Whenever I head over to China, my wife asks me if I’ll pick her up a new purse. Black ones during the winter, white or brightly-colored ones in the spring and summer. It’s a fashion thing and I don’t pretend to understand it. I just know that I’m supposed to pick up a purse for her just like I’m supposed to bring a stuffed animal home to my daughter. So more often than not, I head to one of the many multi-level half-mall, half-flea-markets in central Beijing where vendors aggressively push their counterfeit goods on anyone who walks past their booth.

If you need a watch, they’ve got Rolexes, Tag-Heuers, and Patek-Philipes. They might even keep time. If you need a purse, they’ve got Prada, Coach, Fendi, Louis-Vitton, and more. Some of them are even leather. The same goes for North Face jackets and backpacks, Nike shirts and shoes, or pretty much any other brand you can name. If they don’t have it in one stall, just walk next door and you’ll probably be in luck. None of them are real, of course, but they’re so cheap, you don’t care. The sport is in finding the better fakes and then bargaining for them.

Whenever I go, these places are packed with both tourists from around the globe as well as locals who want the latest styles but can’t afford to drop a month’s rent for a nice handbag.

This week, though, I noticed something different. None of the purses displayed on the vendors’ tables had any labels on them. The bags were the same. The exact same “Prada” purse that I brought home last time was even there, just missing its distinctive triangular badge.

“No Prada’s today?” I asked the girl at the stall where I recognized the de-badged version of my wife’s summer purse.

“We have it,” the girl replied. She pointed to a row of purses. “We have these all Prada.”

“There’s no label on it.”

She looked at me hard for a second, then said, “We have it with label.” She pulled another purse out from under the counter. It was the same bag I was holding, only with the familiar “Prada” triangle affixed to it.

“Why was it under the table?” I asked her.

“Because of Bush and trade summit, they’re having crackdown on fakes. No fakes allowed this week. You come back next week, all will be normal again.”

I have no doubt she’s right. According to year-old rehash of a two-year-old story, 60 Minutes, “15-20% of all the goods in China are counterfeit.”

I my case, I know it’s not real (nor, for the equivilent of $12 US, would I expect it to be) and the bag I eventually buy will be both cheaper and, to be honest, of better quality than a cheap handbag back in the states. I don’t care if it says Prada on it or not–it’s easier for me to purchase a fake Prada than a real non-Prada over here. As a 2003 story in the Economist points out, part of the problem was created by the same companies that now suffer the most due to consumer goods counterfeiting:

Since the 1970s, technological advances have taken much of the skill out of manufacturing. This has allowed big business to move its manufacturing base to poor countries to take advantage of low labour costs. Unfortunately, many of these businesses paid insufficient attention to the sort of intellectual-property rights (IPR) on offer in such places. Now they are paying the price.

…

Counterfeiting is as diverse as any legal business, ranging from back-street sweatshops to full-scale factories. Counterfeiters often get their goods by bribing employees in a company with a valuable brand to hand over manufacturing moulds or master discs for them to copy. One of the most infuriating problems for brand owners is when their licensed suppliers and manufacturers “over-run” production lines without permission and then sell the extra goods on the side.

The Economist also points out that this problem is not unique to China, either.

China is by no means the only big exporter of counterfeits. In its annual “Special 301” review, published earlier this month, the office of the US trade representative (USTR) fingered more than 30 countries as counterfeiting and piracy hotspots. Ukraine, for example, is awash in bootleg optical discs; Russia is running on counterfeit software; while Paraguay is rolling in imitation cigarettes. The USTR reckons that American industries lose $200 billion-250 billion a year to counterfeiting.

What I don’t know is how much of that $200b is actual losses, I tend to think it includes theoretical losses which count counterfeit sales as a “lost” sales of the actual product, whether the purchaser would have bought the real good or not. If this were true, then China would be Rolex’s top market, a fairly impressive title for a country whose per-capita GDP is only $5,600 per year.

Or consider my wife’s new purse. Is this costing Prada a sale? Of course not. I don’t have $500 lying around for my wife to spend on a purse and I make a lot more than China’s per-capita GDP of $5,600/year. It might be costing Target a sale, but since their purses come from China anyway, all I’m really doing is saving a few dollars and cutting out the middleman. Maybe the $200b is the value of counterfeit goods in the supply chain being sold (and priced) as actual goods, but I find that hard to believe, too.

Let’s run some numbers, ignoring whether the data is from 2003 or 2004 to make my life easier. China’s 2004 GDP was $7.262 trillion. If 10% of their goods are, in fact, fakes, then that’s $726 billion in fake watches, purses, drugs, golf clubs, motorcyles, phones, CD’s etc, etc, etc. According to the Economist article, China produces just under 50% of the world’s counterfeit goods. That therefore would imply that the world’s total pool of counterfeit goods last year was $1.5 trillion. That’s a lot of fake handbags.

Unfortunately, though, it’s not just fake handbags and watches. Counterfeit drugs cause multiple deaths every year and counterfeit aircraft parts are believed to have caused the crash of an American Airlines jet a few years ago.

I’m probably asking for trouble saying this, but I would argue that there’s a big difference between me knowingly buying my wife a purse which happens to say Prada on it (at least until the badge falls off) and counterfeit drugs or aircraft parts being sold as legitimate goods. If I want to buy a real Prada bag, I’m not going to go to a Chinese market. I’m going to go to the Prada store or a reputable retailer like Neiman Marcus. That is my mechanism for properly authenticating the seller as legitimate.

In the case of drugs or mechanical parts, there are so many different vendors and middlemen in the supply chain that it becomes nearly impossible to authenticate the goods without a security mechanism like RFID. In my opinion, this is one of the better proposed uses of RFID Tags. The authenticity of high-value, easily-counterfeited products like pharmaceuticals can now be reasonably assured while increasing both supply chain efficiency and product safety. If properly implemented, RFID’s provide a nearly unbeatable countermeasure against forgery so I don’t have to worry about the tail falling off my plane on the flight home.

What it comes down to, however, is that manufacturers ignored a key risk that came with outsourcing manufacturing and now both they and the public-at-large are paying the price. Would maufacturers have made the same decision had they considered counterfeiting risk when evaulating off-shoring production? Probably, but it’s too late to put the genie back in the bottle now.

I learned a lot while writing and researching this post, both about the global counterfeiting problem as well as about my own attitudes toward it. If things seem a bit choppy, blame it on the rewrites and the jetlag.

good post. over-running is a major pain for the tech industry too. When a top-of-the-line new router goes to a production facility in you-name-it, they may make thousands more than the ordered amount and sell them for cheap in the “malls”. It’s a direct loss to the designer in this case because the person who bought that router is more likely to buy the genuine router than you buying a genuine Prada.
same goes for CD stamping.

As for RFID, it can be duplicated. It’s very very easy! I can clone the original RFID tag so many times as I want and place them on another parts.

Alexy,

Agreed. RFID is not a panacea, but rather a tool which can be combined with other mechanisms to raise confidence in the legitimacy of a product when combined with generalized tracking of the supply chain, can let a participant in the supply chain who *wants to* ensure that the goods he or she is buying are are legitimate via an out-of-band authentication request.

Most of the commercial applications of RFID that I’ve seen were less about security and more about overall efficiency of routing and tracking systems since the tracking can be implemented anywhere you have a chokepoint narrower than the range of your reader.

RFID’s are good, but a better idea has been patented in Dayton Ohio by a company called Fusion Chriptological Technologies. This technique, which is currently being used daily in small numbers, uses an invisable code on say a bottle. this bottle is then transferred to the pharmacuetical company where the unique code is read. The unipack is filled and another invisable code is placed on the bottle. Only tracable labels can then be sold. The entire process is traceable via e-petigree.

John