China’s business culture has as much respect for intellectual property as a burglar does for no trespassing signs. Knockoffs of consumer goods like CDs, jewelry and clothing run rampant both in China’s markets and abroad. They extend to more sophisticated products as well. There is virtually nothing made that’s immune to being knocked off by unscrupulous Chinese manufacturers.
Several years ago an executive from the HVAC industry told me of a sales engineer sent out to diagnose a sick chiller, only to discover it was a poorly disguised imitation of his company’s model. Many PHCP wholesalers have found phony plumbing and PVF brands on the shelves of U.S. stores or inadvertently passing through their warehouses. Piracy is an integral part of China’s phenomenal economic development. Some estimates hold that as much of a third of China’s GDP comes from piracy and counterfeiting.
The U.S. government estimates China’s counterfeiters cost American companies around $24 billion a year in damages. This estimate measures lost sales revenue and is just the tip of the iceberg.
For instance, U.S. pharmaceutical companies invest billions of dollars in the laborious process of developing and testing hundreds of new drugs over the better part of a decade, knowing that more than 90% of them will never make it to market. A pirate in China need only produce knockoff versions of the 10% of successful medications, saving billions of R&D dollars. So it goes with industry after industry. Counterfeiters enjoy a tremendous competitive advantage that goes well beyond the sale of goods.
U.S. trade officials have grown hoarse jabbering at Chinese authorities to, uh, knock it off. The Chinese government dutifully has responded with a bunch of anti-counterfeiting laws and promises to crack down. These are like scenes from a TV sitcom where parents scold teens to clean up their room, only to be met with half-hearted gestures that invoke the laugh track.
It’s clear that the Chinese government can’t and won’t rein in its counterfeiters. Can’t, because the country’s economic liberalization campaign that has played out over the last quarter-century has left it with perhaps the most laissez faire economy in the world. The Communist Party in Beijing can huff and puff, but enforcement relies on regional and local officials thousands of miles away. Many are corrupt and all have a vested interest in maintaining strong local economies by hook or crook. Won’t, because even if the Chinese central authorities could crack down, why would they? China is hard pressed to sustain its rise as an industrial powerhouse and support its 1.3 billion people. Where’s the incentive to shut down a third of its economy? Fear of being chastised yet again by the World Trade Organization?
If there is any hope for economic justice to prevail, two factors must come into play. One is that China’s counterfeiting binge has started to impact domestic entrepreneurs as well as foreigners. A report last November by the KWD-globalpipe e-newsletter told of China’s largest flexible pipe manufacturer filing piracy lawsuits against domestic competitors - and winning. The report noted that civil lawsuits in China involving intellectual property soared 32% in 2004 and 20.6% in 2005 - although only about 5% of the litigation involves foreign companies.
Patent applications in China also are soaring, a sign that legitimate Chinese manufacturers are trying to protect their interests and that courts are siding with them. If Chinese jurists get in the habit of ruling against piracy, perhaps there is hope for foreign investors. Meantime, every U.S. company that outsources production to China is primed for rip-off. Around half of all U.S. companies producing goods in China report being victimized by counterfeiters. Many of the rest simply haven’t discovered it yet.
The other factor needed to turn this situation around rests entirely with us. Chinese knockoffs would be worthless without a market of willing buyers. The American public lacks any sense of outrage against counterfeit goods flooding our shores. Most Americans are only too happy to pay a cut-rate price for fake merchandise bearing a prestigious logo.
Instead of just lecturing China to do what’s right, we need a cultural revolution within our own society that puts a stigma on those who knowingly buy phony products. People wouldn’t be so keen about making a fashion statement with knockoff Guccis if they were derided by their peers for doing so.
Morality is always a hard sell. So peer pressure will work best if based on the emperor has no clothes principle. That is, anyone buying knockoffs is revealed as a fool who doesn’t recognize junk masquerading as elegance.