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INSIGHT

Counterfeiting in China

Aired May 18, 2005 - 23:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

JONATHAN MANN, CNN HOST: The best shopping in Shenjen (ph). There are some things that Chinese businesses really sell cheap: innovations, information and ideas they don't actually own.
Hello and welcome.

Walk down the streets of Manhattan and you can find what appear to be Swiss watches that didn't come from Switzerland. In Moscow you can buy Marlboro cigarettes that aren't exactly from Marlboro country either. Counterfeiting is a fact of life worldwide, but manufacturers in China are accused of imitating other people's products more than any country on earth and selling billions of dollars of them each year.

As part of our special "Eye on China" week, our program today: How they keep it cheep in China.

Eunice Yoon has the story.

(BEGIN VIDEOTAPE)

EUNICE YOON, CNN CORRESPONDENT (voice-over): Can you spot the real New Balance store? Hard to tell? That's exactly what the U.S. athletic shoemaker is worried about. The Boston-based firm is running into a problem that multinational companies from Louis Vuitton to Warner Brothers face when operating in China, what they say are copies of their trademarks and copyrighted products, but in New Balances case the shoemaker says not only are its goods being counterfeited, its stores are being copied too.

Harley Lewin is an international property rights lawyer based in New York. He represents New Balance in its fight against upstart Chinese brand New Barlun.

HARVEY LEWIN, ATTORNEY: New Barlun represents a quantum leap in the, I probably should say gall factor or cheeky level of counterfeiters.

YOON: Like so many other companies, New Balance is investing heavily in China, lured by its low-cost labor and huge market potential. Eight of the firms 15 footwear factories are located here. Private investigator Ted Kavowras spends his days tracking down copies for companies like New Balance. Kavowras is an ex-New York cop.

THEODORE KAVOWRAS, PANORAMIC CONSULTING LTD.: Because China is a manufacturing base, it's easier for counterfeiters there to access genuine or genuine look-alike components to making higher grade counterfeits. Sometimes it's almost impossible to tell the difference.

YOON: Kavowras's agents went undercover to show how easily a Chinese customer could mistake New Barlun for New Balance, from the store layout to the advertisements to the shoeboxes and shoes. Even the catalogs look similar, with New Barlun claiming that it's the brand from the USA.

Stories like these are worrying the United States, which recently added China to its priority watch list for unacceptable levels of counterfeiting and piracy. So-called intellectual properties in the form of counterfeit DVDs and CDs have long been a point of contention between the two countries. Many U.S. corporations are urging the Bush administration to take China to task at the World Trade Organization, a move that could considerably strain relations between Washington and Beijing.

Myron Brilliant is vice president for Asia with the U.S. Chamber of Commerce.

MYRON BRILLIANT, U.S. CHAMBER OF COMMERCE: We know that the global problem is probably $600 billion or more in magnitude, of which China represents 60 percent of the global problem. It's being manufactured in China, counterfeited and piracy, it's being exported around the world and certainly into the U.S. market. So the U.S. companies are very concerned.

YOON: New Balance is so concerned that it's filed suit against Qiuzhi Sports Goods Company, believed to be the owner of New Barlun, based in Fujen (ph), China.

Qiuzhi denies it's done anything wrong. I representative said the company designs its own products and insists its licenses are legit. She says her company ditched the New Barlun brand long ago.

(on camera): We tried to speak to someone at New Barlun, Incorporated Company here in Hong Kong, but despite our repeated calls, they declined an interview. The offices are supposed to be somewhere in this building.

(voice-over): Kavowras's cameras filmed three New Barlun stores last week. The investigator and attorney Lewin say stores like these open and close so quickly that pinning down who owns them is almost impossible.

LEWIN: It's just a licensing trick. It always reminds me of the child's game that you see at the arcades with the little brown fuzzy thing that pops up out of a hole and you sit with that mallet and you hit it, and then another one pops up and you hit it, and if you move fast enough, you win. This is much like the issue here.

YOON: The Chinese government says stomping out the counterfeiters takes time, as was discussed in January by Vice Premier Wu Yi.

WU YI, CHINESE VICE PREMIER (through translator): Protecting and improving intellectual property rights is not a one-off matter. In our country, where the economic and technological development is low, we especially need the government, businesses and consumers to work hard together to change the current intellectual property rights situation.

YOON: Part of that change is being spearheaded through public awareness campaigns. In February, Beijing hosted an anti-piracy concern with over 100 pop singers, urging fans not to buy pirated music and movies.

LIU LI (ph), CHINESE OFFICIAL: China takes copyright protection work very seriously. This is seen from the last 10 years of laws and regulations which have developed quickly. We have strengthened legal enforcement in the market.

YOON: But Lewin says China could do more. He says the government is hamstrung by its desire to keep its 1.3 billion people employed to maintain social order.

LEWIN: Governors or mayors of various cities that have risen through the ranks rise because they keep their local town employed. If you were the government and you were to suddenly clamp down on counterfeiting, you'd put an awful lot of people out of work.

YOON: Companies like New Balance hope China's growing economy will help ease the problem. They believe as China's consumers get richer more will opt for the real McCoy. New Balance plans to expand from 100 stores today to triple that number by the end of the year.

JOE PRESTON, NEW BALANCE: I think the Chinese consumer is a little more savvy than some people give them credit for. New Balance is a performance athletic brand with its foundation based on technology, so the more we can educate the consumer on what the real New Balance is, the easier it is for them to make the differentiation between New Balance and a counterfeit.

YOON: And for some it's not hard to tell the difference. We gave Kenyan marathon champion Henry Wanyoike a pair of similar model shoes from both New Balance and new Barlun, and though he's blind, Wanyoike picked out the New Balance shoes right away.

(on camera): So how did they feel?

HENRY WANYOIKE, MARATHON RUNNER: For training I prefer this one. In Africa, because (UNINTELLIGIBLE) it has good grips, which can enable you to touch the ground comfortably.

YOON (voice-over): The New Balance pair retails for $58, the New Barlun, roughly half that.

At the end of the day, closing down the counterfeiters is a responsibility that all consumers share.

LEWIN: Everybody has a little bit of larceny in them. Everybody likes a good deal. But this is no different than a guy who takes a gun, walks into a little shop and holds it up and says "Give me your money."

YOON: Eunice Yoon, CNN, Shenjen (ph), Southern China.

(END VIDEOTAPE)

MANN: Piracy was one of the things that came up in a conversation between Western executives and Chinese officials at the Fortune Global Forum, a business conference in Beijing. The Chinese said talking about the problem was the right way to solve it.

(BEGIN VIDEO CLIP)

WANG JINGCHUAN (ph), CHINESE OFFICIAL (through translator): On the issue of intellectual property rights, we need cooperation rather than confrontation, we need dialog rather than blaming. That is the harmonious environment we should create.

(END VIDEO CLIP)

MANN: That having been said, we invited a representative of the Chinese government to talk with us on this program. They did not accept the invitation.

We take a break. When we come back, putting a price on intellectual property. How the piracy of ideas is promoting Chinese growth.

Stay with us.

(COMMERCIAL BREAK)

MANN: One of the ways that governments around the world support their industry and agriculture is with subsidies. But every subsidy costs money to the government that offers it, the taxpayers who ultimately fund it. When a government allows companies to use illegally copies software, industrial designs and other copyrighted material, it has the effect of a subsidy, except it's free.

Welcome back.

Pirated running shoes are one thing. Running pirated software is another. It takes a lot of time, investment and expertise to develop software, though not necessarily in China. A trade group known as the Business Software Alliance estimates that 90 percent of all the software in China's computers is pirated. It's not only illegal, it's an inexpensive and efficient way to make China more competitive. Cut-rate software means Chinese businesses can run better.

A short time ago we got I touch with Ted Fishman, author of "China Inc.: How the Rise of the Next Superpower Challenges America and the World."

(BEGIN VIDEOTAPE)

TED FISHMAN, AUTHOR: In the United States, companies have a very high technology cost, and they pay for their technology, and what they're buying are proprietary knowledge goods that run their factories.

If you walk into any factory, like the hundreds and hundreds throughout the Midwest, that make even simple products, like ball bearings, they might have engineering stations throughout their factory, and those engineering stations run software, and that's proprietary software, expensive software, and it could cost them $50,000 or $60,000 per year per workstation.

You walk into a Chinese factory, which is competing with those American companies, they have the same workstations, but they're paying nothing for that software. That's the kind of effect which is throughout the Chinese economy. Virtually anything that is made in China has a high chance of being made in a factory in which the technology that makes that stuff simply isn't being paid for and the American component of that technology, which is the knowledge product, the kind that can be transferred by e-mail or disk, is almost certainly not paid for.

MANN: Now, there are a lot of implications for a lot of different industries, but one of the ones that you've written about is particularly intriguing and worrisome, and that's the pharmaceuticals industry. What's happening there?

FISHMAN: Well, what's happened in the pharmaceutical industry is that we want to get paid for our patented pharmaceuticals. It's an industry in the United States that supports a lot of innovation. It pays for, in economic benefit, all of the education that we give to the post-docs and the scientists that create our pharmaceuticals.

Yet when those drugs arrive in China, they are simply copied, and we want to fight to get paid for those drugs, but it's almost impossible right now, because the Chinese are on both sides of the equation benefiting from the piracy. On the government side, where they buy pharmaceuticals, there is a strong interest in buying cheap pharmaceuticals, because of course they have billions of people they have to keep healthy, and on the government side, where they manufacture pharmaceuticals, of course they don't want to pay for the technology. They'd rather copy the technology and sell it.

So it's extremely difficult to drive a wedge between these conflicting interests with some sort of American regime to assert intellectual property laws because the Chinese on both sides simply have no incentive to follow.

MANN: Are the Chinese getting healthy from all of these drugs?

FISHMAN: Well, almost certainly. You know, they don't pay full-boat for virtually any pharmaceutical. They're getting healthy on the things that make them healthy, and they're having fun with the goods that give them a good time. You know, Viagra in the United States costs $10 a pill. In China, it costs about 10-cents.

MANN: I ask about that because at one point you wrote that in fact some of these drugs are so badly pirated that they could make people sick who think that they are going to benefit.

FISHMAN: Yes, well there is that, too. You know, there are the renegade factories, probably not the ones run by the government, that copies drugs, but only copy them in form and color, and people who need lifesaving drugs die from them, hundreds of thousands of people have died in China because of this.

And it could also threaten an American company that makes the actual drug, because these false drugs are working their way into the supply chain. So you could have 28 good pills and two bad pills, but those two bad pills could kill somebody. We know what happens when legitimate drug companies have bad drugs. Well, they could get burned from bad drugs from counterfeiters making their way into the vials of drugs that have their own name on them.

MANN: Now the Chinese government is taking very publicized steps against copyrighting --

FISHMAN: You know, publicized is the keyword there. You know, it's very public, it's very vocal, but enforcement is extremely negligible. You know, piracy goes up as the Chinese get richer, and they're getting richer, and that's something we should applaud. But as they get richer, they spend more on counterfeit and pirated goods, so the problem is getting worse and worse.

In the DVD business, for example, you've seen DVDs go from back alleys in the back of bicycles to stores that sell thousands of pirated DVDs, but they look something like Blockbusters. And when there is a policeman in those stores, they're rifling through the bins looking for an evening's entertainment, not looking to shut them down. The problem is growing quite rapidly.

MANN: Is it beyond the Chinese government's ability to stop the DVD market, or anywhere else?

FISHMAN: It may be beyond their ability, because there's lots of conflicting jurisdictions in China, and often those jurisdictions have their own counterfeit businesses.

But, you know, the Chinese government is pretty good at enforcing the laws it wants to enforce. You know, if there were DVDs about Tibetan independence or Falun Gong, you would see the Chinese moving in very, very quickly. If there were Taiwan independence DVDs, you would see the government take every action it could to close it down, and, you know, if they had the will, they certainly have the way.

MANN: We heard a moment ago from a representative of the Chinese government who said that more dialog with the West is needed, not confrontation. Is dialog the answer? Is there anything that Western countries, industrialized countries, essentially the victim countries in all of this, can do?

FISHMAN: Yes, there is a lot we can do.

You know, because things that come back into this country that are manufactured in Chinese factories are almost always built on some sort of component of pirated technology, we could have our own companies monitor whether the sources of their goods that they buy to fill our big bucks stores are made in those factories, and if we were to focus on our own companies that bring in goods, I think you would see pressure from American companies rather than from American business change the intellectual property regime in China. That could be very effective.

It's worked pretty well in the garment industry. You know, China doesn't have a real child labor problem there because American companies really don't want to do business with factories in China that use child labor, and they watch for it, and they could do the same with intellectual property.

MANN: We'll be talking a little bit about garments in a moment with Ted Fishman, author of "China, Inc." Thanks so much for talking with us.

FISHMAN: My pleasure.

(END VIDEOTAPE)

MANN: We take a break now. When we come back, a warning from one of China's largest trading partners.

Stay with us.

(BEGIN VIDEO CLIP)

ROBERT PORTMAN, U.S. TRADE REP.: Opening new markets is critical, but we must also ensure that our trade partners play by the rules. To ensure that, I will use all of the tools available to us. This includes consultation and negotiation, but when appropriate it also means taking legal action to enforce our rights and to defend American interests.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

MANN: Forget piracy. Think about pants. Chinese pant exports to the United States, for example, are up 1,500 percent. Chinese clothing has been flooding markets worldwide. The reason: global quotas ended January 1 and China can now sell as much as the world will buy. Last week, the Bush administration said it would impose quotas on Chinese pants and other clothing. The European Union isn't happy either. The Chinese government says Washington is violating world trade rules that it agreed to.

"Once an agreement is reached, everybody has to abide by their commitment," Chinese Commerce Minister Bo Jeli (ph) said. "Otherwise, there is no point in negotiating rules."

Welcome back.

There are accusations going both ways about Western intellectual property being stolen, about Chinese currency rates being set too low, about global trade rules being flouted.

A short time ago we got in touch with Linda Yueh, an economist at the London School of Economics, who says all of these problems stem from one thing: China's transition to a free market economy.

(BEGIN VIDEOTAPE)

LINDA YUEH, LONDON SCHOOL OF ECONOMICS: if you look at the trade deficit with the European Union and the United States, if you look at the currency issue (INAUDIBLE) to the dollar, these are all essentially problems with markets not being completely liberalized and essentially a global imbalance in terms of trade and capital flows, and that, of course, is related to the fact that China is only partially marketized and it is not completely yet a market economy.

Now, if you look at the copyright issue, in a lot of ways as well, that is the rest of the world actually asking China to live up to, as it were, intellectual property right protections as accorded under WTO rules. So, again, it's a transition towards a better copyright system, a better patent system.

MANN: China has been getting a lot of attention, and we've been devoting a lot of attention in this program, to intellectual property theft and copyright piracy. Does China deserve the blame it's getting?

YUEH: I think in a lot of ways the copyright issue has highlighted the main fragility in the Chinese economy, outside of the economic reforms, and that is the legal system. China actually has patent, copyright and trademark laws dating from the mid-1980s, which are essentially at the international standards, in accordance with the Trips (ph) Agreement.

However, implementation and enforcement are entirely different issues, and I think that's why China has been under a lot of criticism to speed up legal reform, so that the legal protections accorded to (INAUDIBLE) and foreign products can meet international standards.

And, of course, the difficulty here is that if there is political posturing, then it could derail attention from actually the most critical part of this issue -- is that it is in China's interest to improve intellectual property rights protection, to foster innovation, both domestic and to give assurance to foreign investors that they can transfer technology and invest in China and it will be a win-win situation for everybody involved.

And if China can't do that, then there is a real danger that it will not gain the productivity advances that it needs to continue its phenomenal rate of growth. So everybody is headed in the same direction. However, a lot of the disputes that we see, it's because there is a lot of both misapprehension and I think a degree of misunderstanding of where China's IPR laws actually stand. But it is true, they still have a long ways to go, and the Chinese are well aware of it.

MANN: Now, there is another area where China seems to be in transition, and once again there is a lot of misunderstanding, and that comes to currency. Once again, I suppose you could say it is in China's interest to raise its currency rates. That's what outsiders are saying. Does it deserve the blame it's getting for essentially unnaturally low currency rates?

YUEH: The currency issue is actually rather difficult.

I mean, the common perception is that the currency is not being moved, maybe for competitive reasons, but if you actually look at the comment of U.S. Treasury Secretary John Snow and actually the Chinese authorities, they do seem to agree that the real issue is about the depth of financial reform in the Chinese system.

So, in other words, the Chinese are reluctant to reform their currency, not really because they're worried about the competitiveness of their exports. Over 50 percent of Chinese exports are produced by foreign invested enterprises -- multinationals -- its wages are 1/30 of U.S. wages. But the concern -- so therefore, it's not really on exports, but it's actually on how to prevent a currency crisis, like we saw in East Asia in the late 1990s, from becoming a financial crisis.

MANN: These kinds of questions arise in other countries. China isn't the only trading nation that the United States or the European Union have to work with. Is China just different? Is the enormity of its industrial base, the enormity of its potential market, mean small disputes become enormous disputes because it's China? It's not like any other place on earth.

YUEH: I certainly think that's part of it. China is a $1.4 trillion economy. It is likely to be one of the major players in the coming years in the global economy. So I think when it does take action, because of the impact that it can have -- for instance, its textiles and clothing could reach 50 percent of world market share this year, just because exports, clothing restrictions, were lifted at the start of the year. It could increase global market share to 50 percent.

It's that kind of figure I think that makes Chinese actions very much closely scrutinized by a lot of countries.

MANN: Linda Yueh, of the London School of Economics, thank you so much for this.

(END VIDEOTAPE)

That is INSIGHT for now. I'm Jonathan Mann. The news continues.

END

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