FSB Author Article
China's Latest Deadly Counterfeits
By Peter Navarro,
Author of The Coming China Wars
“Beware of cheap Chinese products that
can kill you.” In the wake of last year’s massive recall of deadly
toys, this modern day Confucian warning is proving once again to be all
too true. In this latest case, the BBC is reporting the recall of
hundreds of thousands of counterfeit Chinese chargers used primarily
for Nintendo Game Boys but which also have application for mobile
phones, personal digital assistants, MP3 players, and other game
consoles.
The “cheap Chinese products” part of our Confucian
warning is particularly relevant here because the chargers in question
are retailing for less than half of the safe, legitimately branded
chargers. Moreover, many of the chargers are being peddled over the
Internet where there is far less oversight.
As for the “can
kill you” part, you can be electrocuted by the faulty wiring as a
7-year child was by a fake Chinese charger bought in Thailand.
Alternatively, the charger can blow up in your face or simply burn your
house down while you are sleeping at night. The problems range from
detached wires to charger pins that don’t fit properly into sockets and
thereby overheat.
This incident is particularly troubling given
the increasing reliance all of us have on electronic chargers. For
example, in my own household, I can count no less than twelve chargers
for everything from Ipods, mobile phones, and Bluetooth headsets to,
yes, my kid’s Game Boy. That’s a lot of chargers to be working
overnight like ticking fire bombs.
The broader problem here is
China’s economic addiction to counterfeiting and piracy. In fact,
China accounts for two thirds of all the world’s pirated and
counterfeited goods. The long list of purloined products includes
consumables like baby food, soft drinks, and hard liquor as well as
common household products like makeup, perfume, and razors. It
likewise encompasses big ticket items like air conditioners and
refrigerators. It extends even to the lofty elevator and the lowly
toilet seat.
Here is one typical “ghost-shift” scenario of how
such piracy occurs in what has become a global supply chain of piracy
and counterfeiting: A factory in China is hired by a multinational to
make 1,000 units of a product per day. However, rather than just run
two regular eight-hour shifts to produce the contracted-for amounts,
the factory also runs a third “ghost shift” and then ships the extra
500 items out the back door.
One of the most lucrative – and
dangerous -- counterfeit sectors in China is cigarettes. Rivaling any
one of the big multinational producers, China churns out 65% of the
world’s counterfeit sticks. Of the more than 35 billion cigarettes it
produces annually, almost 30 billion are exported.
Cigarette counterfeiting is largely a clandestine cottage industry as many of
China’s small cigarette production facilities are quite literally
underground, either in basements or in subterranean rooms accessible
only by tunnels. As James Nurton has noted, in these hidden dens,
“counterfeiters will hire workers for just a few days or even hours to
produce a batch of counterfeit cigarettes using old machines and
hand-rolling the finished product.” In such clandestine environs,
cigarettes, already one of the most efficient killers of the human
species, often become even more deadly. Indeed, those counterfeit
Marlboros or Camels for the macho male set or those fake Virginia Slims
for the ladies may contain five times as much cadmium as genuine
cigarettes, six times as much lead, and high levels of poisonous
arsenic.
An equally lucrative sector of China’s knock-off
economy is that of replacement auto parts. Chinese pirates account for
70% of all counterfeit auto parts in the world, and, as a clear red
flag to any prospective consumer, more than half of all Chinese
vehicles contain counterfeit components.
In contrast to the
highly decentralized cigarette counterfeiting operations, auto part
piracy is well-organized. Fake products include everything from brake
pads, oil filters, and fan belts to fenders, engine blocks,
windshields, and windshield wipers. Given that selling new cars is
often a “loss leader” to establish a lucrative aftermarket in
replacement parts, such counterfeiting represents a particularly
crippling form of economic “cream skimming” that cuts deeply into the
bottom line of the legitimate auto industry. As has been noted in
Forbes, “Replacement parts are to car companies what popcorn is to
movie theaters. It’s how they pay the rent.”
There are also
significant safety issues for an industry in which several tons of
metal traveling at high speeds depends on equipment reliability. In
some cases, the quality and appearance of the fake auto parts is so
good that is difficult to distinguish between a fake and an original
product. In many other cases, the parts are of such poor quality that
they are doomed to early and often dangerous failure. As reported in
Automotive News, some of the “many horror stories” include “brake
linings made of compressed grass, sawdust or cardboard; transmission
fluid made of cheap oil that is dyed; and oil filters that use rags for
the filter element.”
One of the most dangerous counterfeit
Chinese products is fake prescription drugs – from Lipitor to Viagra.
China’s dominant role in the counterfeit drug trade is not just
because of a huge production capacity and sophisticated distribution
network. It is also because as fast as you can say, “Can you fill
this prescription, please,” China’s highly skilled pirates are able to
reproduce the so-called blister packaging, vacuum-formed clamshells,
fake holograms, and distinctive pills so artfully and faithfully that
drug companies typically can only detect fakes by using complex lab
testing. This counterfeiting capability is no small feat, particularly
since pharmaceutical companies continue to boost the complexity of
their packaging in an effort to thwart counterfeiting.
The
uncanny ability of the Chinese to excel in highly sophisticated piracy
is attributable to precisely the same factors that have allowed China
to become the world’s factory floor. Chief among them is the flood of
foreign direct investment that has brought in all the latest
sophisticated machinery necessary to knock off whatever drug or product
from which money can be made. When the pills and packaging are
complete, China’s counterfeit drug dealers then harness many of the
same transportation, distribution, and sales channels established for
legitimate purposes by foreign companies in China to distribute the
illegitimate products worldwide.
China’s ritualistic government
crackdowns notwithstanding, the dirty little truth here is that China’s
pirate activities contribute as much as 20% or more of GDP growth, and
this state-sanctioned theft is a vital component of government policy
that creates millions of jobs, helps control inflation, and raises the
standard of living for many of the Chinese people. As
anti-counterfeiting expert Li Guorong has noted, “counterfeiting is now
so huge in China that radical action would crash the economy overnight
[and] even destabilize a government where counterfeit factories and
warehouses are often owned by local military and political grandees.
These
economic and political motives for Chinese piracy are strongly
reinforced by a set of cultural norms that flow from an amoral fusion
of a 60-year old Maoism and a centuries-old Confucianism. The core
problem is that the government of the People’s Republic of China was
founded in 1949 on the abolition of private property. Thus, there
exists several generations of Chinese executives who truly believe
that, as former US ambassador James Lilley has noted, “any technology
in the world is the property of the masses.”
When one adds to
this Maoist version of property rights a large dose of Confucianism,
the counterfeiting and piracy picture comes much more sharply into
focus. Since ancient times, Confucianism has revered, rather than
reviled, imitation. The result is the perfect economic, political, and
cultural laboratory for a counterfeiting and piracy boom. Caveat
emptor!
©2008 Peter Navarro
Author Bio
Peter Navarro, author of The Coming China Wars, is a business professor at the University of California-Irvine, is the
author of the best- selling investment book If It's Raining in Brazil,
Buy Starbucks and the path-breaking management book, The Well-Timed
Strategy. Professor Navarro is a widely sought after and gifted public
speaker and a regular CNBC contributor. Prior to joining CNBC, he
appeared frequently on Bloomberg TV, CNN, and NPR, as well as on all
three major network news shows. He has testified before Congress and
the U.S.-China Commission and his work has appeared in publications
ranging from Business Week, the L.A. Times, and New York Times to the
Wall Street Journal, Washington Post, and Harvard Business Review.
www.peternavarro.com
www.comingchinawars.com