In China, A Growing Taste for Chic
But Fakes Also Vex Developing Market
By Peter S. Goodman
Washington Post Foreign Service
Monday, July 12, 2004; Page A01
SHANGHAI -- Beneath the high ceilings of the Plaza 66 shopping center, a
temple of consumption in China's most materialistic city, Nicole Jiang
steps through the glass doors of Louis Vuitton.
Christian Dior sunglasses tinting her view and an Omega watch glinting from
her wrist, the 30-year-old entrepreneur exemplifies the new-money mentality
that has made China the world's hottest market for purveyors of expensive
chic. Vuitton, which opened its first outlet in China in a Beijing hotel in
1992, now has nine. Armani opened on Shanghai's riverfront promenade, the
Bund, in April -- and plans 30 stores by 2008.
"China is the market with the fastest growth in the world," said Giovanni
del Vecchio of Prada, which has 10 stores in China and plans 20 more by the
end of 2005.
Jiang is doing her part. After a half-hour at Vuitton, she has added to her
repertoire a new wallet, a passport case and a canvas handbag -- about
$1,500 in all. She estimates that she spends $4,000 to $6,000 per month on
luxury items. "These famous brands have been in business for so long," she
says. "Their designs are classic, and their quality is very high."
But the scene just a few blocks away reveals the flip side of China's
influence on the global fashion trade. At the open-air Xiangyang market,
vendors hawk counterfeit Vuitton wallets laid out in plain view for as
little as $4. Merchants offer high-quality fake Gucci and Prada handbags,
most accompanied with forged certificates of authenticity. Salespeople
express willingness to ship their wares to points around the globe.
China's small but growing nouveau riche have become an increasingly
significant market for luxury products, giving fashion executives visions
of duplicating the staggering growth they enjoyed in Japan in the 1980s and
'90s. But at the same time, China's factories and merchants are growing
more sophisticated in counterfeiting and exporting many of those same
products. Nearly three-fourths of all counterfeit luxury goods seized last
year at ports in France and Italy originated in China or Hong Kong,
according to customs authorities in Europe.
The same attributes that have enabled China to acquire wealth -- cheap
labor and a swift assimilation of new manufacturing practices -- menace the
brands trying to capture it. The concept of intellectual property is
relatively new and widely disregarded. In addition, corruption remains
rampant among China's customs officials, enabling counterfeits to be
shipped worldwide.
A shopkeeper in the center of Shanghai offering charcoal-gray suits with
Giorgio Armani tags for less than $200 said she routinely ships such goods
to the United States and Europe. "We can take the buttons and labels off
and you can put them back on at the other end," she said. "That way, you
will have no problem with customs. That's what most people do."
Well-Made Fakes
Most counterfeits are sold on street corners from New York to Rome to
people who know they're not real. But in recent years extremely
high-quality fakes have penetrated legitimate distribution channels and
landed in reputable U.S. and European shops, selling to customers who think
they are buying the genuine article, according to the authorities.
In a series of investigations between 2000 and this spring, Italian customs
officials seized more than 200,000 watches -- most of them counterfeit
Rolexes -- bound for boutiques in northern Italy, Marco Fanti, chief of the
anti-fraud department at the Italian Ministry of Finance, said in a recent
interview in Rome. The watches were so well made -- including the internal
identifying marks stamped inside real Rolexes -- that even Rolex had
trouble distinguishing them as fake, Fanti said.
According to Fanti, many of the parts for these watches were manufactured
in southern China and flown from Hong Kong and Malaysia to Austria, Belgium
and Germany, then tucked into removable floorboards in cars and driven to
the southern Italian city of Naples, center of a distribution ring overseen
by a branch of the Mafia known as the Camorra. Finally, they were parceled
out to artisans near Venice, who fashioned gold cases and put the pieces
together.
The investment in this production was as much $2,500 per watch, but
customers typically paid $12,000 or more, Fanti said. Some of the boutique
owners were in on the scam; some were unwitting dupes. The watches were
mixed into a well-established "gray market" in which boutiques purchase
real goods at discounted prices from smugglers who buy them in Eastern
Europe, where retail prices are lower, then sneak them into high-cost
countries such as Italy, France and Germany.
But customs authorities acknowledge that the sheer volume of China's
exports means they can catch only a tiny fraction of smuggled fakes. "If
one were to control all of the containers that pass through the port of
Naples in one day, it would take at least a year to inspect them all,"
Fanti said.
In the United States, so-called secondary markets, in which retailers sell
excess stock to trading companies, has created a similar opportunity for
counterfeiters to get goods on shelves at reputable stores, according to
legal experts. The trading companies resell the stock to other retail
operations. Counterfeiters sometimes pose as legitimate sellers by forging
invoices that make it seem as if their products were once bought directly
from the major brands.
In May 2000, the U.S. clothing chain Daffy's bought 600 Asian-made fake
Gucci handbags, then sold them for $300 to $400, according to a judgment
from the U.S. Court of Appeals for the Third Circuit in a trademark
infringement case brought by Gucci. Daffy's purchased the bags from a
supplier with whom it had frequently done business, paying $238 to $250.
The court found Daffy's was not liable because it had been duped.
"The quality of the counterfeits has gotten better and better," said Louis
S. Ederer, an intellectual property lawyer in New York who has pursued
cases in which Chinese-made counterfeit Tommy Hilfiger clothes have landed
on the racks at Wal-Mart. "This is not just a street business anymore."
The Internet also has become a major channel for fakes. Cartier recently
raided a two-room office in Manhattan, finding more than 550,000 fake
watches. According to Cartier attorney Harley I. Lewin, the parts were made
in China, flown to New York via Hong Kong and assembled in workshops in
Chinatown before being sold worldwide over hundreds of Web sites. The parts
cost $3 to $5 per watch, while the finished products retailed for $150 to
$200. The lone warehouse supported sales of $100,000 per day, Lewin said.
The major companies are worried that the growth in high-quality
counterfeits may dilute their brand in the wealthiest markets -- Europe,
Japan and the United States.
"I'm most concerned when I see some ladies with high income going to buy
what they call a good copy," said Dior's chief executive, Sidney Toledano.
"That bag might look okay today, but the counterfeiter cannot use gold,
cannot use the best part of the skin, cannot use the same manpower we use.
Not only have I lost a customer, but in six months that bag will look like
a potato sack. It will have a bad odor. It will be a disaster. And because
she has a high income, no one will think she carries a fake one and so it
damages the image."
Battle of the Brands
Given that China remains an emerging market, some companies dismiss the
prevalence of fakes in the country as a minor irritation. Serge Brunschwig,
chief operating officer for Vuitton, calls it "a temporary phenomenon," one
that will disappear as incomes continue to rise. "People have a desire for
the real thing," he said.
Some have even suggested that counterfeiting amounts to free brand-building
as China's market develops. "If you're not part of the fake offering, it
means you're not hot enough," said del Vecchio, Prada's commercial director
for Asia, the Pacific and Japan.
But most of the major brands dismiss that sort of talk as naive.
"If the product is everywhere, how can we convince people the product is
unique?" asked Marc Frisanco, deputy intellectual property counsel for the
Swiss luxury group Richemont, which owns Cartier and Montblanc.
Interviews with shoppers in Shanghai and Hong Kong indicate that the easy
availability of fakes is already having an effect on sales.
A media executive who splits her time between Beijing and Shanghai and
earns about $80,000 a year said she no longer buys real handbags from major
brands.
"I realized that the quality of counterfeit stuff is not bad at all, and
the price is one-tenth of the real products," said the executive, who gave
her name as Ms. Gu. "I have never felt embarrassed to carry a fake. I have
good taste, and I know what is high quality and what is in. . . . It is not
as if I buy this bag just because of the brand. It has to be a style I
like."
Still, in a country with 1.3 billion people and a modern-day aesthetic that
now tends more toward mohair than Mao suits, the fashion brands are
prepared to accept a few losses in the pursuit of securing a piece of the
burgeoning market.
For now, the mainland China stores are more billboard than cash register:
They are building up awareness of brands and styles as incomes grow, and
they appear to be funneling customers to Hong Kong, where selection is
greater and prices are sharply lower thanks to tax breaks. Hong Kong has
seen a flood of mainland Chinese visitors in recent years following the
lifting of travel restrictions.
But Hong Kong is also a root source of the counterfeiting. Wealthy Hong
Kong women bring their handbags over the Chinese border to the city of
Shenzhen, where they hire skilled craftsman to duplicate them, contributing
to a dramatic increase in the quality of Chinese-made fakes.
Further up the Pearl River in the city of Guangzhou, the Baiyun leather
market is reputedly the largest outlet for fake handbags in the world.
Sales agents preside over air-conditioned stalls with catalogues and
business cards, their demeanor no different from representatives of
legitimate factories at a trade show. Yet their goods are illicit: Cartier
belt buckles for 50 cents, Gucci imitation leather wallets for $5, Fendi
white leather bags stamped "Made in Italy," for $12.
One shop, Zhongao Leather City, offered Louis Vuitton wallets for $2.50. A
sales agent said her factory could supply large volumes.
A representative from a sea freight company, Hsien Shih Co., stood nearby
offering cards. Contacted by phone, a sales agent said he could arrange to
ship fake products anywhere by sea by mixing them into loads of real
products.
"We have friends at customs," the agent said. "Some are in charge of
checking the goods, so they can make sure the goods are not checked."
Special correspondent Wang Ting in Shanghai contributed to this report.
