The Business of Fake Goods

Risk & Insurance, April 1, 2001 by Lori Widmer

Counterfeit products are saturating the marketplace to the tune of $61 billion a year in China alone. Multinational corporations are pouring millions of dollars into a problem that costs them up to 40 percent of their market share, with no clear solution in sight.

Do you know where your company's trademark is? Most likely on a counterfeit copy of your product. For just about every product manufactured, there is a strong likelihood that there's a counterfeit copy on the market somewhere being passed off as the real thing. While many know of the handbags, watches, designer clothes, and sunglasses, few people are aware that counterfeit goods are also saturating the auto parts, pharmaceuticals, food, and hair care industries.

Product counterfeiting is a bigger problem than many think. While counterfeiting has been around for some time in the form of pirated movies and music products, a staggering amount of other pilfered trademarks also exist. Conservative estimates put the damage to legitimate brands at anywhere from $300 billion to $1 trillion per year.

It's a problem so large that Fortune 500 companies spend anywhere from $2 million to $10 million per year to combat it, according to an International Anti-Counterfeiting Coalition study. That same study shows that automobile manufacturers and suppliers alone are losing $12 billion a year thanks to counterfeit parts. The Federal Trade Commission estimates that some 210,000 jobs are eliminated as a direct result of copied auto parts. In fact, a 1993 estimate by the U.S. Customs Service projected that Americans have lost more than 750,000 jobs as a direct result of product counterfeiting.

"Some companies will tell you that their numbers (in losses to counterfeit goods) are easily 15 percent to 40 percent of their sales," says Rick Weatherly, VP of sales at Westvaco Brand Security in Stamford, Conn. "It's a huge problem even if you look at 15 percent of your brand or sales being taken away. What a large market share that is."

Alex Duperouzel, president of Kroll Fact Finders in Hong Kong, says overseas numbers are no better. "In China, most multinationals think that they are losing between 15 percent and 30 percent of their domestic market share. Many counterfeits are made for export. I know of several multinationals that have lost about 50 percent of their market share in China and Eastern Europe. It would not surprise me if the number was closer to 5 percent of global trade."

Electronics, videos, golf clubs, and other commodities such as health and beauty products are most effected. Counterfeiters have saturated the market in CDs and videos as well, according to the experts. The computer software industry alone looses between $12 billion and $16 billion per year due to piracy and counterfeiting. Microsoft has seen more than its share of counterfeit and pirated goods replacing its product.

"I found a package that had Netscape, Windows 97, 98, and 2000 for two bucks. The problem is there's no tech support," says Doris Long, professor at John Marshall Law School, Chicago.

Sanford Warren, partner and head of the intellectual property section of Gardere Wynne Sewell in Dallas says that all product lines are vulnerable. But the software industry is being hit hard, he says. "It's so easy to counterfeit due to the technology. The same thing with the Internet. The reason these people on the Internet are able to auction stuff off so cheaply is that the technology's made it easy to copy it."

Even insurance products are being stolen. Royal & SunAlliance recently announced its investigation of alleged fraudulent use of the name Global Indemnity Company, one of its licensed companies. The company said that its name was being used to peddle transportation or fleet insurance. According to a company spokesman, "the scope of the situation is unfolding and it could be big."

Big Business in China

Counterfeiting is a booming business in China where in 2000, confiscated products seized by U.S. Customs officials totaled more than $15 million. Duperouzel believes that China's size is a chief reason for its dubious distinction as one of the leaders in fake goods. "China is a tremendous engine of the world's productive capacity. It's also a very big and developing country that is having difficulties in enforcement. This environment makes it a great place for counterfeiters."

The International Anti-Counterfeiting Coalition (IACC) in Washington has named 15 countries that are hot spots for counterfeiting activity. Two in particular, China and Paraguay, are being monitored closely by the IACC as countries that "deny effective protection and enforcement of intellectual property rights and market access," according to the report.

IACC president Timothy P. Trainer blames lack of enforcement for many of the trade problems in these countries. "There's a lot of protectionism and corruption (at a governmental level in the countries). I think some would like to think we're getting a handle on this. I personally don't know that we are. We still don't see in many countries a serious use of laws and law enforcement to do something about it. The World Trade Organization (WTO) agreement went into effect in 1996 for developed countries and in January 2000 for developing countries. Despite these magic dates on the calendar, we've not seen a real hard-core commitment to penalize people for this activity."