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.