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China's latest deadly counterfeits

By Peter Navarro
web posted August 11, 2008

"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.

KLG...home of good chicken. I like chicken, especially with bacon. Who doesn't though?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! ESR

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. ©2008 Peter Navarro

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