The Power of Knock-Offs

As we discussed in class in the past few lessons about "Crocs" and the companies troubles, I saw this article in "The Economist" and thought it added nicely to the discussions we have had in class about companies dealing with knock-offs. For one, this counterfeit industry is growing rapidly and is affecting companies and programs like Phillip Morris, Ferrari, Porsche, and even NASA. Reflecting on what we learned about Crocs and how not only that they grew in an economic boom, but how their competition grew rapidly because of cheaper and similar knock-offs, it is apparent that knock-offs can damage companies and influence markets, even if on the black market or in a department store.

The Economist states that, the Organization for Economic Co-operation and Development (OECD) "estimates that the international trade in counterfeit and pirated goods was worth around $250 billion in 2007. The International Anti-Counterfeiting Coalition (IACC), a lobby group, says the true figure is actually closer to $600 billion, because the OECD’s estimate does not include online piracy or counterfeits that are sold in the same country as they are made. Counterfeit goods make up 5-7% of world trade, according to the IACC". These figures are staggering, although believable. "Counterfeiting “used to be a luxury goods problem”, says Therese Randazzo, who is in charge of protecting intellectual property at America’s customs service. Now people are trying to traffic counterfeit items that have a 'wider effect on the economy', she says, such as pharmaceuticals and computer parts". This effect is the part that is quite amazing, because as mentioned before, it has effected NASA, Porsche, Ferrari, and Phillip Morris. However, this market also extends into electronics and pharmaceuticals.

While some may picture the black market as a person selling items like dvd's or sunglasses on a street corner, they may not expect that knock-off electronics have gotten into the U.S. Military as well, potentially effecting expensive military equipment. According to a new study by the U.S. Department of Commerce, "the number of counterfeit parts in military electronics systems more than doubled between 2005 and 2008", which means that the American people have been buying expensive knock-offs with their tax dollars.

The rise in the knock-off market is due to a few things. For one, because the manufacturing industry has been moving to countries without as much "protection of intellectual property, the property has provided both the technology and opportunity to make knock-offs". Again, because this market accounts for 5-7% of world trade, this should be concerning because this lack of protection can only mean that military technology as well as other valuable technology and medicines can fall into the wrong hands and be dispersed with little distortion to the actual product, meaning that the products can be unsafe for the consumer. Furthermore, the growth of this market is also due to online auction sites like eBay, who allow for these transactions to take place all around the globe, and according to "MarkMonitor, a firm that helps companies defend brands online, estimates that sales of counterfeit goods via the internet will reach $135 billion this year". The recession in richer nations has also led to the rise of counterfeiting, because consumers can get similar goods at a lower price simply because the goods are knock-offs. This has been seen steadily for the past few years by the U.S. Customs, who have noticed this growth and "in 2008 the value of fake goods seized at America’s borders increased by nearly 40% over the year before. It subsequently fell by 4% last year—far less than the 25% decline in imports overall. In Europe in 2008 customs services confiscated more than double the previous year’s haul of counterfeit goods". With this emphasis on the consumer trying to get a good deal when money is tight, it should be a constant worry for companies who wish to not end up like Crocs.

Businesses however, are making a stand against this new competition. Companies like Louis Vuitton are getting into the protection game and "lawsuits brought by companies against manufacturers and distributors of counterfeits are at an all-time high" says Kirsten Gilbert, a partner at Marks & Clerk Solicitors, a British law firm. Other means of protection include sophisticated holograms, inks, and watermarks to distinguish real goods from fake ones. Furthermore companies are emerging to meet the needs of the new market of goods protection, who "have also started to peddle radio-frequency identification technology to help companies track shipments". These companies also are "incorporating materials with special genetic markers into the packaging or product itself. Firms or officials can then literally check an item’s DNA to ensure that it is real". Although expensive, companies with high end products like Wineries are using this protection, and because of it, James Hayward, the boss of DNA Applied Sciences, has said this technology is essentially recession-proof because clients are literally "knocking down our door".

Governments are also trying to protect goods and services of their countries because it influences the economy through imports and exports, and according to a study by Frontier Economics, a consultancy company, "counterfeiting and piracy cost G20 economies €62 billion ($85 billion) a year in lost taxes and higher spending on unemployment benefits". The U.S. Chamber of Commerce also estimates that for "for every dollar invested in the fight against counterfeiting in America, the government receives $5 in extra tax revenue". Countries like France and Italy have taken this fight a step further, and threaten people in their countries with huge fines or prison time for those who purchase fake items. The European Union, America, and Japan are also "discussing a a new treaty, called the Anti-Counterfeiting Trade Agreement (ACTA), that would strengthen international controls on counterfeits and piracy", and is expected to be in effect soon.

Based on what we have learned in class about patents being the driving force for innovation, and companies like Crocs, it is essential that governments combat counterfeiting goods because it costs the taxpayers tremendous amounts of money whether we realize it or not. Furthermore, in a time where economies are still fragile but growing, the lost stimulation of money on knock-offs has a negative impact on the economy, and is slowing recovery. Essentially, knock-offs are not all that they are said to be, and it is influencing the world market and businesses through the rise of counterfeiting. However this fight will be a great test of the relations between the countries effected by the rise of knock-offs in the world market and China, where "where 80% of the world’s fake goods are thought to be produced". Essentially, if knock-offs continue to rise it will influence the world economy and the way business world works.

Do you think the anti-counterfeiting treaty will be successful? How will China respond to this economic threat if companies fight against the counterfeiting of their goods? Do you think this is a detriment to the world economy or not? Will the rise in counterfeiting lead to slower innovation, or will companies protect patents even more in regards to what we have discussed in class? How does this information relate to what we have discussed in class about Crocs? Will this information change your consumer habits?