The Status of Fakery in China

China is infamous for the production of counterfeit consumer goods that occurs within its borders. From high-tech electronics to wine, Renaissance-era fine art to shellfish, if there is a market for something, someone is likely trying to fake it. While the central government has made moves to curb this practice, a penny-wise public’s desire to conspicuously consume keeps fake products flowing within China’s shanzhai markets, and out into to the world. While the quality of counterfeited products usually pale in comparison to the real thing, many consumers sacrifice craftsmanship for prestige in their quest to “keep up with the Wangs“. An article in The Economist explores the driving forces and overall implications of China’s fake luxury industry:

Economists and policymakers around the world want China to consume more. They are eager for it to reduce its dependence on investment, which amounted to almost half of GDP last year. No economy that invests so heavily can possibly invest it all wisely. Economists therefore worry about a widespread misallocation of capital, or “malinvestment”. But some of China’s consumption is also a bit questionable.

[...]A Prada handbag is a bundle of two things: a well-made product and a well-marketed brand. But some consumers value prestige, not quality. Fakes allow shoppers to “consume” the prestigious brand without buying the high-quality good, as Gene Grossman of Princeton and Carl Shapiro, now of the University of California, Berkeley, pointed out in a seminal 1988 paper. This unbundling no doubt drives Prada and others mad, but it would seem to be a boon to consumers.

But it is possible that buying genuine luxuries imposes an externality of its own. Status, after all, is a “positional” good. To be top of the social heap, it is not enough to have fine things. Your things need to be finer than everyone else’s. Someone who buys a more expensive watch or car to climb up the social ladder forces other social climbers to spend more to stay ahead. In making their purchase, they will carefully weigh how much prestige their big spending will buy. But they will not take into account how much extra everyone else will now have to spend to preserve their social position. As a result of these “arms races”, China may be overspending on luxury goods. Its shoppers account for only 6% of the world’s consumer spending, but, according to figures released by Bain Consulting last month, they now account for 20% of global sales of luxury goods.

A blogpost from The Economist covers the same topic, mentioning a paradox born from the desire to impress:

If a customer falls for a fake, they obviously lose out. That is a clear example of malconsumption. But many buyers are not duped by their purchase; they want their purchase to fool everyone else. No doubt they often succeed, passing off a counterfeit good as the real thing. But in China, fakes are so widespread, the opposite danger also looms: genuine articles may be mistaken for fakes. Yue Li of Nottingham University (Word doc) cites one Chinese shopper who wrote the following on an online discussion board:

 Even if I bought a real one, it’s really embarrassed [sic] if other people think it’s fake, should I explain to everyone that it’s real?

A Global Times article briefly summarizes the topic, and provides some pictures of ambiguously branded products:

While China’s rich rival their foreign counterparts in conspicuous consumption, poorer Chinese are no strangers to these brands, either. Fake products are easily available at street stalls and some big markets at very cheap prices. Other goods sell under domestic brand names, but are virtually indistinguishable from famous global labels.

The authorities have repeatedly launched anti-counterfeiting campaigns in recent years, but the effects so far have been barely visible in the marketplace.

So when somebody proudly brandishes their handbag or wears a new designer shirt, it might mean profits for Paris or Milan, or, more likely, another shanzhai product fresh off the line.

Chinese made fakes are not only found in upscale consumer markets. Practical and essential products and commodities like medicine or cooking oil are also reproduced. Sometimes, counterfeiters target foreign markets. ABC News reports on a shipment of fake train tickets found in Italy this week:

Italian police are not surprised when they find counterfeit goods from China, but were taken aback to find $35 million worth of counterfeit train tickets for Rome’s “Leonardo express” train on a ship that arrived from China.

Police in the Tuscan port of Livorno discovered over 2 million Chinese-made counterfeit train tickets stashed in 28 cardboard boxes at the back of a container meant to be carrying office furniture and postcards.

The tickets were all for the Rome central train station-airport “Leonardo express” train which sells at 14 euros ($19) a ticket.

The National Journal reports on a new bill designed to keep nearly indistinguishable counterfeit microchips out of the US military’s supply chain.

A flawed Department of Homeland Security policy has opened the “floodgates” to counterfeit microchips from other countries, Rep. Mike McCaul, R-Texas, said on Thursday as he announced a bill designed to stem the tide.

“This is a tremendous national security risk to our military and our intelligence networks,” McCaul, who chairs the House Homeland Security Oversight and Investigations Subcommittee, said in a statement.

He said that in 2008, DHS officials stopped providing companies with photos, serial numbers, and other information needed to identity fake microchips.

That policy, McCaul said, allowed the United States military to buy nearly 60,000 counterfeit microchips from China in 2010. Corrupt microchips were discovered in Navy anti-submarine helicopters and aircraft, as well as military cargo planes, according to a Senate Armed Services Committee investigation.

June 22, 2012 1:33 PM
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