Login or signup
36
GROW

Attack of the $35 Gucci Handbag

Knockoffs may seem like a cheap-and-easy way to outfit your wardrobe with the top luxury brands. But all those counterfeit Louis Vuitton purses and Dolce & Gabbana sunglasses add up -- costing the U.S. economy billions in lost revenue and thousands of jobs each year. An inside look at how some of these real-life companies are fighting the war on fakes.
Advertisement

The Zippo lighter, a streamlined metal rectangle that opens and closes with a signature snap, has been a favorite among smokers for more than 75 years. But that simple, iconic design has also made it a favorite among counterfeiters.

"This is not rocket science," says Jeff Duke, Zippo's general counsel. "Anybody involved in light-metal manufacturing could gear up to make this product. Obviously we have sophisticated equipment, and we make it better and faster than anybody in the world, but there really isn't anything we can do to stop the counterfeiters from copying it."

Although all of Zippo's pocket lighters are produced at its headquarters in Bradford, Pa., anywhere between 5 and 50 percent of lighters bearing the Zippo name sold across the globe are fake, the company estimates. (Asia, Eastern Europe, and South America are counterfeit hotspots, according to Zippo.) Two years ago, such rip-off Zippos were cutting into the company's revenue by about 25 percent, and Zippo was forced to layoff 15 percent of its workforce -- 121 employees altogether.

Tracy Burgess had been assembling Zippo BLU butane lighters for about a year when she got the news. Work in the factory had been slowing down for some time and rumors were circulating about possible layoffs, but Burgess stayed positive. Zippo had kept its workers busy enough in hopes that business would pick up, she recalls.

 

"One day, they finally came and said they had to let us go," Burgess says. "It was embarrassing, because I cried like a baby. It was the first time I had been laid off. And even though it was a layoff, it felt like I was being fired. There's still that feeling that you've let down the company or you've done something personally wrong."

"Most of the people I worked with were new hires," Burgess adds. "It went from sadness to some anger. There was a sense of despair. We are a small town here, and 121 people in a town this size is a lot of people."

The company's story is not uncommon: Losses from counterfeiting and piracy lead to the loss of more than 750,000 American jobs, the U.S. Chamber of Commerce estimates.

Since the company began cracking down, with the help of investigators, police, and customs officials, Zippo's overall sales have since picked up about 10 percent, Duke says. But the problem is far from eliminated -- about 10,000 finished lighters and hundreds of thousands of lighter components were seized at Chinese factories last year alone. In China, Zippo mainly relies on the work of one private investigation firm that tracks down illegal manufacturing sites and alerts local law enforcement. The actual raids are conducted by China's Administration of Industry and Commerce and the People's Security Bureau.

The rise in sales is reason to be optimistic, Duke says, especially taking into account widespread anti-smoking campaigns, which inevitably reduce the demand for lighters. As a result, most employees who lost their jobs in 2006, including Burgess, were given a chance to come back.

While luxury brands, such as Dolce & Gabbana and Louis Vuitton, are common counterfeit targets, Zippo is an example of everyday items that are increasingly subject to knockoff. Piracy, of course, is not a new concept, but the International AntiCounterfeiting Coalition, a Washington-based non-profit, estimates that the number of counterfeit products on the market has surged 10,000 percent over the past two decades. At least part of the growth stems from the manufacturing boom in China, where many counterfeit goods wind up being produced in the very same factories that make the real ones.

Counterfeit buyers, tempted by $25 Coach purses and $10 Dolce & Gabbana sunglasses may only see a bargain, but both the U.S. and global economies take a hit as a result. The U.S. Chamber of Commerce estimates that the U.S economy loses between $200 and $250 billion in annual sales due to counterfeiting, while the world economy is robbed of about $650 billion every year. A 2007 study by the Institute for Policy Innovation, Lewisville, Texas-based think tank, claims that copyright theft costs the U.S. economy $58 billion in lost output and $2.6 billion in lost tax revenue.

Nearly everything is subject to counterfeiting today -- from medications to airplane parts. According to a report released last year by the Department of Homeland Security, the top three types of items seized on U.S ports of entry were footwear (the equivalent of $77 million in authentic goods), apparel ($27 million), and consumer electronics ($16 million). However, those statistics represent just goods that were seized, which is a small fraction of overall counterfeit activity.

Large companies with ubiquitous brand names naturally make the biggest targets. In 2007, video game giant Nintendo lost $975 million in revenue due to piracy alone, and seized nearly 2 million pieces of pirated software. Commercial success of the company's Wii and DS consoles has resulted in a demand for cheap alternatives, says Jodi Daugherty, Nintendo of America's senior director of anti-piracy. To prevent piracy, she says, game developers embed security measures into all software -- code that makes it more difficult to copy games.

Pirated electronics can also present a significant safety risk, Daugherty points out. Last year, a seven-year-old British boy was electrocuted and killed when his parents unknowingly purchased a knockoff Nintendo Game Boy adaptor in Thailand.

Nintendo trains customs officials around the world to recognize knockoff Nintendo products, and has reached out to the U.S. trade representative to enact more aggressive anti-counterfeiting legislation. Countries such as Mexico, Brazil, and China are particularly challenging for Nintendo's market because their local counter-piracy laws have not effectively halted a rampant counterfeiting culture.

Fighting against counterfeiters is often an exhaustive process for companies, especially smaller ones short on resources and manpower. Once the counterfeited company has gathered proof that suspicious products are indeed fakes, it can approach the U.S. Immigration and Customs Enforcement and the U.S. Patent and Trademark Office. Brand-protection companies can help catch instances of online counterfeit sales, while private investigators can take counterfeits out of the market. Businesses are also increasingly turning to local authorities, like the economic crimes division of some local police forces.

Andrew Oberfeldt, a private investigator at New York-based Abacus Security, says that simply alerting authorities is not enough -- companies need to train customs and security in identifying their products and hire investigators who can be a 24-hour contact for law enforcement.

'It's like drug smuggling, Oberfeldt says. "There's so much money and it's so multifaceted that if you aren't doing it on every level, you're not doing anything."

"My mantra is that customs offices and officers are your best friend," adds Barbara Cason, intellectual property director at Columbia Sportswear, a company that seized 250,000 counterfeit items in 2005. "Not only do they provide the opportunity to register your trademark, but they also have opportunities for brand owners to come and present their products and show what an authentic or a fake looks like."

With trendy labels, advertisements for counterfeits appear in countless junk mail inboxes as physical products are strewn over discount street vendor racks. When a brand gains momentum, companies are encouraged to take action sooner rather than later. If a counterfeiting industry has time to take off, it becomes that much more difficult to extinguish.

"If you have a leak in your roof and you let it grow over weeks and months, it becomes a lot bigger of a problem," says Frederick Felman, chief marketing officer of MarkMonitor, a San Francisco, Calif.-based brand-protection company. It's very similar in the counterfeiting world. If you don't treat something, other people start to pile on and start abusing and copying your brand. But if you take action, it makes the economics of it less interesting, so they move on to a brand that isn't defended."

Some companies are taking a more grassroots approach. Abercrombie & Fitch, Coach, and Estee Lauder, among others, have partnered with the International AntiCounterfeiting Coalition to create a college outreach program, which provides case studies to marketing and public relations classes at schools like Harvard and New York University. Students get the opportunity and funding to practice crafting their own PR campaigns -- through blogs, Facebook, and fashion shows, and other efforts -- while the IACC raises awareness and enlists supporters for its effort.

No matter how focused the efforts, however, links on the counterfeiting chain are difficult to break. Factory raids might cause an individual manufacturer to lose inventory and machinery, but those running the operations from a distance are tough to identify.

"We end up raiding manufacturers and have a very hard time figuring out who really is behind all of it," Zippo's Duke says. Although the number of fake lighters on the Chinese market has dropped about 10 percent in the past two years, their quality seems to have picked up, he says.

"Without any question, we are still losing 15 percent" of total sales, he says. "That's a very big number."

Last updated: Apr 29, 2008




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Comment and share features
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: