Raising the stakes in fighting fakes

From ridiculous ‘iPhone’-branded handbags to innocuous soy sauces to contraband illicit medicines, China is awash with horror stories of hijacked trademarks and fake goods that range from whimsical headscratchers to the disastrous or fatal tragedies.

For most brands, the issues are not life and death, but the impact can be horrific in economic terms. The Global Intellectual Property Center, run by the US Chamber of Commerce says that China alone accounts for more than 70 percent of physical trade-related counterfeiting, valued at more than US$285 billion.

But while the finger-pointing outside of China continues, brands inside the mainland market are suffering from cannibalised sales.

So-called ‘scavenger lawsuits’ designed to discourage fakes, meanwhile, are perversely creating demand for them at the same time. China has spawned an industry of professional ‘fake hunters’ who purposely root out frauds to get compensation from manufacturers, taking advantage of article 55 of China’s consumer protection law, introduced in October 2013, that specifies damages of up to three times the price of general merchandise.

As counterfeiters get increasingly sophisticated, detecting fakes of brands such as Prada is becoming a high-tech business.

For food and medicines, the compensation jumps up to 10 times the sale price. Illustrative of just how lucrative this trade can be, one prominent ‘fake hunter’ swept up almost Rmb 1 million (US$145,000) worth of fakes in bulk orders during last year’s ‘Singles Day’ online shopping festival on 11 November—potentially netting a massive windfall in compensation claims.

Alibaba and the 380 million thieves

Ecommerce giant Alibaba has recently been waxing lyrical about its anti-counterfeiting technologies, which it says are capable of scanning as many as 10 million online product listings a day. The company—which is in the middle of a four-year whitelist/blacklist tango with the US Office of the Trade Representatives—has claimed that in the 12 months ending August 2016, it removed more than 380 million imitation listings.

At the basic level, optical character recognition has proved useful in finding mismatches in the text of listings and their accompanying photos, says Matthew Bassiur, head of global intellectual property enforcement at Alibaba. A luxury watch that should retail for around Rmb 100,000, for example, might have that price in a text field in the listing, but a far cheaper price superimposed far more prominently on the product image. The OCR scan is able to pick up that discrepancy.

Bassiur says the company has other syntax and semantics analytic tools that examine over 100 characteristics of an ecommerce listing, including online store design, transaction records, product release patterns and consumer complaints. At the same time, another set of algorithms runs transactions through 600 detection indicators, looking at seller behaviour, product information, reviews and user reports. The system rates merchants on a 100-point scale, with scores above 80 triggering red flags.

By correlating national identification card details, shipping or return addresses and also Alipay accounts, Alibaba then traces the source of counterfeits, right down to the factory location.

In a first-ever instance of an ecommerce platform taking a counterfeiter to court in China, Alibaba sued two Shenzhen merchants for vending phony Swarovski watches on Taobao, worth an estimated total Rmb 200 million.

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Fake concern: china’s efforts and priorities  Mark Tanner, managing director, China Skinny Why isn’t China as effective at regulating fake products and hijacked trademarks as it is at censorship and ‘information-dictatorship’? The biggest reason is priority. The Chinese Communist Party considers control of information of utmost importance to the stability of the party and country by proxy; whereas, whether or not the country has fakes is not considered a national security risk by Beijing.  The contribution that fakes make to China’s economy and its workforce is also nothing to be sneezed at. The US Chamber of Commerce estimated that fakes bring in US$396 billion annually, accounting for 12 percent of exports and 1.5 percent of GDP. There are local governments which have become quite reliant on the industries for tax income and employment. As a lot of enforcement in China is at a regional level, there is little incentive for local authorities to come down too hard on manufacturers of fake goods.  Nevertheless, Beijing is likely to place more emphasis on fighting fakes as China seeks to move up the value curve through its own brands. In 2015 it already became the first country to ever register over 1 million patents. This transition will place more emphasis on protecting IP than ever before. China’s first-to-register trademark policy is well known, so even if a brand is not currently thinking about China, it should still register its trademarks in both English and Chinese. If your brand is already successful in other markets, there is a good chance that an opportunistic business has already registered your trademark in China. Fortunately, China is seeing increasingly more equitable rulings in favour of the rightful foreign brand owner. Beyond the well-known cases of sports brand Michael Jordan and menswear designer brand Michael Bastian, there are a number of lesser-known businesses winning back their trademarks in China as the squatters have been inactive using them. Finally, ensure you are working with a trusted partner in China; there are numerous examples of fake trademark registration certificates.

Can’t do it alone

According to a report from the OECD and EUIPO which analysed customs seizures around the world during a three-year period, footwear is the most-copied item. This is one reason why Skechers has seen its legal department in China getting larger. “We are suing shops on a weekly basis,” reveals Vincent Leung, senior vice-president of Skechers Hong Kong.

Last month, Alibaba announced the formation of an alliance with 20 big brands including Louis Vuitton, Samsung and Mars to crack counterfeits together. But while this has been hailed as a welcome move, it also raises the question: What about small- and medium-sized brands?

“There’s always more that Alibaba can do,” says Leung. “But is it Alibaba’s duty? Is Alibaba the government?” When Skechers opened its Tmall store in April 2013, he says, Alibaba required the brand to provide extensive documentary proof of its authenticity. Yet, the brand received another round of demands for further documentation last month when the Singles Day spree was expanded to Hong Kong last year. “They are very serious actually, especially on Tmall,” comments Leung.

Still, Alibaba’s struggle to combat these issues completely opens the door for other avenues.

Secoo, a Beijing-based ecommerce site specialising in second-hand luxury items, has invested in what it calls “China’s largest luxury authentication centre” and employed professional appraisers, says Nicole Yang, the site’s chief marketing officer.

But with counterfeiters getting increasingly sophisticated, this is no easy task. Cross-checking stitching patterns, shapes or colours against a genuine article is no longer enough to guarantee authenticity. The secret, Yang says, lies in the metallic composition of accessories, buckles or zippers that accompany the handbag. Using spectrometers and alloy analysers, metallographic assessments can show the precise proportions of copper, zinc and so forth, which can be checked against the manufacturer’s specifications.

Proactive prevention

While ecommerce platforms purport to be putting fakes in the firing line, leaving it entirely to them is fraught with risk. Brand marketers can be more proactive, and given the complexity of the issue, prevention may be better than the remedy.

For Shanghai Fashion Week last year, independent Chinese-American fashion brand Babyghost embedded a collection of its clothes with VeChain chips using blockchain technology to give each item a unique ‘digital signature’.

The chip allows anyone with a smartphone to scan a garment to access all related information—material origin, description, supply chain—and track and verify the source of it.

The solution, based on an ethereum-based blockchain more well-known for being the tech underpinning cryptocurrencies, is considered disruptive in fashion, but it is difficult for most non-financial people to understand, says Sunny Lu, co-founder and COO of VeChain, a Shanghai-based startup.

Yangcheng Lake authorities have adopted extensive measures to fight counterfeiting of the highly prized hairy crabs.

The chip acts as a digital stamp of accreditation addressing several marketing headaches at once: anti-counterfeiting, traceability and personalised consumption experiences, Lu explains.

This seems manageable for boutique brands, but for mass-market fashion, food or FMCG brands, it would involve industrial-sized operations, says Lu. However, he believes the cost-reward ratio is worth the investment.

“It’s not expensive, relatively speaking. The cost could be maintained under 0.1 percent of the retail price,” adds Lu, though he declined to elaborate on the volume or product type needed to achieve such economics of scale.

Labels, codes and registers

Most manufacturers and importers, however, rely on their own ad hoc systems of tracking down fake goods. Some of the latest copy-casualties were products as wide-ranging as Whisper sanitary pads and Yangcheng Lake hairy crabs.

Rene Co, Procter & Gamble’s Greater China head of communications, says the company responded to the sham sanitary pads by instructing retailers to “refer to the anti-counterfeit labels … on every shipping case of Whisper products”, and by calling on customers to dial their service hotline.

Yangcheng Lake authorities adopted similar methods to tackle the counterfeit crabs. “The easiest way to identify the source of a [Yangcheng Lake] hairy crab is to ring the phone number on the anti-counterfeiting barcode attached to it,” echoed Neville Lau, manager of Hung Fook, a Hong Kong importer, speaking to SCMP when the scandal broke in October.

Brands are reacting retrospectively to this challenge as best as they can, but the question remains as to just how many consumers are prepared to call to verify every single purchase in his or her shopping basket or dinner plate. Is there an easier method?

Eliminating physical knock-offs will remain a daunting task in China’s complicated supply chain. But at the very least, brands are encouraged to register their proprietary goods properly and early.

Protecting intellectual property should not be reactive, or left to the company’s lawyers, advise experts Campaign spoke with. Marketers must try to prevent violations of brand integrity, even if many of the advised best practices will seem extreme compared to other markets.

It is vital, highlights Joseph Simone, founder and director of IP specialist firm SIPS, to register relevant trademarks in the Chinese language at the point of conceptualisation—even if a brand has no plans to sell in the country yet. Failure to register early leaves the brand vulnerable to ‘trademark squatters’, due to a quirk of Chinese copyright law. This can result in the loss of income and reputation from negative feedback if a consumer unwittingly purchases a low-quality fake; but a sales ban due to losing an intellectual property lawsuit—as occurred in famous cases involving Michael Jordan and New Balance—to a pirate is more damaging.

Another overlooked lapse is to rely on logistics companies that import small, niche foreign brands into China to also take care of trademark administration. “It is unwise to do so,” advises Carol Chan, director of a London-based agency, Comms8, which helps premium ice-cream brands enter China. “These logistics companies only care about shipping volume.”

If fraudsters are spending so much resources on low-margin fakes like sanitary pads and hairy crabs, should marketers be allocating more budget to fighting fakes and less to discounts and promotions?

It’s a crab leg to chew over.