Shanzhai Saturday: Inside a Putian Shoe Factory

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Shanzhai (??): Chinese imitation and pirated brands and goods, particularly electronics.

Real vs. Fake Nikes (Image from NYT)

This week’s column will be slightly less fun and entertaining and a bit more on the serious side of IP infringement and enforcement. For anyone interested in the world of China IP, instead of reading about the latest outrageous fake product, your time will be better spent simply reading “Inside the Knockoff-Tennis-Shoe Factory” by Nicholas Schmidle in the New York Times Magazine. The article does not particularly break any new ground or anything; it is not news, but a lengthy summary of the China IP situation. It’s one of those things that people tell you to read if you don’t have the time or inclination to read anything else on the topic, and I mean that as a compliment.

Schmidle takes a shoe factory in Putian as his concrete example and then uses that as a platform to discuss the IP problem in China generally, using quotes from several of the heavy hitters on the China IP scene, including Mark Cohen (used to be head of IP with the U.S. embassy in Beijing, now with the U.S. law firm Jones Day) and Joe Simon (Baker & Mackenzie law firm). Again, nothing startling in what Mark or Joe have to say, but the fact that Schmidle found his way to them tells me that he talked to the right (foreign) people while he was doing his research.

One thing you will not find in the article is advice on how to fix the problem. This is actually a point in its favor, since the only people that have a quick “solution” to the IP problem are charlatans and hucksters (i.e. lawyers, investigators and consultants) looking to drum up business. Schmidle instead explains what some of the problems are, letting his readers understand that solutions will be difficult and long-term.

For example, Schmidle uses a quote from the Putian factory owner, named Lin, who explains that years ago, it was relatively easy to get prototypes and new product information from legitimate factories, allowing shanzhai manufacturers to produce even more quickly sometimes than the IP owners. These days, security measures have put an end to that sort of thing:

“There’s no way to get inside anymore,” Lin told me, describing the enhanced security measures at the licensed factories: guards, cameras and secondary outer walls. “Now we just go to a shop that sells the real shoes, buy a pair from the store and duplicate them.”

Good news/bad news, though. Maybe they’re not as fast as before, but reverse engineering a shoe purchased legally is not only easy, but the practice is impossible to stop. The point here is that even with pretty good IP laws (seriously) and a lot of enforcement activities, it is still extremely difficult for China to put an end to this sort of thing.

In his description of the business model of the Putian factory, Schmidle also educates his reader on just how difficult it can be to catch some of these producers. Consider that many of them now manufacture fakes on a per order basis, shipping product out immediately as opposed to leaving counterfeits sitting around in their warehouse and subject to raids by the Administration of Industry and Commerce. Moreover, even when sting operations result in catching them with shanzhai product, lots of other factories are waiting in the wings to pick up the slack on the supply side.

I have a feeling that Schmidle’s article will be widely read and perhaps even used by the usual industry folks in their perpetual mau-mau lobbying campaign in places like Washington, D.C. for more vigorous bilateral negotiations with China. I know it’s asking too much of them, but it would be nice for those folks to pick up on a couple of subtle points:

1. The NYT article is to some extent limited in scope and should not be used to generalize about all kinds of IP infringement and enforcement in China. Consider these statistics:

In the last fiscal year, U.S. Customs and Border Protection seized more than $260 million worth of counterfeit goods. The goods included counterfeit Snuggies, DVDs, brake pads, computer parts and baby formula. But for four years, counterfeit footwear has topped the seizure list of the customs service; in the last fiscal year it accounted for nearly 40 percent of total seizures. (Electronics made up the second-largest share in that year, with about 12 percent of the total.)

Yes, you can find a dizzying variety of fake stuff here, but the big numbers are from big brand consumer items like shoes as well as electronics (add those together, and you have over 50% share of fakes seized by the U.S.). I wonder what those numbers would look like if you also added in digital media piracy?

The point is that you have a few industries that are being hit the hardest, and while almost everyone has IP issues with China these days, not everyone is having their market share savaged by Chinese pirates. There’s a reason why Schmidle went to a shoe factory.

2. This is really a story about global counterfeiting, not about China IP problems. It’s easy to look at China as the source of the IP infringement epidemic. After all, the products are being made here. Consider, though, that everything is produced in China these days; why should fakes be any different?

In other words, if I’m an international distributor of counterfeit products, where am I going to go to find experienced factories capable of making quality fakes? Of course the answer is China. These transactions involve China producers, and distributors and purchasers from all over the world – they all use the Net of course to handle purchase and sale details.

This explains why the FBI, and others, have stepped up international cooperation strategies in recent years. It also suggests that in ten years, after a lot of the low-end manufacturers have completed their moves from China to Vietnam, Bangladesh, and Alabama, we will start to see ramped up counterfeiting from those areas.

Just a guess. Maybe 20 years from now, you will have investigative reporters from China Daily writing stories about corrupt government officials from towns in Mississippi who protect the local shanzhai shoe factories. I imagine the quotes will include “But the factory is the town’s largest employer and taxpayer. And besides, the fakes are just being exported to China anyway. No harm, no foul.”

5 responses on “Shanzhai Saturday: Inside a Putian Shoe Factory

  1. Felipe Albertao

    It would be very interesting if the article also investigated the consumer side of the story. Are corporations really losing sales because of counterfeit? I argue that the counterfeit’s target-market is completely different from the original’s target-consumer: The high-end consumer who can afford the original will absolutely buy the original regardless, while the copies are sold to low-end consumers who would not buy the original in the first place (because they cannot afford it).

    I expanded this view in a blog post:
    http://shanzhaier.com/2010/07/29/the-shanzhai-phenomenon/

    1. Andrew

      Due to the fact that it was a customer in Italy buying the product should be indicative of the fact that we (I mean westerners, but also other nationalities, but mainly westerners) are just as culpable for the problem as the Chinese are. I’m not saying that the customer was Italian (there are a lot of Chinese living in Italy and it could easily come from one of them) but this can’t be every case.

      For instance, living in Beijing, you see countless westerners in the Silk Market, Ya Show Market, among many others, buying these fake goods in copious amounts. I have personally ran into American’s, working for a certain government, buying fake DVD’s by the tens and twenties, loading up right before they go home or right when they get there. The fact is that without westerners ( and many other nationalities including Latin American, Middle Eastern, etc.) filling up the these stores in Beijing, business would not be as booming as it is and there would be a whole lot less factors supplying these products.

      On another note, whose to say that the people who can afford the products and want to pay for the originals aren’t going to “licensed dealers” of Nike or Adidas or Reebok only to buy the carbon copy fake that these dealers pawn off for the originals? There’s gotta be statistics or cases of this, no?

      1. Felipe Albertao

        So far I’ve found only statistics that assume a 1-to-1 relationship between a fake and an original. In other words, they assume that for every single copy sold there is a lost sale of an original product. I find this assumption bogus, because:

        1. There is no consideration about the consumer’s choice if the fake product was not available. For example, a person who bought a bootleg Windows would really buy the original Windows if the option was not available? Or would that same person choose Linux instead?

        2. From my observation, people who want the original and can afford it, they do buy the original. For brand-conscious consumers, buying a fake makes them look bad, as their friends knows the little details that make an original product original.

        It would be very interesting to see statistics for (or against) these claims, but unfortunately there is no incentive for the big brands to debunk them.

        1. Stan Post author

          Not too many people point this out and challenge industry groups on these bogus statistics. I’ve been saying this for years (at the risk of losing clients, I might add), and I think the only other person I’ve seen asking questions online is IP Dragon. The more the merrier.