China Watch Report


In the labyrinth of counterfeit watches

CHINA WATCH REPORT

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January 2020


In the labyrinth of counterfeit watches

It’s a very closed world, but we were able to follow the field work of a company specialising in intellectual property, which collaborates with the Chinese authorities. The seizure of counterfeit watches is a daily occurrence, but counterfeiters are ever more skilled in their copying and ingenious in their distribution methods. E-commerce has increased the size of their playground tenfold.

 INTRODUCTION

In a street in Guangzhou, we are approached by a man holding several signs with the names of some rather attractive luxury watches, including many limited series. We follow him. He leads us behind the scenes of this open-air market. After climbing the rusty stairs of an old building, we pass “through the looking-glass”. We enter a bright, well-appointed lounge with the neon-lit logos of prestigious brands. And hundreds of watches by Swiss brands. Several salesmen present the models to us. Particular emphasis is placed on the best finished models, with the special name “Noob”.

During our visit, two tourists from the Indian subcontinent also enter the shop.

Suddenly, we hear violent blows at the door. “Police!” a voice shouts on the other side. The sellers freeze for a moment. Then, as the shouts and blows continue, they resign themselves to opening the armoured door. Uniformed officers appear. Then begins the meticulous sorting, by brand, of the models. The salesmen and their watches end up at the station, while a crowd of curious onlookers gathers outside the foot of the building, smartphones in hand. We keep a low profile and head straight to the local administration building for a debriefing.

The scene we have just witnessed is one of the many daily seizures of counterfeit watches made in China by the Selective Trademark Union (STU), a company representing the interests of luxury brands, in cooperation with local authorities. The organisation conducts an average of 50 raids per day throughout Asia.

Almost all Swiss watchmaking companies are STU customers. However, during the day’s operation, which the organisation had been planning for several weeks following field investigations, a few watches were not seized. This was the case of the Breitling models. We were told why: following the acquisition of the brand by CVC Capital Partners in 2017, its contract with STU was not renewed. Similarly, none of the fake Hublot or TAG Heuer watches were seized.

“We cannot seize counterfeits of brands with which we do not have a partnership, or if we do not have time to obtain their agreement,” says Thierry Dubois, STU’s Director. Rolex, Omega, Patek Philippe, Audemars Piguet, Longines, Richard Mille, Vacheron Constantin and Panerai copies, brands that are particularly popular with counterfeiters, were duly seized that day. The showroom will be demolished in the coming days. And the timepieces will be destroyed between one and three months after the seizure.

“We cannot seize counterfeits of brands with which we do not have a partnership, or if we do not have time to obtain their agreement”

In the labyrinth of counterfeit watches

 THE COPY CLOSELY RESEMBLES THE ORIGINAL

For Thierry Dubois, who is also the representative of the Swiss Watch Federation in Hong Kong, this game of cat and mouse with counterfeiters is a family affair. STU was founded in 1984 by his father, Charles Dubois. Thierry was born in the midst of the Biafra conflict in Nigeria, where his father was in charge of the Lagos watchmaking school. He grew up in Côte d’Ivoire and in Lebanon. “We left because of the Lebanese civil war,” he explains. “In 1975, we moved to Hong Kong, where I spent most of my life.” That’s what you call experience in the field…

When STU started out, China was still a closed country and Shenzhen, just across the border, was mainly known for its agriculture and duck farming (the city now has 12 million inhabitants). Back then, the production of affordable watches and counterfeit watches – two attributes that generally go hand in hand – was mainly concentrated in Hong Kong. It was only when “official” manufacturing migrated to the mainland that counterfeiting became established there too. When we talk about mass production, the watchmaking ecosystem is not segmented; where genuine watches are produced, copies are usually also found.

“In our early days, we were mainly involved in the markets, targeting sales of fake watches. But over time our customers asked us to also intervene at the source, during the production of copies,” says Thierry Dubois. STU therefore also carries out operations in sweatshops, and has agents who can now operate in more than 100 Chinese cities.

When we talk about mass production, the watchmaking ecosystem is not segmented; where genuine watches are produced, copies are usually also found.

From Hong Kong, the company, which now numbers 150 employees, expanded into Taiwan, Thailand, South Korea, mainland China, the Philippines, Macau, Vietnam and Singapore. It has also extended the fields it covers from watches to leather goods and more recently to jewellery and glasses, which are also frequently counterfeited in Asia. A new field of operation is being set up: writing instruments.

As a true barometer of counterfeiters’ activity, the company is currently experiencing a busy period, and relies on the exchange of information between investigators covering several fields of activity to increase its efficiency. And when a watch investigator gets “burned” in a given city – that is, when his face becomes familiar to counterfeiters – a jewellery agent can always replace him.

A display at an event organised by Stop Piracy, the Swiss Anti-Counterfeiting and Piracy Platform.
A display at an event organised by Stop Piracy, the Swiss Anti-Counterfeiting and Piracy Platform.
(Photo: Stop Piracy)

 IN THE NERVE CENTRE OF COUNTERFEITING

Back in Guangzhou the next day, we go to the Southern Watch Market, which is probably the world’s largest market for wholesalers of fake watches. This time, it is not so much a question of seizing fakes, more of observing the progress that has been made in the reproduction of iconic Swiss models. An expert watchmaker, hired by STU, has just arrived from Switzerland and is accompanying us. We discuss some of the details and nuances of the counterfeits, which are not easy to spot.

We stop at a stand operated by a family of “craftsmen”. A lady presents us with the latest watches that have arrived. Many of them catch the eye of our expert. When it is not an official raid, and a warrant is not available, the company doesn’t hesitate to pay the asking price to acquire a particularly “successful” model, and send it to the headquarters of the Swiss Watch Federation in Biel, or to the partner brands, for analysis.

On that day, nearly 2,000 dollars were handed over in exchange for two good quality counterfeits: the dial, the engraving of the ceramic bezel and the magnifying glass were studied in detail. “I’ve never seen a watch so well copied,” exclaims the watchmaker as we leave the market. As a result of this exchange, a particularly advanced counterfeit network could be traced back to its source and dismantled.

The STU expert gives us some advice on how to recognise a fake watch. On some models, the hands are not mounted in the right order. If you can open the watch easily, that’s another clue. And, on the dial, small imperfections might be visible, such as poorly attached Superluminova. But the problem is that these kinds of imperfections can also occur on a real watch. Recently, brands have introduced a new trick: an identifying engraving on the watch glass. But counterfeiters are starting to reproduce those too.

“The main technical defects that will eventually appear are due to the fact that the counterfeits are not waterproof. Also, since they have no oil in the movement, they will stop working,” the expert points out.

In the labyrinth of counterfeit watches

 COPIES OR FAKES?

There are currently two types of copies on the market. The majority of the models, which are generally cheaper, are presented as “replica watches”: the customer is aware that he is buying a counterfeit. The other case, generally for the best reproductions, comprises models sold as authentic, which are much more complex to produce, and which do even more harm to brands. “The person who makes the most profit on a single transaction is the one who buys an 800-dollar fake watch in China and sells it for 18,000 dollars in Europe,” stresses Thierry Dubois. “I have already dealt with the case of an owner of a fake watch who had paid that kind of price. The high value placed on some models on the secondary market, as well as their rarity, encourages counterfeiters to tackle these types of very well reproduced models.”

According to the expert, the quality of counterfeits is increasing. “Sometimes better quality components are found in copies than in originals, when brands supply themselves in China.” Thierry Dubois remembers the case of a fashion watch brand that asked for the contact details of the component supplier for their counterfeit watches, which were particularly successful...

In the majority of cases, however, counterfeiters prefer to limit themselves to the sale of less well-executed, mass-produced copies, which allow for a higher total turnover. Here, the sophistication of counterfeit products reaches its “natural” limits.

 THE BIGGEST BENEFICIARIES OF E-COMMERCE

Most of the counterfeiting workshops are located in Guangdong province. Much of its output ends up at the Southern Market in Guangzhou, where wholesalers take orders from representatives of counterfeit supply chains from all over the world. Within this international crowd, bilingual officers act as a liaison between the operators of this vast web of counterfeiting. The market is only the visible part of the many showrooms where transactions take place behind the scenes.

In this highly globalised business segment, transport logistics is also becoming increasingly sophisticated. “Counterfeiters are constantly refining their postal mailing systems, in line with changes in customs officers’ practices, in order to identify the points where there are the fewest controls,” stresses Thierry Dubois. A recent documentary broadcast on French television followed an order for two fake watches, and then their delivery by parcel post, hidden inside a “Made in China” toy. “At the moment, networks often go through South Korea to deliver counterfeit goods to the United States,” says Thierry Dubois. “And of course, they don’t send a small number of large packages but a large number of small packages, which are more difficult to control.”

In the labyrinth of counterfeit watches
In a special report in 1963, Europa Star was already investigating the counterfeit market in Hong Kong.
In a special report in 1963, Europa Star was already investigating the counterfeit market in Hong Kong.
© Europa Star Archives

More and more orders are being placed for single items. This is the result of the great “counterfeit supermarket” that is the digital world. Coupled with the production capacity of the workshops of the “world’s factory”, the networking capacity of the internet has boosted sales of copies, which were previously more complex to acquire. In e-commerce, counterfeiters’ networks are also one step ahead of the legitimate industry in terms of efficiency.

Coupled with the production capacity of the workshops of the “world’s factory”, the networking capacity of the internet has boosted sales of copies, which were previously more complex to acquire.

According to the European Union Office for Intellectual Property, counterfeiting (all categories of products combined) costs the EU 83 billion euros and 790,000 jobs every year. The latest US customs figures indicate a significant increase in annual seizures of counterfeit watches and jewellery, estimated at $460 million (representing nearly 40% of the value of all products seized in the United States). According to the OECD, trade in counterfeit goods is also on the rise, and now accounts for 3.3% of world trade in goods.

 NETWORKS OF PROJECT MANAGERS

How to dismantle this global forgery machine? The task is made more difficult by the multitude of sweatshops and the opacity of the supply chain. “There is not a single large counterfeiting factory or group controlling the market, as we sometimes like to fantasise, but a complex ecosystem of subcontractors often delivering both authentic brands and counterfeits,” explains Thierry Dubois. “A multitude of project managers collaborate with these supplier networks.”

According to the European Union Office for Intellectual Property, counterfeiting (all categories of products combined) costs the EU 83 billion euros and 790,000 jobs every year.

The movements used in counterfeit products are often Chinese automatic calibres (Seagull, Nanning or other) or Japanese movements acquired via intermediaries. On cheaper copies, a quartz movement is simply incorporated into a counterfeit mechanical watch. ETA’s emblematic 2824 movement is itself much copied. Even the name “Noob”, which is supposed to refer to higher quality counterfeits, has been copied. No honour among thieves…

The movements used in counterfeit products are often Chinese automatic calibres (Seagull, Nanning or other) or Japanese movements acquired via intermediaries.

According to Thierry Dubois, suppliers sometimes benefit from leaks that come directly from Swiss factories to copy the most difficult components. Even vintage watches, given the current frenzy around this category, are copied. Then there are are the so-called “Frankenwatches”, with a mixture of authentic components and additions... “In Thailand, I also saw a number of counterfeiters buying real models and setting them with diamonds to sell them,” the manager continues.

 AT THE CROSSROADS OF SEVERAL ADMINISTRATIONS

At the local administration station, it is time for the daily operational debrief. We meet a local manager, who is leaving to take up a promotion in another department. The fight against counterfeiters is currently the subject of a major administrative reorganisation project in China. Historically, the State Administration of Industry and Commerce (SAIC) was in charge of this mission. But it was in a clear conflict of interest, since this body is also in charge of the commercial register, and owns several shopping centres itself.

To change this situation, in 2018 the Chinese government created a new entity – the Market Supervision Administration (MSA) – which is in charge of supervising the fight against counterfeit watches. However, the administrative transition is not yet complete, which means that both authorities are simultaneously active on the ground, a situation that will persist until Beijing’s decision can be implemented in every district of this immense country. “Today, in some cities, about half of the cases are still treated by SAIC and the other half by the MSA,” says Thierry Dubois.

In the field, the majority of raids are carried out by MSA agents, whose actions are purely administrative: confiscation of counterfeit products, withdrawal of the sales licence and fines. Operations can also be carried out by officers of the Public Security Bureau (PSB), which acts in criminal cases and can impose prison sentences – it currently covers about 30% of watch seizures.

How does the Chinese government view a company like STU? “We are considered a positive element by the authorities, because we are complementary,” replies Thierry Dubois. “We help their teams identify seized counterfeits, trademarks and designs.”

Energised by the opportunities in today’s digital jungle, the counterfeiting ecosystem now even has its own specialised blogs, which provide in-depth comparisons of the quality level of replica products.

STU enjoys a kind of de facto monopoly on international legitimacy against counterfeiting in China, and is the privileged interlocutor of the authorities on the ground: “Few global companies like ours are active in the country,” Dubois continues. “China wants to change its international image and no longer appear as a country producing counterfeit goods. But there is a huge job to be done because the territory to be covered is huge.”

 WILL COUNTERFEITING REMAIN IN CHINA?

One of the biggest questions is the possibility that watch brands may eventually relocate part of their production to neighbouring countries with cheaper labour, such as Vietnam or the Philippines. This has already been observed in other industries such as the textile industry. If watch mass production were to migrate again, counterfeiting would certainly follow, as has already been observed in the past. As with other illegal or parallel activities, a complex system has developed, with a large number of intermediaries, commission systems and, in some cases, “protections”. At Beijing’s Silk Street and Pearl Market, for example, counterfeits are on display in the heart of the capital. Some of STU’s clients have taken numerous legal actions, at great expense, to stop this activity. Nothing has been done about it.

Energised by the opportunities in today’s digital jungle, the counterfeiting ecosystem now even has its own specialised blogs, which provide in-depth comparisons of the quality level of replica products. The people we met often did not see where the problem was, and stated that these “replicas” were mere “tributes” to rare and inaccessible models.

When the 3D printer holds out the promise that anyone can easily design objects at home, intellectual property will undoubtedly be one of the great battles of the 21st century – in watchmaking as in all sectors with high added value!