Last year, a large scale criminal enterprise that dealt with smuggling imitation luxury products was uncovered. This enterprise accounted for approximately 100 billion won in fake products. 15 people from 2 separate groups of smugglers were caught by customs. Around 140,000 items were seized at the scene of the incident which included fake luxury bags, watches, shoes, even include fake impotence drugs for men and cancer drugs made in North Korea which have been banned for formal importation. Prosecutors identified a moving company in Guangzhou, China for distributing forgeries several years ago. Forgeries are all over the place now; maybe someone you know just got one whether they know it or not. Let’s look into the real state of selling frauds which is growing more creative and how to eradicate the fakes.
The scale of Korea’s forgery markets
According to the Korea Consumer Agency, the scale of Korea’s forgery markets is the 11th largest in the world, and accounts for about 26 billion dollars (about 27.4 trillion won). However, based on adjusted GDP (Gross Domestic Product), Korea is actually the 5th largest destination (1.4% of the world trade). As a result, Seoul and its autonomous districts have began to crack down on forgeries at major tourist regions in its downtown areas over the last four months. This has led to the seizure of a total of 27,497 fake items. The number of exposed forgeries has been estimated at 16.2 billion won in the Myeongdong special tourist zone, Namdaemun market, Dongdaemun fashion tourist zone and Itaewon where foreigners can be found in large numbers. There are also forgery markets in the five microchip fields like analog chips, microprocessors and memory chips. These chips account for two-thirds of the semi-conductor market. Last year, the fake semi-conductor market accounted for 169 billion dollars worldwide. The scale of the domestic liquor market is anticipated to reach 1.2 trillion won. The scale of the knock-off liquor market is also anticipated to be huge at 100 billion won. The organized scale of making fake liquor is much less than it was in the past, but the small scale of distribution is still around and services businesses that sell mixed liquor.
The forgery markets in Itaewon
We visited the Yongsan Police Center in the Itaewon district on January 24th, 2013. We asked the police where the street forgery markets were. One officer smiled and said, “If stores that openly engage in the forgery market exist, we can not say we are discharging our duty. We have closed many cases and many sellers of illegal merchandise have been put in jail.” We pressed them further and asked where crackdowns frequently take place, and the finally told us what we wanted to know. We made our way to the forgery markets and saw a sign that read “Importing luxury” on the dense commercial street. Among them, we went into a store that displayed a tremendous number of forgeries in the shop window. From the gate, Coach bags with 60,000 won price tags caught our eyes. All wallets and bags were individually wrapped with plastic wrap. A storekeeper welcomed us speaking the Daegu dialect and we tried to talk to him in depth about dealing in forgeries. At first, we asked, “Are these forgeries imported from China?” and he answered, “All of these forgeries are made in Korea, and they are of higher quality than those made in China.” Second, we asked, “Where and how can we buy fake luxury goods?” and he answered, “Most storekeepers have at least one fake product, but they can’t sell them openly because of the harsh crackdown, so they only show and sell forgeries to customers who want to buy them by contact.” Then he added, “When you go outside, you can find a person standing alone despite the cold weather. If they ask you to buy some bags, I am sure they are forgery dealers.” When we tried to take a photo, he adamantly rejected our request, and said, “Even foreigners in Itaewon hate having their pictures taken.” After we finished the interview, it was easy to spot strange people strolling in front of their stores. Then one of them approached us and as anticipated he asked, “Hey, do you need any bags?”
The evolution of forgery markets
Forgery businesses, which usually operate on a small scale, are compartmentalized to production, selling and business. The scale of these enterprises has reached about 10 billion won, which is much bigger than before. In recent times, forgeries have improved a great deal in production quality and many of these products look genuine. Between 2009 and 2010, the operating system changed to producing small quantities, which allows components to become considerably more elaborate. Forgeries at the highest level are mainly taken by order in Korea, and custom-made in China. After the domestic crackdown intensified, forgery technicians and engineers in charge of manufacturing began to go to China. If they convey their know-how to Chinese manufacturers, they will be able to make near perfect forgeries which will make it difficult for those who buy luxury goods to tell the difference by sight alone.
The illegal dealing of forgeries online
The Observer has done research about how prevailing illegal forgery online shopping businesses. We tried to type in the search “Gucci bag” on three representative portal sites, and the results were consequently changed to shopping mall lists of the sponsor link each time. This is because advertising agencies can turn on or off quite freely. However we tried the search again that weekend when there was a sudden increase in the number of web surfers.
Connecting to the 2-3 websites that came up on the search, we found the following red flags. ① Details such as materials or size in each of the items offered were not specifically indicated and only 3 to 4 photos were pictured on the front
② There was a strange notice; "For consumer’s protection, we will possibly deliver your package with a name that does not match the receiver you requested. So, please do not send your package back to us for this reason."
③ The pattern of contents on reviews or Q&A written by consumers was similar and numerous.
④ A pop-up came up every minute which stated that only members can access "All menus," and the site denied our access.
⑤ At the bottom of the site, there was an address that seemed to be a Chinese company and the key number started with 070.
⑥ One of the sites had a conspicuous banner which stated that members must check Naver Cafe, if the site changed domain names. When we clicked the banner, there was a notice that the domain address had changed 3 times.
The only site which actually obtained an offical business registration number had been ordered to suspend its business as a result of searching on “baleun nuri zikeam e” (It provides information on imitations, smuggling illegal food products, merchants who deal in harmful goods, and dealing with other illegal items online). Nevertheless, this mall is still operating at this very moment. Next, let’s look into the current state of dealing forgeries on large open market sites or through social commerce. In case of the large open market sites or market site a major dealing time for fake products is from midnight to 6:00 a.m. When they are dealing in forgeries, they use their own slang, such as “imitation” or “the class of SA” and they continue to create their own language because it is not easily regulated. In the case of social commerce, businesses which supply the products to social commerce win a contract with genuine goods in the qualification process. However, when it comes time to sell their goods, they lie to consumers and social companies, using the trick of skillfully distributing products which are composed of a mixed bag of genuine and fake goods. In January, “Ticket Monster,” “Coupang,” “We Make Price” and “Groupon Korea” publicized the Aruti pore brush made by the company Aruti and earned about 67 million won for fake brushes. Because of this, the Fair Trade Commission ordered a corrective action and imposed a fine. Four companies refunded 200% of the total money received to each buyer based on their pledge to refund over 110% of the purchase price to consumers who buy forgeries.
Problems due to imitations
The negative effect on luxury goods makers is considerable. Trademarks serve the function of creating trust. If consumers buy imitation they believe to be genuine goods, they could come to distrust the company because consumers feel dissatisfied about the quality. Therefore, a company that produces genuine luxury goods cannot make any progress. This has led that suffer from imitations to develop technology to prevent copying, which requires additional expense. That additional expense by the company increases prices. Imitation products also promote unhealthy consumerism. For example, imitations promote “masterpiece tribe consumption.” Some consumers who know they are buying imitation goods often do so because of curiosity or vanity. Imitations incite their spending and aggravate their vanity. There are also many people who simply cannot afford genuine luxury goods, and they are happy to buy well made imitations. Additionally, if a company’s trademark is damaged by imitations, they do not trace imitators aggressively because they fear that Korea would be streotype as a country of imitation. Actually, Korea is on a priority watch list in America and Europe. Imitations also cause confusion in commercial transactions because imitation steal the trademarks of legitimate companies for production and sale. Imitations create a false sense of quality. In the past, if the police cracked down on outlets that distributed imitations, it was possible to sever the distribution loop. However, nowadays it is more difficult to crack down on imitation goods because there are multiple distribution routes. Finally, imitations are beginning to involve criminal groups. Imitation goods are produced outside of industry safety regulations. In many cases, toxic materials are used. Criminal enterprises are attracted by the high profit margin on luxury knock-offs.
A Korean company fights back against imitations
An example of a Korean company that fought back against imitators is “Lock&Lock.” Lock&Lock is in the ace airtight container field. However, Lock& Lock’s products were constantly being imitated according to the Korea Customs Service and KOTRA (Korea Trade-Investment Promotion Agency). Lock&Lock recognized the need to defend itself against the increase of imitations. Knock-off products from China in this field amounted to about 5.3 billion won, which accounted for 42% of all profits. Lock&Lock fought against this by improving the quality of its goods. Even if the outward appearance of the imitations was similar, they were not able to copy the interior quality. Consumers want genuine goods. They also reduced the production period of new products. As imitation products came into the market, Lock&Lock had already released new products. Lock&Lock also made an effort to get consumers on their side. They educated consumers about fakes by highlighting the differences on their homepage and in their stores. Lock&Lock also decided not to sue imitation producers because lawsuits cost time and money. Instead, they warned concerned people and merchants to not sell imitations. Finally, Lock&Lock started an imitations task force. They investigated closely and vigorously. They were able to identify and stopped imitations in China in August of 2010. This investigation led companies in China to forfeit products and 12,000 mold facilities.
We need a better plan to eliminate imitations
The government needs to establish stronger punishments. Korean law imposes a seven year sentence or a 100,000,000 won penalty for manufacturers, distributors and sellers of imitation goods, but these penalties are not carried out properly. Retail merchants are constantly exposed by the police, but they only receive fines. This does not hinder these business because they pay the fine and they can still gain profits. Let’s look how other countries are dealing with this issue. France has the strongest laws in the world. French law punishes those who produce and sell imitations and those who buy or own them as well. You can be fined up to 300,000 euro or be sentenced to three years in prison. They also regard a person who has more than ten imitation products as a seller. In New Zealand you can be sentenced to three months house detention, and 300 hours of community service. Second, in New Zealand a man was sentenced to three months house detention and 300 hours of community service for selling imitations of the jean brand “True Religion.” He also had to pay two million dollars in damages to “Denim Groo,” the manufacturer of True Religion jeans. The most important issue is to deal with consumer consciousness. 22% of all respondents answered that they buy imitations. Among these, 67.7% answered that they knowingly buy them. There is a consumer education class held by KIPRA (Korea Intellecture PRoperty PRotection Association) for eliminating imitation distribution. This program was nationwide and conducted by with KWIA (Korea Women Inventors Association) and took place from April 2012 to October 2012. It targeted housewives, female university students, office workers who lack access to information on the acquisition of intellectual property rights, and the problems created by imitations. The lecture consisted of patent agents, patent office judges and invention education experts. The lecture consisted of presentations made by experts and videos. It dealt with the illegality of imitations, the economic problems that have been created, damage cases and issues of discrimination.
We asked an industry expert Seung-Dae Baek about the reasons for this phenomenon, the view point of university students, and what ways to improve the awareness of consumer.
Q) What do you think about the social phenomenon of imitation markets?
A) I think society has created the market for imitation goods. Nowadays, only high quality and luxury brands appeal to consumers. Consumers buy brand goods to show their social position or life level. Therefore, ultra-luxury brands have appeared. Almost all imitation goods produced now are of these high end luxury products. If a seller makes imitations of cheap goods, it is not profitable and consumers aren’t interested in them. Buying these high end imitations gives access to social status that would not otherwise be available to those of limited means.
Q) What do you think about university students who buy fake goods?
A)In my opinion, this is a little bit more understandable. However, university students are intelligent, and they should be better informed consumers. In the university, we learn professional knowledge as well as wisdom about how to live a moral life.
Q) How can we change the consciousness of consumers?
A) First of all, we need to strengthen consumer education and old consumer campaigns regarding rational consumption. Moreover, we need to change social perceptions that equate luxury items with status.
We were surprised by the large scale of the imitation market. In spite of police intervention, sales of imitation goods have increased rapidly. People might feel good if they are able to buy a product that looks exactly like the genuine luxury goods. However, our markets have fallen into disorder because of it. After all, consumers need to understand the results. Many university students contribute to this situation. Most of all, consumers should have the correct mindset and engage in honest consumption.
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