Since Marty McFly flew across a pond in Back to the Future Part II, the world has been eagerly awaiting the invention of a hoverboard. In 2013, the world got a little closer to realising their dream with the announcement of Inventist’s Hovertrax. Sadly, this creation was marred by the work of counterfeiters.
The auto-balancing electric skateboard, invented by Shane Chen, earned over $85,000 in Kickstarter pre-orders and seemed ready to take the world by storm. Fast-forward to today: by now we’ve all seen a hoverboard at some point in the last couple of years. They’ve become almost ubiquitous in cities around the world, offering speedy, versatile urban transport that can fit into a backpack.
So, Chen must be revelling in his recent success, right?
Shane Chen - a cautionary tale of IP theft
While Hovertrax did enjoy moderate success, stemming from their Kickstarter campaign, it wasn’t until a few years later that the real hoverboard boom really happened. This came as much of a surprise to Chen as to anyone.
Inventist had become the latest victims of shanzhai, China’s pervasive knock-off manufacturing industry. As Inventist had been operating without a brand protection service, Shanzhai manufacturers in China had found their product and were free to make their own imitations. The designs spread across the network of copycats and the product exploded in popularity. Meanwhile, Chen saw his company losing millions in potential earnings through these exploits.
Chen wasn’t about to sit back and watch his business crumble, however. As a native of Beijing and an American citizen, he was in an advantageous position to take the fight to the Chinese counterfeiters. So he went to China to try to appeal to the Chinese courts in an attempt to solve these issues. What happened next was shocking.
According to Chen, he received a phone call from the judge presiding over the case, who explained that the only way that he would decide in Chen’s favor would be if he gave the counterfeiters permission to continue manufacturing his product. Chen’s options were to either keep fighting for brand protection, and inevitably lose the case, or to legitimise the counterfeiters manufacturing designs stolen from Inventist. Chen dropped the case when the mounting legal fees became too much and returned to America.
In practise, there really is no separation between the courts and the government in China, and a lot of big businesses in China have connections that can bend the law. The courts may go after smaller companies if pushed, but that really amounts to a drop in the ocean in the context of shanzhai manufacturing. The legal system there is generally either inept at tackling big businesses, or simply unwilling. It's a clear example of Chinese industrial corruption in action.
So just where are shanzhai manufacturers operating to move such quantities of these illegitimate products?
Alibaba - A threat to brand protection?
Jack Ma, owner of Alibaba Group, is an incredibly polarising figure. On one hand, he is said by some to be China’s greatest living philanthropist, and has even suggested throwing counterfeiters in prison. On the other hand, Alibaba has been branded a notorious sanctuary for counterfeiters, and Ma himself has said that counterfeit products are of higher quality than the originals they steal from.
According to Chinese media, upwards of 40% of all products that are sold on Chinese e-commerce sites are counterfeit, and Alibaba has made a fortune having counterfeits sold on their platform. They showed Amazon, eBay, and the rest of the world that letting counterfeiters operate within your online marketplace is extremely profitable.
Trusted websites following suit
According to Wade Shepard, Amazon starting pursuing Chinese merchants in 2015; they were encouraged to use Amazon as their primary Western marketplace. Amazon wanted Chinese manufacturers to be able to sell directly to EU and US consumers, and for them to use Amazon as a primary platform. This worked as an extension of Amazon’s primary business model of cutting out middlemen. They’ve since been continuing this practise by moving into ocean shipping and, famously, introducing drones for home delivery.
Welcoming the sellers from China onto their platform has clearly been a very fruitful move, as Amazon’s profits soared by 28% a year after courting Chinese manufacturers, and has currently established Amazon owner Jeff Bezos as the world’s richest person, with a net worth of approximately $130B.
Amazon wasn't going to be alone in this venture for long, though.
Surprising contenders getting in on the action
Just this year, there has been an undercover federal investigation by the U.S. Government Accountability Office which implicated even brick-and-mortar stores Walmart and Sears, as well as Newegg, eBay and, of course, Amazon. The investigation discovered massive sales of counterfeit products masquerading as authentic. Nearly half of the products bought and tested turned out to be counterfeit copies. The scale of these operations cannot be understated, and is continuously expanding, as more and more companies are running third-party online marketplaces.
An industry analysis from Red Points has discovered that social media sites such as Instagram and Facebook are becoming infected by sales of counterfeit products. If it’s difficult to for legitimate companies to protect their brand against knock-offs when they’re in public view on eBay or Amazon, imagine the trouble caused by secretive teams of counterfeiters on social media moving their products. To have any chance of combating the flood of counterfeits, brand protection solutions need to become incredibly effective, or legitimate enterprises may find themselves drowning.
If shanzhai means a "mountain hideout" for counterfeiters, then these online marketplaces truly have become a citadel for these knock-off merchants.