The Emergence of the European Counterfeit Markets

Maftei, Loredana Article The Emergence of the European Counterfeit Markets CES Working Papers Provided in Cooperation with: Centre for European Studies, Alexandru Ioan Cuza University Suggested Citation: Maftei, Loredana (2013) : The Emergence of the European Counterfeit Markets, CES Working Papers, ISSN 2067-7693, Alexandru Ioan Cuza University of Iasi, Centre for European Studies, Iasi, Vol. 5, Iss. 2, pp. 246-253 This Version is available at: https://hdl.handle.net/10419/198246 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ C CE ES SW Wo or rk ki in ng gP Pa ap pe er rs s 246 THE EMERGENCE OF THE EUROPEAN COUNTERFEIT MARKETS Loredana Maftei* Abstract:The European market of counterfeit goods has become a subject of increasing concern for businesses, private firms and policymakers. With a growing demand in consumption for this kind of goods, each sector is damaged from the toy industries to the pharmaceuticals industry. This article is aimed to expose the dynamic of the European counterfeiting markets, to highlight the main factors of production, the main providers, the smuggling routes, the overall profit, the main counterfeit products and also to offer a general perspective on the affected European markets. Keywords: illegal markets; counterfeiting; piracy; criminal networks; intellectual property. JEL Classification: K42; K14; H26; F60. INTRODUCTION Today counterfeiting has become a real business with major implications all around the world affecting several industries, national economies but also known as a huge grey industry that practically helps financing criminal organizations channels. As a result of this globalized world, it is designed as an extent of the underground market along with a serious growing demand of cheap goods. Step by step the consumption values were distorted and people`s attitudes towards spending money and investing changed. While one of the few sides of consumption is characterized by a significant share of manufactured goods placed and produced through decentralized sectors, the consumers tend to balance between consumption of cheaper products and quality and expensive products, products that suggest also a growing demand on the luxury market. The days when the trade secrets were closely guarded are gone, now those who hold intellectual property rights are very often threatened by those looking for quick profit with cheaper materials but with a strong “borrowed” business idea, aiming to seduce the lower end of the market. Generally when unauthorized copies appear on the market, it is very unclear where or who to blame or even how to take measures to combat this kind of illegal practice. Although the interesting part of counterfeit markets is the simple fact that in most parts of the world a few can tell a copy from an original, so these unauthorized goods can support also higher prices. *Loredana Maftei is a PhD Candidate at the Faculty of Economics and Business Administration within Alexandru Ioan Cuza University of Iasi, Romania, e-mail: [email protected]. C CE ES SW Wo or rk ki in ng gP Pa ap pe er rs s 247 Counterfeiting is defined as an illegal form of reproduction or imitation of products, often of inferior quality, sold without the brand owner`s authorization. It is known as an illegal practice when an Intellectual Property Right (IPR) is infringed. Basically the process of counterfeiting does not take into account the value and the right of the registered trademark, designation of a product, a patent or a copyright agreement. Despite international action and agreements, the counterfeit market is still growing and it is no longer just a matter of copying the common luxury fashion goods, the market itself suffered several transformation covering a wide range of products, from simple goods like toys, electronic equipment and materials, to pharmaceutical and medications items, that can poses serious health and safety consequences. Counterfeiting represents about 5-8% of world trade and is nowadays less risky and more profitable than drug trafficking (Penz, Schlegemilch and Stottinger, 2009, p. 67). It is estimated that the total annual value is over £ 250 billion, and the counterfeiting is a crime that has grown alongside globalization as the proliferation of technology and more porous borders (Treadwell, 2011, p. 177). Thus the global market faces new trends, the European market seems to be directly affected by this. However, the European market it is not seen as a whole is very divided in buying fake goods, it is very different if we consider the extreme points, the Western and Eastern parts of Europe, both with a different history, culture, social values and education towards consumption. Within Europe the consumption of counterfeit products brings important implication on the economy, such as corruption, the rise of the black market and tax avoidance, but also gives a lower rate to the society’s morality. This article will examine the European consumption of counterfeit products, the consumer behaviour and also the main providers of such goods. 1. THE COUNTERFEITING PHENOMENON IN EUROPE With the recent economic situation, counterfeiting in Europe is considered to be on the rise. Usually known as a place where counterfeiting luxury goods dominated the main markets, Europe seems to be a simply market where the producers are now more concentrated on counterfeiting more ordinary items characterized generally by cheap ways of production. According to the Report on the EU customs enforcement of intellectual property rights (IPR, 2012), China continued to be a significant provider of goods suspected of infringing which entered C CE ES SW Wo or rk ki in ng gP Pa ap pe er rs s 248 the EU (73% of the total amount of articles), followed by Turkey, a main source for foodstuffs, Panama for alcoholic beverages, Thailand for non-alcoholic beverages, Hong Kong for mobile phones, computer equipment and Syria for recorded CD/DVD (IPR, 2012, p. 3). Most of the cases of counterfeit are often thought of as luxury watches or designer handbags or even clothes, thus a significant number of reports demonstrated that counterfeits can exist in nearly all product categories. Before analysing the data on counterfeits per product category it is important to headline that the market for counterfeit goods is very difficult to quantify. However the most accurate image of the market size is provided by the European Commission – Taxation and Customs Union. Regarding the main type of detained products can be figured medicines items which accounted for 24% of the overall amount, followed by packaging materials (21%), cigarettes (18%), clothing (4%), accessories for mobile phones (3%) and labels, tags and stickers (2%) (IPR, 2012, p. 3). A counterfeit does not mean only a part of the shadow economy and tax avoidance, the counterfeits products can also be potentially dangerous to the health and safety of consumers (suspected items concerning food and beverages, body care articles, medicines, toys and so on). Table 1 offers an overview of the top categories of detained articles such as medicines, packaging materials, cigarettes, clothing, mobile phone accessories, or labels, tags, stickers and so on. Table 1 - Top categories by articles in Europe, 2011 Counterfeit commodities Number of incidents Medicines 23,93% Packaging materials 21,21% Cigarettes 17,63% Clothing 3,52% Mobile phone accessories 2,73% Labels, tags, stickers 2,19% All others categories 28,79% Source: Report on EU customs enforcement of intellectual property rights 2012, p.13, available athttp://ec.europa.eu/taxation_customs/customs/customs_controls/counterfeit_piracy/index_en.htm According to the European Commission, in terms of cases, the top 3 categories are especially shoes, clothing and bags, wallets and purses. These kinds of products are very often shipped via post and courier after an order via internet (see Table no.2). C CE ES SW Wo or rk ki in ng gP Pa ap pe er rs s 249 Table 2 - Top categories by cases in Europe, 2011 Commodities Number of incidents Non-sport shoes 27,94% Clothing 19,68% Bags, wallets, purses 7,53% Electrical household goods 6,37% Watches 5,03% Sport shoes 5, 80% All other categories 32,58% Source: Report on EU customs enforcement of intellectual property rights 2012, p.13, available at http://ec.europa.eu/taxation_customs/customs/customs_controls/counterfeit_piracy/index_en.htm The data in Table 2 illustrates an increasing constant regarding traditional counterfeit commodity such as clothing, watches followed closely by electronic equipment’s such as CD/DVD. The general trend is given by the consumers demand for luxury goods. For example some researchers suggest that thanks to the proliferation of digital communications it was possible and easier the copyrighted work of luxury brands which today seems to continue to experience strong growth, especially in emerging markets such as India and China and from there, worldwide (Chadha and Husband, 2006). Counterfeiters do not concern themselves with product development costs, guarantees or advertising. The profit is maximized by the theft and copying of an original idea, often with cheaper materials. Nevertheless, IPR infringing goods are increasingly sold at a price similar to that of the original goods and effectively substitute them on the market (IPR, 2012, pp. 13-14). Among the European states in 2011, Bulgaria seems to be first country regarding the number of intercepted articles followed by Italy (see Table 3). C CE ES SW Wo or rk ki in ng gP Pa ap pe er rs s 250 Table 3 - Overview of cases and articles per Member State The evolution of the number of intercepted articles in Member Statesperiod 2010/2011 Member State Number of intercepted articles 2010 2011 % Austria 292.606 97.957 -67% Belgium 1.776.855 4.297.806 142% Bulgaria 4.444.533 32.593.339 633% Cyprus 88.985 170.914 92% Czech Republic 1.451.993 1.861.910 28% Germany 2.378.815 2.277.714 -4% Greece 12.391.430 5.490.037 -57% Spain 12.391.430 5.490.037 -56% Italy 15.900.422 29.908.415 88% Netherlands 9.625.526 5.086.932 -47% Malta 2.650.692 4.568.054 72% Romania 3.303.353 1.339.058 -59% United Kingdom 5.940.183 4.653.454 -22% Total 103.306.928 114.772.812 11% Source: Report on EU customs enforcement of intellectual property rights 2012, p.21, available at http://ec.europa.eu/taxation_customs/customs/customs_controls/counterfeit_piracy/index_en.htm The power of the Internet enabled the counterfeit merchandisers to reach consumers in all parts of the world. With the entrance of the Internet as a new market actor, the merchandisers of such goods are posing a real threat to the luxury houses, generally because of the phenomenon extent, professional websites, low prices, and faster delivery times and so on. The luxury brands are losing enormous amounts of money and are for example, responding stating that buying counterfeit products help support for instance terrorism and other not only illegal activities but also morally apprehensive. One dramatic example of counterfeiting leading to losses for brands is that of Louis Vuitton, in the Italian market, that, in the late 1970s, withdrew completely from the market when they found themselves unable to compete with the counterfeiters of their products. (Radon, 2012, p. 74) Besides luxury goods another issue is given by the software piracy. A study conducted by BSA Global Software demonstrated that over the half of the world`s personal computer users, 57% admit to pirating software. Thirty one percent say they do it “all of the time”, “most of the time” or “occasionally”, and another 26% admit to having stolen software, but only “rarely” (BSA, 2011, p.1). The commercial value of this shadow market of pirated software climbed from $ 58.8 billion in 20120 to $63.4 billion in 2011, a new record, propelled by PC shipments to emerging economies where piracy rates are highest (BSA, 2011, p.1). C CE ES SW Wo or rk ki in ng gP Pa ap pe er rs s 251 Table 4 - Software Piracy in Europe 2008-2011 Source: BSA 2011, p. 9, available at http://globalstudy.bsa.org/2011/ Among European countries, it can be concluded that in the 2008-2011 period, the countries in Central and Eastern Europe were most affected by this phenomenon (Bulgaria, Greece, Romania, Poland, etc.) followed by the countries from the Western and Central Europe such as France, Germany or Italy (see Table 4). 2. DISTRIBUTION OF COUNTERFEIT COMMODITIES According to IPR statistics 2012, China remains the primary country where the suspected IPR infringing goods were coming from at the moment of the detention. In the last few years, in the top 10 were figuring China, Hong-Kong, India Turkey and the United Arab Emirates. Among these countries Syria appears to be the first time situated in this classification due to detentions of recorded CD/DVDs. Most of the counterfeit commodities reach Europe markets by sea, air, express and postal transport. Figure 1 - Countries by provenance by articles Source: Report on EU customs enforcement of intellectual property rights 2012, p.15, available at http://ec.europa.eu/taxation_customs/customs/customs_controls/counterfeit_piracy/index_en.htm EU countries Piracy Rates Commercial Value of Unlicensed SOFTWARE ($) 2011 2010 2009 2008 2011 2010 2009 2008 Austria 23% 24% 25% 24% $226 $209 $212 $184 Belgium 24% 25% 25% 25% $252 $233 $239 $269 France 37% 39% 40% 41% $2.754 $2.579 $2.544 $2.760 Germany 26% 27% 28% 27% $2.265 $2.096 $2.023 $2.152 Italy 48% 49% 49% 48% $1.945 $1.879 $1.733 $1.895 United Kingdom 26% 33% 34% 33% $13.749 $12.771 $11.750 $13.0223 Total 32% 33% 34% 33% $13.749 $12.771 $11.750 $13.023 C CE ES SW Wo or rk ki in ng gP Pa ap pe er rs s 252 Figure 2 - Countries of provenance by value Source: Report on EU customs enforcement of intellectual property rights 2012, p.15, available at http://ec.europa.eu/taxation_customs/customs/customs_controls/counterfeit_piracy/index_en.htm CONCLUSIONS According with the data provided by BSA studies and European Commission, counterfeiting is extent phenomenon that emerged in the last few years in European countries. Helped by the influence of China, Turkey and India counterfeiting markets, Europe is drowned as a beginning market dominated by counterfeiters, which have decreased in some manners the morality of the society. Although the big luxury houses are threatened by the expansion of counterfeiters and fake goods the real threat is given by the underground channel that helps financing terrorism activities. Currently is very hard to compare a high quality product with a fake one, because generally the counterfeiters are really professional when it comes to sell their products. In Europe the extent of counterfeiting has also a socio-economic impact, considering the big numbers of job losses, sale opportunities, tax revenues and so. The governments are very implicates taking measures to combat this real issue, through police investigation and operations at a large scale. REFERENCES Penz, E., Schlegemilch, B.B., Stottinger, B. (2009) Voluntary Purchase of Counterfeit Products: Empirical Evidence from Four Countries, Journal of International Consumer Marketing, Vol. 21, Issue 1, pp. 67-84. C CE ES SW Wo or rk ki in ng gP Pa ap pe er rs s 253 Treadwell, J. (2011) From the car boot to booting it up? eBay,online counterfeit crime and the transformation of the criminal marketplace, Criminology and Criminal Justice, Vol. 12, Issue 2, pp. 175-191. IPR (2012) Report on EU customs enforcement of intellectual property rights, accessed on 13 of May 2012 at http://ec.europa.eu/taxation_customs/customs/customs_controls/counterfeit_piracy/index_en. htm. Chadha, R., Husband, P. (2006) The cult of the luxury brand: Inside Asia`s love affair with luxury. London: Nicholas Brealey. Radon, A. (2012) Counterfeit Luxury Goods Online: An Investigation of Consumer Perceptions, International Journal of Marketing Studies,available on www.ccsenet.org/ijms. BSA (2011) Global Software piracy study, Ninth edition, May 2012, accessed on May 2012 at http://globalstudy.bsa.org/2011/.