Fake Product Industry

1
Fake Product Industry Technology Theft in China

• Julie Fullerton
• Dave Aktary
• Mike McCallen
• July 23, 2009

2
Stanley Market Hong Kong
3
Agenda

• Counterfeiting the numbers
• Cultural/Societal Factors
• New Balance / New Barlun
• Company Reactions
• Chinese Government Response

4
Industries Affected

• Movies/Music
• Software
• Pharmaceuticals
• Chemicals
• Information Technology
• Industrial Equipment

• Publishing
• Textiles
• Consumer Goods
• Electrical Equipment
• Automotive and Aircraft Parts

5
Fast Facts

• 16 billion counterfeit goods sold in China
• 90 musical recordings sold in China pirated
• 10-15 PG revenues in China lost counterfeit
  products

6
Cultural/Societal Differences

• Government supports (legal) technology transfer
  to Chinese economy
• Relationship-driven system
• Allegiance to individuals
• State laws of secondary importance
• Low per capita income
• Incentive to produce counterfeit goods
• Sell corporate secrets

7
ExampleNew Balance vs. New Barlun

• New Balance lured to China by low cost of doing
  business.
• Production secrets sold out the backdoor of its
  Chinese factories
• New Barlun was born.

8
ExampleNew Balance vs. New Barlun

• New Barlun copied New Balance
• Shoe and shoebox design
• Catalog layout
• Similar domestic and Japanese stores
• New Barluns - the brand from the U.S.A.

Assistant Secretary of Commerce for Market Access
and Compliance William Lash's Press Conference
9
How Companies are Coping

• Anti-counterfeiting features
• Evident to consumer
• Relies on consumer to confirm authenticity
• More effective when customer cares (e.g.
  pharmaceuticals)
• Secret or hidden identification
• Does not rely on customer action
• Relies on extreme corporate secrecy

10
How Companies are Coping

• Lawsuits
• Landlord liability
• Gucci, Burburry, Chanel and others civil suit
  against Silk Street Market landlord.
• Microsoft - private investigators to shut down
  software pirating operations

11
How Companies are Coping

• Alternative methods
• Competing Directly
• Yamaha introduced low-price motorcycle
• Adobe systems slashed prices 80

12
Response of the Chinese Government

• 2004 - China's State Drug Administration
• closed 1,300 illegal factories
• investigated cases of counterfeit drugs worth 57
  million
• China increased fines, and toughened prison
  sentences for rights offenders

13
Olympic Logo Crackdown

• Success in protecting Olympic Logo.
• 2002 - national law passed exclusively to protect
  the logo.
• Careful control over manufacturers
• No products to sell on the black market
• International firms reaction

14
Conclusion

• Currently difficult to enforce laws
• Powerful local officials
• Lack of police resources
• International pressure growing
• World Trade Organization
• European Union push
• China attempt to comply
• New stricter laws
• Olympic Crackdown