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Keeping up with the copycats

by December 21, 2017 General

By Lim Wei Shi, Christopher Tang and Sarah Gao Yini

ACCORDING to the International Chamber of Commerce, the total value of counterfeit and pirated goods is estimated to rise to $2.81 trillion by 2022. While this number may appear staggering, less obvious but equally if not more important is its bearing on the wider social landscape. The same report estimates that hidden costs including the displacement of legitimate economic activity, loss in foreign direct investment, fiscal losses, and costs of crime will amount to $1.87 trillion.

A similar sentiment was expressed by the Philippine Chamber of Commerce and Industry. It felt that the ill effects of counterfeit products threaten not only the well-being of Filipinos but also cause layoffs, impact expansion of businesses, and discourage entry of more foreign investments.

Several Asian countries are culprits of the counterfeiting industry. A report released by Organization of Economic Cooperation and Development (OECD) showed China and Hong Kong leading the pack, making up over 80% of counterfeit seizures. Even Alibaba, the biggest online retailer, has been reported to sell counterfeit products.

In the Philippines, P13.33 billion of counterfeit goods were seized in 2014, a figure that has declined in recent years in part because of unrelenting enforcement campaigns that have curbed counterfeiting.

Companies spanning from Puma to Pandora and Prada have also stepped up measures to outdo counterfeiters. Pandora, the Danish jewelry company, has a brand protection team that has taken down a look-alike Web site selling imitations from China twice in the past. However, once a site has been shut down, it often pops up on another Internet service provider.

Hence, companies such as MAC, the American cosmetics company, offers counterfeit education on its Web site in the Philippines on where to find genuine MAC products and how Filipinos can report counterfeits.

But copycats are popular because they confer consumers the social status associated with luxury goods without the high price.

In our study on counterfeits at the National University of Singapore Business School, we had three observations as to why copycats are more likely to successfully enter the marketplace.

First, fakes are usually of high resemblance but low quality. Low-end, ill-equipped factories that produce imitation goods are mindful that by producing better quality copycats, they run the risk of encroaching on the profits of genuine brands. If they maintain a lower quality, the impact on genuine brands is low and genuine brands “tolerate” their presence. Such factories also avoid attracting the type of attention that results in calls for enforcement of anti-counterfeit measures.

Second, regardless of actual entry of a copycat, the potential threat is sufficient to force luxury brands to lower the prices of their genuine goods.

Football club Liverpool cut the cost of its latest shirt from $87 to $30, in an attempt to convince Chinese consumers to buy its official merchandise. While the low-cost shirt may look similar to the official jersey, it is redesigned with simpler materials and is not made by the club’s official sponsor, New Balance.

Even luxury brands have adjusted their prices to contend with the counterfeit markets. While it did not offer a cheaper version of its most sought-after bag, Chanel in 2015 aligned global pricing across Asia and Europe to regain control of its brand image. Other luxury houses such as Prada, Cartier, and Burberry also followed suit.

Despite the discount, it may be challenging for brands to compete with the fake that looks similar but costs much less. Liverpool’s price cut faces potential backlash from UK fans who are already unhappy with the high price they have to pay.

There’s also the consideration of the impact of counterfeits on consumers’ social status. While counterfeits do not measure up to the real thing, consumers still buy them as it offers the opportunity to gain a higher “social status,” as long as they are not discovered. In the event that they are found out, they may be humiliated or shunned by their peers.

The ubiquitous counterfeit market has luxury brands to rethink its strategy for Asia.

As a response to market demands, brands have either resorted to creating a genuine copycat, if you will, of its product and/or lowered the cost by more than half to break into the Asian market.

Whether such a strategy will be successful remains to be seen. However, based on experience, these low-cost counterfeit-producing factories are innovative enough to keep genuine brands on their toes as they continue to reinvent their business model to stay ahead of the business and the law.

This vicious cycle is likely to continue unless there is stronger law enforcement to crack down on counterfeits. The Philippines appears to have made some headway here. Even now, many firms in developing Asian countries are able to produce and sell imitation products because of efficient supply networks, inconsistent law enforcement, and large underserved markets.

Lim Wei Shi is Associate Professor of Marketing at the National University of Singapore Business School where Sarah Gao Yini is a PhD student in Analytics and Operations. Christopher Tang is University Distinguished Professor and Edward Carter Professor of Business Administration at the UCLA Anderson School of Management.