Counterfeit Product Issues

Asia and the Issue of Counterfeit Products October 4, 2006

Discussion

I. Countries & Products

II. Reasons behind the issue

1) Profitability

2) Demand is strong

3) Penalties are low

4) Good way to launder money

III. Consequences of counterfeit products

1) Lost revenues

2) Tarnished company image

3) Societal Costs

(1) Child Labor

(2) Sweatshops

4) Consumer effects

(1) Fire

(2) Harm, death

5) Lost wages and jobs

6) Criminal Activity

(1) Terrorist funding

(2) Organized Crime

IV. Why is it so difficult to stop?

1) Little cooperation from Government

a. Chinese legal environment

(1) IP laws are very strong in China

(a) Condition to World Trade Organization admittance in 2001

(2) Legal Environment

(a) 200,000 judges to 140,000 lawyers

(b) Judges don't have law background

(c) Judges are selected locally, paid locally, promoted locally, and fired locally

(3) Corruption - Paying for a decision is very common in Chinese courts.

b. Government

(1) Extensive use of counterfeit products and pirated software

(2) Economic dependency issues

2) Difficulty in identification

a. Legal question - Is it counterfeit if it is produced in the same factory using the same materials according to the same specifications?

b. Progress of technology in the printing, scanning, and copying fields.

3) New Balance in China

Current Events

1) Time Warner DVD sales in China

2) Microsoft Windows Genuine Advantage

3) Enforcement in China: too weak to stop pirates

4) Indian Pharmaceutical, Aurobindo Pharma, grows via pirating strategy

Appendix A - Current Events

Time Warner DVD sales in China

Business Week Online, "Take That You Pirates", 9 October 2006, http://www.businessweek.com/magazine/content/06_41/b4004063.htm?chan=top news_top news index_global business

Hollywood studios claim that up to $2B is lost annually to pirated DVDs across Asia. In a new strategy, Time Warner has dropped DVD prices from $3 to $1.88, close to what pirated copies go for. This allows pirating, but makes pirated copies (ones typically from crude reproductions with no extras) less attractive. This is one of several attempts to combat pirating. The MPAA recently filed a suit against two local retailers and has won settlements in 10 similar suits over the past three years. In the first half of this year, the MPAA says an operation it calls Operation Red Card has resulted in 405 raids in China and seizures of 1.9 million pirated DVDs.

Microsoft Windows Genuine Advantage

Ina Fried, "Microsoft kick starts Windows piracy crackdown, But will freebies do the trick?", 26 July 2005, http://software.silicon.com/os/0,39024651,39150740,00.htm

Microsoft estimates that 1/3 of all copies of Windows are not legitimate. Windows Genuine Advantage (WGA) is a program that will ensure that all non-security related Windows XP add-ons will require validation. Microsoft will also begin offering goodie add-ons that will also require legitimate copies of Windows. So, Microsoft accepts that the product will be pirated, but will eventually become unstable, obsolete or simply undesirable, thus making pirated versions less attractive over the long run. If not carried out right (meaning, too many false positives), Microsoft runs the risk that this strategy could negatively impact their customer's user experience and possibly result in non-trivial operational expenses related to customer service issues.

Enforcement in China: too weak to stop pirates

Dan Washburn, "How to Catch a Pirate", 6 July 2006, http://www.shanghaidiaries.com/archives/2006/06/20/how_to_catch_a_pirate/

Counterfeit goods are estimated to account for 5-7% of global trade, roughly US$450B. And some 60-70% of such items worldwide are believed to have their origin in China. Basically, that means any company with even the slightest name recognition should assume that its products are being counterfeited somewhere in the world, for example, "Batteries, toothpaste, razorblades; everything from widgets to entire motor vehicles and engines. Plane parts, too. 60% of the pharmaceuticals found in developing countries are thought to be fakes."

"In January Starbucks won its lawsuit against a local imitator which was using the Chinese translation of the US coffee-shop chain's name. And it was Prada, along with fellow luxury brands Gucci, Louis Vuitton, Chanel and Burberry, which in December won a Beijing court ruling aimed at stopping the sale of knockoff handbags at Beijing's equivalent to Xiangyang, the famed Silk Market."

"What made this verdict unique is that it did not penalize those who sold the illegal items, rather it targeted the market's landlord. But the fine levied was minimal--US$24,800, which Mr Fernyhough says is less than what most counterfeiters pay in bribes to authorities responsible for enforcing intellectual-property rights every week--and the fake handbags were back out on the shelves in the following