RIPPED OFF: FAKES AND COUNTERFEITS STEAL BUSINESS FROM U.S. EXPORTERS

By Robert R. Frump | Shipping Digest
November 10, 2008

Tim Demarais, a vice president of ABRO Industries, was cruising through the exhibits at the Canton Trade Fair in the fall of 2002 when he spied a picture of his wife happily staring back at him from a tube of super epoxy.

It was only then that ABRO, a South Bend, Ind.-based exporter of quality adhesives, epoxies and fillers to developing countries, discovered that its products and its packaging -- including the one with the photo of Katy Demarais on the label -- had been counterfeited and offered at a fraction of ABRO prices.

"I really was stunned to see a booth, a Hunan Magic Booth, full of ABRO products," Demarais said.  "It had our epoxy, our super-glue, our gasket-maker. They literally had assumed our corporate identity.

"I noticed they had the actual photo of my wife in some of the paperwork," he said. "And I asked them, 'Who is this woman?' And they said, 'It's just some Western model.' I said: 'Western model! This is my wife!' "

Hunan Magic and other counterfeiters of U.S. goods steal more than the packaging and the brand image, of course. U.S. job and exports are at stake, and the problem has moved beyond the high profile knock-offs of film videos and expensive watches to the less glamorous grocery shelf and stock room and parts items.

The FBI estimates that intellectual property theft costs the U.S. economy more than $250 billion a year. According to U.S. Customs and Border Protection, that translates into more than 750,000 lost jobs.

Exactly what that means in terms of lost exports is tough to quantify, but Jonathan Huneke, vice president of the U.S. Council for International Business, believes it is profound.    

"Products with significant IP (intellectual property) make up more than half of all U.S. exports, driving 40 percent of the country's growth," he said.

And according to Hank Cox, a spokesman for the National Association of Manufacturers, the problem is made worse by the fact that most small businesses do not know there is a problem.

"Research conducted in the spring of 2005 by the U.S. Patent and Trademark Office indicates that only 15 percent of small businesses that do business overseas know that a U.S. patent or trademark provides protection only in the United States," Cox said.

He also noted that the FBI reports that in the U.S., all traditionally defined property crimes accounted for $16 billion in losses in 2005. "The best estimates we have for losses from piracy and counterfeiting exceed that number by five or 10 times," the NAM official said.

True, there have been some high profile busts lately. A doctor known as the "King of Viagra" pleaded guilty in October to being part of a global conspiracy to sell fake medicines in the United Kingdom. Dr. George Patino, 48, is expected to do serious jail time for helping to smuggle in fake copies of the impotence drug from illicit factories in China, Pakistan and elsewhere in Asia. He was caught in a sting operation.

Big pharmaceutical companies can devote millions of dollars to anti-counterfeiting operations and prosecutions, but the onslaught of piracy can be deadly to a medium-sized business such as ABRO.

With sales of about $100 million annually, nearly all of it outside the U.S., ABRO saw its sales plummet after the Canton Fair discovery because Hunan Magic and some other Chinese companies were offering much cheaper wholesale prices of inferior goods in fake ABRO packaging. Its U.S. suppliers saw orders drop by 18 to 20 percent, resulting in layoffs. The company said it lost tens of millions of dollars in sales as exports slumped significantly for years.

But even as business was dropping, Peter F. Baranay, president of privately held ABRO, made a decision. He fought back and fought back hard, even though it meant a concerted effort in the 150-plus countries where ABRO products were sold and hurt by counterfeits.

"We were pretty much the poster child for the new piracy," he said in an interview. "We were one of the first to let people know piracy is not just about software and movies and Gucci bags."

Indeed, the goods sold by ABRO are pretty much everyday items with relatively low margins. Over 65 years, the company developed a good brand name for products ranging from sealants, tapes and lubricants to small motorcycles. ABRO manufactured nearly all of them in the U.S. and exported nearly all of them to Third World markets.

Nearly six years after discovering its entire company had been counterfeited, ABRO has reclaimed its identity. Along the way, the head of Hunan Magic ended up in a London prison cell, at least briefly, following a "sting operation." The company is still in business but has agreed under pressure from the Chinese government to stop knocking off ABRO products; instead it presents its own product line under its name.

ABRO now routinely spends more than $1 million a year on private investigators, undercover operations and legal counsel.

"You rip off my product, that is a criminal activity," Baranay said. "We've gotten that message out there and we've gotten our company back. I'm happy to say we are back to our original level of sales and above that level, aiming at $250 million a year now.

"We also have a full-time attorney on staff devoted to nothing but intellectual property protection," Baranay said. "And he is on the road 75 percent of the time."

Not all stories end so happily.

In the world of small business, there may not always be a chance to fight back. A painter and designer, who asked that her name not be used, two years ago sent out a fabric design to be reproduced by a Chinese manufacturer. She obtained an international copyright and seemed to follow all the steps needed for a modest expansion of her little operation in a resort town. 

But as she was holding a press conference to unveil her new design, friends hesitantly told her that they had already seen purses with the design available in the shops of the tourist area where she worked. The counterfeits were from China. 

"The fakes actually were turned around faster than her originals," a friend said. "There was nothing she could do that made any sort of economic sense as she had no resources to fight it. All of us in the design business learned a lesson that very small businesses must be very careful in outsourcing material."

>> Read complete report