Piracy, Counterfeiting, Patent Violation, the Price You

Piracy, Counterfeiting, Patent Violation, The Price You Pay for Outsourcing China

Piracy, Counterfeiting and Patent violation

In this paper we will focus on piracy, counterfeiting and patent violation taking note of latest cases towards items such as in software, books, music and other related things. Here a huge emphasis will be given on China and how many different industries across the globe suffer losses due to the illegal practices carried out by Chinese manufacturers who tend to offer a copy of the original product at a relatively cheap price.

The meanings of terms piracy and counterfeit in today's age are relatively similar, i.e. To make an illegal copy of something. "Patent violation is a term which translates into any illegal practice which involves the usage or selling of any product without the permission of the patent holder who has the proper rights of that product." (Boyle 1997).

All of these above mentioned practices are known to cost tremendously to the firms who produce the original products, much of the pirated objects found today belong in the categories of software, songs, movies, digital equipments, books and so on. "Much of counterfeiting practice is carried out in the developing economies of the world" (Moody 2001) therefore in this paper we have chosen to mainly scrutinize China and assessing its role in this entire scenario. "Counterfeiting can be combated through the creation of tougher laws" (Proctor 2005). Let's have a look at this in more detail.

II. Counterfeiting and Pirating in China

Some facts

Pirated, counterfeit or fake items made or sold in China are found easily everywhere in the mainland Chinese territory as well as in the rest of the world. During the mid 2000s some estimates taken by various sources pointed out that about ninety percent of the music, movies and various types of software being sold in China were not original. The total market value of counterfeit and pirated goods being produced in China was estimated to be worth somewhere between twenty two billion and thirty billion dollars in the year 2008." Counterfeiting phenomena is increasing drastically" (Lally 2002).

Many trade groups as well as analysts have acknowledged that the illegal Chinese copying of designer clothing, music, electronics and digital equipments such as watches or computers costs the legitimate producers of those products many billions of dollars on annual basis. However, there are many other estimates which counter this sum of losses and according to many other critics the industries which produce the original products do not suffer as much loss as is acknowledged by them. By many sources, it is though that a total of less than twenty billion dollars is lost in sales worldwide due to pirated copies of the original products.

A study carried out by Business Software Alliance estimated that if the practice of software piracy was completely eliminated throughout the world then it could result in the addition of about two and a half million jobs as well as an economic activity of four hundred billion dollars alongside sixty seven billion dollars in additional tax revenues. According to this study China was capable of creating about three million jobs in the sector of information technology if the practice of piracy was reduced sharply.

Another study of similar type was conducted by OECD, it valued the pirated products all across the globe to be worth one hundred and seventy six billion dollars in the year 2006. This amount is comparable to the trade between United States and Japan. It is also commonly observed that there exist little or no respect and understanding regarding the concept of intellectual property in many parts of the world. There isn't any sort of stigma attached to the selling or buying of pirated items even those which have fake but similar names related to the original products such as Nake instead of Nike. The Chinese government also seems to tolerate quietly this pirating and illegal goods manufacturing process to some degree since it provides employment to a huge number of people.

It has been observed that the Japanese went through a relatively similar position during their economic development i.e. copying many of the European and American products, later on the Japanese government and firms took a firm action regarding such practices when the Japanese firms required laws in order to protect their own intellectual property rights. Therefore it is assumed that this same process will occur to the Chinese as their economy, technology and manufacturing capabilities matures into a much more developed form where the firms and related businesses practice their dealings in a much more responsible manner.

"The practice of pirating may tend to provide an easy way to earn quick profits but for the future development it is deemed as very damaging." (Mowery 1996). A primary reason for this is that the companies will not be able to invest more in research and development processes if they know that whatever they will create would be copied. "Counterfeiting is a huge threat to the original product's R&D process" (Mihm 2007).

There are many cases where the biggest buyers of pirated items in China are foreigners, they tend to buy a cheap replica of the original product in a much cheaper price such as pirated DVDs, watches, electronic equipments or other things and then sell in their respective market at a nominal rate which attracts a lot of consumers since the price of offering is cheap as compared to the original product. "Low prices attract consumers of all types" (Hopkins 2003).

According to the Washington post, there is a lot of emphasis given on the Chinese market which produces these fake items but a lot less importance is given to those major buyers who buy these equipments and it is these foreign and local buyers which make this business running. "A business thrives because of its demand rather than supply power" (Vickers 2002).

According to some estimates about two thirds of the fifteen million shoppers per year at the Beijing Silk Street are composed of foreigners and the amount of interest the foreign buyers take in all of this activity is growing very fast since the consumers all across the globe especially in the Western world went through a financial crisis that resulted in severe job losses as well as decrement in their ability of buying. "Counterfeited objects thrives at sales in environments where the common person's ability to buy is weak" (Garnaut 2004).

Common fake products

The most commonly counterfeited products include computer software, CDs, watches, foreign cigarettes, medicines, Tibetan jewelry and even currency notes. Throughout the markets in Shanghai a person can easily get a fake bag of Louis Vuitton for the price of twenty five dollars, jackets of North Face for twenty six dollars, Cartier wallets for fifteen dollars, expensive golf clubs for around thirteen dollars and a tennis racket of Wilson for around ten dollars. "Pirated objects often last very little as compared to the original product" (Bell 2004).

If a customer does not find what it wishes to purchase then that person can also demand for the creation of a copy of the item which it desires to have and usually many foreign buyers tend to do their business this way. Many huge firms which operate and sell their original products in the same areas where the counterfeit items can be purchased are often seem to be very reluctant to advertise for their product since it can result in more sales for the pirated item rather than the original material. In China, the counterfeit banknotes are also very common therefore the cashiers operating in any business take a close look at every fifty and hundred Yuan notes which is equivalent to six and twelve dollars respectively. "Duplicating currency is regarded as a much serious crime as compared to duplicating other common commodities" (Ostergard 2003).

In many stores it is very easy to find oranges having fake Sunkist labels. Piracy is so common that the pirated version of collected works belonging to Deng Xiaoping can also be found. The provinces of Guangdong and Fujian are regarded as the main source for counterfeiting, forgery and pirating. Guangdong is the home to many thousands of firms which produce pirated goods and equipments, many other factories there also produce original items.

Fujian is widely regarded as the destination to go for forged documents, securities and gift certificates. There are many printing facilities present in Fujian which can copy expertly any sort of certificate, voucher or coupon even those which have unique sort of holograms given to them as the source of their unique identification. This makes it even more impossible to differentiate the fake from the original.

There are many towns which specialize in the counterfeiting of one line of items such as Taizhou which is expert in counterfeiting auto parts, Wengang for different varieties of pens and Chaozhou for cosmetics. Many of the popular trademark names of Japanese brewers have also been used in China without taking the permission from the real brewers. "Digital equipments are commonly found to be copied" (Lynch 2004).

Different varieties of counterfeit Apple iPhone are easily available which greatly resembles from the original product in their looks, software and quality as well. These counterfeit products usually appear about a month or two after the original product goes on for sale, although it appears to be exactly the same product in looks as well as usage but the price tag for the fake item is just a fraction as compared to the original product, in our case the Apple products are a good example for this. "Many of the top brands are available in their relative cheaper counterfeit versions" (Broadhurst 2005).

Fake luxury goods

Counterfeiting of luxury items is also very common in China, wallets of Louis Vuitton are sold for as little as four dollars. The products of Prada, Hermes, Burberry, Chanel, Ralph Lauren and Givenchy are particularly very popular with the shoppers and counterfeiters. High quality Prada and Gucci bags come alongside complete forged certificates which tend to show the originality of the items. "Forging documents is a thriving business" (Balkun 2006).

The issue of counterfeiting is a very serious one both inside China as well as outside it. Some three fourth of the entire luxury items being seized at the ports in Italy and France originate from China. The suppliers who sell these items often separately ship the labels from the items which are later on sewn when the items are cleared by the customs. The producers often produce labels and goods in different locations in order to avoid being detected.

According to many analysts the quality of counterfeiting is improved over time, this has led to many of the great experts being fooled in identifying which is the original item and which is fake. This has led the counterfeit items to easily make their way into the proper distribution channels from where they go to the stores where ordinary people are fooled and they purchase the fake thing instead of the real one.

A study carried out by the Italian authorities concluded that during the early 2000s the fake watches of Rolex were so perfectly made including their internal and external identifying marks which are stamped at real Rolex that the professionals from Rolex had a tough time in differentiating the original ones from the fake, here the selling of a fake Rolex watch is worth twelve thousand dollars which was originally made of just twenty five hundred dollars. "Sellers often sell fake products with the price of the original" (Carrabine 2004).

In the same study, it was reported that many parts of luxury goods were being manufactured in the southern part of China which were later on taken to Europe and thereafter assembled and distributed with the assistance from the Naples mafia and with the final touch being provided by the craftsmen of Venice. "Product piracy attracts investments from the far sides of the globe" (Stiansen 1999).

Most of the buyers in Europe as well as in other foreign countries where the counterfeit item goes know that the items they are purchasing are not real. A media executive working in Shanghai who earns eighty thousand dollars yearly gave an interview to the Washington Post in which he said that he realizes the quality of counterfeit items which is very remarkable, and the price is about a tenth of the original item. He also said that he never felt any sort of embarrassment in carrying a fake item rather than an original. "Digital devices are commonly found to be pirated" (Matthews 2002).

Through this interview, many things can be assessed regarding the taste and preferences of the common people as well as those of the upper-middle class in China. Most of them don't just go for the name of the brand and rather go for the style and quality the items have. Since these cheaper alternatives have a huge demand from all sectors of the society including the rich therefore it is common to see that these fake versions are more sold in the market as compared to the original. "Fake products often make more sales due to a cheap price tag" (Sell 2003).

In terms of varieties, the counterfeiters are also very quick to adapt to any new changes made in the original product. They also even tend to introduce their own versions of the original product in which some of them are very popular in the general public. "Fake products also come in different varieties" (Murray 2004).

Pirated music

Piracy is accountable for ninety five percent of the entire CD and music sales in China. It is very common to buy a CD on the markets and streets of Shanghai by any Western artists like Michael Jackson, Pink Floyd, Madonna, Sinead O'Conner, Leonard Bernstein, Bon Jovi, Justin Bieber or Lady Gaga for as little as fifty cents per piece. There are many local favorites available as well such as Red Sun alongside many other Chinese revolutionary songs.

Pirated music grosses two billion dollars per year and accounts for five percent of the forty billion dollars worth of music industry in China. The trade of pirated music is very well organized which has its close ties with the organized crime. There are reportedly some forty factories in China which produces compact discs in which most are purchased by the domestic consumers. The sale of DVDs and CDs including the pirated copies have increased greatly in recent times, in 2001 it was accounted to have one hundred and nine million unit sales whereas by 2010 this amount have crossed the one hundred and fifty million level.

Piracy's effect on music industry

It is commonly observed that the record companies tend to take less interest in setting up distribution networks, their main focus is concentrated more towards the management of talent and making more profit through producing better quality artists rather than selling the records. In many cases, it has also been seen that the artists spend their own capital to promote themselves and the companies for which they perform do not participate in this task, here many artists often tend to use different varieties of social media for their outreach.

It is estimated that some twenty or so quality albums are being produced in China per year. Many of the star musicians earn money by making appearances, performing live or by doing endorsement deals. Concerts are a huge source for promoting any talent, here many artists tend to share the spotlight so that the sponsors get the most from their money. Many artists goes into contracts with different sponsoring companies and rely on this as their main source of income, therefore it is through these facts that we see the impact of piracy on the music industry in China as well as the rest of the world which is huge.

A well-known singer in China named Wang Lee Ho gave an interview to the International Herald Tribune in which he said that the piracy has already killed the music industry in China and that it is long dead. This fact greatly frustrates his life and that of other artists as well. A senior executive of Warner Music Asia gave his opinion to the International Herald Tribune in which he stated that there exists no income from royalties therefore the Chinese artists more often record single songs which are for radio play as compared to making albums for the general consumers, and that artists are now looking elsewhere to fund up their rock-star lifestyle.

Factor of free downloads

It was argued in The Economist that if we think for a moment that all the bad predictions regarding the music industry turns out as a fact, efforts by record companies and governments to shut down websites which shares files freely such as Pirate Bay end in failure then in this condition piracy will become a huge menace.

It will result in the common person not buying legitimate CDs. Consumers will also fade away from the iTunes stores of Apple which sells original music tracks. Consumers will also refuse to pay the monthly subscriptions of many different services which offer genuine music items thereby collapsing the related firm's businesses. All of this can be imagined elsewhere as the extreme end point which the industry might face in the future but in China this has already come and passed.

Gary Chen, who is a digital entrepreneur and a former music promoter, said that things are so bad for the record companies that the average Chinese consumes are now not willing to pay even a penny for the purchase of recorded music. He launched a website named Top100.cn in 2006 which offered many different sorts of music to be downloaded through the system of monthly subscription. The prices being offered to the consumers were low but eventually not low enough.

Music fans in China were so impressed by knockoff CDs that they were used to get whatever they wanted from the pirated CDs or from different file-sharing websites. Mr. Chen also added that China may become a global economic superpower in recent times but its music industry has a very tiny share in its overall economy.

Recently the website Top100 began to offer the Chinese consumers free downloads of music, this was supported by advertisements, it resembles any free iTunes store which lets the users download files of their choice rather than streaming them. This is regarded as the only such service present in the entire world that has the proper support of leading record firms.

Top100 gives about two hundred million tracks per month, here some sixty percent of its overall traffic appears from Google which has its investments in the website. Mr. Chen believes that he soon expects to earn tens of millions of Yuan from the advertising. In such case this amount would be considered as a trivial sum as compared to the markets of Britain or America. Thereby this new tactic of advertising is very efficient and many new entrepreneurs are looking to earn through it.

Although the earnings for Top100 seem to be appropriate enough but the fact is that it is below the expectations of the management, since a huge chunk of the profit goes on the operational functions, in other words before taking any capital by themselves the website first has to pay off the record firms for their content. In addition to this, the withdrawal of Google from China in recent times has followed up with a huge cyber-attack on the firm. All of this has badly translated for Top100 as the traffic for the website has been cut by a significant margin.

Top100 now faces some stiff competition as well, China's biggest internet search engine Baidu also has its very own MP3 search service. Many of the record firms have sued Baidu that it gives links to many of their songs which are available in their pirated version but so far any rulings in this matter have come in the favor of Baidu. Therefore it is companies like Baidu that Mr. Chen considers his biggest competitor, here the factor of support from the state level is also very obvious since Baidu is a Chinese search engine which has its plans of dominating the local market.

Mr. Chen has identified two major options which have been left for firms like his since it is now almost impossible to sell any sort of music and also it is very difficult to make any huge amount of money from the source of advertising next to free music.

The first option here is to charge for the selections of music instead of the music itself, in this phase Top100 has already begun to introduce many different Smartphone applications through many online stores in China, this involves charging just a few amount of Yuan for music reviews as well as giving recommendations by many well-known artists, all of this is provided via links through which their suggestions can be downloaded.

The hope is that the consumers will pay for well-presented and convenient bundles of music, it is just like paying for magazines or newspapers even though in much of the cases the articles appearing in the print media can be read out for free through online resources. Mr. Chen is also hoping that soon he will introduce a unique subscription cloud service that would enable the music lovers to have access with their desirable tracks from different varieties of devices.

Although all of these plans laid out by Top100 are still not guaranteed to succeed but they are regarded as a first step in combating piracy through unconventional means, since controlling or halting piracy is well beyond the means of a firm like Top100 therefore it is these tactics as well as others which the Chinese firms related to music industry are increasingly choosing for the sake of creating a better profit margin or in many cases just to survive in a very hostile business environment.

Here, many of the Western media firms are also keeping a close eye on the Chinese firms since this whole crisis which is made because of counterfeiting practices can also struck the Western markets very soon and if it does so than the losses there would be enormous as compared to the Chinese losses.

Many of the forward-looking music executives as well as music consultants have come towards a belief that for many of the consumers especially the younger ones the preference lies not as much on the recorded music but instead at the items which play their music, here those services are also included which makes the information and networking access available through which the consumers can share their opinions, items and other relative material among each other.

In a nation such as China where many of the options regarding making the consumers pay for music items have exhausted, it is widely argued by many experts that new practices should be put in place and new experiments should be done since the threat of piracy is much greater for the rest of the world in the future as compared to what we are facing now. Therefore it is often referred that in order to counter this threat many strategists, executives and other employees related to the music industry should look towards East and observe how business is done here.

Pirated DVDs in China

According to some estimates taken in the year 2007, it was come to notice that more than ninety percent of the movies being sold in mainland China were of pirated origins. These pirated VCDs, DVDs and videos were widely and easily available everywhere on the common streets and markets in China.

The major film industries in Hong Kong, Hollywood and China all lose many billions of dollars worth of revenue every single year because of these pirated videos, these VCDs and DVDs only cost about a few cents to be made and are sold for about one dollar or less at the market places all over China.

Here it is very common to find DVD sellers on subway stations, street corners and at the backrooms of video and DVD stores which sells legitimate items. This business of selling pirated DVDs has become so advanced and full of investment that it is common to find a DVD with a hologram showing its legitimacy as an original item but in fact it would be a pirated one instead of the original material.

This has resulted in significant amount of losses in profit for the cinema owners as the latest Hollywood and local releases often appear at the streets in pirated DVDs, in many cases the pirated version has been found available even before the release of the film at the cinema. A great example here comes in the new Star Wars film which was available on pirated DVDs just a few days after its premier at the Chinese theaters.

This phenomena is so rampant that many of the pirates involved in this business are now afraid that their own merchandise which they produce might get copied and sold by a different pirate for a lesser price. The selection of items being offered by the pirated market is also very vast and has good quality as well since the common consumer looks for quality of the item rather than its originality.

Shops in many different cities of China are full of catalogs consisting of various different genres of films such as action, horror, comedy, drama, action, suspense and thriller all of which is made through piracy.

Many of these pirated DVDs are filmed through a hand-held video device at any American or Chinese movie theatre on the film's opening day of release. If it is made in a foreign territory then the item is flown out to be taken to its destination mainly in the eastern markets such as China where they are later on copied through CD printing machines and then released everywhere.

Others are created from high-quality screens where an advance copy is often given to the members of critics or film academy members. In common cases the movies recorded with hand-held camcorders appear first on streets, this is followed by a better quality material which often shows up after few weeks of the movie release.

Many of the pirated DVDs are made by making use of copies which are easily available through the Internet. It is this ease in availability of the item which is also of very high quality that the common consumer now doesn't intend to buy a one dollar DVD since it knows that the item would appear on the Internet where it can be freely downloaded. In terms of the Chinese market, a very famous website which provides Chinese movies for free is Mtime.

Hollywood often criticizes the policy standards of Beijing arguing that they fail in providing a proper crackdown on the pirated DVD market while in the same time restricting the import of DVDs of original moves and music.

Effect on the movie industry due to fake DVDs

In the start of the year 1995 the pirated CDs started to show up on markets across China, in the start it is estimated that they caused about forty percent of revenue losses to the Hong Kong film industry, this led to many of the theaters and video shops to close down. Currently it is thought that piracy in movie industry is costing the losses of about three billion dollars in terms of lost sales. Here, the Chinese distributors and filmmakers are considered to be the biggest losers and the major Hollywood studios are estimated to lose around quarter of a billion dollars on yearly basis on DVD sales.

The pirated item's price is low since there is huge competition among vendors. In the year 2005 any DVD of recently released movie could be bought for as low as sixty cents. The quality of the movies on DVDs has also improved greatly in the past years. Many of the customers prefer the pirated item since it is more often not censored by the government, also its availability is much more quicker since their distributors don't have to go through lengthy legal procedures to release any item. Therefore the items presented at an illegal shop are more often chosen by the consumers as compared to the shops which sell legal items.

Many of these pirated versions are those which are shown outside the Chinese territory therefore they contain uncensored material as well, it is all because of these practices that the movie industries rely heavily on the opening day profits since in the later stages of any film's release that film is mostly found to be easily available at various different locations.

Software piracy in China

More than eighty percent of the software used by the Chinese is of pirated origins, this is well above the average rate of the Asian region which is fifty five percent. The losses suffered by the foreign as well as Chinese software developers are accounted to be at least a billion dollars. In this case, many of the latest software from the world renowned firms such as Microsoft and other latest games can be easily found in their pirated forms at the market.

The prominent United States software firms WordPerfect, Autodesk and Microsoft won a very significant victory at the Chinese courts which were against a Chinese firm named Juren computer company which is located in Beijing, here the Chinese firm was accused of producing pirated copies of the Western firms' software. After this ruling many analysts and critics hoped that further steps would be taken which would allow the foreign firms to punish those counterfeiters or pirates which copy and sell their software.

Playstation 2 which is a very famous and successful gaming console was released much later in China as compared to the rest of the world because its manufacturers feared that it might get pirated. A report released by Sony in 2004 stated that there were a minimum ten operators in China which were producing more than fifty thousand pirated Playstation consoles every single year.

Software piracy accounted for about forty billion dollars in losses all across the world in the year 2006. Here in the list of the top ten countries in accordance with the ratio of highest usage of pirated software Vietnam came first and China came third. By contrast the pirated software in United States accounts for only twenty two percent of the entire software used.

Pirated books in China

In the publishing industry of China the phenomena of piracy is also very rampant, just like it is in the DVD, CD and software markets. Here many famous books such as Harry Potter are widely available all across China, the books containing Chinese translations were available in the pirated version earlier before the selling of official copies.

A pirated book of Harry Potter costs about three dollars, this was just a third of the original book's price, but many of these pirated versions contained mistranslations as well as misprinted characters and many of the pages were also missing. In this case the books of Harry Potter were an exception since the pirates took on themselves to perform the translation.

Most of the pirated books available in the Chinese market are a very good copy of the original published version, therefore it is often very difficult to find out which is the original one and which is the fake. Besides this there exist many forms of pirated books ranging in different categories whose price depends upon their qualities.

Counterfeit goods sales in China

Besides the market of luxury items, China is also home to one of the largest manufacturers of ordinary counterfeit goods. These are sold on streets as well as markets everywhere just like other counterfeit items. These items include common accessories such as bulbs, TV, toothpaste, brushes, makeup, pencils, batteries, hairpins, glasses, shoes, papers, remote control and so on. Here, it is also very interesting to notice how the law enforcement agencies tend to avoid this whole situation and therefore are regarded as extremely corrupt when action is required to be taken against these sellers as well as the producers of these items.

Pirated DVD and CD factories in China

Factories of DVDs and CDs are doing a very profitable business throughout China as they tend to produce many tens of millions of units every year. During 1990s the firm China Records used two million dollar equipment for making CDs, this was purchased from an American firm First Light Technologies and it produced a CD in less than ten seconds of its operation, this costs about twenty five cents for the production of a single CD. Comparing this to the situation now and we see that many firms are using similar machines for the production of CDs as well as digital audio disks and CD-ROMs.

There are many legitimate businesses as well who are known to be involved in counterfeit operations such as Suzhou laser disc firm which was reported to make copies of items produced by Microlink Systems which is a California-based firm. Many of the factories have their ties to the top level government officials as well as top military officials.

A survey taken in the mid 2000s concluded that more than seven hundred and seventy registered production facilities had the capacity to produce more DVDs or CDs than the total amount which they were actually licensed to produce. Many of these firms produced the pirated DVDs, here the profit earned through this production didn't had to go through any tax cuts.

Many of the other pirated DVDs are created at different black market firms, most of these are located at the Southern Guangdong province which smuggle their items to Macau or Hong Kong. Many of the organized crime gangs are involved in this distribution and production process, in some cases the profit margins are greater and the risks lower as compared to the trade of other more dangerous items such as heroin.

Fake electronics and iPhones in China

In the year 2010, before the real items would go on sale, the knock-off version of the latest iPhone and iPad were commonly available in many of the malls at different Chinese cities. Some of these fake devices had unique functionalities which were not present in the mainstream Apple devices such as the option of having two SIM cards and being able to remove batteries. There were also phones available in the market known as Shanzhaiji which had touch screen and other applications just like the original iPhones, they also had the Apple logo on them but their price was much cheaper as compared to the original item's price.

In a brief interview given to Washington Post, a Chinese vendor who was selling pirated iPhone4s said that it is very difficult to differentiate between the original item and the fake ones even for the company professionals who produce the original item. He also added that he was selling the counterfeit iPhones at a monthly rate of more than one thousand units. This alongside came with a money back guarantee if the product faults within a specific time period, but still thus far the vendor claimed that not a single buyer has returned the phones he is selling.

These fake iPhones are so flexible in their accessibilities that they could adapt to the original item's accessories such as earphones and charges. The fake iPad was being sold for one hundred and fifty dollars in Shanghai during the later half of 2010, this was opposed to the one thousand dollar price of the real iPad.