SPEAKING to his company’s investor conference last Tuesday, Alibaba founder Jack Ma made a controversial, and entirely valid, observation:
“The problem is that the fake products today, they make better quality, better prices than the real products, the real names,” Ma said, according to a Bloomberg report. “It’s not the fake products that destroy them, it’s the new business models.”
The same factories being used to produce branded products are the ones making the counterfeit products, Ma explained. The goods are made in the same place, by the same workforce, using the same materials and methods; the only difference is whether the name that is hung on the finished goods complies with trademark law.
Because of the rapid growth of market access through the internet, in part thanks to platforms like Ma’s Alibaba, factories that produce ‘counterfeit goods’ can promote them directly to consumers, making policing the global marketplace increasingly more difficult. Ma assured his audience that his company—which has come under fire for ‘not doing enough’ to combat piracy and trademark infringement—is doing the best it can to combat the problem, but the implication of his comments was that the effort was at best only partly successful, and is probably doomed to eventually fail.
Ma’s comments didn’t sit well with many people, especially the Chinese authorities, who are quite anxious to change their country’s reputation as the world’s source of cheap knock-offs. But he was undeniably correct; and to be fair to China, it’s not the only country grappling with the problem. Bangladesh, which is a source for a significant amount of the world’s supply of apparel, has also been taken to task for not having stronger protections against counterfeiting, and other countries like India, Pakistan, and Sri Lanka have also been criticized.
As Ma pointed out, it’s not the factories or their output that are the real problem, it’s the globalization business model. There was a time a few decades ago when to Western consumers a branded product was superior to a cheaper, unbranded product because of its origin; one would prefer a pair of Adidas sneakers over a less expensive no-name pair, because the Adidas shoes were made in Germany with all the attention to quality that origin implies. As companies began to move manufacturing overseas, however—to places like Korea and Taiwan at first, then later to countries like China, India, or Bangladesh—the branded products were still preferred because of the assumption that the quality standards were still maintained.
But now, particularly with the rise of native Chinese brands—names like Huawei and ZTE in the electronics sector are probably good examples—the brand premium of Western brands like Adidas, Nike and Apple is no longer self-evident, for the very reason Ma described. If a particular branded product is produced in a Chinese factory alongside and in precisely the same way as a counterfeit or otherwise ‘unbranded’ product, explaining what distinguishes the former from the latter becomes very difficult.
So long as the product is properly made, tangible brand attributes, the actual features and benefits, cannot be used to support the notion that the brand is a superior choice. The brand value has to be based on entirely evocative cues, which really only works on stupid people, and ultimately transfers the added value from the product to the consumer—in other words, what makes the brand worth its premium price is the mere fact that some consumers are able to pay more for it. In consciously consumerist markets (like the Philippines) where there is still a great deal of social worth attached to labels, brands still have some traction, but their staying power will have a short duration. Consider, as an example, the market for mobile phones: Brands that were once considered ‘second-rate’ (or didn’t even exist a few years ago) collectively dominate the market, and have democratized it—when nearly everyone can afford a smartphone that has capabilities equal to everyone else’s phone, the perception of prestige that comes from owning an iPhone or top-end Samsung vanishes.
And that leads to another disturbing, but interesting question: If a brand is not uniquely associated with objective attributes of a product—technical specifications, proprietary methods of manufacture, or the like—and the intangibles associated with the brand are essentially valueless, then what exactly are companies protecting against counterfeiters and copycats, and why should government aggressively support those efforts? The easiest answer is that if they did not, it would be difficult to impose and maintain standards for products. But on the other hand, that is an area where the market tends to be self-correcting, even if it lags in the sense that the market has to first discover that a product is bad. With the acceleration of public communication, thanks to the internet and social media, however, that time gap is narrowing; consumers need not rely on regulators to protect them as much as they needed to in the past.
One conclusion to all this may be that globalization may be having the opposite effect in terms of strengthening companies than its proponents—the companies themselves—intended. That’s ultimately good for consumers, and probably good for the vast class of smaller businesses, the sort that benefits the most from platforms like Jack Ma’s Alibaba, but bad for the engines that drive globalization in the first place. What happens next is anyone’s guess.