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July, 2017

Zhejiang police bust major cosmetics counterfeiting ring

Police in the Zhejiang province city of Dongyang have shut down the operations of a major cosmetics counterfeiting ring as production and sales of the knockoff products reached RMB 100 million. Among the trademarks infringed are those of Shiseido, L'Oreal, Clinique, and NARS. 

In total, Dongyang police arrested six suspects and seized 1.7 million pieces of counterfeit cosmetics and 440 million pieces of packaging. They also confiscated five production lines and various production equipment. 

Investigators noted in a report that the counterfeiters had a large facility on Wanjiang North Road in Dongyang. The facility occupied the fourth and sixth floors of a factory building and included separate rooms used in different stages of the production process as well as several dedicated storage areas.

Analysis:

Yiwu City in China's Zhejiang Province is the largest wholesale market in the world. As such, it is a hub of both legitimate and illegitimate business. A 2014 World Trademark Review report found that Yiwu was home to 30,000 stores selling 100,000 types of counterfeit goods.  

The leaders of the counterfeiting ring described in the story - a husband and wife team - sold the fake cosmetics in Yiwu primarily for export to Iran (the top market), Pakistan and Afghanistan. 

According to the article, they not only had their own cosmetics brand, but also served as contract manufacturers for Shiseido, L'Oreal, Unilever, NARS, and Clinique - the same brands they were counterfeiting.

There is a key similarity between these cosmetics counterfeiters and the fake footwear makers based in Fujian province that TIPG reported on several weeks ago: Before manufacturing counterfeits, both began their businesses producing genuines, but later got involved with knockoffs because of lucrative margins. 

The Dongyang suspects told investigators they turned to counterfeiting because their own cosmetics brand was selling poorly. While one unit of fake lip gloss has a wholesale price of 8 jiao to 2 yuan, a genuine version of the same product can sell for a retail price of 80 to 150 yuan. So the temptation to counterfeit is strong indeed. 

So why make genuines at all? Well, it has its advantages. Producing both genuine and counterfeit product adds a layer of security for the counterfeiters, who can use the ambiguity to their advantage. Genuine product can provide the front business for the real money-making operation of counterfeit goods, and shipments that pack both genuine and counterfeits in the same containers or cartons may be less scrutinized. Furthermore, If during a raid action, Chinese authorities are presented with genuine trademark certificates (whether or not related to the target product) and or some form of brand owner authorization, the legality of the raid can become unclear in the eyes of the officials, resulting in a non-seizure.

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