Are Companies Benefiting From the Counterfeit Goods Trade?

Published on September 7th, 2010 | by

One thing you will notice walking the streets of any eastern Chinese city these days is the burgeoning consumer middle class. What might not be initially as evident is whether the Nike, Louis Vuitton or Polo they are sporting is real or counterfeit.

According to a recent New York Times Magazine article, “Inside the Knockoff Factory”, the US Customs and Border Protection seized over $260 million worth of counterfeit goods last year, 80% of which came from China. The article focuses specifically on the international counterfeit trade, but because the middle class in China is growing at such furious clip and will soon usurp the US as the world’s greatest consumers, let’s look at how knockoff goods could play an unintended role in China and actually provide an advantage for those companies whose product is being counterfeited.

The manufacturing and sale of counterfeit goods is illegal. And while companies discourage this behavior for obvious reasons, governments such as the US and those in Europe see this business as a global crime that can encompass drug dealing and possibly terrorism. However, we know how these types of international efforts go- money is thrown at the cause with little regard to strategy and the hole deepens (the “War on Drugs” is a good example and is explicitly referenced in the article).

Similarly, many development economists will tell you that a disregard for international property rights (IPR) will stunt development because businesses will be less likely to set up shop in those countries. In the case of China this has been false, as access to cheap labor and raw materials has triumphed.

The Chinese middle class can’t seem to get enough material goods. However, while they may not be able to afford the real thing, they would like to be seen with the label. Therefore, it seems that these knockoffs may be doing less harm to businesses such as Nike as they are actually creating future customers that will potentially purchase their goods as salaries rise. If nothing else, the companies making knockoffs are not competitors, as middle class Chinese would not be buying the real product anyway. Interestingly an anonymous source at a major footwear company is the most indifferent interview in the article saying “Does it cut into our business? Probably not. Is it frustrating?… Of course. But we put it as a form of flattery, I guess.”

The alternative given by the main character in the article, a large producer of counterfeit goods in a well know area called Putian, maybe of greater worry. He states, “Making counterfeit shoes is a transitional choice. We are developing our own brand now. In the longer term we want to make all our own brands, to make our own reputation.”

This potential competition should be of much greater concern to companies like Nike and although policy should be no means discourage competition, maybe it’s time for policy makers to put failed attempts in their back pocket and give a more unconventional approach a chance.

Image Credit by anti-factory redux via Flickr under a CC license


About the Author

Jonathan has worked in both journalism and various facets of small business development over the past eight years. Most recently, he graduated from the Monterey Institute of International Studies (graduate school of Middlebury College) in 2010 with an MBA and an MA in International Development Policy. His interests include SME development and its role in economic growth, particularly in Sub-Saharan Africa as well as how CSR/Sustainability measures impact both business operations and the communities in which businesses operate. While at MIIS he worked as a summer fellow involved in small business consulting in Accra, Ghana and was an active member of the MIIS Net Impact chapter. As a life long traveler, Jonathan has been fortunate to have lived in, worked in or visited over 20 countries on 5 continents and he truly hopes that he will be able to continue this trend.
  • Hi Jon- Great article and refreshing perspective. I agree that the counterfeit good trade actually does stimulate growth and consumption for the foraging middle class in various countries, and to be honest, I don’t really care about big brand companies who ‘buy’ a name/label and call it their own- seems like companies who ‘buy’ a particlar strand of corn. Also, it is probably more of an issue because actual three dimensional products are easier to regulate than music, etc, though authorities would be smarter to invest in regulating counterfeit intellectual property than counterfeit goods because they would recup an even larger sum.

    However, if I were the ‘label-er’ then I might be peeved b/c it was MY idea, but as a consumer myself, I haven’t thought of it as a moral conundrum to buy counterfeit goods, but I also never thought of it in the context of millions of dollars. I would even actually pride myself in buying knock-offs b/c some dumb person actually paid 5x the amount for the same thing minus the label. FYI- no big deal but ‘maybe’ in the 3rd paragraph should be ‘may be’. Otherwise, awesome post and good work. Three articles a week may be a good target for you, since you are a good writer. I will check back in for sure. Hope all is well!

  • Kendra-thanks for the note:

    I agree, that the issue of IP rights is different for tangible goods such as sneakers as opposed to that of music and art as you mention. Of course there are plenty of both floating around.

    As I mentioned on a macro level, this lack of enforcement by developing country governments has typically decreased foreign direct investment by international companies, but this has scarcely been the case in China.

    On a micro level, I agree, most consumers don’t see counterfeiting as a major moral/ethical dilemma. If anything they are probably more concerned about the quality of their purchase.

  • 80% of which came from China. i donot think so , i come from china , too much number