Intellectual Property Rights in China or Counterfeit Clothes in the Local Market

Intellectual Property Rights (IPR) protection is one of the largest challenges that China faces today.  One of the conditions that China had to agree to when it joined the WTO was to work on improving IP violations and infringements, but this has been a long and hard process.  Unfortunately (or maybe fortunately, depending on how you look at it), IPR violations are still common place in China today.

Just take a walk down any street in any city within China and you’ll see several vendors selling counterfeit movies on DVD for less than $1 USD.  Visit any of the thousands of factories in China, and see that almost every factory is running illegal versions of Windows XP on its computers.  Walk into any local Chinese clothing store and you’ll find a plethora of illegal (and counterfeit) clothing.  Talk to any foreign high-tech company operating in China and ask how many staff steal IP every year.

These are not trivial problems, and they are costing global corporations billions of dollars each year.  Even if your company doesn’t do business here, it’s still a problem.  Just ask LVMH, which performs no production within China, yet tons of the counterfeit Louis Vuitton products come from China – and these items are sold globally thanks to Internet companies such as eBay. 

While everyone knows these problems exist, no one has developed a solution to resolve them.  One of the many reasons these problems still exist is because it’s hard to convince someone who doesn’t have enough money to feed his/her family that he/she should respect someone’s property who he/she has never, and probably will never meet.

So what’s a company to do?  Well some companies, such as the ultra-exclusive high-end consumer products have set up stores in China.  These stores are loss leaders – they cost the company money to run, but only to the untrained eye.  Many Mainland Chinese travel to Hong Kong to go shopping (even though products are made in China, it is usually cheaper to buy them in Hong Kong due to relaxed taxes and tariffs on goods).  Every single ultra-high end product that has opened a store in Mainland China has recorded increased sales and profits in Hong Kong.  How does that work you ask?  Well the store in Mainland China sells the idea of a product or brand, and people go and purchase them in Hong Kong.  Even though these products are sold to the ultra-rich, people are still price conscience and will go where the best deal is.

So what about companies that are manufacturing in China but have no stores in China?  Companies such as Abercrombie & Fitch, Aeropostale, and The Gap.  Well these companies are in for a real shock when they decide to come out here.  When they set up a store in China, they will realize that Chinese people have been buying illegal (counterfeit, stolen, or over-run) copies of their goods for years, which has effectively destroyed the clothing line brand.  The problem is that Chinese consumers can’t relate to these brands, the brand means nothing.  When these companies finally decide to come here (and they will), they will have a ton of trouble trying to convince customers to buy legitimate clothing for 5 times the price than at a local Chinese store. 

Lacoste had this problem before, and is doing everything it can to fix it.  It’s very easy to find a counterfeit Lacoste shirt in China, and for a while there were no official sales stores here.  Lacoste started combating this problem by opening up sales stores.  Sure, these stores have a relative low sales volume compared to the number of people who actually wear Lacoste clothing in China, but the name Lacoste is starting to mean something, and I wouldn’t be surprised if Lacoste stores in other parts of the world started finding increased sales from Chinese shoppers.  I’ve even noticed people buying genuine Lacoste clothing in official Lacoste stores.

Let’s go back to companies like Abercrombie & Fitch, who have no stores in China.  You might say that these companies can just follow the Lacoste formula, and everything will be fine.  Unfortunately this won’t be happening, as the local market is changing at a rapid pace.  As I’ve mentioned, there is still a lot of counterfeit and illegal clothing in China, readily available at numerous local clothing stores, but now these products are being re-branded!

There is a small clothing chain in China called Hotwind, with confirmed locations in Shanghai & Guangzhou.  Hotwind carries what I would call illegal clothing (counterfeit, overrun production, or stolen), and it sells these products to the public, at Chinese prices.  For example, I have a shirt from Aeropostale, which has the Aeropostale logo on the inside back of the shirt.  One day while I was walking through Hotwind, I found the exact same shirt, except the Aeropostale logo was missing!  In Guangzhou, Hotwind re-brands clothing as its own!  Hotwind had stitched its own logo overtop of the Aeropostale logo.  A quick look through the clothes rack showed that all the clothes proudly presented the Hotwind logo instead of the proper brand.  Gap 1969 jeans (the high end jeans from Gap) were rebranded as Hotwind jeans, although the button on the jeans still said Gap 1969.

Can you imagine what will happen when Aeropostale shows up in China and tries to sell this shirt at 5 times the cost as Hotwind does?  People will say, hey, you’re stealing Hotwind’s design and charging 5 times the price!

It’s amazing how many companies do not have China on their radar.  The market is maturing at dramatic speeds, yet I hear on a daily basis that company X has no plans to go to China, and company Y doesn’t see China as a realistic market – these companies are in for a rude awakening!  The world is changing, and China is a big part of that change.