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Piracy In China. T’Ain’t No Big Thing.

Posted in Legal News

Businesses are secretive. Some more so than others. My international law firm has a long history of representing companies in the international fishing business. Most fishing companies are laughably secretive. I say laughably, because they try to keep things secret that the whole world already knows about. Just the other day, a Russian fishing client of ours was in our office revealing the secret of how his company had recently switched to using so and so as its new agent in Pusan, Korea. I promised secrecy, but I then pointed out that two people had already called me to ask me why the switch had been made. Another time, a US based company told me it now had a couple of vessels in the Russian fishery, but that I should be sure not to let anyone know. I went to my office and printed out a couple of internet articles saying the same thing.

I mention all this because the fear of piracy in China is similar. Everyone is afraid of piracy in China, but really only a small percentage of companies doing business in China need worry much. Yes it exists, of course, but how much impact does it really have on your business?

With very few exceptions, my firm’s China clients have either not been hit with piracy in China or they are too focused on making money from their own products to worry about it much. I do not mean to minimize the problem in China because it is most certainly there, but it is not nearly as much of an impediment to profits as believed. I am writing about piracy today because Forbes Magazine just came out with an article on the subject, entitled,”How To Deal With Piracy In China” and its subtitle is “It needn’t be an insurmountable problem for your business.”

The article has it right.

The article starts out talking about how piracy is an issue of wealth, not morality. I agree. It then notes how piracy in china is declining as china’s consumers get wealthier. I agree.

It then calls on companies selling their software and DVDs in China to change their sales and pricing strategies. I sorta agree. I say sorta because my firm represents a number of gaming and educational software companies, and rather than selling their products on disks, their methods (which have worked pretty well for the most part) have been to sell the product in digital format online with all sorts of security measures. Can these security measures be hacked? I am sure they can. Are these companies making good money nonetheless? I think they are. I know that sometimes companies are very reluctant to lower their prices in one country (let’s say China) for fear of angering their customers in other countries. That is certainly a valid consideration and one that every company needs to weigh.

The article then talks about how the “the piracy situation has gotten markedly better in the past three years” in the luxury goods arena and how by “the end of next year, China will overtake the U.S. as the second-largest market, after Japan, for genuine luxury products.”

It then discusses the results from a China consumer survey regarding luxury goods:

The vast majority of them told us they would buy nothing but genuine luxury products if they could afford to. Most said they already buy what real items they can and then match them with fake ones.

A 24-year-old secretary in Shanghai said, “Right now I can’t afford to buy all real Gucci, so I save to buy a real Gucci bag and match it with fake shoes. But I’m not fooling anyone with the fake stuff. My friends can tell. As soon as I have enough money, I’ll buy only real products.”

Consumers value the real thing when it comes to luxury items, unlike with DVDs and software. Fakes don’t bring them the status they aspire to. Therefore luxury goods companies shouldn’t waste time and money suing or raiding vendors of fake goods. They should build flagship stores, penetrate third- and fourth-tier markets and launch marketing campaigns that truly connect with the Chinese to create brand loyalty.

Way back in January, 2006, in a post entitled, “Faked in China — Protection is Possible,” we had this to say about counterfeit consumer goods in China:

Like everywhere else, those in China who can afford the real thing, prefer to buy the real thing. As Chinese wealth increases, and as more and more Chinese companies seek to protect their own brands, counterfeiting will decrease. This is what happened in both Japan and Korea, both of which were at one time, notorious for counterfeiting.

At this point, I do not believe the increased sale of luxury goods in China has anything to do with a decrease in sales of counterfeit “luxury” goods in China. In fact, I would expect sales on both fronts to rise in tandem for quite some time. But, the increase in luxury goods sales does prove out what we have been saying for a long time and that is that though China does have piracy, that has never stopped most good companies from doing just fine.

UPDATE: I just read a comment from someone who says this post is overly simplistic for ignoring the harm counterfeit products, such as medicines and food, cause China’s consumers. Though I would not use the word simplistic, I would wholeheartedly agree with the thrust of the comment. This post completely ignores the impact on consumers; it is written strictly from the perspective of harm to foreign businesses. It was written this way not to in any way minimize the huge problem this comment raises, but simply because I wanted to bite off only this small part of the apple.

  • ceh

    Good post. Don’t forget also that not all piracy is alike, and not all acts flying under the jolly roger are equally reprehensible (from both legal and moral standpoints). There is also a gulf between piracy in respect of copyright and trademark. Speaking generally, the former protects forms of expression, while the latter protects brand image and consumers from confusion.
    In the case of counterfeit luxury goods, there is usually a definite, perceptible difference in quality vis-a-vis the fakes. As pointed out, people who can afford the real stuff tend to eschew the fakes. Cf. shan zhai culture (where fake is preferred–no consumer confusion there).
    Software, music, and other copyrighted goods are entirely different, as the fakes usually attempt to be identical to the real versions, so you don’t “get more if you pay more” (shiny box aside).

  • http://nanfengoranges.com michael

    Agree with the statement it’s an issue of wealth not morality.

  • Klaus Speilbergen

    I disagree totally. Piracy is a huge problem in China. Everything from fake medicines to vehicle parts to bottled water abd even eggs.
    Its not just Louis Vuitton and DVDs, there is a much more insidious and deliberately nasty industry there. Fake products that people rely on for their wellbeing and safety is a massive China problem. Your being too simplistic over the extent of the problem and its effects on the populace.

  • anon this time

    I strongly disagree. Wealth has something to do with it, but if wealth were a close correlation, piracy wouldn’t be the huge problem that it is here in the U.S., or in South Korea.
    Illegal downloads of music being example A. Okay, this isn’t piracy/fakery in the same vein as a fake object, but it boils down to something darn similar.
    In China, it was obscene to spot copies of MS Office on sale for a price equal to many people’s monthly salaries. It especially seemed so when you consider that often in China, the “official” version isn’t so official.
    Having said that, it would be one thing if the piracy and theft of IP in China were limited to expensive software and Gucci bags, but it isn’t. It’s foodstuffs, furniture, poorly made clothing, etc. It’s everything, and no it isn’t really everything, but for a consumer, can you be blamed for becoming jaded enough to think it is? I think the mindset that creates so much piracy – cutting any possible corner to make/save money – is the same thing that leads to the terrifyingly common problems like the melamine incident.
    Also, you can’t afford Photoshop, Gimp is free. There are certainly very, very good free OS that are compatible with MS Office, and you can get them in putonghua.

  • Ed Hillier

    Dan,
    This is a thought-provoking post.
    I’ve been in the UK for a couple of months after several years in China, and I think the different approach to pirated goods in the UK and China is really interesting.
    I was surprised a few weeks ago when a lawyer friend in the UK showed me her new Louis Vuitton handbag, which she had bought on eBay. It was obviously fake, and she had paid a substantial amount of money for it. Not wishing to rain on her bonfire, I asked if she was worried that it might be fake, and her reply indicated that she wasn’t too bothered.
    My former lawyer colleagues in China, on the other hand, would be very concerned if they had a fake bag. They simply wouldn’t have done it.
    My point is that the relationships between the group of people who buy fakes and the group who don’t in China and in Britain seems to be different.
    I recently had the opportunity to someone who is making a good living in the UK printing copyrighted t-shirt designs illegally and selling them on eBay. When I asked if the people buying the shirts knew they were counterfeit, his view was that they did, and that they didn’t care. He said the shirts, though good quality, were obviously fake, and he rarely had complaints.
    In the UK, owning counterfeit goods almost has a certain caché, people feel like they have bucked the system when they buy them.
    In China on the other hand, the young professionals who were my contemporaries genuinely did not want to buy pirated goods. For them, owning a genuine product was a way to differentiate themselves from people with no ‘taste’ or money, and thus show their status and sophistication.
    This fits in with my impression that in China, when buying high-status goods, consumers are less concerned with ‘objective value’ than their counterparts in the UK.
    Though this is not directly related to the topic of whether piracy can cost a company money in China, it certainly leads to my view that a Chinese consumer who can afford a Louis Vuitton bag, for example, is very unlikely to buy a fake. It is my perception, therefore, that sellers of luxury goods actually have less to worry about in China, in the sense that their target consumer in China is probably less likely to buy a counterfeit than their target consumer in the UK.

  • Greg

    When it comes to fake and relatively harmless goods, t-shirts, dvds, watches, etc. should be no big deal and I’ve bought plenty of clothes meant for bad weather with no problem. If you are a foreigner in China who insists on flashing the bling to impress the locals, you may have a few issues.
    I go with a Timex Ironman simply for the durability and reliability and because it doesn’t attract attention, especially with more crime against foreigners. Looking like an english teacher when going about my day to day stuff or in the bar for a couple of beers is no big deal. When I go out, I get the good stuff out.
    But when it comes to any food items or other stuff which may affect my health, or if I do want to buy something for going out, I’ll spend the money and if there is a concern, ask some local friends. They will always be the first to know. I’m still a foreigner.

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