Advances in piracy scare companies


Valor Econômico, 04/02/2005
Frederik Balfour, BusinessWeek, Canton (China)

The global counterfeiting industry is out of control, involving everything from computer chips to life-saving drugs. It is so ugly that even China may need to crack down on these activities.

A year and a half ago, Pfizer received an unsettling call on its customer service hotline. A woman who had been taking Lipitor, supposedly from Pfizer, to lower cholesterol, complained that the pills in a new bottle tasted bitter. She sent the suspicious pills to the company, which tested them in a laboratory in Groton, Connecticut. The white oval pills appeared to be perfectly genuine - and even contained traces of the active ingredient in Lipitor. But Pfizer soon determined that they were counterfeit products. In the next two months, distributors collected around 16,5 million tablets that were on deposits and shelves in pharmacies across the country. Was this an isolated case? Far from it.

Last October, Brazilian police received a report about a shipment of counterfeit cartridges for Hewlett-Packard inkjet printers and seized more than the equivalent of $ 1 million worth of goods. Last year, Chinese police raided it when it confiscated all sorts of goods - from fake windshields for Buicks to imitations of Viagra. In Guam, the secret service discovered in July a chain selling counterfeits, produced in North Korea, of pharmaceuticals, cigarettes and $ 100 bills.

But the counterfeiting industry has grown - and this is alarming multinationals. "We have seen a huge increase in the past five years, and there is a risk of becoming an uncontrolled spiral," says Anthony Simon, director of marketing for Unilever Bestfoods. "It is no longer a backyard industry." The World Customs Organization estimates that counterfeits account for between 5% and 7% of world trade in goods, equivalent to a loss of sales of up to $ 512 billion last year - although experts say this is only an estimate. Seizures of counterfeit goods by American customs jumped 46% last year, after counterfeiters substantially expanded their exports to Western markets. Unilever says that imitations of its shampoos, soaps and teas are growing at 30% annually. The World Health Organization (WHO) claims that 10% of medicines worldwide are counterfeit - a lethal risk that could be costing the pharmaceutical industry $ 46 billion annually. Sales of counterfeit auto parts could reach $ 12 billion worldwide. “Counterfeiting has turned from a local inconvenience to a global threat,” says Hanns Glatz, DaimlerChrysler's intellectual property expert.

The scale of the threat is spurring new efforts by multinationals to prevent, or at least contain, the spread of counterfeit products. Companies are mobilizing detectives in increasing numbers around the world, putting pressure on governments - from Beijing to Brasilia - to crack down on and try all sorts of resources - from electronic labeling to product redesign to aggressive price reduction - to tackle counterfeiters . Even some Chinese companies, themselves victims of counterfeiting, are beginning to act defensively. "After Chinese companies start bringing other Chinese companies to justice, the situation will be more balanced," says Stephen Vickers, chief executive of International Risk, a Hong Kong consulting firm specializing in brand protection.

China is central to any solution. Since the country is an economic gorilla, counterfeiting in the country is also a beast - accounting for almost two-thirds of all counterfeit and pirated products worldwide. It is estimated that from bumpers to “Daimler” engine blocks they have conquered 30% of the market in China, Taiwan and Korea. And Chinese forgers produce millions of motorcycles a year, with unauthorized copies of the Honda CG125 selling for about $ 300, or less than half the price of a real Honda.

"The Chinese government is starting to take things more seriously due to the unprecedented uniform protests from the USA, Europe and Japan," says Joseph Simone, a lawyer specializing in intellectual property issues at Baker & McKenzie in Hong Kong .

However, curbing the activities of counterfeiters in China and other countries will require heroic efforts. This is because counterfeits flourish amid the globalization process itself. After all, globalization is the dissemination of capital and technology in new markets, which in turn contribute with cheap labor, thus creating the ideal exporting machine, initially making cheap things and, over time, increasing the value added. That is the story in Southeast Asia. And it's the same story in China. Now, the same path is followed by the counterfeiting industry. This type of piracy benefits the most from specialized labor, intelligent distribution and market differentiation of products without getting caught up in uncomfortable and costly details such as research and development and brand building.

The result is a kind of global industry that is beginning to rival multinationals for speed, reach and sophistication. There are factories in China that can copy a new model of a sophisticated golf club in less than a week, says Stu Herrington, who oversees the brand protection activities of Callaway Golf Co. “The Chinese are extremely resourceful, inventive and scientifically oriented , and are becoming the world workshop ”, he says.

 Last year, for example, 15 children died after eating fake milk powder 

Counterfeiters are adept at copying holograms, “smart” chips and other security devices incorporated into legitimate products in order to distinguish them from counterfeits. “Sophisticated technologies, which took years to develop, were copied in a matter of months,” says Unilever's marketing director.

Many counterfeits, however, are getting so good that even company executives say it takes a forensic scientist to distinguish them from the real product. Armed with digital technology, counterfeiters are able to produce perfect packaging - essential to outwit wholesale distributors and persuade retail consumers. General Motors (GM) has encountered counterfeit air filters, brake pads and batteries. "We had to dismantle the products or subject them to chemical analysis to be able to prove" that they were not legitimate, says Alexander Theil, director of investigations at GM Asia Pacific. These parts would possibly last half the life of legitimate products, but a consumer would only realize this long after purchase.

Counterfeiters even imitate multinationals by diversifying their suppliers and manufacturing bases in several countries. Last August, Philippine police raided a cigarette factory in Pampanga, two hours from Manila. What the police discovered was a miniature worldwide operation. The factory was producing counterfeit Davidoffs and Mild Sevens to be exported to Taiwan. The factory, whose construction must have cost around US $ 6 million, contained a very modern German cigarette making machine capable of producing around 3 billion units annually, equivalent to US $ 600 million. They had transportation, storage, knowledge and network infrastructure to transfer products easily.

After a product leaves China, it can be placed in the legitimate supply chain in almost any country. Sometimes, counterfeit components enter the assembly of authentic products. Last year, for example, Kyocera had to collect 1 million cell phone batteries that turned out to be counterfeit, which cost the company at least $ 5 million.

Some traders mix imitations with authentic products. "It is easy to mix some fake Levi's under a pile of legitimate pants," says an investigator who works in Shanghai. Illegal copying has become as profitable as the narcotics trade, and it is far less risky. In most countries, convicted offenders get away with a reprimand and a fine of a few thousand dollars. Counterfeiters, after all, do not have to cover research and development, marketing and advertising costs, and most of the spending is intended to make their products look visually compelling, regardless of their performance.

While counterfeiters are accumulating profits, multinationals are spending more and more to stop them. LVMH Möet Hennessy Louis Vuitton, which manufactures luxury goods, spent more than $ 16 million last year on investigations, raids and legal fees.

In the past six years, cigarette maker JT International has increased its anti-piracy budget from $ 200 to $ 15 million, having spent that money to finance a network of anonymous investigators, lawyers and informants in factories suspected of producing counterfeits.

Pfizer will soon adopt identification tags based on radio frequency signals on all Viagra packaging sold in the United States, which will allow the company to track drugs from the laboratory to the medicine cabinet. Other companies simply try to make the life of counterfeit manufacturers and distributors as difficult as possible by promoting raids on factories and warehouses or slightly modifying the look of their products to make it more difficult for counterfeiters to keep up to date with authentic versions of products .

In the face of competition from illegal copies, Yamaha has restructured the way it designs and manufactures motorcycles to lower costs. The company is now charging $ 725 for its cheapest motorcycle in China, which previously sold for about $ 1,8. To remain competitive, counterfeiters then cut their prices from around $ 1 to approximately half.

 Counterfeiters do not have to cover research, development and marketing costs 

The biggest difficulty is getting cooperation from China. For years, Chinese authorities have turned a blind eye to the problem, largely because most of the damage fell on foreign brand owners, and most counterfeiting was considered a victimless misdemeanor. The only time China has acted harshly against counterfeiters has been when there was an evident risk to the Chinese. Last year, for example, 15 children died after eating counterfeit powdered milk. The gang leader was sentenced to eight years in prison. But when the victim is a company, not a person, the courts are much less severe.

However, more Chinese business interests have seen their profits affected by counterfeiting - which could result in a tougher Beijing reaction. Li-Ning, authentically Chinese “number one” in sneakers and sportswear, received the highest praise from the counterfeiters: they started copying their sneakers. For that reason, Li-Ning now has three full-time employees tracking the counterfeiters. The state-owned monopoly cigarette maker has been participating in joint raids with major international companies in the industry, since the counterfeiters started producing copies of Double Happiness, Chunghwa and other Chinese brands.

The government is finally realizing that piracy - which accounts for 92% of all software used on the continent - is not just hurting companies like Microsoft. "Piracy is a major problem for the development of a local software development industry," says Victor Zhang, China representative for the Business Software Alliance, an entity representing computer program developers. Some observers fear that Western companies could cut research spending in China if the central government does not step up crackdown.

China is now tightening its legal sanctions. In December, Beijing lowered the threshold that justifies the opening of criminal cases against counterfeiters. Before the changes, a person had to be caught with the equivalent of $ 12 worth of goods before he could be prosecuted. It was easy to circumvent the law by dividing stocks in several places. Today, the threshold has dropped to $ 6 for counterfeiters caught with products of a single brand and $ 3,6 for those with two or more brands.

Many counterfeiters maintain contacts with local authorities, who view counterfeiting operations as an important source of jobs and pillars of the local economy. "Two or three of our police raids came to nothing due to local protection schemes," said Joseph Tsang, chairman of the board of Marksman Consultants in Hong Kong, who made raids contracted by Titleist and Nike Golf.

Beijing says it is doing what it can. The government has raised intellectual property issues to the highest levels: The trade “czar” and deputy prime minister, Wu Yi, for example, has held regular meetings with the Trademark Quality Protection Commission since 2003.

Even more alarming are the counterfeiters' relationship with the underworld. "Organized crime benefits a lot from piracy," says Ronald K. Noble, Interpol's secretary general. And also terrorism. Noble says profits from pirated CDs sold in Central America finance Hezbollah in the Middle East. An executive at a cigarette company estimates that North Korea earns $ 100 million a year in fees charged by pirates who maintain production facilities in the country. This type of activity proves that buying counterfeit products is not an “innocent attitude, nor a joke”, concludes Bernard Arnault, chairman of the LVMH board. (Translation by Sergio Blum)

(Carol Matlack, from Paris, Amy Barrett, from Philadelphia, Kerry Capell from London, Dexter Roberts from Beijing, Jonathan Wheatley, from São Paulo, William C. Symonds, from Boston, Paul Magnusson from Washington, and Diane Brady, from New York, collaborated )