nofficial translation

Gorbushka flee market is being closed for the hundredthtime.  Gorbushka is not taking any notice,just like the previous 99 times. International recording companies such as Universal and EMI shout thatit is impossible to operate in Russia but nevertheless continue doing businesshere.  At the end of February, SonyMusic will open an office in Moscow to make a stand against its globalcompetitors in a country where no one can win against the pirating.  Managers of international companiesofficially pour scorn over manufactures of sham products, but unofficiallyrecognize that these products also promote their brandnames.

The authorities express a willingness to protect theinterests of “civilized producers”, but it is mainly just talk.  Why do they pretend?

Difficult Estimates

Recently a round table discussion was held in Moscow to dealspecifically with production of counterfeit goods in Russia.  Major international companies and theRussian Government which organized the event estimated the size of thecounterfeit industry in Russia at $1 billion per annum.  This money slips from underneath the gaze ofowners of strong brands into the pocket of small-scale local companies. 

Round table participants might have underestimated theactual figure.  Other sources refer to amuch higher amount of damage caused by sham products to civilized producers.  For instance, the President of the Commerce- Industry Chamber, Stanislav Smirnov, believes that direct losses for localand international companies arising from trade-mark pirating in Russia are inexcess of $1.5 billion annually.  “Atthis point in time, the counterfeit industry is on the scale of a nation-widedisaster”, Smirnov believes. “There is an urgent need to develop and effectstatutory regulations and normative acts in this country which arise fromRussia’s international obligations”. 

Last September, local affiliated companies of multinationalProcter & Gamble, Unilever, Schwarzkopf & Henkel and Nestle agreed toact jointly to lobby such regulations and share their experiences of combattingcounterfeiting.  Foreign companiesestablished an informal association -The Brand Protection Group - inMoscow. 

“According to the association’s estimates, the turnover inthe consumer counterfeit industry in Russia is at least two billion dollars peryear”, says Andrei Bader, Head of External Affairs in the Procter & GambleMoscow office. 

One billion dollars, one and a half billion dollars, twobillion.  Any one with a higher figure?

As far we understand it, in all these cases, expertsestimate losses as a result of direct counterfeiting, leaving out highlycontrived counterfeit schemes.

Trafficking On TheSide

An explicit copy is the most primitive technique used bysmall-scale operations and sometimes by unsophisticated producers.  The overwhelming majority of Moscow fleemarkets display their achievements in this area.  On the outside, these products are often a poor copy of theoriginal goods and the price is much lower. If original Reebok sneakers would cost you at least $100, for blatantlyobvious reproduction sneakers you would pay (only should you pay) 150-200rubles.  China is the major supplier ofsuch goods where the consumers are predominantly  people who cannot afford authentic goods.

The boom in counterfeiting of Reebok goods, according tocompany employees, reached its peak in 1996-1997.  Three years ago the company established a department, whichtogether with law enforcement agencies track down counterfeited goods.

“One way or another, sham goods damage producers ofauthentic goods”, believes Alexander Maslov, who is in charge of Reebok’sMoscow clothing division.  However,there are other viewpoints regarding the issue.

Like other producers whose goods are shamelesslycounterfeited, Reebok is trying to withstand the onslaught of Chineselabouress. The company conducts its own investigations to detect distributionchannels for illegal goods.  (Suchinvestigations are carried out by 32% of international companies as surveyed byMagram Market Research and The PBN Company at the beginning of the year onbehalf of the Coalition for Intellectual Property Rights, equivalent to TheBrand Protection Group).

Last October the media reported the results of one suchinvestigation carried out by a local Reebok branch.  The US company found that 46,000 pairs of counterfeit sneakerswere imported to Russia by Simaund, a Bulgarian firm.  Reebok representatives “forgave” the Bulgarians in exchange forthe information of the names and whereabouts of Chinese producers shamfootwear.  A sample number  of sneakers confiscated from the Bulgarian firmwas destroyed, others were donated by US company employees to the needy.

It appears that this donation is not consistent withReebok’s statement on how any illegal product damages the brand image.  When it comes to dealing with sham goods,theactions of big companies quite often are at odds with their statements, and wewill further look into this issue.

Sometimes the counterfeited product resembles the originalbut is inferior in quality.  Those who“copy” prestigious brands have to make their goods resemble well-knownbrands.  Ten years ago one of oureditorial staff bought a counterfeit Rolex watch in a Moscow store for just$15.  Such goods are normally acquiredby well-informed people who have no illusions of the authentity of theproduct.  However, since the copy looksexactly like the original it is possible to show these items off.  The authenticity of a Rolex watch can bedetermined only if you take a close look at the watch.  Incidentally, this watch has so far keptgood time, although the bracelet fastener broke two years after the watch hadbeen bought.  This often happens withcounterfeited goods, the manufacturer is caught out on small details.

It is noteworthy too, that the Procter & Gamble Moscowoffice tried to estimate how profitable underground businesses are that packagewashing powder imitating famous Procter & Gamble brands.  It turned out that this business shows aprofit of 400%!  The most expensivecomponent of such a product is the packaging, while the content(discarded-product) is bought very cheaply from small factories.

Another section of the counterfeit market is much moreprofitable than the explicit counterfeit - it consists of commercially producedquality goods, and quite often these are made of the same materials and usingthe same technology as in the case of authentic goods.  These items are priced 20-30% lower than theoriginal products.  For example, thistechnique is used all over the world to counterfeit Levi jeans.  “Most frequently they copy the famous 501 model”,acknowledges Irina Platinova, Levi’s brand manager with Jamilco. There arecases when the fit is the only thing that makes a difference betweencounterfeit Levi’s and authentic jeans. And the fit is also of good quality, only copied by another firm, forinstance YKK. 

In the Russian regions locally produced vodka is bootleggedand the quality of the illegal product may be no worse than that of theoriginal product.

Experts do not exclude the possibility to buy counterfeitperfume in Moscow.  According to AndreiMalygin, Perfume & Cosmetics editor in chief, samples that are nowavailable in Moscow in huge quantities (estimated at 10% of the market size)and are normally sold in small stores and street kiosks may contain a highpercentage of imported counterfeit product. “Currently we are reviewing this issue jointly with corporate brandholders”,  says Andrei Malygin.

There is obviously no way for this country of smokers toescape counterfeit cigarette brands. According to Pyotr Lidov, the PR manager of the Russian office of PhilipMorris, over the last few years a number of illegal small factories producingcounterfeit Marlboro and L&M were liquidated with the assistance of lawenforcement authorities.  Thesefactories used state-of-the-art equipment costing $250,000 to $500,000 .  And the tobacco quality was quite good.  Pyotr Lidov claims that counterfeit goodsdamage the brand image but do not ‘hit’ company profits:  “All over the world sham product constitutes5 to 10 percent of retail cigarette sales. Based on our estimates in Russia,this percentage is not any higher”.  Butif we take into account that in 1999 Philip Morris produced 900 million packetsof cigarettes , 10% is 90 million packets estimated at more than $40 million.

In fact such counterfeit goods are a big  problem for authorized dealers, distributorsand for producers themselves.  First,the brand reputation is damaged: Levi jeans bought in a cash-and-carry marketwill not last you that long and do not look as good as the genuinearticle.  Secondly, revenues that couldbe earned by brand owners flow into the pockets of manufactures and suppliersof illegal products. 

“We had a case of a buyer coming to us with a bag bearingour logo who wanted to buy another one to give as a present since he liked thebag himself very much”, reports Anar Mamedov, a Hugo Boss boutique advertisingmanager.  “But we have never producedbags of this kind.  Though the designand quality of that bag were not below the authentic standard”.

Counterfeit producers follow fashion trends and are able toquickly respond to changes in the popularity of a particular brand.  “The Hugo Boss counterfeit industry reachedits peak last year”, says Anar Mamedov. “In 1997 Moscow used to sell more of Turkish Versace, in 1998 -Gucci.  Now wholesale markets offeralmost the entire variety of our products - from a key ring to a sheepskincoat.  Common targets of the counterfeitindustry are leather items - coats, purses and jeans.  Shirts and footware are counterfeited less frequently.”

 Turkish Hugo Bosscounterfeit items made of high quality leather are close to the original goodsand are not inexpensive.  A rigorousprocess is followed to copy brand-specific designs including labels on buttonsand inside detail.  “There were somecases when those same factories which previously handled authentic Hugo Bossorders, engaged in counterfeit production”, continues Anar Mamedov. 

Some producers of counterfeit consumer goods have become soskillful in copying other companies’ design and quality that they now refuse touse the “original” logo on their products. Walking through Moscow markets you can come across sneakers made bySouth East Asian companies which bear an explicit resemblance to Nike andReebok but carry a different name.  Thisis a high profile technology.  Whetherthese samples can be called a sham is indeed a controversial question.

Further on you will find a story about a local company whichproduces cigarettes in packets of a similar design to Philip Morris.  The company managers assume their businessis quite legitimate. 

False Protests

The first impression is that all civilized producers areconcerned with counterfeit products and we have already reference to this.  In fact, there are different views on thisissue. 

The first group of victims are those companies which havemanaged to squeeze counterfeits of the market. One of the most mistake examples are Russian companies dealing withvideo products and their foreign partners, i.e. copyright owners.  In the past two years, they have won abattle against videopirates in Moscow and have moved the battlefield to theregions.

“Now licensed goods are gradually squeezing out from onetown to another,” Varus Video Chairman Yakov Abrukin believes.  “In Moscow 90% of the video market accountsfor licenced goods, and only 10% for counterfeits,” Videoservice Vice PresidentAndrey Khromov asserts.

In the case of fairness it should be stated that thetechnical specifications of video products helped these companies to remain inthe market.  A customer can assess thequality of video products without any special equipment. 

Another group of companies are those which want tofight  counterfeiting, but areunable.  In particular, producers ofaudio goods are in this category.

“We represent EMI and Virgin in Russia, and piracy is aserious problem for us.  In fact weoperate in circumstances where 92% of the market belongs to manufacturers ofpirated goods”, Gala Records foreign music expert Maria Ezhukova says.  A major issue is technology -- “pirates”have learnt long ago how to make audio products of a sufficiently highstandard.

And finally, the third group of “civilised producers” ismade up of companies which only verbally fight counterfeiting. In fact managersof these companies believe these illegal manufacturers play into their hand.Inreferring to such companies we unable to name them due to the fact thatofficial statements by their representatives contradict comments made by thembut which are not subject to official release.

Some producers of consumer goods such as tobacco, clothing,domestic consumer goods and motor oil are in the third group.

A common feature for all these companies is that none ofthem produce low priced goods. The unofficial logic used by these companies’stop managers is as follows.

In every country -- especially in those poor countries suchas Russia -- there are people who can only afford very cheap goods.  Some of these customers, particularly  younger people, have a chance to improvetheir financial situation and in time move to higher quality consumergoods.  If they used to purchasecounterfeit goods with false labeling of a specific company, then once they  increase their earning power, these peoplemay qualify as customers of authorized retail outlets.

In this manner, these illegal manufacturers (if these arerelatively good quality counterfeits) widen the price range set by  the original company thereby helping thelatter to save money and efforts.

That is why there are so many counterfeit goods on themarkets in Moscow.  Complaints by majorproducers that they can not withstand counterfeit product domination of themarket are often not completely sincere.

However, mega-brand owners will never acknowledge this fact.

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