June 28, 2001; Page 6B

Product piracy poses biggest threat to China's economic status

By Steve Friess
Special to USA TODAY

BEIJING -- Right outside a fast-food restaurant that lures customers with a picture of a Col. Sanders-wannabe, a group of Chinese women repeatedly mutter to passers-by in their best English.

''DVD? CD?'' they whisper to pedestrians. When someone takes an interest, they whip open a knapsack to display stacks of counterfeit albums and movies, many of which made their debut just days earlier in the USA. They sell for a mere $1.25 each.

Less than a mile away is the so-called Silk Street Market, a knockoff trading center so famous that many Western tours include it as a stop. A recent brochure for a government-sponsored technology conference suggested it as a better place to buy a fake Rolex than Manhattan.

Rampant, blatant counterfeiting of well-known foreign products and unauthorized use of logos are as ubiquitous in China as tea and rice at meals, posing the greatest threat to China's legitimacy as a world economic power.

Politicians wrangle about fallen spy planes and arms sales to Taiwan, but this issue, as much as concerns over human rights, has delayed China's much-desired entry into the World Trade Organization. A vote now is expected by November.

It also could scare away millions of dollars in foreign investment. It costs Western businesses an estimated $16 billion in sales each year.

''Companies have come right out and said (that) unless the counterfeiting problems could be solved, they would seriously consider not investing or not investing more in China,'' says Joseph Johnson, president of Unilever Bestfoods China. Officials acknowledge the problem publicly these days and have raised penalties amid a crackdown on counterfeiting.

''Every time such instances come to my attention, I am filled with a strong sense of indignation, and I cannot sleep well,'' Chinese Premier Zhu Rongji said at a March press conference.

Yet the biggest cities are dotted with stores selling packages of counterfeit Gillette razor blades for less than $1.50 alongside the real thing for four times that price. And dozens of those KFC-lookalike restaurants line major boulevards, sporting a logo with a white-bearded man that foreigners mockingly refer to as ''Chairman Sanders.''

Procter & Gamble claims counterfeiters sell $150 million in products annually, using its brand names such as Safeguard and Head & Shoulders, about 15% of P&G's total China take. The company's investigator says he won't use shampoo in any Chinese hotel because, despite the Pantene label, it's probably fake and possibly harmful.

So if Zhu is having sleepless nights, how can this trade persist in plain sight?

''Particularly in Beijing, I have a tough time answering that,'' says Johnson, chairman of the China Anti-Counterfeiting Coalition, a group of 65 foreign companies working to reform the system. ''The short answer is, you would expect them to be more vigilant, but it's a very visible problem, even in Beijing.''

Outside the big cities, local government officials and police have little incentive to attack a problem that provides huge numbers of jobs in manufacturing, transportation and sales and may include kickbacks to authorities.

''In China, the local governments have lots of troubles to deal with, so this may be not the most important thing they are thinking about,'' says Jiang Zhipei, chief judge of the Supreme Court's Intellectual Property Chamber and a reform activist. ''To them, there are more serious crimes; people have no food.'' Taking action Companies can try to take action themselves:

* They can sue, but even when they find cooperative authorities, the legal structure is convoluted and penalties weak.

* They can attempt to get criminal prosecutions, but these require a huge burden of evidence that includes hard-to-get proof the counterfeiters have sold a certain amount of product.

* They can try to get local police to raid factories or wholesale centers and confiscate the illegal products. This may remove some illegal products from the market, but the offenders pay meager penalties and serve no jail. Plus, the company is often asked to cover expenses involved with a raid and storage and destruction of phony items.

P&G, the most vocal Western corporate activist and one of the biggest taxpayers in China, refuses to pay such fees. The company has received more support than others for local raids, but the results aren't satisfying, says Asia spokesman John Yam. ''We feel there may be some slight progress, but we've not seen any reduction of counterfeited products on the store shelves. In the past 3 years, we've conducted more than 1,000 raids, and they've resulted in only about 10 criminal convictions. A lot needs to be done.''

In many cases, though, Western companies say and do little. In Shanghai, U-Like Coffee stands at a prominent intersection with a looming green sign almost identical to the Starbucks logo. The manager, Tony Luo, revels in the similarities to the Seattle-based coffee giant that has a franchise up the block: ''Our coffee is better.''

It's a situation that would almost certainly net a cease-and-desist order in the USA, but Luo says the shop hasn't heard from Starbucks. Starbucks would not comment. Keeping quiet

Indeed, several prominent American companies declined comment or did not return calls despite obvious counterfeiting and pirating problems here. Procter & Gamble and Unilever Bestfoods once stayed silent, too, until losses became unbearable.

''Many companies . . . don't want to highlight the problem with their consumers, because the consumers would be leery about buying any of the products,'' Johnson says. They also fear that confronting the government would hurt their plans for expansions in China.

The most significant success in recent years is persuading the top leaders to take the problem seriously, many agree.

''On a national level, the government realizes this is an exceedingly important issue that could have been a major stumbling block to entry into the WTO,'' says David Peerless, manager of the Beijing branch of Pinkerton Consulting Services, a firm of corporate investigators. The government now holds regular workshops to educate local law enforcement on the law, hoping to make it a patriotic cause by explaining that it costs Chinese brands millions of dollars, too.

But evidence of change is difficult to spot. When word got out in May that fakes were forbidden at Silk Street Market, vendors started hiding phony wares, rolling them out only when bargain-hunters asked. A few weeks later, they were back on open display.

Still, many are more optimistic about a turnaround here than in other Asian countries with similar problems. China is obligated to do more, now that it has entered bilateral agreements with several countries with intellectual property rights clauses, precursors to WTO entry.

''We are sorry we have these problems,'' Judge Jiang says. ''But China at least is setting up the protection and the legal system now. We can do the job. We just have to start doing it.''

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