Online Extra: New Balance: The Cost of Copies
Athletic-shoe maker New Balance has been fighting to stop a former supplier in China from making counterfeit shoes for domestic sales and export to Europe, Japan, and Australia. Ed Haddad, vice-president of marketing at the Boston-based outfit, shared his experiences of fighting the fakers with BusinessWeek's Asia correspondent Frederik Balfour. Following are edited excerpts of their conversation:
Q: You discovered a former subcontractor was selling fake New Balance shoes, and the case has been dragging on for some time. What's the status? A:
Q: You discovered a former subcontractor was selling fake New Balance shoes, and the case has been dragging on for some time. What's the status?
A:It has been in the court of appeal for three years, and we can't get it out of there. There's still corruption going on, bribes offered. It's appalling, just appalling. We're trying to make it the poster-boy case of the worst part of China. And we can't make headway.
The [fake] shoes are still in the market. What makes it so difficult to stop him is that we have a system of dating our shoes, and the counterfeiter continues to date the shoes bright and fresh and clean, but they all say 1999 [when he was still an authorized seller and manufacturer for New Balance].
Q: How much have you lost? A:
Q: How much have you lost?
A:That's hard to evaluate. We never had a very big business in China from wholesale, and we have a distributor out of Shanghai, so we didn't have a thriving business that was lost. Our loss has been in energy fighting him and stopping his shoes from getting into Europe, Japan, Australia -- our established markets. We have spent more than $1 million just trying to stop him.
Q: How did this subcontractor get into counterfeiting? A:
Q: How did this subcontractor get into counterfeiting?
A:He started as a supplier for export to the U.S., and then he proposed to start a wholesale business in China. We gave him a distribution agreement as well. At first things went slowly. Then in 1999, sales numbers ratcheted up literally overnight.
On the surface, we were very excited. But the product he was developing there was more of a fashion -- the classic look [and not a model he was authorized to produce.] We told him to pull back. But he didn't and continued producing classics. We then discovered hundreds of thousands of shoes in the pipeline.
Then shoes started leaking into the Japan market and Taiwan, so we terminated him in 1999. Now he neither has the authority to use our trademarks, nor the authority to sell our products.
Q: Do you have other problems with fakes? A:
Q: Do you have other problems with fakes?
A:There's always counterfeiting going on. We have a network of investigators that scour the marketplace. They report information -- that they've found a factory of product with our trademark -- then make decision to raid the factory. We do one a month. It's really just shoes -- that's what counterfeiters copy -- because they're well known. At this point we aren't as well known for apparel.
Q: Are you going to win this battle? A:
Q: Are you going to win this battle?
A:We're never going to stop [the counterfeiting entirely], but we try to manage, control, and stop it at the factory level before [the shoes] reach the market. When [they] hit retail, someone might just have five pairs in his store. From a cost-effectiveness point of view, we'd rather do it at the factory level.
Our first line of attack is the factories, but if product shows up in the market, if they don't pull it off the market, we go after them. We will go after retailers. [We did] it in the U.S. and Japan. In the U.S. we raided an Internet dealer. If goods [do make it into the U.S.], they're showing up in flea markets.
Q: How much do you spend fighting fakes? A:
Q: How much do you spend fighting fakes?
A:We spend about $1 million for ongoing counterfeiting. Most of it is centered in China. In Korea and Indonesia, we haven't had big problems. We did have a problem in Argentina, [which has] a large shoe-making industry. We closed our business [there] two years ago.
Once word gets out that you're diligent and will aggressively prosecute it, counterfeiters will find another brand. If you don't do something, you run the risk of having your brand destroyed. Someone floods the market with goods, and the consumer doesn't know what's real and fake, so they won't buy your brand.
You spend years and years developing a brand and reputation, and you could literally lose it overnight if you don't manage this counterfeit issue. Losing sales is [serious], but it's more important to protect the brand and image. That's what this is all about.
Q: Do you see counterfeiters getting more sophisticated? A:
Q: Do you see counterfeiters getting more sophisticated?
A:In China there's a new phenomenon where counterfeiters take U.S. or English names and use Chinese characters that provide the U.S. name. The characters mean nothing, but sound the same.
For New Balance, there's a company who sells itself as Niu Ba Lan. For a Chinese person with no grasp of English, it sounds like New Balance. They have registered a company name, passing themselves off as New Balance, they have copied our advertising and look and even call themselves them a U.S. company. We're raiding retail stores. It's just incredible how they have copied the look and graphics of ads, taken our campaign, slogans, logos -- copied everything. These counterfeiters are very, very sophisticated and know what they're doing.