China The Kingdom Of Luxury Fakes - C.fagon

15/08/2008

RESEARCH STUDY

CHINA : THE KINGDOM OF LUXURY FAKES

Clément Fagon

Business Environment in Asia www.hydwi n.com

Research Study 2 China : the kingdom of luxury fakes

“We don’t want to ignore counterfeiting, but for those foreign companies, when they enter the Chinese market, I’m afraid they should also pay some cost due to the realities of China”.

Gao Feng, head of China’s anticounterfeiting police unit.

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TABLE OF CONTENTS OUTLINE

Section 1. Counterfeiting: a threat or a windfall for luxury brands? I-

The Chinese luxury market : a very attractive but dangerous market 1. 2. 3. 4.

II –

A tremendous demand for luxury brands A market dominated by European giants The changing scale and nature of counterfeiting The economic consequences of counterfeiting on luxury companies Is counterfeiting good for luxury brands?

1. A source of innovation? : the “piracy paradox” (Sprigman and Raustiala, 2006) 2. Two flawed assumptions against luxury fakes

Section 2. Can luxury brands counterfeiting really be stopped in China? I-

China’s failure to stem the tide of luxury fakes 1. China’s efforts to strengthen IP protection legislation 2. A weak and ineffective enforcement 3. Is counterfeiting inside Chinese culture?

II-

Enforcement strategies for luxury brands 1. 2. 3. 4. 5.

Focusing on intelligence Acquiring enforceable IP Rights in China and going on the offense Encouraging positive legal development in China Reducing exposure Acting on the demand

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Introduction

Although China’s economy continues to flourish and the country is set to become the second biggest consumer of luxury goods by 2015, counterfeiting remains at epidemic levels and cause serious economic harm to luxury brands. The Chinese government, to its credit, recognizes the problem. Since its accession to the WTO in 2001, China has adopted various laws to protect IP and from now on comply with international standards. But not enough had been done. Significant problems still exist with enforcement of such laws and since the mid1990s, the Chinese authorities have been playing a cat and mouse game with counterfeiters. Luxury brand companies such as Louis Vuitton, Bally, Gucci and Ferragamo have been investing in the Chinese market, but today not too many of them are making a handsome profit in China. The Chinese mainland luxury market is still in its formative stage even if it clearly presents tremendous opportunities.

The present research paper investigates a range of conceptual and empirical issues surrounding counterfeiting of luxury products in China, to explore how much is understood about the magnitude and nature of the phenomena. It also proposes possible enforcement strategies to help luxury companies successfully protect their intellectual property rights.

The purpose of section 1 is to emphasize the complexity of the phenomena through the following question: is counterfeiting a threat or a windfall for luxury brands established in Asia? In this part, we will explain why we consider that China is a very attractive but dangerous market for luxury brands. We will also look and discuss the different arguments that could lead to the idea that counterfeiting is in fact good for the luxury industry.

In section 2 we outline the main reasons of China’s failure to stem the tide of luxury fakes. Then, we propose a set of measures that could help luxury companies to improve their fight against counterfeiting of their brands.

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Section 1.

Counterfeiting: a threat or a windfall for luxury brands ?

Many luxury companies view counterfeit products as the biggest threat to their brands. Since 1999, the phenomenon exploded, probably because it is now closely related to organized crime. However, we can highlight at least two flawed assumptions against luxury fakes in China and recent researches argue that the counterfeiting phenomenon could in fact have unexpected positive impacts on the luxury goods industry.

I- The Chinese luxury market : a very attractive but dangerous market 1. A tremendous demand for luxury brands Sales of luxury goods are booming across the world as the strength of the global economy helps to forge a new class of wealthy consumers in Asia, the Middle East and Eastern Europe. According to Bain & Co., worldwide sales of luxury goods are expected to grow at an average of about 6 percent up to the end of the decade, with the sector growing by as much as 9 percent in Asia1. The above-average growth in Asia is attributable in large part to China. In December 2005, a report issued by Goldman Sachs has predicted that China will consume about 29 percent of the world’s total luxury goods in 2015, surpassing Japan as the world’s top luxury brands market. The studies predict that the demand for luxury goods in China will grow by 25 percent annually between 2006 and 2010, exceeding Japan’s expected 28 percent share at that time 2 . A similar prediction is made by Merrill Lynch, which expects that extravagant offshore spending will see Chinese consumers likely to account for almost a quarter of global luxury goods purchases by 2014.3 A luxury consumer market that didn’t exist 20 years ago is now on a seemingly unstoppable path to dominate top end retail. How did it happen? First of all, a continuing double-digit economic growth is filling pockets and encouraging consumers to move away from the savings culture of older generations. Changing demographics also fuel the furious spending. The mainland’s one-child policy created a generation of cosseted only children and the first generations of these “little

1

“Conspicuous consumption makes a comeback as luxury goods boom”, China Daily, 10 June 2006 “Luxury brands seeking more chance in China”, Chinaview, 9 November 2004 3 ”China luxury goods expected to surge”, Women’s Wear Daily, 4 October 2005 2

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emperors” are now in their twenties. Therefore, the self-indulgent consumerism has expanded from children's products into luxury goods, and this has been a driving force behind the rapid expansion of the luxury goods industry in recent years. In 2007, 20-29 year olds have become the highest-earning age group in China. They aspire towards, and can afford, expensive Western lifestyles: holidays, beauty products, trendy clothes and designer bags. Besides, sales of certain luxury goods have been given a further boost by the progressive reduction of tariffs on imported luxury goods since 2005 in accordance with China’s commitments to the World Trade Organization. For example, the 28 percent to 40 percent tariff that was levied on imported watches until the end of the year 2004 was cut to 12.5 percent and will be further reduced to 11 percent by the end of 2006. 2. A market dominated by European giants The luxury brands currently operating in China are largely of European origin and span across various retail sectors such as fashion apparel and accessories, footwear, perfume and cosmetics, jewellery, automotive, and liquor. Louis Vuitton and Gucci are the best-performing brands in China but plenty of other famous names are investing heavily on the mainland, like Fendi, Möet & Chandon,or Montblanc. LV has been profitable since its first year in China, with annual growth of almost 50 percent.4 Consistently rated Asia’s favorite brand, it succeeded to open its first outlets in top locations and created products that are specifically tailored towards Chinese consumers. For example, in 2004 LV offered a range of Lantern Charm accessories based on the traditional Chinese lantern to celebrate the opening of the new Beijing store5. Its main rival, the Italian retailer Gucci, which has 16 stores in China, recorded sales growth of more than 65 percent in 2006 and claims that 45 percent of world sales are now generated in Asia6. The mainland ranks third following Japan and Hong Kong. Following in LV and Gucci’s footsteps the luxury retailers are continuing to bet on the figures and fire ahead with ambitious expansion plans. However, the Chinese luxury goods market is still not mature and while it is growing rapidly, an equally fast-growing segment of local industry has been counterfeiting.

4

“The Cult of the Luxury Brand”, Radha Chadha and Paul Husband “Luxury cars target China’s new rich”, Peoples Daily, June 2004 6 “Growing economy lifts demand for international brands”, China Daily, 4 December 2004 5

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3. The changing scale and nature of counterfeiting Just as China has become the world’s leading assembler and exporter of manufactured goods, it is likewise said to be dominating the underground trade in luxury fake. According to the Comite Colbert7, a trade association which represents the French luxury brands industries, 80% of fake luxury goods are manufactured in China and the income loss for all fake industrial products is estimated at 5 billion euros8. Customs statistics also show evidence that a large amount of counterfeit luxury goods are manufactured in Asia and exported to Europe, most common sources for seized counterfeit clothing accessories being China and Thailand, and for counterfeit watches and jewellery China and Hong-Kong9. Actually, the nature of counterfeiting has changed considerably in recent years. In the mid1980s, Grossman and Shapiro referred to the “fly-by-night nature of the culpable parties and the fact that they usually lack attachable assets” 10 . While such opportunists may still be present today, the Union des Fabricants (2003), argue that counterfeiting has become an organized crime, and the returns from counterfeiting are often used to fund other organized criminal activities. Their report argues that, “from being a small-scale activity conducted in illegal workshops in the 1990s, counterfeiting has become an industry using costly, modern facilities. Counterfeiters no longer work in isolation on an ad hoc basis; they have become international entrepreneurs, with connections to highly organized networks. Counterfeiting has never been so highly structured”11. Indeed, for Chinese organized crime organizations such as the powerful Hong Kong Triads, counterfeiting can be more lucrative than activities such as drugs dealing and, in general, carries a lower penalty. Attracted by the profitability of this illicit activity, these organizations now control the actual production and trade of counterfeit goods. Due to their involvement, the production and distribution phases of counterfeit products were greatly improved. Criminal organizations operating in different countries have established close ties and synergies. The same routes and concealment methods utilized to traffic drugs or firearms, for example, can be exploited for trafficking counterfeit goods while the great potential for intimidation and corruption of organized crime

7

Comite Colbert website : http://www.comitecolbert.com/ « Les grands patrons à la chasse aux faux », Le Figaro, 10 June 2004 9 European Commission (2006). Community-wide counterfeit statistics for 2004. Available at http://ec.europa.eu/taxation_customs/index_en.htm (12.6.2006) 10 « Counterfeit-Product Trade », Grossman, G.M. and C. Shapiro American Economic Review. Vol. 78. March 1988 (p85) 11 « Counterfeiting and Organized Crime», Paris: Union des Fabricants 2003 (p. 7) 8

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is another facilitating factor. The illicit channels controlled by the Chinese Triads and dedicated to the trade of fake luxury goods are perfectly well-organized: the money comes from Hong Kong, the production of luxury fakes is made in China, notably in the city of Yiwu in Zhejiang Province and in the cities of Xingfa and Panyu in the Guangdong Province. Both regions are centers for legitimate manufacturing of leather goods, so getting raw materials and other supplies is relatively easy (some luxury companies, like Coach, manufacture in China, while others, like Louis Vuitton, are manufactured only in Europe and the U.S.). Then, the stocks are transported to Thailand and Cambodia where they are concealed inside containers with foodstuffs or other consumer products like lingerie and afterwards send to their final destinations in the US (New York and San Francisco), Italy (Naples), Holland (Rotterdam) or France (Paris)12. According to industry experts, most counterfeit luxury goods are low-quality counterfeits sold outside the authorized distribution channels. These counterfeit products are sold at flea markets, fairs and street festivals, bazaars, small boutiques that sell only counterfeit products, over the Internet, from house and office parties and hotel sales. Nevertheless, better quality luxury fakes, previously largely distributed through informal markets, are infiltrating legitimate supply chains, with products now appearing on the shelves of established shops. The Internet for example has provided counterfeiters with a new and powerful means to sell their products via auction sites, stand-alone e-commerce sites and email solicitations.

12

« Le crime organisé d’origine chinoise en Europe de l’Ouest: évolution de la menace », Clément Fagon, Mémoire pour l’obtention du D.U. Analyse des Menaces Criminelles Contemporaines, DRMCC, Université de Paris II Panthéon-Assas

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Illustration of flow of goods in licit and illicit trade of counterfeiting goods

4. The economic consequences of counterfeiting on luxury companies A number of the economic consequences of counterfeit goods are well known13. For right holders, we can identify direct and indirect mechanisms that lead to financial losses.

Firstly, let’s focus on the direct effects. Counterfeit products substitute genuine products, which leads to direct losses of revenues for the luxury brand owner. The loss in market share has two components: sales lost to consumers who purchase a counterfeit product believing it is genuine and sales lost to consumers who knowingly purchase a lower-priced counterfeit product instead of a genuine article. However, it's hard to quantify exactly how much money a luxury brand loses to counterfeiting, since investigators and manufacturers say most people who buy fakes wouldn't pay for the real thing anyway. Besides lost sales, other direct effects of counterfeiting is increased number of liability claims, such as warranty repairs. The technical quality of counterfeits is inferior to originals and thus counterfeit products are more susceptible to cause warranty claims among customers. Even though it is straight forward to 13

« The economic impact of counterfeiting and piracy : Executive Summary », OECD 2007

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inspect whether a product has a valid guarantee by checking the original sales receipt, this is not always demanded for example in luxury goods industry due to practical reasons, because the receipt can be unavailable due to multiple reasons (the item was a gift or inherited, the receipt is simply lost etc.). For example, luxury good company Dooney & Bourke receives an average of sixty counterfeit purses each week from persons requesting warranty repairs14. Trade with counterfeit luxury products also leads to higher costs for right holders, because of spending on efforts to combat counterfeiting. They have to invest heavily in monitoring, prevention and reactive measures. For example, Louis Vuitton employs 40 full-time lawyers and 250 freelance investigators around the world, and in 2003 its operatives were involved in 4,200 raids on counterfeiting rings and 8,200 legal actions Counterfeiting of luxury products has also diverse indirect effects on brand owners. The larger risk is that fakes may damage the brand image and reputation of firms over time. Indeed, presence of counterfeit products can diminish the exclusiveness of a brand, and lower quality of counterfeits can decrease the perceived quality of original products. Especially in luxury goods industry, exclusiveness of the brand is crucial and customers who pay considerable amounts of money for luxurious products do not want to see the large masses of consumers wear the same brand. In 2004, Chemise Lacoste commissioned a poll in 12 markets to study the impact of counterfeits on its brand image. When asked how they felt about the proliferation of fake luxury items, most respondents said the prevalence of a widely copied product considerably eroded the image of the authentic brand; 76% said the growing abundance of forged items and logos made buying the original far less alluring15. Moreover, Chinese consumers are fast becoming more knowledgeable and more quality demanding. If they believed they were buying a genuine article when in fact it was a fake, they will likely blame the manufacturer as they may not obtain the quality, reliability and after-sales back-up they believe they are purchasing, which will leave them at a lower level of satisfaction and welfare. It may also make them reassess their future source of such products, when they would be better off buying the original branded good. Another indirect effect is that illicit trade leads to development of future competitors as counterfeiting helps illicit actors to gather know-how and infrastructure for production. For example, the former Chinese counterfeiters of the luxury Johnnie Walker “Black Label” now

14 15

« Tips for avoiding counterfeit products », Loss Prevention Concepts, Ltd.. December 1998 « The purse-blues party », Time magazine, 29 July 2004

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produce their own whiskey. Today, Chinese consumers prefer this second choice brand, less expensive but in fact completely identical to what they were used to drink for a long-time16. Finally, industrial experts point out the fact that counterfeiting could reduce the incentive of some luxury firms to invest in the development of new products. However, some researchers claim that copying doesn’t hurt the luxury industry much, and indeed probably helps it to innovate.

II- Is counterfeiting good for luxury brands? 1. A source of innovation? : the “piracy paradox” (Sprigman and Raustiala, 2006) In an original and very interesting article, entitled “The piracy paradox: innovation and intellectual property in fashion design” published in the Virginia Law Review, two American law professors, Chris Sprigman (University of Virginia School of Law) and Kal Raustiala (UCLA Law School) argue that the fashion industry counter-intuitively operates within a lowcopyright equilibrium in which copying does not deter innovation and may actually promote it. The article offers a model explaining how the fashion industry’s piracy paradox works, and how copying functions as an important element of and perhaps even a necessary predicate to the industry’s swift cycle of innovation. Two main arguments are used. The first relates to induced obsolescence. Piracy diffuses innovation in a positional goods world and accelerates the diffusion of designs and styles, leading to an acceleration of the renewal of goods. “In short, piracy paradoxically benefits designers by inducing more rapid turnover and additional sales” The second argument is that unrestrained copying not only drives the production of new designs by making older designs obsolete, but it also helps shape the new designs around themes so that consumers can easily identify what looks are "in" or "out" at the moment. “A low-IP regime helps the industry establish trends via a process we refer to as “anchoring”. Our model of anchoring rests on the existence on definable trends... Copying does this by anchoring the new season to a limited number of design themes... Thus anchoring helps fashion-conscious consumers understand (1) when the mode has shifted, (2) what defines the new mode, and (3) what to buy to remain within it”

16

« La contrefaçon se développe à grande échelle en Asie du Sud-Est », Le Monde, 27 December 2002

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The Sprigman and Raustiala article may be a good first step in moving beyond traditional, blanket assumptions about the relationship between copying and innovation. However, the two phenomena identified above are at the very least peculiar to markets involving "positional goods", and may well be peculiar to the fashion industry in particular. The models developed in the paper aren't really that generalizable to other IP regimes, and the authors acknowledge as much. Recently, French economist Jacques Attali gave his full support to the study made by Sprigman and Raustalia, even claiming that we should entirely stop fighting against copying, as it is “an invitation to create, going further, a real engine of progress for humanity”17. Actually, in a previous article written in 2005, "Shopping for Gucci on Canal Street" 18 , Jonathan Barnett (University of South California) already contested the assumption that counterfeiting harms innovation incentives. Building on his thesis that counterfeit consumers like the increased social status conferred by name brand ownership, he claims that one, the existence of luxury goods copies may actually increase the "snob effect" of the genuine article and the price more "elite" consumers are willing to pay for it; and two, it may lead "non-elite" consumers to perceive a greater status benefit to be gained by acquiring the real thing, which could then lead them to purchasing it. 2. Two flawed assumptions against luxury fakes The first flawed assumption against luxury fakes is that a consumer who buys a fake would have otherwise purchased the genuine article. This is obviously untrue. A Chinese woman does not buy a Hermès Birkin bag for RMB 100 000 because she needs a handbag. She wants the brand and for all the utilitarian verisimilitude of a RMB 200 copy from Shanghai, this is something even the best fakes cannot offer. It's true that thousands of fake luxury handbags are sold each year in China. But very few of them, if any, cannibalize the sales of the real product. The second flawed argument against fakes is that they harm the brand equity of the luxury brand. Indeed, because they are usually manufactured by lean, market-driven entrepreneurs, they are often the first signal of a luxury brand's renaissance (when copies appear) or of the final nail in the coffin (when they don't). As a result, more than one great luxury house uses counterfeit sales to predict demand for its own brand and gauge its overall health. Fakes are 17

Europe 1, 23 December 2007 “Shopping for Gucci on Canal Street: Reflections on Status Consumption, Intellectual Property and the Incentive Thesis”, Jonathan Barnett , Virginia Law Review, October 2005 18

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also often the first place where consumers develop an awareness and aspiration for genuine luxury.

Despite these assumptions, we consider that counterfeiting is mainly a threat for luxury brands; of course because of its direct and indirect negative economic consequences in China but also for the distortions it creates for the world economy, the dangers it poses for the consumers’ health and safety and the profits it creates for organized crime.

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Section 2.

Can luxury brands counterfeiting really be stopped in China?

Although China has adopted various laws to protect intellectual property (IP), the enforcement of such laws remains problematic. Therefore, a luxury company needs to take aggressive measures to minimize its potential IPR vulnerability in China.

I-

China’s failure to stem the tide of luxury fakes 1. China’s efforts to strengthen IP protection legislation

Since its WTO accession on December 11, 2001, China has substantially revised its IP laws. As a part of this process, the Government agreed to implement the Agreement on the Trade Related Aspects of Intellectual Property, or the TRIPs Agreement that provides minimum standards for intellectual property protection and enforcement, including chapters on patents, trademarks, copyright, trade secrets, and integrated circuit designs. The registration and protection of trademarks are governed by the “Trademark Law of the People’s Republic of China” and the related regulations. Recent amendments to this law and an interpretation on the IP sections of the Criminal Law released in December 2004 by the Supreme People’s Court introduced tougher penalties for trademark infringement. Individual counterfeiters having an illegal turnover exceeding US$6,200 (or US$3,700 if two or more registered trademarks are involved), or manufacturers and vendors dealing with more than 20,000 copies of counterfeit trademark representations (or 10,000 copies if two or more registered trademarks are involved), can face criminal sanctions and may receive a maximum punishment of three years’ imprisonment and/or a fine. The maximum punishment will increase to seven years’ imprisonment and a fine if the illegal turnover exceeds US$31,000 (or US$18,500 if two or more registered trademarks are involved), or where more than 100,000 copies of counterfeit trademark representations (or 50,000 copies if two or more registered trademarks) are involved. China has made further commitments to step up IP enforcement. In July 2005 the People’s Procuratorate issued a draft regulation directing administrative bodies to refer IP violations promptly to criminal authorities for prosecution when a case meets the prescribed standards

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for criminal prosecution. The Ministry of Public Security has also established a working group to coordinate efforts in the criminal enforcement of IP rights nationwide. Moreover, the increased recognition and protection of well-known trademarks is another encouraging sign for luxury companies. At the end of August 2005 30 foreign-owned trademarks from nine different countries had been accorded well-known trademark status in China pursuant to the Regulations for Recognition and Protection of Well-Known Trademarks, which came into force in June 2003. Under these regulations, only the registrant of a trademark involved in a dispute may apply for recognition of the mark’s well-known status. In addition, if the application is unsuccessful another application for recognition of the same mark cannot be made until a year after the refusal. The figures also seem encouraging. In its 2007 report, the State Intellectual Property Office said the authorities had shut down 13,170 counterfeiting-oriented businesses. A total of 4,322 criminals involved in 2,684 cases concerning IP-rights infringement, rising 23 percent and 18 percent year-on-year respectively, have been fined or sentenced to imprisonment of up to seven years, according to Xiong Xuanguo, vice president of the Supreme People's Court.

However, the level of counterfeiting of luxury goods remains high and the effort that China has expended in trying to improve IP protection does not seem to stem the tide. How can we explain such a failure? 2. A weak and ineffective enforcement China has two routes for enforcing IP rights: judicial proceedings and administrative actions. Administrative enforcement is by far the most common and frequently used form of enforcement of IP rights. Determining which IP agency has jurisdiction over an act of infringement can be confusing. Jurisdiction of IP protection is diffused throughout a number of government agencies and offices, with each typically responsible for the protection afforded by one statute or one specific area of IP-related law. There may be geographical limits or conflicts posed by one administrative agency taking a case involving piracy or counterfeiting that also occurs in another region. In most cases, administrative agencies cannot award compensation to a rights holder. They can, however, fine the infringer, seize goods or equipment used in manufacturing products, and/or obtain information about the source of goods being distributed.

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The second enforcement track is the judicial track, in which either the IP owner or its exclusive licensee has standing to bring a civil action in the People’s Court requesting injunctive relief and/or damage. While injunctive relief and compensatory damages are available from the court system, litigation in China is a costly process. Plaintiffs are responsible for collecting all of the evidence, which can be a tedious for foreign companies in China. Determining which IP agency has jurisdiction over an act of infringement can be confusing, due to the fact that jurisdiction of IP protection is diffused throughout a number of government agencies and offices, with each typically responsible for the protection afforded by one statute or one specific area of IP-related law. Moreover, there may be geographical limits or conflicts posed by one administrative agency taking a case involving counterfeiting that also occurs in another region. Criminal investigation and prosecution is available in cases of egregious infringement, but can only be initiated at the governmental level. But many foreign rights holders complain that the criteria for referral of criminal cases are too vague, permit too much discretion, and that the minimum evidentiary threshold for prosecution is too high. There are several other factors that undermine enforcement measures, including China’s reliance on administrative instead of criminal measures to combat IPR infringements, corruption and local protectionism, limited resources and training available to enforcement officials, and a lack of public education regarding the economic and social impact of counterfeiting and piracy. In most regions of China, the police are either not interested in pursuing counterfeiting and piracy cases, or simply lack the resources and training required to investigate these types of cases effectively. In these areas, most judges lack the necessary technical training, and that court rules regarding evidence, expert witnesses, and protection of confidential information are vague or ineffective. Basically, this means that if a luxury company like Chanel has IP in China that is infringed, and it takes the matter into the Shanghai court system, where IP protection is taken seriously, it has a more reasonable chance of prevailing than if it acts in remote areas of the country. This leads to an ineffective two-tiered enforcement system in China. In order to illustrate the weakness of this system, let’s take the example of the Beijing Silk Market (xiushuidongjie), renowned for its luxury fake products. In 2004, the Beijing Administration of Industry and Commerce issued a decree banning all sales of high-profile luxury goods such Prada and Burberry in all markets of Beijing. The Chinese authorities then stated that “vendors continuing to sell such commodities would be investigated as suspected

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trademark infringers.” But did conditions really change “dramatically,” as the authorities claimed? The Chinese government used these measures as examples of China’s strong commitment to combating IPR offences, but the ban was obviously ineffective. The Silk Market was forced to close down later in 2004, but a new five-story Silk Market opened next to the old site, with inspectors finding infringing goods on opening day19. 3. Is counterfeiting inside Chinese culture?

As to the reasons for this prevalent counterfeiting, some of the opinions from foreign countries consider counterfeiting to be a part of Chinese culture. Let’s start by recalling the three different functions of the copy in Chinese culture20. First of all, copying is the privileged way of learning in many domains. In old China, disciples started their learning by reproducing the work of their master (calligraphies, poesies, paintings…). Today in schools, children still learn how to write the thousands Chinese characters by continuously copying them. Besides, the Chinese verb xue means “to learn” as well as “to counterfeit”. In China, copying is also a way to honor someone’s work. In an article entitled “The Cultural Origin of Chinese Counterfeit Products” published by the Voice of Germany (Deutsche Welle), the Secretary-General of the Germany-China Economic Association (Deutsch-Chinesiswche Wirtschaftsvereinigung E. V.) claims that because traditional Chinese Confucian education requires reciting and copying, students take a great man (a scholar, a poet, or a philosopher) as a role model, appreciate the ideas of the forefather and then retell them. It is this Chinese culture that determines the practice of following the example of others, and imitating others is a kind of honor in China. Finally, whereas in Western civilizations the copy is devaluated and has a negative connotation, in Chinese civilization the copy has both an intellectual and commercial value. This is why the price of some luxury fakes in China can be very high, provided that the quality gets closer to the original branded product. Moreover, the Chinese concept of intellectual property is very different than the one prevailing in Westerner’s minds. In Western countries, the intellectual property is often associated with the idea of self-affirmation and creativity. It is an individual right that need to be protected. In contrast, Chinese society is traditionally based of two fundamental principles:

19

“Paper dragon: inadequate protection of intellectual property rights in China” Omario Kanji, Tsinghua University Law School, Beijing 20 « La notion de propriété intellectuelle en Chine », Nicolas Occis, Annales des Mines, March 1999

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“harmony”, which makes the primacy of the group prevailing upon individuals, and “hierarchy” and submission to superior strata. In such a context, what place should be attached to intellectual property in China? It is a relatively new concept which is based on an individual right that goes on the opposite of Chinese cultural background. Of course, these cultural factors are disputable in the contemporary Chinese society and we cannot invoke them as the only explanation of the prevalent counterfeiting of luxury goods in China. To denounce Chinese culture as a counterfeiting culture can only intensify national resentment and it is not a rational attitude for the solution of the problem. Nevertheless, these specific cultural aspects should be kept in mind by luxury brands when they decide to enter the Chinese market.

II-

Enforcement strategies for luxury brands

Doing business in China require a multifaceted approach to IPR protection that emphasizes prevention and while using all possible avenues to enforcement. We have seen that despite the recent measures, the scale of luxury counterfeiting appears to be increasing, and luxury companies are encouraging the implementation of a wider range of initiatives. There is no single or simple solution to protecting intellectual property in China. The following is a summary of the possible enforcement strategies for luxury brands: 1. Focusing on intelligence Though pro-actively catching and prosecuting IP violators is critical, luxury companies should first focus on preventing violations to their brands. The brand owner can build a database including details of the infringing products, locality of the infringement (source and destination if stopped in transit), identity of the party or parties involved (retailer, importer and, if possible, original source), markets supplied, method of distribution, and enforcement action taken. Intelligence can be gathered via private investigators or informants, staff, licensees or local attorneys, or in some instances administrative agencies. It obviously implies an increased co-operation between Chinese and foreign customs and police, including by ensuring that intelligence is communicated more quickly. Luxury companies should in particular to work with INTERPOL by supplying data on known and suspected counterfeiters under its new data collection pilot programme.

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Staff and licensees (and their staff) should also be educated about counterfeiting and trained to identify, differentiate and report infringements. 2.

Acquiring enforceable IP Rights in China and going on the offense

Luxury companies should register their brands in China as early as possible to mitigate the risk and devote time and resources to detecting violations and taking legal action against counterfeiters. When it is possible, they must initiate criminal actions because local police have more ability and power to deal with the infringer, and criminal penalties can be significant. Seizures by customs agencies can also be effective (and cheap), but usually requires a specific level of information. 3. Encouraging positive legal development in China This could be done by engaging at various levels with government, business and academic leaders. Example actions include: continue action with the related central government agencies to improve their knowledge and law-enforcement capacity building exercises, engage in local standard debates and align interest with local government parties, nurture alliance with researchers, academics and policy advisors and helping them expand their knowledge and influence. Global luxury groups such as LVMH or Richemont should work with the Chinese authorities by pooling data and pursuing joint lobbying initiatives to improve the enforcement of legislation. 4. Reducing exposure Luxury brands can reduce their exposure to counterfeiting with a more careful selection and monitoring of business partners in China. They can also increase service capabilities to preserve product value. Value-added services and brand attributes that enable consumers to use products much more effectively can turn a desirable product into an essential one, and make substitution of derivative products unworkable. 5. Acting on the demand Luxury brands should increase Chinese consumers’ awareness of the negative impacts of counterfeiting on society and economy. Even more important, luxury brands need to seed their success through establishing a luxury culture in the Chinese market. Such culture will

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define the context in which luxury brands operate. Many Chinese customers have little sense of luxury culture with much of the nation still living in relative poverty, and while there is a growing cohort of rich Chinese most are yet to have a full understanding of and appreciation for the “luxury lifestyle”. While the sudden jump in wealth among Chinese has resulted in a short-term boom in luxury buying, only through the cultivation of a luxury culture can luxury brands look forward to sustainable, healthy development in China over the long term. As has been evidenced, fashion shows, special events and other public relations efforts by luxury companies create a luxury culture environment, giving ample opportunities to Chinese customers to practice their taste for a luxury lifestyle and build emotional connections with the brands.

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Conclusion There is no one-size-fits-all solution to IP problems encountered by luxury companies established in China. The laws are changing and uneven. Minimizing risks and devising costeffective strategies must be customized according to the circumstances of each company. However, luxury companies must play their part in the reform process through increased cooperation with Chinese authorities. Recent counterfeit cases have assisted in raising awareness among Chinese consumers of the importance of brand authenticity. However, luxury fakes are not going to disappear from Chinese streets anytime soon. In order for them to disappear, China must become much more developed and that development will require a great deal of internal IP in need of protection and, along with it, a sophisticated judicial system fully equipped to vindicate IP rights with full governmental backing. We believe the country is heading in this direction. Yet building an effective Chinese legal framework for IPR protection will take many years, if not decades.

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REFERENCES

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Books:

“The Cult of the Luxury Brand”, Radha Chadha and Paul Husband, Nicholas Brealey Publishing, 9 november 2006

“Little Emperors: A Year With the Future of China ”, Joann Dionne , Dundurn Press, 11 february 2008 “China Shakes the World: A Titan's Rise and Troubled Future-and the Challenge for America”, James Kynge, Mariner Books, October 2007 “Cols blancs et mains sales : Economie criminelle, mode d'emploi”, Noël Pons and Claude Mathon, Odile Jacob, 23 mars 2006

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Academic articles:

“The Piracy Paradox: Innovation and Intellectual Property in Fashion Design”, Kal Raustiala, and Chris Sprigman, Chris Virginia Law Review, Vol. 92, 2006

“Counterfeit-Product Trade ”, Grossman, G.M. and C. Shapiro American Economic Review. Vol. 78. March 1988 (p85) “Shopping for Gucci on Canal Street: Reflections on Status Consumption, Intellectual Property and the Incentive Thesis”, Jonathan Barnett , Virginia Law Review, October 2005 “Paper dragon: inadequate protection of intellectual property rights in China” Omario Kanji, Tsinghua University Law School, Beijing “ La notion de propriété intellectuelle en Chine”, Nicolas Occis, Annales des Mines, March 1999 “Protecting Your Intellectual Property in China”, David McHardy Reid and Simon J. Mac Kinnon, MIT Sloan Management Review, March 10, 2008 “The Enforcement of Intellectual Property Rights in China – a Statistical Perspective”, Jianqiang Nie Paper presented at WIPO/OECD Meeting on IPR Enforcement Statistics. October 2005 “IP Protection and Counterfeiting in China”, Richard P. Sybert, Intellectual Property & Technology Law Journal, Vol. 20 n°7, July 2008

Research Study 23 China : the kingdom of luxury fakes

“The Economic Structue of Intellectual Property Law”, Landes, W.M. and R. A. Posner, Cambridge, Mass: Belknap Press, 2003 “Enforcing Intellectual Property Rights”, Lanjouw, J.O. and M. Schankerman, NBER Working Paper 8656. December 2001 “Luxury: Exposing the Myths. Research carried out by Ledbury Research for Davenport Lyons”. London. April 2006 “Contrefaçon en Europe : le vent en poupe” Mickaël Roudaut, Fondation Robert Schuman, Questions d’Europe n°86, 14 January 2008 “Intellectual Property Rights in the P.R.C.: Impediments to Protection and the Need for the Rule of Law”, Jeffrey W. Berkman, UCLA Pacific Basin Law Journal, 1996 “Pirates, Dragons and U.S. Intellectual Property Rights in China: Problems and Prospects of Chinese Enforcement,” Glenn R. Butterton, Arizona Law Review, 1996 “Counterfeiting in the People’s Republic of China,” Daniel C.K. Chow, Washington University Law Quarterly, 2000 •

Press articles:

“Le Guangdong, manufacture mondiale des contrefaçons s”, Le Figaro, 16 June 2004 “Chine : l’Empire du faux”, Le Figaro, 9 July 2005 “La copie, une chance pour la mode”, Le Monde, 26 December 2007 “Conspicuous consumption makes a comeback as luxury goods boom”, China Daily, 10 June 2006 “Luxury brands seeking more chance in China”, Chinaview, 9 November 2004 “China luxury goods expected to surge”, Women’s Wear Daily, 4 October 2005 “Luxury cars target China’s new rich”, People’s Daily, June 2004 “Growing economy lifts demand for international brands”, China Daily, 4 December 2004 “Les grands patrons à la chasse aux faux”, Le Figaro, 10 June 2004 “Tips for avoiding counterfeit products”, Loss Prevention Concepts, Ltd. December 1998 “The purse-blues party », Time magazine, 29 July 2004 “ La contrefaçon se développe à grande échelle en Asie du Sud-Est”, Le Monde, 27 December 2002

Research Study 24 China : the kingdom of luxury fakes

“IP Protection Best Practice Tips” Godfrey Firth, The China Business Review Online, January/February 2006 “4,300 People Convicted of Intellectual Property Right Infringement in 2007”, Song Shutao Xinhua, April 15, 2008 “China Defends Results in Push to Protect Intellectual Property”, Reuters - Associated Press (via International Herald Tribune), April 17, 2008 “How to Work with China and PYA - Protect Your Assets”, David Hale, IndustryWeek, April 2, 2008 “China’s Piracy Plague”, Roberts, D., F. Balfour, P. Magnusson, P. Engardio and J. Lee, Business Week. No. 3684. New York. June 5. pp. 44-48.

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Websites:

Comite Colbert website : http://www.comitecolbert.com European Commission (2006). Community-wide counterfeit statistics for 2004. Available at http://ec.europa.eu/taxation_customs/index_en.htm

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Reports:

“Counterfeiting and Organized Crime”, Paris: Union des Fabricants 2003 “The economic impact of counterfeiting and piracy : Executive Summary”, OECD 2007 “Synthesis Report on Parallel Imports. Directorate General for Financial, Fiscal and Enterprise Affairs, Trade Directorate. Joint Group on Trade and Competition”, OECD, Paris: OECD, 2002 “Counterfeiting: a global spread, a global threat”, United Nations Interregional Crime and Justice Research Institute (UNICRI), 2007 “Best Practices: Intellectual Property Protection in China”, The US-China Business Council “Theft: Greater the Reach, Greater the Risk”, Global Fraud Report, April 2008 “Prevention, Detection & Response”, Global Fraud Report, 2007/2008 “Intellectual Property Fraud: How Big Is the Problem?”, Global Fraud Report, January 2008 “Staying ahead of China’s counterfeiters”, AT Kearney, 2 November 2005 “Redefining Intellectual Property Value. The case of China”, PriceWaterhouseCoopers, 2005

Research Study 25 China : the kingdom of luxury fakes

APPENDIX

The Beijing Silk Market (xiushuidongjie) – closed in 2004

The Shanghai « Fake Market » (xiangyang) – closed in 2006

Samples of luxury fakes (LV bags, watches and Chanel bags)

Research Study 26 China : the kingdom of luxury fakes

Source : AT KEARNEY

Source : AT KEARNEY Product

Original price (in Euros)

Counterfeited price (in Euros)

Rolex watch

3 000

10 - 20

Louis Vuitton bag

300

10 - 25

Chanel scarf

200

2-5

Prada sunglasses

250

5 - 10

Source : Personal investigations, August 2007

Research Study 27 China : the kingdom of luxury fakes

Source : International Chamber of Commerce

Source : Euromonitor (2007)

Estimates of value of counterfeits in different industries Computer software Audio-video Textiles and clothing Perfumes Pharmaceuticals Watches

35% 25% 22% 10% 6% 5%

Source : European Brands Association (AIM)