. They systematize the study into three main categories
of research: environmental (economical, legal, political), supply side ("the counterfeiter") and
the demand side ("consumers"). Each research category is examined towards: relevant drivers,
attributes, and containment options. Chapter seven gives a final summary and analyses future
prospects.
1
"one country two systems" (yiguo liangzhi) means, that Hong Kong and Macau stay capitalistic oriented
market economies for 50 years after the reunification with Mainland China. China's economic system remains
socialistic oriented. Since, the IPR legislation of Hong Kong is based on British case law, this paper focuses on
Chinese legislation.
1 Introduction and Preliminary Remarks
3
Fig. 1: Methodological structure of the present study
Introductory remarks concerning data
Although many authors mention detailed numbers on counterfeiting, the basis of their
calculations stays often unclear. One crucial example is the share of counterfeiting in world
trade. The share is estimated to be "somewhere between 4% and 8%". Since official sources
cite these numbers, many researchers transfer these assumptions and consequently they
became common sense. Similar problems are the notations by newspapers, enforcement
groups and industrial speakers concerning the amount of lost revenues (cf. IACC, 2005;
Balfour et al., 2005; ACG, 2003). It is outstanding that most authors mention "estimated"
losses. Due to the illicit nature of counterfeiting there is no scientific data to deal with. Chow
(2000, p. 12) states that:
"There is no scientific method for determining the exact size of the counterfeiting
problem".
Also OECD sources doubt the existence of
accurate statistics (OECD,
1998, p. 3). A possible
solution may be to examine statistics of custom authorities, but they are also random samples
and may not be appropriate. Summarizing, all numbers, cited in this study are understood as
relative approximate values and are used in a descriptive way.
Definition of Counterfeiting
Impact and scope of the counterfeiting problem
Market
environment
Description
(Attributes of research object)
Analysis
(Analysis of relevant drivers)
Solution
(Containment options)
Suppliers
Consumers
Summary and outlook
4.3
4.1
4.2
5.3
5.1
5.2
6.3
6.1
6.2
3
4
5
6
7
Appendix and References
8
1
2
Introduction
4
2 Definition and Delimitation of Relevant Terminology
Defining and delimitation of counterfeiting (weizao) is complex, because terms and
definitions are often used interchangeably. Most authors divide into four different counterfeit
categories: (1) Counterfeiting, (2) Product piracy, (3) Imitation, (4) a grey area (McDonald,
Roberts, 1994; Lay, Zaichkowsky, 1999; Hung, 2003; Cheung, Prendergast, 2004a).
(1) Counterfeiting: Originally counterfeiting is restricted to trademark infringement (OECD,
1998). Usually counterfeiting is defined as unauthorized imitating of a products appearance in
a way the consumer can not recognize if the product is an original one (OECD, 1998, p. 5;
Hung, 2003, p. 59). Relatively speaking, it is an infringement of intellectual property rights of
another party, like the infringement upon copyrights and trademarks (OECD, 1998, p. 5;
Hung, 2003, p. 76; Bloch, Bush, Campbell, 1993, p. 27). One main attribute is the intension to
deceive the customers (Bamossy, Scammon, 1985, p. 334; Kay, Zaichkowsky, 1999, p. 180).
The process of counterfeiting includes the replication of brand names and trademarks as well
as imitation of packaging, labelling and other product characteristics (Hung, 2003; OECD,
1998, p. 5).
(2) Product piracy: Product piracy is often used substitutional with counterfeiting which
shows that the concepts are hard to differentiate. In the TRIPS agreement pirated products are
defined as:
"...any goods which are copies made without the consent of the right holder or
person duly authorised by the right holder in the country of production and which are
made directly or indirectly from an article where the making of that copy would have
constituted an infringement of a copyright or a related right under the law of the
country of importation" (OECD, 1998, p. 5).
In principle, the act of pirating products is similar to the act of counterfeiting. A copy or
imitation is made of the genuine product. But in contrast to counterfeiting, pirated products
are not necessarily sold as genuine ones (Cheung, Prendergast, 2004a, p. 5; McDonald,
Roberts, 1994, p. 58; Chow, 2000, p. 9). The costumer is aware that a pirated, non-genuine
product is offered.
Pirating often refers to the act of copying content from books, films and software. The content
or the main utilizable product attribute of a pirated good is often similar to the genuine
2 Definition and Delimitation of Relevant Terminology
5
product. The packaging and labelling may differ (Chow, 2000, p. 9). Main affected industries
are Software, Film, Music, and Publishing industries as well as arts-and-crafts (Chow, 2000, p.
9; Lay, Zaichkowsky, 1999, p. 180).
(3) Imitation: Imitation refers to the manufacturing of a product which has a very similar
appearance compared to the genuine product (McDonald, Roberts, 1994, p. 58). The main
peculiarity is that the product is not advertised and distributed as the genuine one. Imitated
products are also known as "knock-offs" (Bamossy, Scammon, 1985, p. 334; McDonald,
Roberts, 1994, p. 58). Bamossy and Scammon (1985, p. 334) introduce a fine example:
"...a Mexican made champagne uses the same name and label used to identify
premier French champagne, but adds enough Spanish words so that it is only
imitating the French label, not counterfeiting it".
The appearance of imitated products is very similar to that of genuine products, and for the
consumer hard to distinguish between the both (McDonald, Roberts, 1994, p. 58). Lay and
Zaichkowsky (1995, p. 180) state, that substance, name, shape and form look alike but
through closer inspection differences are visible. Imitated products mask their origin and try
to deceive the costumer but they are not sold as genuine products (Bamossy, Scammon, 1985,
p. 334; McDonald, Roberts, 1994, p. 58).
(4) Grey area activities: The grey area includes all other forms of counterfeiting like "parallel
trading" and "over-runs".
Parallel trading as explained by an OECD sources refer to situations where products are
legally bought in one country and diverted for sale to another country. The right holders
restrictions are evaded (OECD, 1998, p. 6). In general it means that original goods are
distributed in markets which are not authorized by the right holder.
"Over-runs" are goods which are unauthorised and manufactured by legitimate suppliers
(Bamossy, Scammon, 1985, p. 335). The other contracting party manufactures more goods
than stipulated in contract and sells it on own account on the black market (OECD, 1998, p. 6).
Also low-quality and second choice productions do refer to "over-runs" problem. Especially
in China "over-runs" is a practise used by Chinese Joint Venture partners and contractors
(Hung, 2003, p. 63; Sieren, Kamp, 2004, S. 58; Roberts et al., 2000, p. 20f.; Uchatius, 1999, p.
24). The product sold to the costumer is a genuine product which has no limitations apart
from lacking after sales service and lacking warranty. In the case of second choice
productions, the quality level is substandard. Enforcement institutions often do not take
2 Definition and Delimitation of Relevant Terminology
6
forms of the "grey area" for serious counterfeiting. In consequence right holders need to find
own strategies for prevention (OECD, 1998, p. 6).
All four concepts are only slightly different and are often used substitutive. They all have in
common that they infringe another party's intellectual property rights
2
(zhishi chanquan).
Table 1 gives an overview of the discussed concepts and highlights its differences.
Tab. 1: Overview of counterfeiting concepts
Description
Quality
Intention
towards
costumers
Price level
Counterfeiting
unauthorized copy
of genuine product
usually below
genuine
deceiving
costumer
equal to genuine
Product piracy
unauthorized copy
of genuine content
content equal to
genuine
no aim to
deceive
much lower than
genuine
Imitation
close copy of
genuine product
but slightly
different
different content,
usually lower
quality
deceiving
costumer
lower than genuine
Grey area
unauthorized
distribution of
genuine product
equal to genuine,
except second
choice production
deceiving
costumer
depending on
distribution channel
Source: compiled by the author
In practice a clear distinction is difficult. Cases of property right infringement often include
several forms of counterfeiting (OECD, 1998, p. 5). McDonald and Roberts (1994, p. 57)
argue that the different concepts of counterfeiting are all illicit actions and that the differences
arise from the intention to deceive the costumer. Consequently they highlight the ethical
question of counterfeiting. Other authors like Wee, Tan and Cheok (1995, p. 19) use broader
definitions, because the substantial impact of all forms are quite similar and enforcement
strategies never focus solely on one of the explained forms (cf. Shultz, Saporito, 1996;
Chaudhry, Walsh, 1996; OECD, 1998).
2
"Intellectual property" refers to all creations of the mind: such as inventions, literary and artistic works, and
symbols, names, images, and designs which are used in commerce (WIPO, 2005).
2 Definition and Delimitation of Relevant Terminology
7
Literature review gives evidence, that counterfeiting in China has various forms and often
includes several forms of infringement. To achieve a comprehensive overview about all
aspects of China's counterfeiting, a broader definition of counterfeiting will be used. Based
on OECD (1998, p. 5) terminology counterfeiting will be explained as:
"...any making of a product which closely imitates the product of another. Hence, it
may also include the unauthorised production and distribution of a product that is
protected by other intellectual property rights, such as copyright and neighbouring
rights."
Consequently, the present paper the term "counterfeiting" will include all additional concepts
like product piracy, imitation and the grey area.
The product manufactured through the action of counterfeiting is named: "counterfeit"
(jiahuo). The terms: counterfeit, counterfeited good, fake, fake product are used
interchangeable, they are replaceable.
Additionally, the term "counterfeiter" (weizaozhe) stands for the originator of counterfeiting.
This can be an individual or an organizational structure such as a company or a crime
syndicate. Since, some counterfeiters are legal companies and other counterfeiters are private,
illegal operating groups, a sharp delimitation is impossible. Beside the term counterfeiter is
the term "infringer" is used substitutional.
3 Impact of China's Counterfeiting Problem
8
3 Impact of China's Counterfeiting Problem
3.1 Negative Impacts of Counterfeiting in China
3.1.1 Introductory Remarks
The following chapter deals with negative impacts caused by Chinas counterfeiting. Even
though the present paper mainly focuses on counterfeiting in China, the impacts must be
evaluated on a cross-border perspective. The problems caused by Chinese counterfeiting do
not only affect China. Through export and transnational trade the problems are also present in
other countries and economies. Consequently, it is necessary to leave the regional level and
embrace non-Chinese subjects as well. As a result, the following chapter will also include a
few examples, numbers and problems from other affected countries to highlight the broad
range of negative impacts.
3.1.2 Costs to the Right Holder
All industries and all types of products even in markets outside China may be affected by
China based counterfeiting (cf. Tab. 17-A and Appendix D). Consequently the range of right
holders is various. Every company in the market is a potential target for counterfeiters this
includes domestic Chinese companies as well (Balfour et al., 2005, p. 1; Sisci, 1997, p. 1.;
Chow, 2000, p. 16). There is clear evidence from literature that some industries are more
affected, than others. The Green Paper on counterfeiting in the EU (1999, p. 5) states:
"There was fairly general agreement that the industries most severely affected were
software, textiles, clothing, toys, music, perfumes, publishing, pharmaceuticals,
phonographic/CD recordings, videos, car parts, and sports goods; but the list was
long, over fifty items, and went as far as garden gnomes and CAT scanners."
The specific costs to right holders vary greatly. There are financial losses, brand erosion or
decreasing goodwill as well as additional enforcement costs or lawsuits initiated by
consumers concerning product liability (IHK, 2004, p. 2).
(1) Direct pecuniary losses: Pecuniary loses have various reasons. The first, sales of genuine
products decrease and returns drop. The scale of losses is various and hard to verify
3
. Some
spokesmen of certain industries and promoters even exaggerate their losses. In general, most
3
See chapter one, methodology restrictions concerning the possibility of measuring counterfeiting activities.
3 Impact of China's Counterfeiting Problem
9
losses cited by experts are substantial. The following examples give an impression about the
variety and magnitude of the financial losses:
Foreign companies estimate a loss of 20 percent of their overall sales due to counterfeited
products (Porteous, 2001, p. 28). Hung (2003, p. 59) cites Chinese government sources, who
conservatively estimate the total value of counterfeited goods in 1998 to about 16.2 billion
U.S. dollars. Wölfel (2003, p. 37) also defines Chinese counterfeiting a: "16-billion-Dollar-
industry". Ho (1995, p. 2) says that the software industry lost half a billion U.S. dollars in
China in 1994. OECD (1998, p. 12) states a number of 120 million U.S. dollars lost sales for
U.S. motion picture industry in 1997 in China.
Tab. 2: Estimated trade losses due to piracy (in millions of U.S. dollars) and levels of
piracy in the PRC (1999-2002)
Source: Wang, Zhu, (2003, p. 103)
Numbers form the automotive industry come from Daimler-Chrysler which claims a damage
of more than ten million U.S. dollars from counterfeiting. In 2001, over 4,000 windshields
and 60,000 brake pads were confiscated by corporate investigators (Wölfel, 2003, p. 46). In
1998, Unilever has detected over 100 factories which have produced fake Unilever products.
In 1999 they mentioned 213 fake factories (Wölfel, 2003, p. 38). The Germany based,
chemical company Henkel estimates that over 30 % of all soaps and creams in Chinese
supermarkets are faked (Wölfel, 2003, p. 38). In 1989, even before the tremendous
distribution of easy copying technology and private computers, Lotus Development
Corporation assumed a loss of 200 million U.S. dollars annually from Taiwanese
counterfeiters alone (Swinyard, Rinne, Kau, 1990, p. 655). Ang et al. (2001, p. 221) mention
that in urban areas of China, over 90% of daily-use products are counterfeits. Bottenschein
(2005, p. 121) assumes that 15 % to 20 % of all marketed brands are counterfeited.
Industry
1999
2000
2001
2002
Loss/Level
Loss/Level
Loss/Level
Loss/Level
Motion pictures
120.0/
90%
120.0/
90%
160.0/
88%
168.0/
91%
Sound recordings
70.0/
90%
70.0/
85%
47.0/
90%
48.0/
90%
Business software applications
437.2/
91%
765.2/
93%
714.6/
92%
1,637.3/
92%
Entertainment software
1,382.5/
95%
NA/
99%
455.0/
92%
NA/
96%
Books
128.0/ NA
130.0/ NA
130.0/ NA
40.0/ NA
Totals
2,137.7
1,085.2
1,506.6
1,893.3
3 Impact of China's Counterfeiting Problem
10
All these examples, give evidence that genuine manufactures face substantial losses due to
counterfeiting. Additionally, the lost sales and revenues
4
which were mentioned, lead to social
costs which are discussed in 3.1.4.
(2) Brand Erosion: Another basic problem for genuine manufactures is the loss of goodwill
and reputation (INTA, 2004, p. 2; Chow, 2000, p. 10; Wee, Tan, Cheok, 1995, p. 19).
Basically brand owners are more affected than copyright owners (Chow, 2000, p. 11). In this
case, there are three main concerns.
Consumers are worried about buying a product if they can not be sure that it is a genuine one.
Brand acceptance shrinks which lead to brand switching. Also the value of status goods will
drop if too many people wear the same brand, which was explained by the Rolex example
(Wölfel, 2003, p. 43; Grossman, Shapiro, 1988, p. 98). Consequently sales and return will
decrease.
The other problem arises from low product quality. If a consumer buys a counterfeit for a
genuine and the product is flawed, he/she will think the genuine producer is accountable.
(Bloch, Bush, Campbell, 1993, p. 27; OECD, 1998, p. 27). Especially in China this is a
problem because the ability to identify authentic brands is low (Lay, Zaichkowsky, 1999, p.
180). If costumers are not satisfied with a new brand, brand loyalty may not evolve. In early
and developing markets like in China, this may have strong influences on long-term sales
(Lay, Zaichkowsky, 1999, p. 181). In contrast, one may not forget that the scope of brand
erosion is lower throughout consumers who knowingly buy a counterfeit. They do not expect
a high level of quality so the distance between expected product attribute and real product
attribute is not that high. Dissatisfaction thus does not arise.
A last issue is that the consumer gets the impression that the genuine product is much too
expensive. If the genuine product is for example ten times more expensive, the consumers get
the impression that the genuine producer is cheating on costumers because they do not
perceive the high price as a fair offer. This may lead to the consumer's attitude being put off
big businesses (see 6.2.4) and a shrinking product loyalty (Wölfel, 2003, p. 43).
4
While discussing lost sales or lost revenues, it is important to distinguish between the conscious buyer and the
unconscious one. When the consumer unconsciously buys a counterfeit the genuine manufacturer certainly faces
lost sales. If the buyer is conscious, it may be possible that he/she would not have bought a genuine product
anyway. People who knowingly buy a fake Rolex are usually no potential costumers for a genuine Rolex
because prices are much too high. Consequently, dealing with numbers of potential losses, there is a need to keep
in mind that sales of counterfeits would not consequently be potential genuine sales.
3 Impact of China's Counterfeiting Problem
11
(3) Other costs: There are several other negative impacts for genuine manufacturers.
First of all, a market undermined by counterfeiters is less attractive for foreign and local
companies. Growth or entry strategies need to be reviewed (OECD, 1998, p. 22). A high
scope of counterfeiting may even led to market exit.
Increased counterfeiting requires enforcement strategies which bind capital and other
resources (OECD, 1998, p. 22). Chinese and foreign SMEs often lack the resources to fend an
attack by aggressive counterfeiters (Chow, 2000, p. 16). Additionally, transaction costs
increase.
Research and development as well as production costs may increase because anti-
counterfeiting technologies need to be developed and implemented (OECD, 1998, p. 22).
If the call for legal and administrative support is too hard to deal with, companies may suffer
from resentments from local or national authorities in China (Chow, 2000, p. 47).
Faked and phony products may danger consumers and consequently led to lawsuits initiated
by consumers (IHK, 2004, p. 2).
3.1.3 Costs to Consumers and Potential Users
There are two main problems caused by counterfeiting.
(1) The consumer surplus shrinks when an inferior product is bought at a comparatively high
price (OECD, 1998, p. 23; Bamossy, Scammon, 1985; p. 335). If the customer is not aware,
that the bought good is counterfeited, he or she pays a price which is far too unjustifiable.
This is a form of asymmetrical information and leads to market failure (cf. Arrow, 1963). A
more simple fact is that; conscious cheating leads to dissatisfaction of the buyer. Additional, a
decrease in consumer surplus arises in an increased price level for genuine products caused by
enforcement costs of the original manufacturer (Bamossy, Scammon, 1985, p. 335).
(2) The other and most problematic impact of counterfeiting towards consumers is the threat
of consumer's health and safety caused by low-quality products (OECD, 1998, p. 23; CIB,
2004, p. 8; Wölfel, 2003, p. 41). This affects the conscious and unconscious buyer. He/she
faces the risk that ingredients and preliminary products are not identifiable and may face
safety risks. Counterfeits are not only cheaper because of savings for brand management and
R&D. Counterfeiters usually use unskilled labor, child labor, inferior materials, cheap
machinery and they usually do not have safety inspections or a quality management. The aim
of counterfeiters is to produce merchandise and commodities as cheap as possible. In
consequence, the products are often of poor quality and thus a risk to consumer's health
3 Impact of China's Counterfeiting Problem
12
(Wölfel, 2003, p. 42). The number and the scope of casualties and accidents caused by unsafe
counterfeit products are distressing. The following examples highlight some recent cases
which can be seen as the tip of the iceberg.
In 2004 by the province of Anhui, 12 infants died after being fed with fake milk powder.
More than 229 other babies were injured (cf. Li, 2004). In 2001, a China based factory was
discovered which had produced and distributed fake windshields, lacking safety elements like
shatterproof features ("GM, Ford, and DaimlerChrysler", 2001). Oster (cf. 2000) cites
Chinese officials who state that every year dozens of people die from unsafe bottles and
"lead-tainted" beverages. The last source indicates that in 2001, 192,000 people died by
taking fake drugs in the whole of China, which shows the magnitude of the problem (Godman,
2002).
Although, these examples are outstanding in terms of impact it can be assumed that "smaller"
impacts such as toxicities in faked clothing, malfunctions of fake electronics or hazardous
toys are a threat to consumer's health and thus cause substantial losses to consumers.
3.1.4 Social Costs
Social costs are negative impacts on the society and the economy of a country. The character
of counterfeiting and IPR infringement supports various negative aspects like: unemployment,
substandard working conditions, dropping tax revenues, organized crime and decreased
ability for innovation and national growth.
(1) Unemployment is a direct outcome of dropping revenues of original producers (OECD,
1998, p. 22; Bamossy, Scammon, 1985, p. 335). There are few concrete numbers in literature.
The Anti-Counterfeiting Group estimates annual job losses of 4,100 in Great Britain (ACG,
2003, p. 2). The European commission published an estimated number of 200,000 annually
lost jobs worldwide (EC, 1999, p. 4). Numbers about counterfeit based unemployment in the
PRC are not available, but it is estimated that unemployment is a concern in China as well.
In contrast to the argument that counterfeiting supports unemployment, one may also argue
that counterfeiting creates jobs as well. The problem is that these jobs are often based on
substandard working conditions or child labour (OECD, 1999, p. 2).
(2) Tax revenues are lost if illicit businesses displace tax paying companies. There are few
concrete numbers in literature, but most authors mention lost tax revenues as one of the main
3 Impact of China's Counterfeiting Problem
13
problems (OECD, 1998, p. 23; Cohen, 2003, p. 5; IACC, 2005, p. 8). Chinese authorities
estimate that they lose three billion U.S. dollars in tax revenues each year ("Une coalition
internationale contre", 2003). Other financial damages arise from increased costs for
investigation and enforcement against counterfeiters (OECD, 1998, p. 23).
(3) Organized crime and terrorism are a disturbing and unpleasant concern of politicians
worldwide. Counterfeiting has been identified as one of the easiest way for criminal
syndicates and terror groups to finance their operations (cf. "Une coalition internationale
contre", 2003; INTA, 2004, p. 11; Roberts et al., 2000, p. 20f.; Wölfel, 2003, p. 21f.).
Counterfeiting is less risky than smuggling, prostitution or drug trafficking. In other words,
profit is higher and penalties lower (IHK, 2004, p. 3). Especially in China, a change from
smuggling to counterfeiting is visible. In 1999 China's central government launched a
campaign against smuggling. (Ostrov, 2000, p. 44f.). Penalties became much higher. Even
death penalties were imposed in the last few years (Ostrov, 2000, p. 47). Consequently many
criminals switched to counterfeiting businesses.
The problem of terrorism is published in several papers (Union des Fabricants, 2003, p. 1f.,
IACC, 2003, 20f.; Wölfel, 2003, p. 21; Hudson 2003, p. 30ff.). The most famous example is
the first bomb attack on the World Trade Center in 1993. In this particular case, the FBI found
evidence that the activities of Sheik Omar Abdel Rahman and his henchmen were financed by
counterfeited T-Shirts (IACC, 2003, 20.f). Baguioro (2003) cites EU authorities who report
that the Muslim extremist group Hizbollah is involved in the distribution of counterfeit goods.
The origin of the seized goods was China (Baguioro, 2003, p. 1). Wölfel (2003, p. 21ff.)
mentions several international terror groups being involved in counterfeiting, such as the:
BTK, IRA, Italian Mafia and Islamic fundamentalists.
(4) Innovation and national growth
is an important and crucial factor for China as a
developing country. Counterfeiting inhibits the capability to innovate and consequently the
development of national growth. Furthermore it diminishes the competitive advantage of the
economy and leads to a negative reputation as location for investments.
In general, innovation is crucial for economic growth and prosperity (cf. Sodipo, 1997, p.
51ff.; Rapp, Rozek, 1990, p.77). Many authors found that there is a strong link between
economic development and IPR protection (cf. Marron, Steel, 2000; Ginarte, Park, 1997; Rapp,
Rozek, 1990). Rapp and Rozek (1990, p. 77ff.) state, that strong patent protection has a
3 Impact of China's Counterfeiting Problem
14
positive influence on economic development. Fink and Braga (2000, p. 3) describe the role of
IPR protection as an:
"Effective way to foster the dynamic benefits associated with innovative activities."
IPR assures that an innovator has incentives to innovate. Without an IPR regime, invested
resources are not refunded. Consequently rational actors will not innovate and contribute to
the welfare of an economy or society
5
. Practically, the rampant
infringement of intellectual
property rights
in China restrains potential investors and entrepreneurs (OECD, 1998, p. 23;
Shultz, Saporito, 1996, p. 20; Arayama, Mourdoukoutas, 1999, p. 63f.). With a stable IPR
regime the inflow of FDI, latest technology and knowledge the process of transition and thus
the growth of Chinas welfare is expected to be much faster and more extensive.
3.2 Positive Impacts of Counterfeiting
Most authors, institutions and lobbyist groups see counterfeiting basically as negative. Even
in scientific literature there are no comprehensive discussions in a moral or economic way if
counterfeiting may have positive aspects. Basically this seems coherent as the magnitude of
negative aspects discussed in chapter 3.1 shows. Nevertheless positive aspects may exist. This
paper has the aim to give a comprehensive overview on counterfeiting. Consequently, the
following paragraph will provide an introducing excursus on positive aspects of
counterfeiting.
3.2.1 Positive Impacts to Consumers and Local Economies
(1) A main argument results from the price advantage. If a consumer consciously buys a
counterfeit good, he or she can satisfy their own individual personal need; they also pay the
price willingly and without reluctance (cf. Slive, Bernhardt, 1998). If the consumer is aware
that the bought good is counterfeit, there will be no dissatisfaction after the purchase since the
buyer did not anticipate a high standard and quality product. In a simple way: The consumer
seeks a cheap product and gets it.
The counterfeited product offered fits the needs of the consumer, the genuine does not. From
consumer's point of view, there is thus a clear positive attitude towards counterfeited goods
(cf. Slive, Bernhardt, 1998; Bloch, Bush, Campbell, 1993, p. 28). Counterfeit are seen as an
extension of the product choice and legitimate buying options.
5
On the other hand, one can suggest other incentives for people to innovate. One example would be that
innovators do not seek for financial success but for social status and prestige. Since, social status is important in
some cultures, the innovator would have an interest to share his ideas for free just to enhance his/her reputation.
3 Impact of China's Counterfeiting Problem
15
Also the argument of reduced goodwill and shrinking brand awareness losses its impact, if
one assumes that the buyer knows that the product is counterfeited. If the buyer does not
expect a high level of quality he/she will not be unsatisfied with a lower standard. A negative
effect on the genuine brand will not take place.
(2) Another aspect is mentioned by Schultz and Saporito (1996, p. 22). They state that a
certain level of counterfeiting may arise by promotional influences. Throughout so called
"wannabe" consumers, a demand and supply is created. This leads to higher brand awareness
for the genuine brand, and may result in a broader range of potential consumers in the future
(when the purchase power has increased).
Another argument comes from Slive and Bernhardt (1998) who recommend selling software
without cost for private use, to promote sales to commercial users. McDonald and Roberts
(1994, p. 63) argue the same way. They say:
"Pirate product buyers know of their deception and seek ultimately to trade up to the
genuine product as they become more affluent."
Especially in under developed economies this process is traceable (Shultz, Saporito 1996, p.
22). But also in China, as a developing country this may fit because the Chinese market is still
nascent (Lay, Zaichkowsky, 1999, p. 181).
(3) In paragraph 3.1.4 social costs of counterfeiting like unemployment
were
mentioned. Of
course these arguments can also be seen the other way round. It is known that in some local
economies counterfeiting is the dominant business. Some villages or townships depend
substantially on the returns generated by counterfeiting
6
(cf. CIB, 2004; Roberts et al., 2000, p.
20f.; Chow, 2004, p. 6). On a global perspective this is a major problem (cf. 3.1.4). On a local
level, counterfeiting business fosters development, provides jobs and tax for local
administration (Chow, 2004, p. 6). For the people in those regions counterfeiting has a
positive impact. As a result, local authorities will protect counterfeiters and local people will
protest or even demonstrate against enforcement measures to protect their jobs (see 4.2.3.2).
6
A colourful example is cited by CIB (2004, p. 19). A village near Shanghai is mentioned where over 10.000
people directly or indirectly work in the counterfeiting businesses, making handbags and leather goods.
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