China’s Buccaneer Corporate Edge

China is the epicenter of the counterfeits boom.... Just a few years ago, counterfeiting was all Gucci bags and fake perfume. Now it’s everything. It has just exploded. It is many times larger a problem than it was only a few years ago. The counterfeit inventory ranges from cigarette lighters to automobiles to pharmaceutical fakes that can endanger a life. I would bet that there are companies that don’t even know they’re getting screwed around the world.

—Frank Vargo, National Association of Manufacturers

Chapter 2, “China’s Counterfeit Economy and Not-So-Swashbuckling Pirates,” describes in detail the immense scope of China’s government-sanctioned counterfeiting and piracy. At this point, however, two points pertaining to the China Price advantage must be noted:

First, Chinese counterfeiting and piracy is an essential cost-cutting component of the China Price in at least three areas of manufacturing and production. Unlike U.S. automakers, pharmaceutical, and other R&D-intensive companies, their Chinese counterparts don’t have to expend billions of dollars on research and development. Nor do Chinese companies have to spend millions more buying software and other IT components that they simply steal. Finally, Chinese pirates don’t have to spend millions of dollars marketing brand names that they just rip off. Collectively, the money saved on R&D, software, and marketing adds up to a big cost advantage for Chinese manufacturers.

Second, the rampant piracy and counterfeiting that exists in modern China could not exist without the full support of the Chinese government. That’s why no one should be fooled by the occasional and very highly publicized government crackdowns. The grimmer reality is that China tacitly supports widespread counterfeiting and piracy because such intellectual property theft creates tens of millions of jobs, helps keep domestic inflation rates low, and provides domestic consumers with purloined American, European, and Japanese products for pennies on the dollar.