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      COVID-19 and the rise of the counterfeiters

      Published on 29 Apr 2020 | 8 min read

      Across the world businesses are being forced to make game-changing decisions based on assumptions and instinct.

      So unprecedented is COVID-19 in modern times that many experts reference case studies from 1918 when the last major flu pandemic rocked the world. Only a few months ago the release of 2019 year-end data was considered essential to strategic plans and forecasts for 2020. Now, that data is meaningless, irrelevant to the challenges businesses face today. Instead, they must rapidly re-engineer data flows and analytical models in order to understand an entirely new landscape of risk and opportunity.

      In this context what can we say about the landscape for IP rights owners? What game-changing decisions are being made based on assumptions and instinct as opposed to data and analysis founded in the immediate reality? On the risk side of the landscape, one of the biggest factors for IP owners to consider is the threat to consumers and business posed by counterfeiters. How will this threat change as a result of COVID-19? What immediately available data can help IP rights owners assess this threat as it manifests now and how should old strategies adapt? Some assume that as terrible as COVID-19 is, it is also a panacea for unresolved threats like counterfeiting, a remedy forged from the forced shutdown of global markets and supply chains. Some point to blue skies in places like China and the absence of pollution as evidence of this elixir. However, these are exactly that, assumptions, and the game-changing decisions to stop or rapidly slow-down anti-counterfeiting efforts altogether are dangerous, both for consumers and brands, if they are not rooted in immediate facts and data.

       

      Chinese Customs seizures - a useful source of data

      To assist a major brand owner with their decision-making we gathered current seizure data from Customs ports across key exit routes in Southern and Northern China. Ordinarily, this seizure data isn’t consolidated and released until the half-year point in late July or August. As a result, the data has to be searched for on the individual websites of each port (if they publish) or manually collected through phone calls to port officials. Regardless, it is vital information if we are to understand the immediate context and help shape brand protection strategy accordingly. The information we gathered (see further below) was striking and leads to three high-level conclusions:

       

      1. Counterfeiters have not stopped as a result of COVID-19 (see table 1). In fact, Customs data suggests that they have continued unabated, perhaps emboldened by the shutdown of enforcement authorities and brand owners. While not every port has released data, certain key ports like Shenzhen have, indicating no significant change in seizure trends.

       

      2. Equally, there appears to be no significant shift in industry or product trends. While an assumption could have been that counterfeiters shifted focus to medical devices and industries benefiting from the upswing in online consumer demand, this does not appear to be the case. In fact, counterfeit products seized by Customs between January and March 2020 are not significantly different from the categories of products seized for the same period in 2019 (see table 2 for reported product seizures).

       

      3. There are two data points that have shifted significantly in the period January-March:

      • An increase in parcel seizures, again evidence that COVID-19 is accelerating the shift to e-commerce, and shows the speed with which counterfeiters have adapted their route to market.
      • An increase (in some cases more than 200%) in seizures through land ports bordering both Northern and Southern China. These ports are traditional points of exit for goods moving into the CIS region (via Russia), and into South East Asia (via Vietnam and Myanmar). These are key trade routes for China’s Belt and Road policy and into ASEAN (see table below showing general trade trends). Given the rise in Q1 trade to these regions generally, it is perhaps not surprising therefore, that they are witnessing a steep rise in illicit trade from China.

       

      When confronted with this data, our client struggled to grasp how Chinese counterfeiters were able to operate so brazenly at a time when the external world was locked down. This is to misunderstand how the majority of Chinese counterfeit networks are run. They operate through tightly controlled and closed family networks that manufacture and assemble products without the risk of external interference. Distribution is highly agile and increasingly e-commerce based, enabling them to shift supply routes and markets extremely quickly, as can be seen in tables 2 and 3.

       

      Table 1: Shenzhen Port – IP Seizure data Q1 

      Port

      2020 Q1 seizures

      3 months Jan - Mar

      2019 seizures

      5 months Jan - May

      Shenzhen

      544 shipments,

      43.85 million pieces

      Valued at CNY7.5million

      1283 shipments

      18.96 million pieces

      Valued at CNY14.52million

      Source: Economic Daily 14 April

       

      Table 2: Individual Port Seizures – Reported Q1 2020 

      Port

      Date

      Seizures

      Destination

      Tianjin

      Mar

      25 shipments, seized 58,000 pcs infringing goods

      Iran

      Xiamen

      Mar

      47,688pcs seized comprising mainly children’s clothing and watches

      UK

      Taiwan

      Nanning

      Jan

      Postal interception of 4,357parcels, seized 6,407pcs of individual goods covering mainly luxury brands.

      European countries

      Feb

      Postal interception, 17 shipments, seized 107 infringing items covering mainly luxury

      ASEAN countries,

      Mar

      Postal interception, 30 items infringing mainly sports brands

      Thailand

      Ningbo

      Mar

      3,080 items of luxury goods seized

      African countries

      Manzhouli

       

      Mar

      Train station seizure, 1200 items of electronic equipment

      Russia

      Mar

      Train station seizure of two containers of infringing toys.

      Russia

      Shanghai

      Mar

      8,000 N95 masks infringing imported from Uganda. The first mask case handled by Customs since COVID-19 outbreak

      Imported from Uganda

      Huangpu

      Mar

      E-commerce seizures totalling 16,239 items infringing luxury watches and leather bags.

      European countries

      Hangzhou

      Mar

      18,000 items seized at seaport

      Angola

      Kunming

      Jan-Mar

      Seized 42,755 items covering mainly clothes and luxury.

      ASEAN

      Source: Customs on-line news

       

      Table 3: China Trade Flow and Trend Data Q1 2020 

      Trade flow

      Total value

      Trend

      China with Belt and Road

      USD 282.0 billion

      +3.2%

      China with ASEAN

      USD 140.1 billion

      +6.1%

      China with EU

      USD 123.9 billion

      -10.4%

      China with US

      USD 94.4 billion

      -18.3%

      China with Japan

      USD 65.8 billion

      -8.1%

      China cross-border e-commerce

      USD 345.3 billion

      +34.7%

      Source: China Imp & Exp News published by State Council 14 April 

       

      Adapting brand protection strategy

      In the current environment most brand owners will be reducing anti-counterfeit spend, although to do so on the assumption of a reduced counterfeit threat is dangerous. Current data does not support this assumption. However, businesses should be looking to adapt their strategies as follows:

      Firstly, by ensuring they have access to immediate data points that cast a light on the macro and micro problem as it manifests today. This will require a shift to manual data sourcing and filtering rather than reliance on old data sources and systems.

      Secondly, Customs can be an extremely cost-effective remedy at a time when enforcement authorities are limited in their capacity to bring physical action. This is one area where brand owners should continue to invest in targeted training and enforcement, particularly in China and across key Belt and Road territories.

      Thirdly, now is a good time to be looking at contingency litigation and compensation-based claims in China, particularly looking ahead to the second half of 2020. Damages awards are reaching a level that makes this approach sustainable (see chart 1 below) and corruption in the courts is no longer a major issue. If ever there were a time to be building contingency litigation into anti-counterfeiting programmes in China, it is now.

       

      Chart 1: Compensation levels per city

      Please click on the graph to see a larger version.

       

      This is one of a series of Insights developed by Rouse Consultancy to help IP mangers navigate the immediate disruption and begin to understand what the new normal might mean for them, their teams and the intangible assets they support. If you currently receive the Rouse Magazine each month you will receive the Insights automatically. If you would like to be added to the mailing list, please contact Catherine Bunyan.

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