Bottom line: Beijing should offer more incentives to local governments to tackle piracy at its roots, or risk seeing homegrown high-flyers like Xiaomi get undermined by fakes.
China’s fast-rising high-tech sector passed a dubious milestone last week, when media reported that fake copies of smartphones made by local superstar Xiaomi have begun appearing in Germany, marking one of the first such cases for a Chinese brand. Xiaomi wasn’t the only company in the headlines for piracy, as other media reported that fake copies of the new Apple Watch (Nasdaq: AAPL) were already widely available in China, as the US tech giant began taking orders for its latest gadget.
Both cases illustrate the continued prevalence of piracy in China, despite Beijing’s best efforts to stamp out the problem. The Xiaomi case also underscores the growing potential for piracy to undermine some of China’s most promising brands, as they try to take their place alongside more established international players like Apple and Samsung in the global marketplace.
Despite Beijing’s resolve to tackle the problem, one major obstacle has come from regional officials who are sometimes reluctant to act aggressively for fear of harming their local economies when factories are closed and managers prosecuted. To address that part of the equation, Beijing could look for creative solutions that would provide positive incentives to tackle piracy wherever it occurs, thus helping to safeguard the welfare of future of both domestic and homegrown players.
Xiaomi has become the pride of China’s high-tech world, rising to become the most popular smartphone maker in its home market and the world’s third best-selling brand just 5 years after its founding. Xiaomi now makes 4 of the top 5 selling smartphone models in China using the popular Android operating system that accounts for the big majority of the market.
The company has risen on a uniquely Chinese blend of well-designed mid- and lower-cost phones, combined with a savvy marketing campaign that focuses on Internet sales and “hunger marketing” to create an image as a cool, must-have product. But that image is starting to come under pressure, as pirates take advantage of Xiaomi’s reputation to sell fake, inferior copies of its phones in China.
That problem is now taking a new twist, as media reported last week that fake Xiaomi phones have begun to appear in Germany. (Chinese article) That appearance comes as Xiaomi itself embarks on a global expansion that has so far been limited to developing markets like India and Malaysia, but has yet to enter developed markets including Germany. Thus the early arrival of these lower-quality fakes could undermine Xiaomi’s image and reputation in Germany when it decides to officially enter the market.
The same reports pointed out that a US security firm had uncovered a backdoor in a Xiaomi phone that allowed the company to secretly listen to callers’ conversations. But Xiaomi later responded by saying the tested phone was a high-quality fake, highlighting yet another risk to its reputation that these pirated products could pose.
As those reports were circulating, separate ones were detailing the wide range of fake Apple Watches that have flooded the China market just a month after the highly anticipated gadget was first unveiled. (Chinese article) Apple started taking orders for the watches in China last Friday, but Chinese media pointed out that the counterfeit products had been available as early as mid-March.
Like Xiaomi, Apple’s reputation could ultimately suffer as some consumers buy fake Apple Watches under the impression that they’re real. Such products are much lower quality and cheaper, costing as little as one-eighth as much as a real Apple Watch, and use variants of the Android operating system rather than Apple’s own highly-regarded iOS.
Such fake goods typically come from factories located in smaller cities that are outside the jurisdictions of more vigilant law enforcement in major centers like Beijing, Shanghai and Shenzhen. Factories in those areas often provide important jobs, taxes and other economic activity, making local officials reluctant to permanently shutter such operations for fear of hurting their economies.
Beijing should be commended for its efforts to tackle piracy so far, which have resulted in a drastic reduction in pirated goods in top-tier cities and from most major retailers. To tackle the problem more comprehensively, the central government should consider taking a more multi-tiered approach to its efforts by offering economic incentives to smaller cities where piracy occurs.
Such measures could include tax offsets, monetary compensation and economic target reductions for governments that close down pirating factories to the detriment of their own economies. Such an approach could help to root out counterfeiting at its source, putting China on a path to end the problem once and for all.