China's Cd Pirates Find A New Hangout

After a crackdown, they've moved to Hong Kong and Macao

At the Silk Market in Beijing, a peddler bundled up against the cold Mongolian wind hawks one of China's hottest consumer products: pirated CD-ROMs. Here, just across the street from the U.S. Embassy, he and other street merchants sell ripped-off versions of everything from Microsoft Corp.'s Windows 95 to Dorling Kindersley compact disks about birds. Most of these CDs come from underground factories in Hong Kong and Macao that were set up to satisfy soaring demand in China. Price: 40 renminbi a disk--less than $5.

Pirates are still thriving throughout Greater China, but they've got a new base of operations. Since last year, when U.S. pressure led Beijing to crack down on illegal factories in southern China, counterfeiters have simply moved across the border to Hong Kong and Macao. "You push down in one place, and it pops up in other jurisdictions," laments Tom Robertson, a Hong Kong-based attorney for Microsoft. Technological advances have made the business bigger than ever. In China, Hong Kong, and Macao, producers now can churn out a billion legal and counterfeit disks a year--triple the capacity two years ago.

IMPROVISATION. CD piracy is now the No.1 problem between the U.S. and Hong Kong. Commerce Secretary William M. Daley and U.S. Trade Representative Charlene Barshefsky both demanded action during recent meetings with Hong Kong officials. "Piracy rates have been increasing substantially," complains Barshefsky. Hong Kong Chief Executive C.H. Tung is increasing raids on sellers of pirated software and proposing new legislation. Tung is winning support in Beijing, where officials are eager to demonstrate that Hong Kong won't deteriorate now that the British have left.

Ironically, the growth of CD pirating in Hong Kong and Macao is a measure of Beijing's success in stamping it out in Guangdong province. China closed 14 pirate factories last year. This decimated illegal production but did nothing to dampen demand. Conservative estimates put the counterfeit disk market in China at $1 billion. Beijing also banned imports of machines that make CDs. With equipment stranded in Hong Kong and Macao, many pirates went to work there instead. Software and recording industry sources estimate that Macao, which had no production lines two years ago, now has up to 100. Hong Kong has roughly 40, compared with seven at the start of 1996.

Innovation in the legitimate industry makes it easier for pirates to improvise. Pressing machinery is now so advanced and compact that it can be operated in a cramped Kowloon tenement. Counterfeiters also find Hong Kong and Macao less frightening from a legal point of view. Law enforcement agencies are more constrained than on the mainland. Counterfeiters in China get prison sentences of seven years or more, compared with an average of two months in Hong Kong. The average fine in the territory is $650, says J.C. Giouw, regional director for the International Federation of the Phonographic Industry. "To pirates, that's just a cost of doing business," Giouw adds.

MORE AGENTS. Hong Kong's law-enforcement agencies find themselves overwhelmed. The Customs & Excise Dept. has expanded its staff of agents by 60% since the beginning of last year, to 188, and they conduct approximately 30 raids a week. While that has contributed to an eightfold rise in seizures of counterfeit goods in the last two years, the agency says that it still can't keep up.

Chief Executive Tung plans to add 48 additional agents and require CD-ROM makers to register machinery and submit to random inspections. The government also wants to offer rewards of up to $3,500 for tips that lead to seizures of counterfeit goods. Tung's bosses in Beijing are drafting a new copyright law, which the National People's Congress may pass early next year. Experts hope it will help close loopholes in existing legislation.

Still, some measures taken with the best of intentions actually may make matters worse. Beijing soon will reopen the factories it shuttered last year, with central government ministries running them. That should ensure that they produce legitimate compact disks, but the added supply may put even more pressure on legal producers in Hong Kong and Macao. "It's going to get worse," says Robertson, the Microsoft attorney. Across China, expect peddlers of counterfeit CDs to continue doing a brisk business.