TIPG Weekly (Linkedin Double Edition) #Semiconductors, #Alibaba-Warehouse #Fake-Goods, #Academic-Fraud, #Huawei, #Xiaomi, #Brand-Confusion
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Data & Analysis
This week's stories
- Zhejiang police bust major cosmetics counterfeiting ring
- Chinese state media rebuts Europol report's counterfeiting allegations
- Alibaba's 'secret' warehouse of fake goods
- Is China's semiconductor investment funding counterfeiters?
- Beijing vows to crack down on academic fraud
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Data & Analysis:
Chinese smartphone brands benefit from brand confusion and lower prices
Left: Huawei's Honor V9 released February 2017
Right: Apple's iPhone 7 released March 2017
Analysis:
By TIPG Director, Dean Arnold
Combining brand confusion and lower prices has been an excellent strategy for taking down incumbents and making significant gains in China's competitive smartphone market. First Xiaomi did it. Now Huawei is reaping the benefits. It's no secret that ascendant Chinese smartphone brands incorporate elements of iconic international brands into their design and advertising. And while it's not exactly counterfeiting, it is uncanny the degree to which Chinese smartphones can resemble Apple's iPhone.
Xiaomi handsets were the first to be called out for their resemblance to iPhones some years ago, and we know that this has been a deliberate move by the company to raise its profile, even if it has resulted in some negative publicity. In 2014, Xiaomi CEO Lei Jun, clad in a black shirt and blue jeans, did his best Steve Jobs impression as he unveiled the Mi 4. Lei mentioned Apple's products throughout his introduction of the phone and even told the audience that Xiaomi went to the same contract manufacturers that make the iPhone, to ask what they could produce for Xiaomi.
Overall, Xiaomi's strategy has been a success. The company is the No. 5 smartphone vendor in China by shipments and remains one of the world's most valuable startups. It is not a big player globally, with the exception of India where it is the No. 2 handset vendor by shipments.
Of course, Xiaomi, despite its sky-high valuation, is barely six years old. We can cut this "startup" some slack for its lack of originality. But what about Huawei, China's top smartphone vendor by shipments and a long-established telecommunications giant? Huawei's newer Honor smartphones closely resemble iPhone 6 and 7 models and also use similar colors. The only notable difference is the circular home button missing from the Honor.
Critics could rightfully point out that there are just not that many ways to design a smartphone. However, when Huawei's advertising and billboards also cut a strikingly similar image to that of Apple's, it doesn't leave much doubt that Huawei's intention is brand confusion. Those who regularly travel through China's domestic airports will know what I'm talking about here; The billboards look and feel like Apple. All in all, it's a means of stealing away demand for the iPhone and also filling that demand for consumers who want the real thing but can't afford it. So in that way, the Honor is akin to a luxury knockoff.
With regard to prices - Huawei and other Android phone-of-the-moment brands Oppo and Vivo offer consumers better value than Apple to be sure. They have near-complete supply chains in China capable of churning out excellent hardware efficiently. They aren't necessarily cheap, but a bargain compared to an iPhone, which starts at 5388 yuan in China. An entry-level Huawei Honor 8 costs less than half of that amount. An Oppo R7 is about 40% cheaper.
Some analysts insist Chinese consumers want to support domestic brands, but ultimately, discerning buyers who can afford it prefer iPhones to Honors.
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Zhejiang police bust major cosmetics counterfeiting ring
Original article: Jiangxi News (Chinese)
Police in the Zhejiang province city of Dongyang have shut down the operations of a major cosmetics counterfeiting ring as production and sales of the knockoff products reached RMB 100 million. Among the trademarks infringed are those of Shiseido, L'Oreal, Clinique, and NARS.
In total, Dongyang police arrested six suspects and seized 1.7 million pieces of counterfeit cosmetics and 440 million pieces of packaging. They also confiscated five production lines and various production equipment.
Investigators noted in a report that the counterfeiters had a large facility on Wanjiang North Road in Dongyang. The facility occupied the fourth and sixth floors of a factory building and included separate rooms used in different stages of the production process as well as several dedicated storage areas.
Analysis:
Yiwu City in China's Zhejiang Province is the largest wholesale market in the world. As such, it is a hub of both legitimate and illegitimate business. A 2014 World Trademark Review report found that Yiwu was home to 30,000 stores selling 100,000 types of counterfeit goods.
The leaders of the counterfeiting ring described in the story - a husband and wife team - sold the fake cosmetics in Yiwu primarily for export to Iran (the top market), Pakistan and Afghanistan.
According to the article, they not only had their own cosmetics brand, but also served as contract manufacturers for Shiseido, L'Oreal, Unilever, NARS, and Clinique - the same brands they were counterfeiting.
There is a key similarity between these cosmetics counterfeiters and the fake footwear makers based in Fujian province that TIPG reported on several weeks ago: Before manufacturing counterfeits, both began their businesses producing genuines, but later got involved with knockoffs because of lucrative margins.
The Dongyang suspects told investigators they turned to counterfeiting because their own cosmetics brand was selling poorly. While one unit of fake lip gloss has a wholesale price of 8 jiao to 2 yuan, a genuine version of the same product can sell for a retail price of 80 to 150 yuan. So the temptation to counterfeit is strong indeed.
So why make genuines at all? Well, it has its advantages. Producing both genuine and counterfeit product adds a layer of security for the counterfeiters who can use the ambiguity to their advantage. Genuine product can provide the front business for the real money-making operation of counterfeit goods, and shipments that pack both genuine and counterfeits in the same containers or cartons may be less scrutinized. Furthermore, if during a raid action, Chinese authorities are presented with genuine trademark certificates (whether or not related to the target product) and or some form of brand owner authorization, the legality of the raid can become unclear in the eyes of the officials, resulting in a non-seizure.
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Chinese state media rebuts Europol report's counterfeiting allegations
Original article: Xinhua, Europol
China's state-run Xinhua News has rebutted allegations by Europol that China is the world's foremost production hub of counterfeit goods. The report alleges that China and Hong Kong account for 86% of the world's counterfeit goods.
According to Xinhua, Europol's data is of questionable accuracy "because there is no [reliable] method of calculating figures on fake products worldwide." Zhao Ping of the China Council for the Promotion of International Trade said: "It may be convincing that they have figures for fake Chinese products in Europe, but it is suspicious that they calculated fake products in China and even China's share of global fake products."
"We cannot rule out the possibility that they are smearing China's image on the basis for trade protectionism," Zhao added.
The Xinhua report further noted that China's commerce ministry "has said China is aware of the importance of IPR protection and has made obvious progress in the area."
Analysis:
Xinhua acts as a mouthpiece for viewpoints in Chinese officialdom - often the mainstream central government viewpoint. Several years ago, Xinhua slammed Alibaba, saying 40% of all goods sold on Taobao were fake or shoddy. It's not clear if Alibaba got the message.
It is interesting the article mentions "protectionism" given China's own pending "to-do list" for its WTO commitments. The U.S.-based Information Technology and Innovation Foundation published a report last year describing the many areas in which China has yet to fulfill its WTO obligations. These include a continued requirement of technology transfer as a condition of market access, restricting foreign investment in the telecommunications sector, a failure to reduce export subsidies substantially, ongoing restrictions on foreign film distribution, and Chinese state-owned firms making purchases based on non-commercial considerations.
China would appear to have made substantial progress in IP protection in recent years. The Xinhua report cites data compiled by the Chinese authorities to prove that point: Last year, Chinese police solved 17,000 IP infringement cases involving goods valued at 4.6 billion yuan. Meanwhile, customs authorities seized more than 17,000 shipments of goods suspected of IP infringement; Courts heard 136,500 IPR cases, up nearly 25% from a year earlier.
However, China needs to do more to address the counterfeiting problem at its roots. Stiffer punishment of offenders - whether they be trademark squatters or producers of fake goods - would be a strong deterrent.
Oversight of e-commerce platforms must be increased as well. To a certain degree, that's in the hands of the internet giants themselves, and to a lesser degree brand owners, as the Chinese authorities rarely intervene. JD.com has strong governance but also benefits from a business model that is not as conducive to counterfeit goods as its rivals. WeChat needs to enhance supervision of accounts dealing in counterfeit goods, especially individual accounts. Alibaba can also do much more.
In addition to a more proactive stance on E-commerce, Chinese authorities could deploy better technology to strengthen the regulation of exports - To date, such regulations have failed to keep up with the pace of the counterfeiters.
With the expansion of the One Belt, One Road (OBOR) initiative, China will have the opportunity show its sincerity in curbing the counterfeit goods industry. The Europol report noted that the expansion of rail links between China and Europe could expedite the transport of contraband across national borders. Transporting counterfeit goods by sea takes up six weeks, but that time could be reduced to just 18 days if the goods travel by rail.
“The rail solution would appear to be a logical choice for many counterfeit consignments…rail connections could offer concrete advantages to international intellectual property right-infringing criminal networks, and should be kept on the radar,” the report noted.
In 2014, there were just 12 external border seizures on trans-Asian rail routes and only two in 2015. As OBOR gathers steam, the world will be watching to see how those figures spike.
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Alibaba's 'secret' warehouse of fake goods
Original article: Tjer.com (Chinese)
Alibaba's fake-goods warehouse is a well-kept secret of which even company employees reportedly have little knowledge. The 300 square meter facility is located in Alibaba's Xixi Park in Hangzhou. This warehouse maintains a constant temperature and humidity year round and is not exposed to sunlight.
It also has a unique name: the Alibaba Anti-Counterfeiting Evidence Warehouse. To crack down on counterfeits, Alibaba says it spends 100 million yuan annually to purchase the goods and inspect them itself. The warehouse is used to store the counterfeit goods.
Analysis:
Apparently, this warehouse is not so secret that it cannot be disclosed to the media. TIPG believes this is the latest in a series of high-profile moves by Alibaba to burnish its anti-counterfeiting credentials. The endgame is achieving the removal of Taobao from the U.S.'s Notorious Markets blacklist in December.
To that end, the article goes into detail about the financials behind Alibaba's anti-counterfeiting work."More than 200 thousand yuan was spent on initial construction, to ensure consistent temperature and the right humidity, and to avoid direct light," warehouse staff member Ling Feng (a pseudonym) said.
According to Alibaba, at present, the warehouse contains 5,785 fake goods stored by category, brand and storage time, neatly stacked in 30 rows of shelves. These fake goods were obtained by both Alibaba's anti-counterfeiting team and the Chinese authorities.
Each fake in the warehouse has a certification report issued by the original brand. Some overseas luxury goods need to be sent abroad for foreign identification.
According to the article, Jack Ma has said that "there is no limit to the budget [Alibaba's] for fighting counterfeits."
If that's the case, then perhaps Alibaba will more aggressively police its own e-commerce platforms. That's the main way eBay reduced the sale of counterfeit goods, although it has benefited from the United States' robust anti-counterfeiting legislation.
Alibaba is cognizant of the need for a stronger legal deterrent against counterfeiters. In a February statement, it said that "progress against this illegal activity is negligible because the costs and risks of producing and selling counterfeits are too low. The only way out of this is to impose tougher criminal sanctions on every individual involved in the chain of operation.”
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Is China's semiconductor investment funding counterfeiters?
Original article: European Semiconductor Industry Association
The European Anti-Fraud Office (OLAF) and Dutch Customs have seized more than one million counterfeit semiconductors and related devices imported into the European Union from mainland China and Hong Kong. The confiscated devices seized over a two-week period include diodes, LEDs, transistors and integrated circuits.
Semiconductor companies and their authorized partners have comprehensive controls to ensure products are as fail-safe as possible. Counterfeiters do not. Further, counterfeiters often use crude methods to extract used semiconductors from discarded boards, which they then assemble into ostensibly new equipment. Quality is typically poor and reliability low. The equipment may initially function without incident but later underperform or fail ahead of its expected life cycle.
Use of counterfeit semiconductors in electronic products may cause computer systems to fail and threaten critical infrastructure. Worse still, the fake chips may threaten human lives, as semiconductors have applications in things like cars, airplanes and surgical instruments in hospitals.
"These seizures illustrate how crucial European cooperation is in the fight against the illegal trade of counterfeit products," said Giovanni Kessler, Director-General of OLAF, in a statement. "By working together, we can ensure that European citizens are not harmed by fake products."
Analysis:
China's IC counterfeiters are threatening the integrity of the central government's initiative to build the PRC into a global semiconductor powerhouse. For security reasons, Beijing doesn't want to rely on imported chips in sensitive infrastructure. It also wants to move up the value chain to become an advanced manufacturer, like Japan, Germany and the U.S. The central government is investing $150 billion between 2015 and 2025 in pursuit of those goals.
Beijing is unlikely to realize its ambitions in the semiconductor field if authorities do not clamp down on counterfeiting. The reason being that counterfeiters are not going to distinguish between what's for export and what's for domestic use. Their only goal is to maximize profits. Thus, opportunities to sell fake chips within China are rising alongside the government's mammoth investment in the semiconductor industry.
Counterfeiting of semiconductors also damages China's image internationally and is likely to harden the resolve of strategic competitors in the sector. In the U.S., there is already considerable concern about the market distortions China's colossal investment in chipmaking could create. "Semiconductors are one of our shining industries, but they have gone from substantial surplus to the beginnings of a deficit," U.S. Commerce Secretary Wilbur Ross told Reuters in a May interview. Noting Beijing's planned $150 billion investment in ICs, he said, "That is scary."
Fortunately, there have been some positive developments in the battle against fake semiconductors. The U.S. Trade Facilitation and Trade Enforcement Act of 2015 authorizes the U.S. Customs and Border Protection to share information and suspect counterfeits with rights holders. That should help speed up identification of fake chips. Additionally, in March 2016, JEDEC, an organization that sets standards for the microelectronics industry, published a new standard identifying the best commercial practices for curbing the proliferation of counterfeit products.
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Beijing vows to crack down on academic fraud
Original article: Financial Times
A global medical journal has retracted 107 Chinese-authored papers from the past five years, prompting Beijing to launch a crackdown on academic fraud. The retraction is the largest case to date of phony peer reviews to endorse research.
Springer, which publishes the journal Tumor Biology, said it made the retraction because the peer review process had been “deliberately compromised by fabricated peer reviewer reports."
After the announcement of the retraction, Shang Yong, Executive Vice Chairman of the China Association for Science and Technology (CAST), said at a press conference: "China will resolutely contain the breeding and spreading of academic fraud and deal with such misconducts seriously."
Shang said that third-party agents who provided fake peer reviews were to blame for the retraction. He called for stricter monitoring of the publication of academic papers and greater integrity in the research process.
Analysis:
China is intent on becoming a world leader in science and technology. It is now the world's No. 2 source of academic publications after the U.S. Unfortunately, like many of the country's ambitious initiatives, academic publishing has primarily become a numbers game. Chinese academics typically expect to advance based on the quantity of their publication output, not its quality. Academic excellence is thus not integral to their career progression.
In a 2012 statement, judges from The British journal Nature and charity organization Sense About Science, which together give an annual award for outstanding scientific achievement, wrote that "China’s rush to modernize and the communist government’s celebration of science and technology have firmly embraced scientists and scientific achievements, sometimes uncritically. And into that permissive milieu has walked a plethora of opportunists ready to take advantage of the situation with padded CVs, fraudulent and plagiarized articles, bogus medicines and medical procedures carried out without clinical evidence."
Yet without a sufficient number of publications, academics face obstacles to advancement. Given the pressure to publish, they may resort to cheating to reach their target. As noted by the Financial Times, 41 of the 43 papers retracted by the British Medical Journal’s BioMed Central in 2015 were written by Chinese authors. According to NGO Retraction Watch, China leads the world in articles retracted because of bogus peer review.
Rampant academic fraud not only weakens China's bid to become a global science and technology juggernaut. It also reinforces the lingering stereotype of the country as a moral vacuum. Nothing is more damaging to China's national brand, especially as it vies to shake off its image as a manufacturer of cheap consumer goods. If a great number of China's scientists are cheats, the world cannot trust scientific research or breakthrough products coming out of China.
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TIPG Weekly is edited by Matthew Fulco (AmCham Taipei, China Daily, Colombia University) with support from TIPG's Analyst Team in Shenzhen.
Sign up to TIPG Weekly for free and have the original newsletter sent to your inbox each week. Benefits include earlier access plus additional data and analysis.
THE INTELLECTUAL PROPERTY GROUP
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