SHANGHAI, China — On Chinese state television last week, Shanghai police unveiled a major counterfeit bust that resulted in 62 arrests, as well as the seizure of more than 30 items of manufacturing equipment, 2,000 counterfeit bags and raw materials worth more than 100 million yuan ($14.6 million).
The gang is accused of producing sophisticated counterfeit Louis Vuitton bags, apparently with insider assistance from a Louis Vuitton shop assistant working at a store in Guangzhou. The employee is said to have passed new bag models onto the counterfeiters, giving them an opportunity to copy and sell high quality fakes at the same time or even before the genuine models were available in Louis Vuitton stores.
The high-tech counterfeits came complete with NFC (near-field-communication) microchips embedded; when scanned, the customer would be redirected to Louis Vuitton’s official website.
The counterfeiters know when the brands aren’t striking them as hard as before and that encourages them to counterfeit more.
Though it may sound strange to say so, Louis Vuitton is in a comparatively fortunate position compared to other brands that get counterfeited in this way. As one of the world’s biggest luxury brands, it has the resources to keep on top of this kind of organised crime, instigate investigations and bring the perpetrators to justice.
In a year in which the pandemic has decimated the bottom lines of fashion businesses the world over, others are not so lucky.
If this were a normal year, Herry Luo would be spending much of his time tracking down the gangs active in producing counterfeit fashion items from his base in China’s southern Guangdong Province — a hotbed of counterfeit activity thanks to its abundance of apparel and footwear factories.
However, it has been anything but a normal year and, for Luo, general manager of Roy IP Legal Consultant Limited, counterfeit fashion products have been deprioritised from his case work.
This isn’t because there aren’t nefarious counterfeiters around, he is quick to say, but because fashion companies hit hard by the worldwide impact of the pandemic are no longer able or willing to hire him for investigations and enforcement actions.
“Because the budgets of fashion brands are decreasing, we are focusing more on pharmaceutical and food areas [right now],” Luo said with a shrug, adding that a drop in investment from the fashion industry will inevitably see an increase in counterfeits.
“The counterfeiters know when the brands aren’t striking them as hard as before and that encourages them to counterfeit more,” he explained, adding that while major e-commerce platform operators Alibaba and JD.com have made inroads into stamping out fakes, counterfeit products are now increasingly rife on up-and-coming e-commerce players, including Douyin and Pinduoduo.
“A lot of young people are using these platforms and we have seen Supreme, Champion, Boy London, these brands that are really iconic for China’s young people, counterfeits of these brands have grown along with the demand in the market,” Luo said.
“I would guess they don’t invest a lot in their counterfeit protection [given] the amount that their fake products on the market are increasing.”
Just this year, Supreme was finally able to secure its Chinese trademark, resulting in a large fake Supreme store being shut down in Shanghai, but the conditions the pandemic has created make vigilance against counterfeiters more and more difficult. When approached by BoF to provide a comment, Supreme, Champion and Boy London either declined or did not respond prior to publication.
The increase in online sales and consumer belt-tightening measures make the lower-priced counterfeit products more attractive.
According to IP expert Toe Su Aung, there’s confluence of factors that now make such fraud easier and more attractive. It is not just the fact that companies and governments are squeezed by the economic effects of Covid-19 cutting intellectual property enforcement budgets. It is also the rapid increase in online sales (a channel that makes it easier for counterfeiters to sell their wares), consumer belt-tightening measures that make the lower-priced counterfeit products more attractive and a knock-on effect of criminality due to Covid-related fraud in other sectors such as PPE and pharmaceutical products.
“It’s a perfect breeding ground for a real problem to happen,” said Aung, a director for IP, digital, business and human rights and sustainability at strategy and policy consultancy, Elipe Limited. “Covid equals more fraud; more fraud equals more fakes; more fakes today during the pandemic equals more fakes after the pandemic.”
Within China, Joe Simone of SIPS, an IP protection firm, says that apparel and footwear factories across the country have unprecedented levels of capacity, due to the double-punch of Covid-19 and off-shoring by international brands seeking greater predictability in the shadow of Trump’s trade war with China. This creates space for counterfeiters to move in and offer factory owners an alternate revenue stream.
“Despite Covid-19, counterfeiters in China see enormous opportunities in selling to consumers online – both inside and outside of China. Meanwhile, it’s increasingly clear to pirates that IP owners – large and small – are reducing their spend on investigations and enforcement. It's a perfect storm,” he explained.
In July, the American Apparel and Footwear Association (AAFA), in conjunction with Trace It, released a report that noted a marked uptick in the appearance of fraudulent advertisements on social media in its home market, since the pandemic began. Fake ads purporting to sell face masks with fashion label logos were a particularly popular sub-genre.
“The report includes a lot of customers who bought a counterfeit product without intending [to do so]. They found a website through a social media platform, it looks official, it has all the photos, it has the logo, they made the purchase, then call the bank and find that it was a Chinese company and they can’t cancel their purchase,” explained Christina Mitropoulos, AAFA’s manager for brand protection and manufacturing initiatives.
“It becomes a reputation issue for the authentic brands,” she added.
Though accurate numbers are difficult to come by given the underground nature of the worldwide trade in counterfeit goods, estimates have valued the segment as accounting for $1.7 trillion in annual sales, with a whopping 80 percent of counterfeit products (for fashion, luxury and beauty as well as a great many other categories) coming from China.
According to AAFA president and Chief Executive Steve Lamar, however, the ongoing off-shoring of apparel and footwear manufacturing from China means that the explosion of fake goods since the pandemic broke out is not just a China problem.
Covid equals more fraud; more fraud equals more fakes; more fakes... during the pandemic equals more fakes after the pandemic.
“There’s a diversification out of China by the legitimate industry and the counterfeiters’ business model is to do what other people are doing and to try to make money off of that,” Lamar said, adding that counterfeiters have proven themselves to be nimble operators.
“If China’s closed, they go to other countries, if those countries shut down and China opens back up, they shift back to China again, so wherever they can find their production they will do that,” he said.
This expansion is even more troubling for fashion brands because, even though it is not known as an IP protection paradise, China has made significant headway in recent years, with an entire industry (employing the likes of Herry Luo and Joe Simone) tasked with policing, investigating and enforcing IP violations happening there. The same can’t be said of new fashion counterfeiting hotspots such as Bangladesh or Myanmar.
Most fashion brands do not yet have IP protection budgets allocated in those countries (and with many slashing budgets for brand protection activities in China, it seems unlikely they will find extra cash to start devoting such resources in other markets). To make matters worse, there also isn’t a robust IP protection system led by the authorities in those markets, meaning counterfeiters are able to work there without the same fear of repercussions they feel elsewhere.
“People need to keep their guard up and keep focusing on counterfeiting as a problem that hasn’t gone away and has actually increased,” Lamar said. “Covid [has accelerated counterfeiting] with a vengeance."
According to IP enforcement experts like Simone and Aung, one way brands can mitigate the potential damage of this newly invigorated counterfeit industry is by working together — something they have been traditionally been reluctant to do because of intense competition between brands within the industry.
“I am saying to companies: ‘Yes, these are hard times, so let’s try working together, let’s try a slightly different approach,’” Aung said.
Sharing not only has the advantage of pooling limited resources, it can also help achieve better results on the ground by bringing the political power of brands to the fore, Simone explains.
“In China, if you are acting as a group you add political zest that can take you over the top – both in term of getting attention from the authorities as well as in getting stronger penalties at the end of the process,” he said.
“Working collectively is a good idea for innumerable reasons. If companies establish ... protocols for working together in the longer term, there may well be a silver lining to the current plague.”