A Security Officer's View of Chinese Counterfeiting

In "Faked in China," Todd Datz writes for Chief Security Officer Magazine about a 2005 report from the National Chamber Foundation (a think tank affiliated with the U.S. Chamber of Commerce) with an interesting comparison between counterfeiting and cocaine dealing:

A kilo of cocaine costs about $47,000, and a dealer can sell it on the street for $94,000; that same $47,000 can purchase 1,500 bootleg versions of Microsoft Office 2000, which can be sold for $423,000. Although an unscientific example, the point is clear—counterfeiting pays well. "There's no marketing overhead, no taxes, and you're not paying workers normal rates," says Simone. Annoying expenses like R&D, advertising and other costs associated with turning an idea into a brand also conveniently disappear.

He goes on to descibe the three major types of counterfeit operations in China identified by Phil Yang, who formerly led Gillette's anticounterfeiting efforts in China. The first is legitimate factories that have licenses to produce goods on behalf of brand-name companies but also produce fakes as well. The second involves joint ventures between a multinational and a Chinese partner who uses excess capacity to make surplus product. The third kind of operation is the hidden, underground (and sometimes mobile) facilities that make fake items such as cigarettes.

Among the suggestions for combating the problem:

• Find out whether partners and service providers are reputable, not in financial trouble, and not involved in any IP-related violations.
• Budget smartly; basic investigations cost between $500 and $1,500.
• Even if you don't sell there today, it's a good idea to register you intellectual property if you might do business there in the future.
• Show your presence; if you have manufacturing operations make sure you have good supervision in place.
• Consider anticounterfeiting technologies for your products.