Lessons From China’s Counterfeit Crackdown

Authenticity begins to trump price in the nation’s online marketplaces

Photographer: Noel Celis/AFP via Getty Images

Beijing resident Wang Wenwen says she frequently trawled China’s online marketplaces for brand-name bargains, but grew tired of receiving obviously fake merchandise. The breaking point was a blue, floral-patterned dress she got for $32 that was advertised as a product of popular Chinese brand Five Plus. Not only wasn’t it a Five Plus dress, she says—no label to be found—it was made with “bad materials, unlike those claimed on the site.” Now Wang makes sure she can see and touch her clothes before she buys them.

Although China is well known as a paradise for consumers of cheap pirated goods—software, DVDs, clothing, makeup—that may soon change. At the same time that the government is taking a closer look at online counterfeits, shoppers are becoming more dissatisfied with the quality of their purchases. In April the State Council, China’s cabinet, announced what official news agency Xinhua called “a new round of crackdowns” against “Internet-based crimes” such as online piracy and fake goods. The wide-ranging campaign is said to cover everything from trademark violations and deceptive advertising to shoddy agricultural products and pharmaceuticals, with the government vowing that companies caught violating the rules “will be banned.”

Product authenticity is the top concern for 91 percent of respondents surveyed in 15 cities by consultant RedTech Advisors, compared with 78 percent a year ago. The rising animus toward cheap fakes comes at an awkward time for China’s e-commerce leader, Alibaba. In January the State Administration for Industry and Commerce accused Alibaba’s primary marketplace, Taobao, of letting merchants sell fakes and infringe trademarks. Spokesman Bob Christie says Alibaba is working with Chinese agencies “to take the online fight against counterfeits offline,” including by conducting random checks. But about 8.5 million mostly local merchants sell products on Alibaba’s sites, so clearing them of knockoffs “is like trying to empty the ocean of water,” says Michael Clendenin, managing director at RedTech.

Alibaba’s closest rival in online shopping, JD.com, has about 60,000 independent merchants on its marketplace. Unlike Alibaba, it generates 55 percent of revenue from direct sales of home electronics, appliances, and products such as iPhones, Coach bags, Ray-Ban sunglasses, and Reebok footwear. That makes knockoff products rarer, says spokesman Josh Gartner. “I don’t think anyone can say that it never happens, but we are very confident that we are ahead of the pack” in controlling the problem, he says.

Jumei International, an online retailer in Beijing specializing in beauty products, may be taking the most extreme steps to win shoppers’ trust. Jumei built its business on both direct sales and commissions on merchants’ sales. Co-Chief Financial Officer Mona Meng Gao says it was difficult to guarantee that people buying from third parties would get what they paid for—cosmetics are relatively easy to fake. So in August the company deeply discounted products on its independent cosmetics marketplace, the source of 30 percent of its beauty business, and in September shuttered the marketplace entirely. Since then it’s shifted completely to direct sales of cosmetics from established brands such as L’Oréal and Max Factor. Jumei now also operates a lab that confirms brand-name products are legit and carry unique numeric codes that customers can cross-check on the brand’s website. “We have to go the extra mile with consumers,” Gao says, “to prove left, right, and center” that Jumei doesn’t sell fakes.

The push for authenticity hurt Jumei’s sales at the end of 2014: Net income fell 44 percent, to $11.7 million, from the third to the fourth quarter. But the company estimates that sales in the first quarter of 2015 rose 45 percent to 50 percent, compared with the same period last year. Since Jan. 1, Jumei’s New York-listed shares have jumped 57 percent, valuing the company at $3.1 billion. Still, Gao says, it will take time to assure some skeptics that any Chinese site can be trusted to deliver authentic goods.

—With Christina Larson

The bottom line: Chinese cosmetics site Jumei is taking dramatic steps to address growing consumer concerns about knockoffs.