Beating Counterfeits with Innovation

Published on Author Suraj Bajracharya
Philosophical T-Rex

As Xmi (X-mini), a “high-quality mini speaker” is being sold at a much cheaper price by the Chinese, Ryan Lee, owner of the China-based company that produces Xmi, believes that the only way to fight these counterfeits is with rapid, unmatched innovation.

Most China-based manufacturing companies now have plants that have split up components among different suppliers so that no single company would have all the required parts to produce the products. This is what Lee is doing with is company too these days. And instead of ensuing a legal battle, Lee would rather invest more in developing better quality products. “I’d rather throw my money to the engineers, not to my lawyers”, says Lee.

As we have also seen counterfeit cars (Chery QQ for example) in Dunne’s book. US International Trade Commission states that American companies reported losses of about “$48.2 billion in 2009 in sales, royalties, or license fees” due to counterfeits solely in China. For more see the BBC article

4 Responses to Beating Counterfeits with Innovation

  1. First, this is a standard intellectual property issue. Many of the companies I visit have trade secrets in their manufacturing processes – reverse engineering isn’t easy. But in the auto industry, customers don’t like to sole-source and so may demand that a company license others as a condition to buying their product. Patents shift bargaining power but aren’t themselves enough; you have to keep innovating if you want to preserve margins.

    Now Chinese consumers are surely not fooled by Chery or others mimicking the design of foreign firms. So I am far from convinced that this costs GM sales – it may even help GM sales by serving as an de facto advertisement that GM’s style is the “in” thing and thus work to GM’s advantage.

    More generally, particularly for high-value consumer items (Gucci handbags), firms vastly overstate the magnitude of lost sales; those who buy Gucci knock-offs are likely not consumers who would buy the real thing, they’re less-well-off women for whom the real thing is out of their price range. Unless you actually go to a “real” Gucci store you also can’t guarantee that you’re at the cutting edge of style, rather than buying a good fake of a now déclassé design.

  2. I think that’s a good point – a number of counterfeit items are produced a a delay of sorts. The intellectual property issue is most compelling when the supplier also serves as a manufacturer, as in the ongoing suit Apple filed against Samsung in 2011. I wonder to what extent this occurs in Chinese-based companies who both manufacture goods and supply parts to other companies.

  3. To expand on the prof’s point on high-value consumer items, Vera Wang opened a Shanghai store in January and began charging Chinese brides-to-be 3,000 yuan to try on Vera Wang Designer dresses. This policy was enacted in an attempt to deter counterfeiters, but the policy only existed in China. As a result, the global community viewed the policy as discriminatory. On March 27, a Vera Wang Spokeswoman told Reuters that the policy was being scrapped: “Please kindly be informed that Vera Wang has abolished appointment fees at her bridal salons worldwide…”

    Even with her attempts to prevent counterfeits, there are fake Vera Wang dresses for sale. A Vera Wang original can range anywhere from $1,300 to more than $6,000, but on a Chinese’s site Taobao Marketplace, imitators may go for as little as $60. Also, Li of Taobao Marketplace said he could achieve up to 90% similarities to the namesake garments without seeing the originals. Essentially the issue comes down to the consumer. If you want an original Vera Wang then you will pay the exorbitant price and if you are unable to afford the “real thing” and love Vera Wang designs, then the next best thing may be a counterfeit gown.


  4. One of the aspects to this story I found interesting was that the owner of the company discovered the counterfeit production from his consumers. This really highlighted how members of the market are better equipped and incentivized to fight counterfeits rather than government entities. Even more surprising to me was Lee’s opposition to pursue litigation. I would expect most companies to be willing to spend disproportionate amounts of money on any case that would make favorable precedent in the future. I believe this is the result of a lack of confidence in China’s judiciary as well as the fast rate of change in the technology market. His decision is probably wise, since enforcing counterfeit production is difficult and requires numerous resources.