Alibaba’s fake product issue – Economics of counterfeit product review

Alibaba’s real product product ratio only accounted for 37.25% of all the products sold through its platform, according to a recent survey of the State Administration for Industry and Commerce of the People’s Republic of China.  Alibaba immediately announced that the survey samples were questionable. The State Administration only took 51 samples from 1 billion products. The State Administration responded to the critique by Alibaba with a white paper which listed Alibaba’s five challenge questions on January 28, 2015. They also required that Alibaba’s executive team behave properly and to reign in their arrogant attitudes. However, the State Administration claimed that the white paper released could not be considered as a legal document two days later to the public. It seemed that the saga was over, but it actually caused Alibaba’s stock price to fall significantly.

A well-known scholar Mr. Larry Hsien Ping Lang undertook a comprehensive analysis of the history of world fake/reverse engineered products. Many advanced economies have experienced a fake products being sold in a  period in their history. Let’s start with the U.S., the U.S. experienced the period of fake products during 1840 to 1910. It had much more serious implications in those days. For example, the author of A Tale of Two Cities, CharlesDickens visited the U.S. in 1842. He found out that fake copies of numerous European masterpieces were all over the place, including his own books.  He was so angry that he wrote a book titled American Notes to reprimand those who had participated in the phenomenon. However, the American book publishers had copied the book and were responsible for selling them widely throughout the  U.S.

A further surprise, Germany (later a high tech/innovative mecca also experienced fake product period from 1871 to 1900. The reason was because right after Germany was united in 1871, it did not have the  fundamental infrastructure to develop its economy. Therefore, Germany came up with a very simple idea that to copy products from the most advanced economy at the time, namely the United Kingdom. In 1887, the State of Britain passed an Act that any product imported from Germany must add a logo “made in Germany”, which identified fake products. 

Also, Japan experienced fake product a period during 1945 to 1960. In this period, made in Japan was equivalent to fake or reverse engineered products. In China, fake products have appeared in the market since 1990s. Nobody can predict how long it will take China to rectify this situation. Perhaps they can learn from how other countries prohibited fake products to everyone’s benefit. 

The methods to counteract this practice can be categorized into the following three areas:

1. To increase product quality. How did Germany achieve the goal? In 1890, the German government announced a policy to compete via product quality. Many German manufacturers, especially small and medium ones started research and development departments. This resulted in the future strong foundation of the German economy. In 1907, German products could compete with U.S. products.  The Japanese government also had a policy of saving Japan through quality. On the one hand, it imported advanced technologies from across the world. On the other hand, the Japanese government supplemented companies that did research through taxation and direct investment. For example, Mitsubishi Heavy Industries Ltd. was able to produce machine tools in 1960 that were considered the most advanced technology at the time. 
2. To increase the capability of industry workers. Germany utilized the apprentice system. When people reached 16 years old, they would become an apprentice for two years and needed to study industrial theory in school for another two years. Germany required that all workers must pass the 4-year apprentice training for 450 industries. Japan created the permanent employment. Japan relies on organizations to train employees on the job. It takes time to train workers to master the process and become really good at it. 
3. To prevent fake products with strict regulations. In Japan, the government uses societal pressure. Any company would definitely go bankrupt if they sold any counterfeit consumer goods. Germany controls the fake products through regulations. I have to say that Germans follow rules in a far superior fashion compared to the rest of the world. If a company breaks the law, they will face a substantial fine and a possibility of jail sentences. Similarly, the U.S. created a law between 1984 and 1994, any company who sold fake products would face a $2 million fine and a 10-year jail services. If they broke the law again, they would face $5 million fine and a 20-year jail services.

The U.S., Germany and Japan ended the fake product phenomena through the above mentioned three-step strategies and became top industrialized countries in the world. Hopefully, the Chinese government will learn from the lessons/experiences of those nations and create a Chinese model to end reverse engineering as soon as possible.