Chinese Counterfeiting and Piracy
Real Dangers to Your Health and Our Economy
Peter Navarro
A lot of consumers may find it hard to feel sorry for big, fat-cat corporations like Louis Vuitton or Disney when Chinese pirates and counterfeiters knock off their luxury handbags or first-run movies and then sell them for pennies on the dollar. There are, however, at least two big problems with this Robin Hood attitude.
First, Chinese counterfeiting and piracy are hardly limited to upscale baubles and Hollywood entertainment. Today, if America, Europe, or Japan are making it, China is faking it. Indeed, the list of counterfeit and pirated goods that China dumps on world markets quite literally runs the gamut from A to Z—from auto parts, batteries, condoms, and elevators to prescription drugs, semiconductors, shampoo, and even fake Zippo lighters that can explode in your face.
That’s the second big reason why no one should take Chinese counterfeiting and piracy lightly. It exposes each and every one of us to quite often extreme health and safety risks.
China’s Counterfeit Kings and Grand Theft Auto
Piracy refers to the unauthorized production, distribution, or use of a good or service. The goal of a pirate is to create a look-alike knockoff that can be sold to a customer as a knockoff, not passed off as the real thing.
Counterfeiting ups the piracy ante by pawning off pirated products as that of the real, branding corporation. Thus, a golf club that looks just like a Callaway driver but has a name like “Hallaway” is a pirated knockoff, whereas a knockoff sold as a Callaway club is a counterfeit. The World Customs Organization estimates that such counterfeit and pirate activities represent close to 10% of all world trade!
China is, hands down, the biggest buccaneer on the planet—with its de facto nationalist banner no longer Mao’s five-star red flag but the infamous Jolly Roger. The statistics speak loudly and clearly for themselves: China accounts for two-thirds of all the world’s pirated and counterfeited goods and fully 80% of all counterfeit goods seized at U.S. borders.
China makes ubiquitous use of “reverse engineering,” which involves taking machines or products apart to figure out how to copy them. Through reverse engineering, Chinese counterfeiters have been able to get knockoffs of everything from Suzuki motorcycles to Callaway golf clubs on the street just weeks after these new products have been introduced to the market.
One of the most lucrative—and dangerous—counterfeit sectors in China is cigarettes. Rivaling any one of the big multinational producers, China churns out 65% of the world’s counterfeit sticks. Of the more than 35 billion cigarettes it produces annually, almost 30 billion are exported.
Cigarette counterfeiting is largely a clandestine cottage industry, as many of China’s small cigarette production facilities are quite literally underground, either in basements or in subterranean rooms accessible only by tunnels. In such clandestine environs, cigarettes, already one of the most efficient killers of the human species, often become even more deadly. Indeed, these counterfeits may contain five times as much cadmium as genuine cigarettes, six times as much lead, and high levels of poisonous arsenic. The profit margins, however, are astronomical.
An equally lucrative sector of China’s knockoff economy is that of replacement auto parts. Chinese pirates account for 70% of all counterfeit auto parts in the world, and, as a clear red flag to any prospective consumer, more than half of all Chinese vehicles contain counterfeit components.
In contrast to the highly decentralized cigarette counterfeiting operations, auto part piracy is supremely well organized. Fake products include everything from brake pads, oil filters, and fan belts to fenders, engine blocks, windshields, and windshield wipers. Given that selling new cars is often a “loss leader” to establish a lucrative aftermarket in replacement parts, such counterfeiting represents a particularly crippling form of economic “cream skimming” that cuts deeply into the bottom line of the legitimate auto industry.
There are also significant safety issues for an industry in which several tons of metal traveling at high speeds depend on equipment reliability. In some cases, the quality and appearance of the fake auto parts is so good that is difficult to distinguish between a fake and an original product. In many other cases, the parts are of such poor quality that they are doomed to early and often-dangerous failure.
It is not just auto parts that China’s pirates steal in this industry. In a mushrooming problem, Chinese manufacturers have taken to ripping off entire vehicle designs across the manufacturing spectrum. The compact SUV Honda CR-V is being faithlessly replicated by China’s Laibao S-RV. Toyota’s land cruiser Prado SUV has been cloned as the Dadi Shuttle. The luxury Mercedes C-Class has been reincarnated as the Geely Meerie. The Rolls-Royce Phantom has a bastard twin in the Hongqi HQD. Even luxury buses are not immune, with Neoplan’s Starliner now carbon copied as the Zonda A9. In what might be darkly comical under other circumstances, China is also producing a variety of “Frankenstein cars” that feature the front end of one car, the back end of another, and still other features from other cars.
As with China’s purloined auto parts, China’s grand theft auto is outrageous. It is also a tragedy waiting to happen. Although each pirated vehicle may look like the real thing, most are deathtraps on wheels (put together with inferior metals, materials, and an array of counterfeit parts) and consistently perform miserably in crash tests.
China’s Snake Oil for the World
Today, at least one out of every ten containers of medicine worldwide is fake. To understand the dangers, consider this small sample of drugs from China’s counterfeit pharmaceutical factories: cough syrup laced with antifreeze, meningitis vaccine and anemia drugs made from tap water, birth control pills that are nothing but compressed wheat flour, Lipitor and Norvasc for high cholesterol and high blood pressure without any active ingredients, Viagra and Cialis laced with strychnine, and malaria pills without a trace of their critical ingredient (artusenate).
China’s dominant role in the counterfeit drug trade is not just because of a huge production capacity and sophisticated distribution network. It is also because as fast as you can say, “Can you fill this prescription, please?” China’s highly skilled pirates are able to reproduce the so-called blister packaging, vacuum-formed clamshells, fake holograms, and distinctive pills so artfully and faithfully that drug companies typically can only detect fakes by using complex lab testing. This counterfeiting capability is no small feat, particularly since pharmaceutical companies continue to boost the complexity of their packaging in an effort to thwart counterfeiting.
The uncanny ability of the Chinese to excel in highly sophisticated piracy is attributable to precisely the same factors that have allowed China to become the world’s factory floor. Chief among them is the flood of foreign direct investment that has brought in all the latest sophisticated machinery necessary to knock off whatever drug or product from which money can be made. When the pills and packaging are complete, China’s counterfeit drug dealers then harness many of the same transportation, distribution, and sales channels established for legitimate purposes by foreign companies in China to distribute the illegitimate products worldwide.
Nor does it necessarily take a huge factory to produce counterfeit drugs. One of the simplest ways to create a phony batch of Viagra is to start with some of the authentic pills. Grind these up, add a little bulking agent such as boric acid, and remold the pills. Presto! You now have Chinese-style “Viagra Lite.” Oh, and by the way, boric acid’s more common use is as a pesticide to kill cockroaches and termites by attacking their nervous systems.
Whether it’s counterfeit Lipitor, Norvasc, Viagra, or Tamiflu, fake Chinese drugs can find their way into your medicine cabinet in many ways. In some cases, it happens when a big chain such as Rite Aid gets fooled by a supplier. In other cases, it happens when a small local pharmacy tries to keep its costs down by buying odd lots from wholesalers. More often than not, however, it is the increasingly double-edged sword called the World Wide Web that delivers these deadly drugs from the bowels of eastern China to people’s doorsteps.
Chinese Piracy Economics 101
Why has China emerged as the world’s pirate king? The simplest answer is that at least in this case, crime pays—and the payoffs are huge.
A major reason why counterfeiting and piracy are so profitable is that China’s rip-off artists do not have to engage in research and development to produce a product or design. They just steal the intellectual property after it is produced. That saves enormous sums, particularly in R&D-intensive industries such as auto-making and pharmaceuticals.
China’s pirates also do not have to spend huge sums of money on advertising and marketing to build and sustain a brand name and open new markets. They just piggyback on the efforts of legitimate companies—while in the process, destroying much of the brand value and goodwill that a company builds up at huge expense.
Perhaps most interestingly, Chinese counterfeiters and pirates are every bit as good at achieving high production efficiencies as any large, modern, multinational corporation. The ability of Chinese counterfeiters and pirates to use production facilities to churn out multiple but related products in large volumes is the very definition of economies of scope and scale and allows these intellectual property thieves to produce at substantially lower unit costs. For all these reasons, China’s counterfeiters and pirates have a huge cost advantage over legitimate producers.
A final element of Piracy Economics 101 speaks to the increasingly important role that organized crime plays in pirate activity. With a sophistication rivaling any MBA-trained top executive corps, China’s crime networks are now diverting resources out of traditional gang staples such as drugs and prostitution and into counterfeiting on the basis of pure economics. Moreover, if a Chinese gang member is caught peddling heroin or speed, it’s ten years or more in the slammer, depending on the country. But if he is caught peddling something far more deadly—impotent Lipitor or heart-stopping Viagra—it is a small fine and slap on the wrist.
Chinese Piracy Politics 101
All our observations thus far about the favorable economics of Chinese counterfeiting and piracy still do not explain why, despite an occasional highly publicized crackdown, the Chinese government tacitly supports these illegal activities. The reason goes back to both basic economics and politics—with a particular Chinese cultural twist.
With counterfeiting and pirate activities contributing as much as 20% or more of China’s economic growth, state-sanctioned piracy and counterfeiting is a vital component of government policy. This intellectual property theft creates millions of jobs, helps control inflation, and raises the standard of living for many of the Chinese people. As anticounterfeiting expert Li Guorong has noted, “Counterfeiting is now so huge in China that radical action would crash the economy overnight [and] even destabilize a government where counterfeit factories and warehouses are often owned by local military and political grandees.”
These economic and political motives for Chinese piracy are strongly reinforced by a set of cultural norms that flow from an amoral fusion of a 60-year old Maoism and a centuries-old Confucianism. The core problem is that the government of the People’s Republic of China was founded in 1949 on the abolition of private property. Thus, there exist several generations of Chinese executives who truly believe that, as former U.S. ambassador James Lilley has noted, “Any technology in the world is the property of the masses.”
When one adds to this Maoist version of property rights a large dose of Confucianism, the counterfeiting and piracy picture comes much more sharply into focus. Since ancient times, Confucianism has revered, rather than reviled, imitation. The result is the perfect economic, political, and cultural laboratory for a counterfeiting and piracy boom. Caveat emptor!