Key reasons of counterfeiting growth

Various authors claim various reasons for growth and expansion in its magnitude and scope. There are few key players which are playing a significant role in the growth of counterfeiting which include the economy of the countries; legal authorities; consumers; and manufacturers of luxury brand goods and counterfeiters as well; both demand and supply side investigations need to be carried out (Exhibit 1). The main reasons of counterfeiting growth are summarized in Appendix 1 and 2.

COUNTRIES’ SITUATION AND LEGAL AUTHORITIES
Various reasons identified by Sridhar (2007) include high illiteracy rate level; low purchasing power; increasing unemployment rate; ineffective law enforcement; and nexus between counterfeiters and law enforcers The problem of counterfeiting emerged mainly due to emerging economies where there is little risk for large profits, low probability to get caught, low conviction rates and less penalty if convicted (Sridhar 2007; Frasca 2009; Bosworth and Yang 2002). It is also growing due to weak legal infrastructure and corruptible public officials (Green and Smith 2002); and countries which have low-cost producing facilities and poor IP enforcement, and are close to large markets play significant role in driving counterfeiting activity (Bosworth and Yang 2002). As suggested by Clark (2006), one of the examples is China where there are noted loopholes and flaws in its copyright and intellectual property legislation, and due to ineffective law enforcement and absence of serious penalties counterfeiters continue to sell illegal goods in the market. However, to date no serious actions have been taken to prevent this (Phau and Teah 2009).

CONSUMERS – THE DEMAND SIDE
The above mentioned reasons for growth of luxury goods counterfeiting might not be the core reasons but the certain aspects which provide the added advantage to the main players of the counterfeiting phenomenon – manufacturers and buyers of luxury goods counterfeits. The more the demand of counterfeits would be, the more counterfeits would be produced by the criminals who indulge in this tax-free business. “Since demand is always the key driver of a market, various researchers have argued that consumer demand for counterfeits is one of the leading causes of the existence and upsurge in growth of the counterfeiting phenomenon” (Bamossy and Scammon 1985). The driver for increasing demand is the aspiring attitude of consumers who wish to buy latest luxury branded products but cannot afford the original luxury goods (Phau and Teah 2009).

Counterfeits are purchased more when brand equity starts to signify an image instead of the actual tangible attributes of the product. When consumers start giving more value to the insignia of a brand on the product instead of the other product attributes, they tend to buy more low-price low-quality counterfeits instead of originals (Gentry et al 2001; Ang et al 2001). The more successful the brand name would be, the more likely it is to have counterfeits (Nia and Zaichkowsky 2000; Eisend and Schuchert-Guler 2006).

Moreover, high power distance in various cultures also leads to high demand for counterfeits of luxury goods; one prominent example is Mexico as it is rated very high on Hofstede‟s „Power Distance‟ Index. Mexican societies is one of those societies where wealth is concentrated in hands of few elites and consumption of counterfeits of luxury goods help remaining people to construct a fake identity which help them to become socially acceptable. Similarly, the results of a study of how social factors influence the Chinese consumers‟ purchase intentions of counterfeits, conducted by Phau and Teah (2009), reflect that status consumption is directly proportional to the purchase intentions of counterfeits of luxury brands. According to Hamm (2009), the collectivist desire to belong to a certain group presents reasons for growing counterfeit purchases, and only the three aspects of Chinese collectivist culture „Liwu‟, „Guanxi‟ and „Reciprocity‟ (Exhibit 2) negatively influence the purchase decisions of luxury goods counterfeits. Singapore is another example where people are judged solely in materialistic terms and as branded goods are very highly priced in Singapore, people tend to buy counterfeits of brands to be socially accepted.

MANUFACTURERS – LEGITIMATE AND COUNTERFEITERS
From the manufacturers‟ perspective, counterfeits of luxury brands do not require much effort to be sold, nor do they require much money to be manufactured. The amount of money and time original luxury brand owners spend in establishing brand equity is huge (Commuri 2009), which these counterfeit goods manufacturers do not have to incur. Secondly, the increase in goods that are worth counterfeiting with the ease of imitating brands due to advancements in technology (Phau and Teah 2009; Gentry et al 2001), and highly fragmented channels of distribution are some of the reasons for the catalytic growth of counterfeiting as is also suggested by Bamossy and Scammon (1985) and Hilton et al (2004). Bosworth and Yang (2002) also identified over production of goods under license as a source or reason of counterfeiting.

Furthermore, the premiums charged from the consumer by the legitimate manufacturers of luxury goods are generally very high from what manufacturers of counterfeits charge to their customers. These companies attract counterfeiters because they command purchase prices that vastly exceed their base manufacturing costs (Gordon 2002). Consumers, who buy products on the basis of functional attributes of the product, seem to value more on the price than rest of the factors. Ang et al (2001) in their study of counterfeits found out that consumers considered the prices of these luxury products to be too high despite the excellent production quality and other benefits associated with them. Also, the study conducted by Yoo and Lee (2005) showed that when price information about the brand was provided to the respondents, the preference for genuine item diminished. But from the luxury brands‟ perspective, price plays a crucial role in communicating and preserving exclusivity and prestige – as these are the important aspects of luxury brands – “as well as keeping the brand out of mass consumption” (Kwak and Sojka 2010; Commuri 2009). Gucci in 1980s expanded its output and made its products widely accessible in many stores which tarnished its image due to non-exclusivity of the products, and then came the counterfeits which damaged the brand even more. It had to withdraw its products from the markets in 1990s.

Scale of counterfeiting

According to Bosworth and Yang (2002), counterfeiting has become a global problem of enormous magnitude. The phenomenon of product counterfeiting – the illegal practice of manufacturing goods impersonating other branded goods and sold as registered legal goods (Staake et al 2009) – had been considered by original goods manufacturers as a serious threat since the 1970s, albeit it had existed since long (Harvey and Ronkainen 1985). Presently the markets are flooded with fake products; the presence of counterfeit goods in the world market has grown over 10,000 percent in the past two decades (Frasca 2009; MarkMonitor® 2009) and by 1100 percent between 1984 and 1994 (Bian and Moutinho 2009). Recently it has been estimated that counterfeits account for 6 to 8 percent of world trade (Frasca 2009; Wilcox et al 2008), and ten percent according to Yoo and Lee (2009). World Customs Organization 2004 report confirmed that global market for such goods exceeded $600 billion and accounted for 7 percent of the world trade approximately (Wilcox et al 2008), Asia being the market that incurred more than one-third of the losses due to counterfeiting (Ang et al 2001). Other figures by Commuri (2009) suggest that counterfeits reduce the sales of genuine-items by $15 billion to $50 billion, and $250 billion if pirated goods are included out of which knock-offs account for $9 billion (Commuri 2009). According to Sridhar (2007), “while the world is growing by three to four percent, counterfeits are growing by 150 percent”.

International Chamber of Commerce in 2004 reported loss of $12 billion every year in luxury goods sector due to counterfeiting, despite the commendable efforts of luxury brand marketers (Wilcox et al 2008). Fashion related items are leading in this menace. Counterfeit products seized by U.S. Customs in 2002 which account for 18 percent of the $98 million were fashion related items (Hilton et al 2004). 30 million dollars in estimation are lost annually by French luxury goods industry (Bamossy and Scammon 1985).
Out of the total, only designer jeans counterfeits account for 10 percent of the market. Calvin Klein‟s counterfeited jeans accounted for $20 million in sales in 1981 compared to $250
3
million of sales of original jeans (Grossman and Shapiro 1988). Levi jeans incur 15 million dollar in losses every year. Cartier Inc. reported the presence of 40,000 copies of its watches compared to 50,000 originals that were produced by the original brand itself (Grossman and Shapiro 1988) and reported losses of 15 million dollars per year. Fake designer sunglasses and designer watches account for about 25 percent share and over 25 percent share respectively of U.S. market (Bamossy and Scammon 1985).

The increase in counterfeiting sales is also due to advent and subsequent rapid development of internet; internet has provided sellers and buyers of counterfeited products with additional, powerful and easily accessible channels. Organization for Economic Cooperation and Development (OECD) noted that significant share of counterfeit products‟ sales is attributable to the internet (International Trademark Association (INTA) 2009). The key factors identified by INTA (2009) include the world wide reach of internet; online payments; anonymity gained from operating via internet; easier to deceive buyers by showing pictures of original products – which have made it simpler for counterfeiters to sell their products.

Counterfeiting of Luxury Brands

Firms spend their resources and time in building their brands over the period of years to have prominent positions in consumers‟ minds and to build the desired image equivalent to the brand identity. For luxury brand owners, brands are the most valuable – though intangible – assets of the firms; a brand without the brand itself is just another product nowadays. Where brands have been facing the challenges due to a troubling phenomenon: the „democratization of luxury‟ (Kennedy) since the last decade, the practice of counterfeiting strong luxury brand goods is another major problem. One of the main problems that luxury brands are facing in today‟s globalized world is of counterfeit goods (Hilton et al 2004). Counterfeiting has become a significant economic phenomenon (Bian and Moutinho 2009; Hamm 2009), and is referred as „the crime of the 21st century‟ (ACG Report 2003), „world‟s premier criminal enterprises‟ and „sophisticated network of criminals‟ (Gordon 2002), „organized crime‟ (McCaughey), and „threat to legal marketers of brands‟ (Perez et al 2010).

Counterfeiting - global problem of enormous magnitude – about which James Moody, former Chief, FBI Organized Crime Division warned saying that counterfeiting will become the crime of the 21st century is considered as one of the oldest crimes. The counterfeiting of luxury products – sector in which counterfeiting is widespread (Hilton et al 2004) - is a longstanding problem itself. But in today‟s world, brand names of leading luxury goods manufacturers that has been synonymous with sophistication, elegance and style is facing a significant threat from counterfeits and cheap knock-offs – counterfeits are called by many different names like imitation, fake, bogus, copy and overrun, which are little different in meanings, but there is not much difference in creating similar problems for genuine-item manufacturers (Yoo and Lee 2005).