China's Counterfeit Market: The Battle Against Luxury Dupes

In 2017, luxury house Alexander Wang sued 459 online retailers believed to be selling counterfeits of its lust-worthy goods, winning an eye-watering $90 million judgement at a New York district court. At the house’s SS17 show later that year, 4x4s decorating the venue were spray-painted with the words “Stop leaking my shit”.

Alexander Wang is not the only brand seemingly fed up with the explosion of counterfeit products proliferating through online platforms and back-alley markets, with many other elite brands raining lawsuits on online retailers peddling fakes. The task seems to have fallen on the shoulders of only a few task enforcement agencies and business coalitions as their efforts, though commendable, seem to have made hardly a dent on the counterfeit products market that account for this international billion-dollar market.

Naturally, one of the world’s greatest and cheapest manufacturing market, China, has come under fire as the main culprit. The touted “World’s Factory” has been accused of accounting for over 60% of the world’s knockoffs by the OECD. An understanding of just how sophisticated the Chinese counterfeits ecosystem has become has eluded most of the Western world, who seem to be largely dealing with the end-products rather than engaging with the complicated supply-chain itself, which is fraught with technical Chinese terms and dealing with Chinese-speaking dealers. However, the fact that Alibaba, the parent company of e-commerce giant Taobao (China’s Amazon-equivalent) shut down over 240,000 Taobao shops reveals just the tip of the proverbial iceberg.

It's easy to dismiss the true sophistication of the fake goods market in China, as popular Western media outlets and their clickbait headlines focus our attention to the comical “fails” of Chinese counterfeit products. We’ve seen – and scoffed – at the wearable parodies of 'Adidos' sneakers, 'Brandy Melove' tops, and 'Dolce&Banana' accessories. But taking into account China’s massive scale, matters like these are ultimately a question of degree. Sina, the main Chinese media outlet, has identified an informal classification system that has formed part of the terminology of the Chinese fake goods market, with levels ranging from “1:1”, “Super A”, “Triple-A”, “A”, “B”, and “C”. Whilst the lowest C-rank goods with atrocious spelling errors are relegated to dingy street-peddlers and will fall apart within the first few uses, the top-line fakes are virtually indistinguishable from authentic ones. These will take an experienced specialist with specific knowledge on each luxury brand’s unique manufacturing process to identify.

But even this category of fakes seems to be the most straightforward to handle. Online Taobao, Amazon and eBay shops suspected to be peddling fakes can be easily picked out by algorithms, and other online domains selling “luxury” wares at suspiciously low prices can be legally curbed by takedown notices, or by simply taking away those domain names. But like a game of “whac-a-mole”, the clamping down of certain markets will only lead to the expansion of others, with smarter processes and models developed to directly outsmart inspection officials. Alibaba CEO, Jack Ma, reportedly made a controversial comment at the e-commerce behemoth’s Hangzhou investor day in 2016 that “the fake products today are of better quality and better price than the real names. They are exactly the [same] factories, exactly the same raw materials, but they do not use the same names.”

The allegation of ‘factory dupes’ surely raises a few eyebrows, with big-name brands like Louis Vuitton claiming that they do not share supply-chains, and stating that supposed ‘factory rejects’ are destroyed in the factory itself. But anecdotal evidence from law-enforcement officers and others engaged in the anti-counterfeit movement seem to spin a different tale. A 2015 EU report on Office for Harmonisation in the Internal Market (Trade Mark and Designs) documents the “AB” case, regarding a criminal organization selling counterfeit labels. Some of the goods and materials were imported directly from China through a web-like organization of direct and indirect contacts with Zhejiang manufacturers. These Chinese factories reportedly worked for the legitimate luxury brands during by day, but would assemble the fake products after official working hours, using the genuine products as a detailed guide. A struggle to police these factories would be an inevitable problem as we consider the scale of manufacturing in the country.

“But like a game of “whac-a-mole”, the clamping down of certain markets will only lead to the expansion of others, with smarter processes and models developed to directly outsmart inspection officials.”

The sneakiest offenders are found in the undergrowth of “brandless” counterfeits, that can possibly steer clear of border customs inspections and evade the usual legal takedown means. These are luxury dupes that resemble the authentic product accurately, sans the distinct logo, and are sold using different avenues. One example would be how a December 2017 raid in Manchester counterfeit mecca, Bury New Street, revealed “back offices” to shopfronts where there were thousands of designer labels, and a machine that would attach these logos to the brandless fake products. Another example would be Chinese e-commerce business Yanxuan, owned by Chinese technology giant NetEase, who claims that they work directly with luxury brand manufacturers to source a stock of brandless products. Therefore, they claim to be able to provide garments and accessories that are a split image of the original, at luxury brand-approved quality, but at a generous markdown. The only caveat is that the goods will not have logos, but that is a small trade-off if we consider the informal high-fashion mantra that the more exclusive and high-end the item is, the smaller and more inconspicuously located the logo will be. Platforms like these have become a formidable rival for luxury brands, as Yanxuan has easily raked in millions of dollars from Chinese consumers.

Taking these factors into account, it's clear that we do have a big problem on our hands. The counterfeit goods market costs the sector about €27 billion annually, and about 10% of sales. Ordinary consumers who knew no better might be faced with the nasty surprise of having been ripped off by “second-hand” or “outlet” websites. Costs will rise for the brands themselves as they have to hire companies and law firms to tackle platforms peddling fakes. But the most dangerous effect for these brands is the damage to their brand reputation. Imagine if you are a committed buyer who purchases a pair of thousand-dollar Yeezys directly from the brand boutique. The obvious justification for the price is the exclusiveness and therefore, perceived elite-status it will confer to you as a buyer. Now imagine if you wear your prized Yeezys out on the street for the first time a few weeks later, and find out that there are about twenty people parading these kicks when you knew for a fact that only three pairs were available in the boutique from your city. A luxury brand that turns a blind eye to the problem of counterfeits will naturally incur the frustration of their loyal consumers and impact brand reputation, leading to loss in future sales.

The modern face of counterfeit culture demands that we confront this situation directly. With the Chinese market as one of the main culprits, it is a step in the right direction that we should address the problem there, before goods inevitably spill across national borders. Alibaba founder Jack Ma has expressed his commitment to the cause, claiming that the company has invested millions into technological innovation to weed out suspected offenders on Taobao. However, the battle is far from being won. The ongoing proliferation of these wares continue to suggest that either (1) stakeholders are not contributing to the solution as much as they claim to be, or that (2) the problem is much larger and more complex than we imagine. With examples like “brandless” luxury markets being identified, it seems like the problem is the latter. The new-and-improved strategy will have to adopt a model that is business-sensitive, and will necessarily have to involve cooperation with Chinese authorities and business stakeholders. As such solutions are at present just a matter of speculation, it is hoped that we will see some such developments in the future, and will definitely be a topic worth following for years to come.


StyleAthena NgComment