June, 2018

Counterfeiters target ascendant Chinese brands

For this week's edition of the newsletter, O2O Brand Protection has prepared a feature-length report on the threat rising Chinese brands face from counterfeiting. As they grow more influential, Chinese brands are increasingly the target of opportunistic counterfeiters. Indeed, counterfeiting in China is no longer a problem for foreign companies alone. 


For many years, Chinese counterfeiters have vexed foreign brands. From fashion houses to coffee chains to pharmaceutical firms and automakers, foreign brands in the China market struggle with trademark infringement. As a result, the battle against counterfeiting in China focuses primarily on protecting the intellectual property - and bottom lines - of global companies. 


That paradigm is now on the brink of a sea change. Chinese counterfeiters are increasingly targeting ascendant domestic brands, whose fortunes are moving in tandem with China's burgeoning middle class and steady shift to consumption-led growth. China's Huawei, Xiaomi and Oppo are the world's No. 3, 4, and 5 smartphone brands by shipments respectively. Beijing-based Lenovo is the world's top PC maker. Internet giant Tencent is the world's largest gaming company by revenue. 


The 2018 BrandZ report by WPP and Kantar Millward Brown found that the value of the world's top 100 Chinese brands grew at a record-breaking 23% clip to reach US$683.9 billion in 2018, compared to US$557 billion a year earlier. The report analyzes consumer opinions drawn from 400,000 interviews and financial data to quantify brand value. 


It is no coincidence that Chinese courts concluded a record 200,000 IPR cases last year, up 40% annually, according to the Supreme People's Court of China. Much of the global coverage of Chinese IPR court activity focuses on foreign plaintiffs, who are winning cases at an unprecedented rate. To be sure, that marks a key step forward for IPR protection in China. However, it's just a small part of the overall picture. Roughly 98% of China's IPR disputes are between domestic companies, research by Tongji University has found. 


The threat to Chinese brands


China's biggest losers from IP theft are its own inventors, brands and consumers, not multinational firms. Counterfeiting proliferates in China because it pays well. Profits are sky-high: Production and shipping costs are low, while demand for some products can outstrip supply, creating an easy vacuum for counterfeiters to fill. Chinese counterfeiters are targeting an ever-larger number of domestic brands precisely because those brands are on the rise. 

Crucially, Chinese counterfeiters are adept at exploiting vulnerabilities in online sales channels - where China does most of its shopping today. Alibaba's Taobao marketplace remains a perennial sales channel of fake sorghum liquor, harming the bottom lines of Chinese brands like Maotai, Wuliangye, Jiangxiaobai and Guanyun. The volume of transactions on Taobao is so high - in the trillions - that it's hard to eradicate infringing listings without barring product categories completely. More often than not, anti-counterfeiting work on the platform is like a game of whack-a-mole.

Curbing trademark infringement on Tencent's WeChat messaging app is even harder. The platform is enormous, with a billion active users, some using multiple accounts under different names. Most counterfeiters active on WeChat know better than to sell fake goods from a high-profile public account. Instead, they use private accounts. Brands can't easily track the activity of those accounts because they must be personally connected to them - on a user's friends list - to do so. Sales made via private accounts resemble ordinary payment transfers, so it's not easy to prove an exchange of counterfeit goods.


IP theft affects Chinese firms big and small. Sorghum liquor maker Maotai, China's top alcoholic beverage brand, estimates that it incurs about RMB 200 million in expenses every year because of counterfeiting. 

In Hebei Province's Qinghe County, renowned for cashmere production - annual cashmere sales total RMB 20 billion - counterfeiters are damaging local industry by producing phony cashmere garments and accessories made of rabbit hair and ordinary wool. An April commentary on people.com.cn urged local authorities to take action before it is too late. Building a brand takes years or even decades, but it doesn't take long at all for counterfeiters to destroy a brand, the commentary said.


In May, Chinese media reported that counterfeiters operating in Beijing blatantly misrepresented their restaurant as affiliated with Quanjude, China's most famous Beijing duck restaurant (established in 1864). The restaurant in the Wangfujing department store used Quanjude's trademark without permission: on signage, on menus, and on social media. Beijing authorities are currently investigating the matter following a complaint from Quanjude.  

Domestic demand for counterfeits


Worryingly, counterfeiting in China shows no sign of abatement. In 2017, Chinese market-supervision authorities investigated 27,000 cases of counterfeiting and trademark infringement involving RMB 330 million in infringement value. 172 different courts dealt with the cases. 


Of course, it's not just the supply side which creates the problem. Chinese consumers themselves remain avid buyers of fake goods and are not always concerned about the rights of brand owners. 


An important reason for that phenomenon is the availability in China of reasonably good-quality fakes. It's no joke: Alibaba founder Jack Ma even suggested two years ago during a speech at Alibaba's headquarters in Hangzhou that counterfeits are better than the real thing. "The problem is the fake products today are of better quality and better price than the real names,” he said. “They are exactly the [same] factories, exactly the same raw materials but they do not use the names.”


A recent conversation between O2O Brand Protection and a Shanghainese sales manager in the media industry illustrates the problem. The person earns over RMB 40,000 a month (a high salary by Chinese standards), owns a comfortable 2-bedroom apartment in the city, drives a BMW and has a growing collection of authentic Rolex watches. 


He recently sought to buy a new leather briefcase for work but didn't want to spend a large amount on the item. He decided on a high-quality fake Frye leather briefcase. "It's a really good fake," he says. "The material and craftsmanship are there, it's just not a legitimate product." He adds: "It's better than carrying an authentic Louis Vuitton briefcase like a small-time company boss." 


New research by the University of British Columbia published on the phys.org website has found that some young Chinese buy counterfeit goods to express their belief in frugality. Most of the participants in the study were pleased with their fake goods, which they equated with frugality and "being a moral consumer."  


Strengthening brand protection 


Fortunately for brands, support for more robust IPR protection is coming straight from the top. At China's National Financial Work Conference in July, President Xi Jinping said that the nation "must step up efforts to punish illegal infringement of intellectual property rights and force infringers to pay a heavy price." Xi reiterated his support for a more robust IP protection regime at the 19th Party Congress in November. Taken at face value, Xi's remarks signal a heretofore-unseen level of support for IP protection from the Chinese leadership.  


Chinese brands have had the benefit of observing foreign brands for years, and as a result they have avoided some of the pitfalls their foreign counterparts face. In particular, they have adeptly navigated the domestic judicial system. However, court remedies only treat the symptom and not the disease: Brands cannot sue consumers for desiring counterfeit products. 


In fast-growing China, for all the rags-to-riches success stories, per-capita GDP remains under $US9,000 in nominal terms. There remains an enormous market for low-cost imitations of luxury products. One Chinese person in Wuhan, a professional in her 30s, told O2O Brand Protection that for some consumers, the price of fake fashion and accessories is often right. "I won't buy fakes myself, because the quality is usually poor," she says. "But a lot of Chinese people want something glamorous, like an LV handbag, for a cheap price, even though it's not supposed to be cheap. They want to look like they have money." 


With that in mind, Chinese brands would do well to adopt the best practices of foreign brands when it comes to brand protection: Consumer education and a zero-tolerance, multidimensional approach, including online-to-offline enforcement. Chinese brands should participate more widely in their industry associations, forming alliances and knowledge-sharing exchanges with foreign counterparts. 


Consumer education needs to improve as well. In this area, Chinese brands have a home-field advantage. Upgrading the value of Chinese brands is a key central-government policy initiative. At the same time, Chinese consumers are showing a growing interest in domestic brands across different industries. 


Meanwhile, the prolific counterfeiting that occurs in China has repercussions outside of the country's borders, where Chinese consumer electronics makers are increasingly active. Smartphone makers Huawei, Oppo, Vivo and Xiaomi are ambitiously targeting Southeast Asia, India and Europe. 


Indeed, those ascendant Chinese smartphone brands now face the same counterfeiting issues that have long plagued Apple and Samsung. At the same time, counterfeiting activity risks reputational damage for Chinese brands. As long as China is known as the world's counterfeit factory, Chinese brands will struggle to persuade consumers in advanced economies that their products are high quality. 


Speaking at China's National People's Conference in March, Maotai deputy general manager Zhang Deqin summed up the challenge facing Chinese brands well: “China now occupies a central position on the world stage, and the nation should have confidence," he said. "If Chinese companies intend to gain a foothold in overseas markets, they must value their own brands. They should abandon counterfeiting and trademark infringement, a short-sighted approach that only offers them temporary benefits."