Made in China, Feigned in China

In 2011, an online blogger by the name of BirdAbroad stumbled upon an impressive job of forgery: on a busy street in Kunming, southwestern China, she discovered in its entirety an Apple store complete with product try-out stations, blue shirted store clerks, and wall advertisements suavely proclaiming ‘iPhone 4’ in Sans Serif font. All faux. In September of 2015, Beijing police found a factory that had manufactured more than 41,000 fake iPhones whose total value amounted to £12.4 million. And in between, trillions of RMB worth of Android tablets, Gucci bags, and Adidas sneakers have been imitated and sold via e-commerce giants like Alibaba and its constituent online shopping site, Taobao. In the past three decades, China’s exponential economic growth has led its markets to become an increasingly attractive arena for foreign firms. But the lure of Chinese consumer demand for such foreign goods cannot shroud the largest obstacle for these companies: intellectual property rights (IPR) laws don’t seem to exist in China. Though such laws have been implemented, with intellectual property courts established in larger cities and an IPR division formed within the Supreme Peoples’ Court, the issue lies in administration’s inadequate regulation of counterfeit activity.

Part of this can be attributed to how swiftly Chinese industrialisation has happened -- starting from the implementation of Deng Xiaoping’s gǎigé kāifàng (reform & liberalization) economic policies in 1979, China’s real GDP has grown at an average of approximately 10% each year, with poverty rates decreasing from 84% in 1981 to 7% in 2012. Consequently, there has been a wide disparity between China’s growing economic presence on the global scale and the inability of infringement education to keep up. As an example: China’s first IPR law, the Trademark Law of the PRC, was implemented in 1982, but its first IPR education centre was not established until 14 years later in 1996.

Do multinational corporations suffer significant losses from counterfeit production overseas? The clandestine nature of forgery industries make the exact figures difficult to confirm, especially if the genuine brand’s sales have autonomously increased. BirdAbroad’s discovery of the counterfeit Apple store in Kunming took place in the summer of 2011, when Apple’s profit margins were higher than they had ever been. The corporation had sold over 20.34 million iPhones in the fiscal third quarter, 3 million more than analysts had predicted and shares grew more than 7%, total revenue nearly doubling in the fiscal third quarter.

However, profit losses are inevitable and consumer incentives for buying counterfeit Nike shoes and designer handbags cannot be overlooked. The utility consumers derive from these forgeries, oftentimes related to the satisfaction of ‘showing off’ or receiving less value but at an even lesser cost are all extant motives for the purchasing imitations. As a result, the substitution effect is largely present -- the greater the price gap, the more likely consumers are to buy the counterfeit. At the same time, China’s paucity of enforcement in both consumer and intellectual property rights results in asymmetric information, most typically with the counterfeit producer in possession of more knowledge. All of these factors serve to harm both the genuine corporation’s revenue and reputation on the global market.

Many of the minds behind these counterfeit products hail from Shenzhen, the first and most prominent Special Economic Zone (SEZ) set up during the infant years of China’s economic reform process. Its proximity to the Pearl River Delta for cheap transportation as well as Hong Kong made it an ideal area for foreign direct investment. In the 1960s, a growing number of multinational corporations in Hong Kong began spreading subcontracting chains into Shenzhen, which subsequently encouraged large numbers of peasants from midland China to migrate south in search of jobs. The development that has taken place in the 40 years that followed, brought impressively streamlining of productive, and increasingly surreptitious.

In the case of counterfeit electronics, the loose but efficient networks of R&D software engineers and suppliers along with the dangerously cheap supply of labour make for a Lego block-like production scheme that can put out large quantities of a good for a third of the cost for genuine brands, who typically exploit the same supply of labour but lack the flexible modules of research linked with supply. So, it seems like both parties involved, genuine and guerrilla, could do with more learning.

And in order to continue attracting foreign direct investments and maintain positive relations with trade partners, China does have incentive to strengthen and uphold its intellectual property rights laws. Now neck and neck with the USA in terms of GDP, the incentive to maintain positive trade relations with its foreign investors is greater than ever. Just last month, the State Administration for Industry and Commerce issued a “special action” aiming to eliminate all counterfeit Disney products. Established in conjunction with the 2016 opening of Disneyland Shanghai, the protection measures reflect China’s recent improvement in the protection of intellectual property rights. Though enforcement still remains a point of concern for foreign firms, the tougher consequences imposed on sidewalk vendors selling unlicensed Frozen dolls is a positive sign for China’s IPR framework. .

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