Made in the PRC: Facts About China's Fight Against Counterfeits

From shampoo to watches, designer leatherware to DVDs, entire mobile phones to high-end telecom switching equipment, China's domestic economy is rife with fakes. Trademarks, copyrights and patents are all contravened in China. This is despite the fact that legislation governing each type of intellectual property is already on the books in China, albeit with varying levels of efficacy. Though trademark counterfeiting is most often discussed in the media, Joseph Lee of Joseph Lee & Associates Ltd, a Hong Kong investigation firm dedicated to counterfeiting cases, says that copyright and patent infringement manufactures are as common in China.

A good example of the type of venue where fakes are sold is Ziyuangang, a thriving marketplace for a range of consumer goods in Guangzhou, the capital of Guangdong province. This wholesale market is an apt microcosm of China's freewheeling coastal provinces and their unique approach to free markets and laissez faire business. Among the hundreds of stalls lined up chock-a-block and run by small-scale manufacturers it is estimated that counterfeit goods account for as much as 80-90% of the products sold.

Evidence suggests the enormity of the problem across China. Government authorities estimate that counterfeit products sold in China outnumber legitimate manufactures by 2:1. In some cities, up to 90% of certain products in daily use are counterfeit, according to Patrick Wang of Nike Inc. Sometimes, products bearing a foreign brand name and sold in China are often not even part of the foreign manufacturer's line of products; a new entrant to the China market faces the unwelcome surprise of seeing "their" products already for sale in China, before they've even set up a distribution channel. Foreign manufacturers and some members of the Quality Brands Protection Committee eventually find that upwards of 30% of the market for their products is comprised of counterfeits. In some provinces, all products bearing a single brand name are counterfeit.

"The [counterfeit] problem couldn't get much worse," according to Joseph Simone of Baker & McKenzie. Simone is the chair of the Quality Brands Protection Committee (QBPC), a Beijing-based organization of 78 foreign brands operating in China. Established in March 2000, the QBPC is dedicated to protecting its members against counterfeiting in China. Their top legislative agenda item is to encourage the government to clarify the standards for criminal, as opposed to mere administrative, liability against counterfeiters.

In a QBPC survey last summer, some members reported seeing a reduction in counterfeits of their own products but, as Simone says, "the problem remains critical for all of our members". Any inroads into the problem have in part been the by-product of the pressure that the QBPC and foreign brand owners have successfully brought to bear on the authorities, and the effective use of the media to publicize the problem as well as to highlight particularly high-profile cases.

The war on counterfeits has to be fought on different fronts simultaneously, and usually without much support from the authorities who have limited resources to tackle the problem. Though no one doubts the central government's sincerity in cracking down on intellectual property infringement and attacking counterfeits, many problems coalesce into an unmanageable and, as far as the central government's efficacy is concerned, seemingly overwhelming whole.

Chief among the problems are local government protectionism, the limited manpower and resources of the Public Security Bureaux, to whom brand owners would like to see more counterfeit cases transferred so that they could be involved in criminal prosecution, the division of responsibilities among many different government departments and their reluctance to cooperate closely in alleged counterfeit cases, and, ultimately, difficulty in ascertaining who's actually responsible for manufacturing fakes. When many different factories produce the same counterfeit item, which one should be targeted first? When labels, packaging and other contributory materials are produced outside the factory, should these operators also be targeted? What responsibility do operators of wholesale markets bear?

One of the biggest obstacles to cracking down on counterfeiters is protection of their factories. Foreign brand owners have seen the negative side of a growth in local autonomy over the past two decades. Monopolistic practices and collusion among counterfeit manufacturers and local officials who've accumulated significant capital effectively shield the manufacturers from government crackdowns on counterfeits and foreign competition in the marketplace.

In China, regulation of most local economic activity falls under the authority of the local branches of the Administration for Industry & Commerce (AIC). The local AICs are responsible for administrative enforcement of trademarks and trade dress, registering commercial enterprises, issuing licences, monitoring prices and preventing irregular and illegal business practices, including monopolies and price-fixing, among other responsibilities. In some places, officials in AICs have reportedly abetted counterfeiters and protected their factories from raids. Though the role of AICs in local protectionism has not been spotless, they should be viewed more as part of the solution to stamping out production of counterfeits than the problem.¹

"The AICs were entrusted to handle trademark enforcement at a time when counterfeiting wasn't a big problem. Their role in dealing with counterfeits should probably have been shifted over to Chinese police many years ago," Simone observes.

Recently, national and local AICs have issued notices instructing local governments to get out of the job of running wholesale marketswhere many counterfeits are sold. Local governments have complied to some extent, but the problem is similar to that faced by the central government a few years ago in forcing the People's Liberation Army (PLA) to divest itself of its business interests. According to Simone, the effect of central government directives to local AICs has been uneven.

The central government has recently boosted the power of administrative enforcement authorities, including AICs, to crackdown on counterfeits, and especially in cases of trademark violation. In the PRC, Trademark Law (中华人民共和国商标法) (2^nd Revision) effective December 1 last year, departments of the AICs at or above the county level were given broader powers to confiscate possible counterfeit products, and they are explicitly encouraged to transfer cases to the police when they suspect that "a criminal offence has been committed" (Article 54). Additionally, AICs are empowered to examine documents of the suspected infringer of a trademark, including accounts, invoices and contracts. This sounds like progress, but it is problematic; most counterfeiters don't keep extensive documentation about the illicit products they manufacture and sell.²

As Simone notes in his article on page 22, determining what constitutes a criminal offence isn't that easy. In addition, there are other problems in getting cases transferred from administrative to criminal authorities. Jason Yao of Procter & Gamble (China) Ltd noted at a recent INTA conference that a big problem facing foreign brand owners who would like to see more cases transferred to the PSBs for criminal prosecution is the reluctance of the AICs to surrender the cases brought to them originally. Administrative fines, currently the main penalties assessed on counterfeiters, are a significant source of revenue for AICs. They are reluctant to lose this revenue. According to Jack Clode, Managing Director of Kroll Fact Finders Ltd, 90% of trademark infringement cases involving his clients and brought to an AIC result in the levying of administrative fines on suspected counterfeiters.

A less self-interested reason that the AICs would be reluctant to transfer their cases, according to Yao, is a lack of general knowledge about how and when cases should be transferred to the PSBs under admittedly unclear legislative provisions. Even when cases can be transferred, Yao says, there are difficulties in evidence collection by the PSBs, and delays during the transfer of the case that make it more likely that some evidence will be "lost".

In addition to the AICs, trademark violation cases, on which most counterfeit claims can be based, are handled by offices of the Technical Supervision Bureau (TSBs) and the Customs department. Aside from AICs and TSBs that can levy administrative fines on counterfeiters, the Customs department forms another layer of bureaucracy that can take action.

In the absence of a top-level policing body that can oversee an aggressive war on counterfeits, China has to struggle with competing jurisdictions attacking the problem in a piecemeal fashion. Periodic efforts are made to unify the fight against piracy under a single authority, but these have largely failed due to different central government members being unwilling to have their influence undercut.

In the meanwhile, counterfeit manufacturing is rampant, with a growing export problem forming a visible international aspect of the problem. Stanley Chan of Gillette (China) Ltd cites US Customs data from the past three years that shows that of total counterfeit seizures by the US authorities in 1999, 2000 and 2001, goods originating in China constituted 16%, 33% and 46%, respectively, in the same time period.

Export counterfeits are increasingly well organized and sometimes involve legally registered foreign trade companies; in some cases, PRC state-owned trading companies have been involved in commercial activities centring on counterfeit goods, Chan says. Sophisticated distribution networks have flooded border areas in the north with Russia and south with Vietnam with counterfeit goods. In the course of a raid on a counterfeit batteries factory and subsequent legal action, Gillette discovered that the factory was exporting the counterfeits internationally and had organized an efficient labour sourcing scheme to bring cheap labour from Anhui province to the production site in Zhejiang.

"Unfortunately, this [batteries] case is not unique, and is in fact only the tip of the iceberg," Chan says. "We've encountered similarly large, well-organized counterfeiting operations before." Gillette numbers Duracell batteries among its product lines. In the counterfeits case referred to here, the seized batteries, numbering 800,000, bore the Duracell brand name but were manufactured by counterfeiters. In addition, the fake Duracells were buried beneath a quantity of Chinese batteries that were legitimate manufactures bound for export, thus introducing the thorny problem of counterfeit exports being subsumed under legitimate export deals and contracts.

"The export aspect [of counterfeiting] is a huge problem," Kroll's Clode says. Often, perhaps surprisingly, overseas counterfeiters give the spur to local activity in China. Overseas parties might travel to China, to a provincial trade fair for example, and agree with a local party that they will manufacture and export a specific brand-name product to the overseas country. Clode has had clients find that their product trademarks are undercut in just such a fashion, and weren't even aware of it until research began.

Foreign brand owners continue to lose lots of money to counterfeits in China, but through concerted action and sound strategies have been able to make some inroads against the problem. "Clients need to have a strategic approach to anti-counterfeiting in order to measure the impact," Clode says. He adds that in the past foreign brand owners' knee jerk reaction to the problem, usually through ad hoc raids on factories and other action, has had some success, but the results have been difficult to quantify. A strategic approach entails conducting proper research into the causes, impact and geographical spread of the problem, implementing a focused anti-counterfeiting programme, and carefully measuring the results.

"It's really difficult, but essential, to actually quantify percentages of fakes in a particular market. Clients must be aware that the problem may be displaced [after a counterfeiting factory has been raided], and their strategy should account for this," Clode says.

While some multinational companies have withdrawn from prospective PRC investments because of counterfeit issues, most are committed to China and to reaping the benefits stemming from the growth of the Chinese economy. This means they're bound to fighting the uphill battle against fakes. Chinese manufacturers have years of experience in copying trademarks, designs, packaging and many other familiar aspects of brand name products. In addition, they have been gaining market experience through the years of economic reform that have made manufacturing and distribution without much official scrutiny more of a fact of domestic business in China. Couple this with a consumer public that generally doesn't see much reason for intellectual property protection, and an uncertain and vague legislative framework for combating piracy, and foreign brand owners' work is cut out for them.

Endnotes

1 In 1998, oversight of local branch AICs was transferred from local governments to provincial-level AICs in an attempt to remove the pressure of local governments on local AICs to permit or overlook price-fixing, anti-competitive practices and other illegal activities.

2 The State Council is still drafting Implementing Rules for the new Trademark Law. The Implementing Rules could play a key role in boosting the deterrent impact of administrative and civil sanctionsprovided the fines set out for counterfeiting, as well as the standards for confiscation of fake products and production equipment, are sufficiently severe and clearly defined. Says Simone: "The government has a once-in-a-decade opportunity to deal effectively with counterfeiting through proper handling of the new Rules."