October, 2017

Is contract manufacturing a road to counterfeiting?

Original article: Cqn.com

Contract manufacturers play a vital role in the global supply chains of many different products. The vast majority of them build reputable businesses, taking responsibility for important manufacturing or assembly work for brands- and sometimes both. Perhaps the best example is Hon Hai Precision Electronics Co., the primary assembler of the iPhone and a long-time partner of Apple.  

Yet, in China, a particular phenomenon has taken root: contract manufacturers segue into counterfeiting. Nowhere is this more evident than in the shoe-manufacturing hub of Putian, a city in China's southeastern Fujian Province. Global shoe makers began to produce shoes in Putian in the 1980s, often contracting out the manufacturing work to Taiwanese firms. Over time, locals learned how to produce shoes from the Taiwanese, and set up companies of their own. Many eventually moved into the counterfeit trade. 

Some of the fake shoes in Putian are such accurate reproductions that they are hard to distinguish from the real thing. That suits some consumers just fine - fake Adidas Yeezy sneakers made in Putian are increasingly popular in the United States.


The author of the article traces the proliferation of counterfeiting among China's contract manufacturers to a lack of brand awareness. Original-equipment manufacturers (OEMs) don't deal with consumers at all. Their job is to produce something to the specifications of their client - the brand. Consequently, OEMs focus on honing technological processes to perfection. Their objective is to produce faster, cheaper and better. 

Because of their position as middlemen, OEMs don't enjoy the same kind of margins as brand owners. Their clients are always haggling to lower prices. Apple is famous - or perhaps infamous - for pushing its suppliers to offer the lowest possible prices. 

In China, where IP protection remains inconsistent, OEMs sometimes move into counterfeiting once their technology and manufacturing savvy are sufficient. It's a much more lucrative business than producing genuine products for someone else. The article suggests that there are two ways to resolve this problem. The first is to strengthen legal recourse; make the punishment fit the crime. After all, China can be quite effective in that area when it wants to be. 

The second idea is to provide education to businesses so that they understand the value in building brands of their own. Yes, the R&D costs are high, but that's the price of investing in innovation; that's what it takes to build a winning brand. Some Chinese brands are showing the gumption to do just that. Lenovo is a major success story; following its acquisition of IBM in 2005, the Chinese firm has become one of the world's foremost PC makers. 

The danger in failing to develop a brand-centric mentality is not restricted to the proliferation of fake goods. In Taiwan, where the counterfeiting industry has been largely wiped out, most OEMs never learned how to develop their own brands. Those who did, like smartphone maker HTC and PC maker Acer, have struggled mightily against international competitors. As the perennial middleman, Taiwan has watched its economic star fade as its neighbors - from Hong Kong and Singapore to South Korea and now China - all have moved up the value chain.