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China's double-edged sword

China offers a marketplace that is booming, and many major companies are now selling their brands widely. Richard Palk says that some ...

By Richard Palk 01 September 2006

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China is a hot market, and the big companies staking a business claim there (like Procter & Gamble, GM, Novartis) are both keen to advance their brands – and protect them. Therein lies the double-edged sword that China represents: The more powerful and marketable brands are to Chinese consumers, the more attractive they are to Chinese counterfeiters who, it is estimated, contribute up to eight per cent of China’s Gross Domestic Product. Indeed, these brands are so attractive that not only are they copied for sale in China, they often end up as exports, creating a battle on two fronts for brand owners.


The value of a powerhouse brand within every constituent part of an international business model is well researched and commonly recognised. However, certain markets (and China is one of them) present a reputational challenge to companies with such megabrands: counterfeits not only rob brand owners of revenue and market share, they also undermine the brand’s consumer promise. If half the bars of a brandlabel soap are counterfeit, the brand owner not only loses that revenue, it might also easily lose its long-term reputation if the counterfeit soap isn’t squeaky clean.


So what can companies to do in such situations? There are three counterfeit hurdles being deployed by the smartest brand owners:


Barrier 1: High replication hurdle


The more complex the requirements to manufacture a product, the greater the hesitation to counterfeit it.


Barrier 2: High domestic hurdle


If a brand owner can create high legal or logistical hurdles to effective domestic distribution, the less likely counterfeiters are to try.


Barrier 3: High international hurdles


Distributing and selling counterfeit goods overseas requires smooth and reliable international transport channels – not to mention safeguards to evade police, military, or customs operations in destination countries. To the extent brand owners can work with authorities and distributors to make it hard for counterfeiters to operate, those who would abuse brand rights are impeded.


Despite these hurdles, China remains an especially lucrative market for those who counterfeit as Western brand owners continue to seek market share there, despite the threat to their brand equity and revenues. Why? The reason is threefold: First, China represents the world’s most rapidly growing consumer economy. To fail to capture market share early in China may well be a severe long-term competitive hindrance to future profitability, even if this means short-term exposure to brand counterfeiters.


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