China's iClone

Company Copy

In 2006, NEC, one of the 25 biggest consumer-electronics firms in the world, went public with the results of a two-year investigation. The company had been receiving complants about products it didn't even make: DVD players, cellphones, MP3 players. Investigators from International Risk, a private security firm employed by NEC, ultimately uncovered a shadow version of the company operating out of corporate offices in China, with ties to more than 50 manufacturing facilities. "On the surface, it looked like a series of intellectual-property infringements, but in reality a highly organized group has attempted to hijack the entire brand," says Steve Vickers, the former Hong Kong police inspector who was in charge of the investigation for International Risk. Executives had their own NEC business cards and e-mail add-resses. They had marketing plans and distribution networks in place. Some "company" facilities even had electronic signs bearing huge, lighted NEC logos. Most bold of all, the bogus NEC actually charged the manufacturers it worked with royalties on its designs.

The investigation led to raids last year on 18 of the manufacturing sites and the seizure of nearly 50,000 fake products. Yet the factories themselves are still operating, just not using the NEC name. The ringleaders of the scam have yet to be caught; like the Samsung copiers, they are thought to still be making fakes.

Death to the Bootleggers

The Chery QQ demonstrates more than just the skill of modern cloning. It also illustrates the danger. Easy-fit doors and rearview mirrors aside, there are differences-scary differences-between the Spark/Matiz and the QQ. As news of the copycat car spread last year, a German automotive club conducted and videotaped a comparative crash test between the two vehicles. When the Matiz hits the barrier, the front end crumples. The rear of the car bucks upward and then thuds back to the ground. An impact chart shows serious yet nonfatal injuries to both the driver's and passenger's head and legs (the chart distinguishes impact with color: the redder the deadlier). The Chery hits the obstacle at the same speed. The rear end of the car lifts higher than the Matiz and begins to rotate. The driver-side door pops open. Hood, engine and roof crumple into the passenger compartment. The frame buckles, bringing the vehicle flat to the ground. On the impact chart, the driver's head, neck and chest are brown and red: not survivable.

Over the past few months, concern over the safety of Chinese copies, as well as legitimate products with Chinese ingredients or brand names, has become more real to consumers in the U.S. In June, the FDA warned consumers about Chinese-made toothpaste, millions of tubes of which were on-sale in the U.S. The substance in the toothpaste-diethylene glycol, a toxic component of antifreeze-had been used as a substitute for glycerin, a common sweetener. A similar substitution killed about 100 people in Panama last year.

Ironically, well-publicized, embarrassing cases like this could actually provide some of the impetus necessary to vault China into the sixth stage of cloning-making better-than-real products. "If Western-style controls are put in place, that's just another way the infringers will learn how to do a better job of what they do," says Danny Friedmann, a Dutch intellectual-property expert who runs a blog called IP Dragon.

Although there have been legal victories against cloners, most of the time they have been minor and fleeting. Last year, Sony won a lawsuit against a Guangzhou company that was copying the company's camcorder batteries. In another of the most watched cases, Prada, Chanel, Gucci, Burberry and Louis Vuitton sued Beijing's organized "Silk Market," one of the city's most well-visited locales for fake goods, and shut it down. Despite the low monetary damages-$75,000 for Sony, and $12,500 in the Silk Market affair-the victories were hailed by some as part of a growing recognition in China that counterfeiting needs to be halted. The cases demonstrated the "strong resolve of the Chinese authorities in protecting intellectual-property rights," says Tan Loke Khoon, head of the intellectual-property practice in Hong Kong and China at the law firm Baker & McKenzie, which brought the two lawsuits.

But on my visit to Beijing, the Silk Market hadn't just reopened. It had expanded, turning itself from a seedy array of tiny stalls into a full-fledged modern shopping mall: a forbidden city of fakes. That's part of the dilemma in "fixing" the counterfeit problem, Friedmann says: "There's an impression that China is strongly controlled by the central government. The truth is that there's power everywhere. China is filled with 'little emperors' who can do whatever they want."

Yet when a cloner is brought to justice-especially if the case makes headlines, embarrassing the Chinese authorities-punishment can be both swift and harsh. On May 29, Zheng Xiaoyu, the former head of China's FDA, was sentenced to death after taking the equivalent of $850,000 in bribes. The bribes were given in part to secure the approval of a counterfeit antibiotic that later killed 10 people in 2006. The Chinese court said the sentence was warranted and that Zheng had "endangered public life and health," as well as "the efficiency of China's drug monitoring." According to Jiang Zhipei, a Chinese supreme-court justice specializing in intellectual-property cases, punishments like this show that "the judicial system is working actively to make people aware of how important this is." Zheng was executed on July 10.