iPhone iClone — Pyrite or Progress?

Chinese production standards are getting lots of headlines these days with recalls of products manufactured under license making daily news in the U.S. One segment of Chinese production has not been much of a focus of that story, and is an open secret that causes further concern: the millions of fake or knock-off products. Fighting fakes has been a priority for the U.S. Chamber, which is launching “Counterfeiting and Piracy Awareness Week” in Los Angeles on August 20 and which calculates that such products cost the U.S. economy $200-250 billion a year in lost sales, jobs, and tax revenue.

This month’s Popular Science has an interesting different take on Chinese production of fake goods, looking at it as part of a development cycle. The author, Dan Koeppel, looks at the quality of some of the ripped-off products and predicts that soon consumers will actually prefer them. He may be right.

The techniques are amazingly sophisticated. Running an extra shift and churning out the same products with modified labels is old hat. Today’s game is much more sophisticated:

• The iPhone clone actually had additional features and even addressed a common iPhone complaint by having a removable battery.
• One group set up an entire shadow corporate identity – headquarters, executive hierarchy, business cards, manufacturing contracts with 50 facilities, marketing plans, distribution networks, and even licensing royalties. The company being faked, NEC, only began to suspect something when it got customer complaints about products that weren’t in its product line, then it took a 2-year investigation to uncover what was going on, and the ringleaders still haven’t been caught.
• LG Electronics’ hot phone, the “Chocolate,” was too slow to unveil in China, taking 4 months, and the high quality fake actually captured the market first, becoming the preferred product.
• When Samsung conducted an investigation of bootleg phones, it found a well-planned strategy that included trade show attendance, patent research, active coding as well as decoding, accessory production, and full-scale manufacturing within 8 weeks that then disappears after a set number of units to avoid detection.
• Lest you think it’s just small stuff that’s easy to manufacture, check out the Chery QQ version of the Chevy Spark (known as the Aveo in the U.S. and the Matiz in Korea). Or the Humvee dashboard gauges ripped off from a company that’s never operated outside of Connecticut.

One thing I found fascinating about the article were the business responses to this competition. Some companies such as Sony and Prada have sued and won — landmark wins but perhaps pyrrhic victories since the damages awarded are small and the practice continues. Other companies, though, adopt the same kind of competitive approach they would to legitimate rivals: move faster, innovate, and undercut or hire the competition. Korean manufacturers now make sure that the Chinese release comes quickly after the Korean one to deny the cloners those 8 precious weeks. Best Buy just opened a retail outlet in Shanghai and established a high level of trust so customers know their big-ticket purchases are the real thing. DVD manufacturers are looking to lower costs and add value through on-line interactive extras only available on legitimate copies. Samsung was apparently so impressed with the clone operation, it figured it may as well pay the cloners to be on its side — no dice, though, apparently it’s still more profitable at $1.25 a pop to make fakes than to take a regular job.

Shaun Rein of China Market Research Group looks at it similarly, advising in a recent Business Week column that companies try to stop piracy by taking a business approach of out-competing them rather than a legal or moral approach. Not that they’re not right legally or morally, just that it may not be a winning strategy. He sees Chinese consumers with growing disposable income and increasing quality demands at the same time that Chinese companies are becoming more innovative themselves, and thus lobbying for improved protections.

The cloners, too, know how to compete – and in an odd turn, the headlines about quality control may ultimately help them compete, forcing them to adopt quality standards and improve safety, according to IP Dragon (a great site following Chinese intellectual property issues).

I can well remember when Japanese products, especially cars, were quality nightmares that no one wanted. Now they’re both mainstream and sought-after luxury brands. The Chinese clearly have ambition, adaptability, a huge market, and competitive instincts. It’s not hard to imagine that they’re on their way to similarly serious world-class manufacturing. To succeed at that, they clearly need “rule sets” as Tom Barnett calls it, or “institutions” like rule of law and copyright protection as development experts refer to it, but getting there looks to be a messy, nonlinear mix of reform and competition.

So, as with all business, there isn’t time to rest on the last success. Legitimate firms are facing this competition head-on. Meanwhile, the cloners get better, too, and the competition intensifies. The Chery QQ was cheap and popular but a disaster in crash tests, and public concern over safety led to improved quality. Now Chrysler is apparently considering an agreement with Chery that would put the Dodge logo on the cars for market in Eastern Europe and Latin America, with Western Europe and North American sales to follow.

And the kicker: that splashy iPhone screen interface everyone raves about? It’s built by a German supplier, but it’s licensed from the Chinese developer.