Brands in China: Pro logo Go back »

2012-01-13 | All chapters

Brands in China: Pro logo
The Economist, Jan 14th, 2012

WHEN Da Vinci, a retailer of expensive imported furniture, opened its new showroom in Shanghai recently, it spared no expense. The gallery, over 10,000 square metres spread over four stories, was filled with extravagant pieces from brands such as Armani Casa and Versace Home. The theme of the event was zhen de jia bu liao (roughly: “what is genuine cannot be counterfeited.”).

Yet Da Vinci is embroiled in a scandal. CCTV, an official media outlet, alleged that some of its imported kit may actually have been made locally, shipped overseas or to a bonded warehouse, then brought back into the country to earn an undeserved “imported” seal. The firm hired a public-relations agency to put a more positive spin on the story. Da Vinci claims this involved paying $150,000 through a broker to a journalist who, it alleges, threatened to run more damaging stories if not paid off.

All parties involved deny wrongdoing. An initial official ruling seemed to clear Da Vinci, but in December the Shanghai authorities slapped fines on the firm for alleged misdeeds including improper labelling. Da Vinci now says it will take the authorities to court to clear its name and has filed a police complaint against the broker and journalist over what it says was an extortion plot.

Whatever the truth behind this murky affair, it has revealed something about how the attitudes of Chinese consumers are changing. Counterfeiters are no longer popular. Not long ago, Chinese shoppers applauded the fakers for saving them money. Now they scorn them. If it’s a fake, the well-heeled sneer, you can’t flaunt it.

Fakery is not dead, of course. In 2009, roughly 30% of mobile phones in the country were thought to be shanzhai—a popular term for clever fakes. The Business Software Alliance, a trade group, claims that nearly four-fifths of the software sold in China in 2010 was pirated. In December the US Trade Representative issued its annual report on the world’s most “notorious” counterfeit markets. Of the 30-odd markets identified, eight were in China. Some, such as Beijing’s Silk Street market, are well-known. The report also points the finger at Taobao, an online marketplace owned by Alibaba, China’s biggest e-commerce firm. That may be unfair. Taobao has clamped down so hard recently that it is enduring protests by angry vendors.

Still, as China grows richer, life is growing harder for fakers. A recent study of China’s luxury market by Bain, a consultancy, concludes that “demand for counterfeit products is decreasing fast.” McKinsey, another consultancy, found that the proportion of consumers who said they were willing to buy fake jewellery dropped from 31% in 2008 to 12% last year. This is good news for all brands, not just the blingy ones. “Consumers are looking for the real thing, and they are increasingly willing and able to afford it,” say the authors.

Cash-strapped youngsters still love counterfeits, says Chen Junsong of the China Europe International Business School. But those over 30, if they have a bit of money, have become extremely brand-conscious. There is a “comparison culture”, he observes. People are ridiculed if spotted with a fake Gucci handbag.

Another reason why fakers are under pressure is that Chinese firms now have intellectual property of their own to protect. Brands such as Lenovo (a computer firm) and Haier (a maker of everything from fridges to air-conditioners) are highly valuable and therefore worth defending. The more Chinese innovators gripe about fakery, the more strictly the government enforces the law. It just announced that it aims to stamp out counterfeit software in government offices by the end of this year.

Even sceptical foreign manufacturers believe China is changing. Douglas Clark, an expert on China’s intellectual-property regime, points to a survey by the EU-China Chamber of Commerce suggesting that counterfeiting, long the first or second gravest concern of its members, is now third, fourth or not even ranked.

Tougher law enforcement has helped, he says, but so too has the fact that foreign firms have learned how to cope with fakes. Some have set up their own branded retail outlets to control distribution. GlaxoSmithKline, a British drugs giant, has introduced fake-proof “e-coding” of pills.

Chinese consumers are realising that brands are not just about showing off. They can also send useful signals about quality. A Coke probably won’t poison you because it would cause billions of dollars of harm to the Coca-Cola brand if it did.

In December China suffered another scandal involving tainted milk. Shoppers instantly shunned the local firm involved. Nestlé, a Swiss food giant, saw an opportunity. It announced this week that with its local partners it will invest some $400m to boost its dairy operations in China.