Inside China's teeming world of fake goods

First of two parts

Three days before President George Bush's high-profile visit to China in November, a warning went out to vendors in Shanghai's sprawling outdoor market for counterfeit goods.

Shopkeeper Huang Jinlan and hundreds of other sellers at the Xiangyang market, world-renowned for fake designer goods, scrambled to clear out their vast array of Rolex watches, Callaway golf clubs and Louis Vuitton bags.

Bush was coming with another stern message to Chinese officials about the need to crack down on knockoffs of U.S. products. One might have thought the message was being heeded as typically aggressive sellers stashed away their incriminating goods. "We're going to lose a lot of business," said Huang, as she worked into the night to hide her Polo knockoffs.

The next morning, many shops were shuttered or half-empty when a dozen stern-faced inspectors clad in blue uniforms and police-style hats walked the aisles, examined goods and checked licenses.

But thanks to the advance warning, the lackadaisical inspection was as inauthentic as many of the products at Xiangyang. By the next week, the fake designer goods were back on the shelves. Business for Huang and the others returned to normal.

Counterfeiting has become deeply entrenched in China's economy as a source of income for both small-time hawkers and powerful local tycoons. With millions of jobs dependent on the counterfeit trade, many in China think cracking down would mainly benefit foreign companies. While authorities recently have strengthened anti-piracy laws, economic and cultural forces will make change slow and difficult.

Fuel for Chinese economy

The U.S. trade representative claims that 90 percent of virtually every form of intellectual property in China is pirated. (Intellectual property includes copyrights on creative works such as music and software, patents on inventions and formulas, and trademark for logos.) China was the source of two-thirds of all counterfeit goods seized at U.S. ports in 2004.

U.S. and other foreign companies complain they are losing billions of dollars as their ideas and inventions are copied for sale within China and for export across the globe. Those losses undermine innovation and cost jobs here. Some forms of intellectual-property theft — involving fake car parts, baby food and medicine — can even cost lives, wherever they are sold.

China has made some important progress, such as a 2004 law criminalizing counterfeiting and piracy, but its enforcement system hasn't kept pace with the breakneck speed of its economic changes. Outside pressure to crack down on piracy runs up against internal pressures to keep people employed and prices affordable for the masses.

The unshackling of China's centrally planned economy over the last two decades has widened the gap between rich and poor. For the majority at the bottom, who lack education and connections, opportunities to rise beyond menial labor are few.

Counterfeit trade provides one alternative. The production, distribution and sale of pirated goods make up a vast industry in China, supporting a kind of entrepreneurial economy.

Piracy provides "a safety valve of trickle-down gain to the man on the street, presenting jobs and economic freedom for people who have no other options," said Nelson Dong, a partner at the law firm Dorsey & Whitney in Seattle, who works with multinational technology companies doing business in China.

Sellers who buy the goods from a local distributor can operate their own highly mobile street business.

A typical scene unfolds daily on a bridge near Beijing Normal University. Street hawkers sell pirated DVDs to passers-by from small boxes or baskets. When authorities arrive, they throw a cloth over the goods, pack up and run to another part of town.

Local officials have little incentive to enforce intellectual-property laws if that could put many people out of work, Dong said.

"The government's tacit winking of the eye is because they know they are gaining something from nonenforcement," he said.

In the case of the Xiangyang market, local government may be gaining financially, too. Hundreds of tenants pay monthly rent to a management company that leases the land from the city. For some shops the rent is as high as $5,000 a month, so the annual total reaches millions of dollars.

And yet Shanghai authorities have vowed to shut down the market this year, saying it damages the city's image.

Hustling for customers

Outside Huang's stall, which resembles a narrow walk-in closet, two scrappy boys in flashy red motorcycle jackets scout for customers among throngs of passers-by.

They offer rows of multicolored Gucci wallets and glossy Mont Blanc pen sets.

"Look here, you look, real leather," says the older boy, Huang Fei, as he passes the flame of a lighter over a wallet to prove it's not plastic. When pressed, he sheepishly admits that his shiny designer watches will work for several months but probably not more than a year.

Across the way, a vendor grabs a Spanish tourist by the arm and tries to pull him back into her shop.

"No, very cheap," she says. "I give you very cheap."

Merchants say they are simply meeting demand. Though many Chinese products are also plagued by counterfeiting, the Xiangyang market's products and knockoffs of foreign goods appeal mainly to tourists.

"Foreigners all like copies," said Jane Chang, who speaks broken English and runs the shop next door. "If foreigners don't like copies, then we won't sell copies."

Shopkeeper Huang, 46, a petite woman with a toothy smile, worked for a state-owned stone-processing factory until she was sent into early retirement last year. Now she works six days a week in the counterfeits shop for extra money to support her daughter, a student at nearby Fudan University. Her husband works in a Shanghai automobile plant.

She sits on a stool in the back of the shop eating a lunch of instant noodles from a metal bowl. Huang says there are few jobs available in Shanghai for a middle-aged woman with little education, so she went to work in the shop rented by her brother.

"My pension is very small and everything keeps getting more expensive," she said. "I need more money so my daughter can eat and pay for books."

Huang Fei, who is not related to Huang Jinlan but sublets half of her tiny stall, said he spent eight years laboring as a waiter, earning just enough to live. Now he wants more money and a better life.

In Shanghai, the minimum wage for full-time workers is about $85 a month. In contrast, during a good month at the counterfeits market, each of the Huangs might take home a few hundred dollars.

Providing cover

As the new center of global manufacturing, China has myriad factories that churn out sports shoes or computer chips — and occasionally apply their expertise to the black market.

About 90 percent of China's counterfeiters operate under the cover of legitimate businesses, said Joseph Tsang, a Hong Kong-based private investigator who works with global companies.

"If they want to copy a Dunhill shirt, they'll put the label on at the last possible moment," he said. "Not until then can the authority raid them and say you are making a counterfeit product."

Most of the counterfeit goods are made in southern coastal areas, close to Hong Kong. But even pirates are subject to economic pressure, and recently some have moved inland to cut costs. Now, said Tsang, an anti-counterfeiting expert with 25 years' experience, "Pirated goods are produced all over China, in nearly every province."

Counterfeiters range from large companies employing 3,000 workers to small operations of less than 30. Some of China's former state-owned enterprises that no longer get government handouts are also turning to counterfeiting to survive, he added.

In the past few years, the pirates have gotten so good that they're moving up the value chain and exporting car parts, clothes and computer chips to the United States, Europe and the Middle East, Tsang said. The fakes are often so well copied that even experts can't tell the difference.

Tsang said his company performs 50 to 100 investigations a month. About one-third of those result in some enforcement action, either by local police, civil litigation in court or by the State Administration for Industry and Commerce, a central-government agency that regulates business operations.

He is convinced China's central government is working hard to reduce piracy but says local authorities don't always comply. The country's huge size and population make piracy, like so many other problems in China, difficult to solve.

Sleuthing for Microsoft

On a cold, clear winter morning in Beijing, a different inspector began his regular task of hunting for counterfeit software.

Private investigator Wang combs the city's electronics and software markets to spot pirated products. His information has helped Microsoft pursue several successful cases against infringers.

Wang, who asked that his first name not be used to protect his livelihood, headed to the Zhongguancun district, known as China's Silicon Valley. With a shopping bag in hand, he parted thick plastic insulation strips covering the doorway of the vast Ding Hao market and entered the liquid crystal glare.

Wang was on the lookout for high-end enterprise software that Microsoft markets to companies.

A regular government-inspection period was under way, so most fake software wasn't displayed prominently.

"After the inspection, it will be back on the countertops," Wang said.

Still, it didn't take long to find counterfeit software. In the stuffy, overheated basement, several vendors operating shops hardly bigger than office cubicles were selling dozens of titles from cardboard boxes on the countertops. Windows 2003 Server, Windows XP Professional and SQL Server could be had for about 60 cents each. Customers were buying.

Upstairs on the second floor of the same building, the authorized Microsoft store was selling the same software titles for as much as $1,000 each. The store was devoid of shoppers.

Broadening tastes

A new Louis Vuitton flagship store opened in November in Beijing inside the chic China World shopping mall. The least expensive item in the three-story, marble-and-glass shop was a leather business-card holder for $125, yet the store was full of shoppers and doing a brisk business.

Some of the favorite brands of counterfeiters have also become the most successful retailers in China. The nation's wealthier consumers are gravitating toward the higher status or better quality of genuine articles — and they often buy brands that first became familiar in the counterfeit markets.

And China has its own business giants, such as Huawei (telecom), Lenovo (personal computers) and Li Ning (tennis shoes), that have a growing interest in protecting their valuable brand names and technology.

Those well-to-do consumers and ambitious corporations may propel a shift in attitudes in the broader Chinese society.

"It's not a problem that is going away in a couple of years," said David Zhang, an Intel veteran who is vice president at Wonders Information, a Shanghai-based software company. "But it will be improved."

In spite of urban China's modern veneer, there's still a deeply rooted cultural component at work. The whole idea of copyright is simply foreign.

From an early age, students have been taught to emulate artistic and literary masters of the past.

"When you study, you learn to copy the masters," Zhang said. "If you say you want to be innovative right away, people say you're crazy. That's a cultural process, and it will take time to change."

Shanghai officials say they intend to close the five-year-old Xiangyang market this year but may allow it to reopen elsewhere if sellers respect intellectual-property rights. The current site's valuable real estate has been marked for redevelopment.

The impact on the counterfeit trade is unclear. When a similar operation in Beijing, the outdoor Xiushui market, was closed last year, a bigger and better center for counterfeits quickly opened up inside a six-story shopping mall next door.

Huang, for one, hopes she can continue her business and earn enough money to help her daughter get through two more years of university education.

"My daughter has great potential. She's studying in a university, so she has a good chance for the future. In my life, we didn't have this chance."

The engaging 19-year-old student, who wears a knit beret and calls herself Yvonne, aspires to be a nurse. But she doesn't aspire to wear Western name brands, real or fake.

"I don't like that market," she said of Xiangyang. "I don't think their clothes are very beautiful."

Seattle Times business reporter Kristi Heim, who conducted many of the interviews for this story in Mandarin, traveled to China on a World Affairs Journalism Fellowship from the International Center for Journalists. Kristi Heim: 206-464-2718 or kheim@seattletimes.com

Seattle Times photographer Alan Berner: 206-464-8133 or aberner@seattletimes.com