INDUSTRY ISSUESCan Parts Counterfeiting
In China Be Capped? SHANGHAI (April 18, 2006) - Frost and Sullivan recently released a report, authored by researcher Amelia Wong, that offered background on why parts counterfeiting is a booming business in China. China is a rapidly developing country with a Gross Domestic Product (GDP) growing at more than 8 percent annually over the past five years. In contrast to the national average, the Chinese automotive market has been growing even more rapidly at more than 15 percent annually. At these rates, GDP will double in nine years, while the automotive sector will double in less than five years. Some suggest that parts counterfeiting is growing even faster. The implications for growth and profit in the vehicle parts and components market are wonderful for OEMs. That said, counterfeiters reap even higher returns than the OEMs - high enough to run the risks of being caught infringing on Intellectual Property Rights (IPR) - which includes reproduction, imitations or translation of well-known trademarks and/or trade secret infringements. The report says that counterfeit problems have severely impacted the automotive industry in China, as well as many other global markets, where many of these counterfeit and pirated automotive products get smuggled across the Chinese border. Global brand automotive companies are now facing the problems of lost market volume and revenue, diminishing brand recognition, and intensified market competition affected by their brand counterfeit products. Wong offered the following insights:
* 45 percent of the vehicle parts and components products in China are counterfeits, most commonly those that frequently need to be replaced.
* Aftermarket replacement parts are more common targets than original OE parts for counterfeiters.
* The lucrative profit margin in making, distributing and retailing counterfeits and pirated products is higher than that for OE parts.
* In certain regions or provinces in China, local regional governments are prone to protecting counterfeiters. Counterfeit manufacturers are big taxpayers to the provincial government. They also provide an economic driving force in certain less developed and poor provinces.
* There are more than 100 automakers and 5,000 parts and components manufacturers in China; most are small in size and lack competitive technology and resources. These domestic manufacturers do not normally own any popular brands and registered trademarks, and they plan to stay competitive and survive in the industry now and become more legit later.
* The Chinese government relies more on regional administration, instead of criminal measures and judicial protection system, to deter IPR infringements. The jail terms and penalties imposed are not heavy enough to effectively deter counterfeiting and IPR infringements.
* For most of the Chinese, price is still the major concern in buying automotive replacement parts - the cheaper the better. When consumers buy on price, that sentiment also becomes a driver for counterfeiting. After joining the World Trade Organization (WTO) in 2001, the Chinese government has been under pressure from the WTO, the International Anti-Counterfeiting Coalition (IACC) and foreign governments. The focus of the efforts has been on strengthening its legal framework and protection for IPRs. For instance, counterfeit manufacturers could set up shop in one region and ship products to another region or abroad. The existing laws prohibit one regional administration from conducting an IPR-related investigation in another region without first getting permission. Less scrupulous regional administrators could simply deny permission, thereby providing protection to the counterfeiter. The efforts of the above bodies are to prevent this by amending laws to protect IPRs, beefing up the penalties and the legal framework, and changing customs policies to require auto part exports to go through only a few designated ports. Nonetheless, international counterfeiting problems originating from China continue to face strong criticism from many countries. Recently, action was initiated by the U.S. and the European Union through the WTO. The complaints are currently being processed and have yet to be resolved. The impact of the parts counterfeiting problem is estimated at $3 billion here in the United States and has prompted recent legislation. The time it takes to effect change in China reflects the longer-term thinking of its culture. They believe there are gains to be made and concessions to be reaped in moving slowly, whether it be in resolving counterfeit auto parts concerns, currency undervaluation claims or other trade matters. While international political and economic pressure continues to mount, the size of the China's emerging market and the unfavorable trade deficits some nations have with China can slow the pace of change.
(Source: Frost and Sullivan:
"Counterfeiting Business - Why is it growing so well in the automotive industry in China?,"
Amelia Wong) 
