[ISN] Next step in pirating: Faking a company

[InfoSec News]

http://www.iht.com/articles/2006/04/27/business/nec.php

By David Lague 
International Herald Tribune 
APRIL 28, 2006 

BEIJING - At first it seemed to be nothing more than a routine, if
damaging, case of counterfeiting in a country where faking it has
become an industry.

Reports filtering back to the Tokyo headquarters of the Japanese
electronics giant NEC in mid-2004 alerted managers that pirated
keyboards and recordable CD and DVD discs bearing the company's brand
were on sale in retail outlets in Beijing and Hong Kong.

Like hundreds, if not thousands, of manufacturers now locked in a war
of attrition with intellectual property thieves in China, the company
hired an investigator to track down the pirates.

After two years and thousands of hours of investigation in conjunction
with law enforcement agencies in China, Taiwan and Japan, the company
said it had uncovered something far more ambitious than clandestine
workshops turning out inferior copies of NEC products. The pirates
were faking the entire company.

Evidence seized in raids on 18 factories and warehouses in China and
Taiwan over the past year showed that the counterfeiters had set up
what amounted to a parallel NEC brand with links to a network of more
than 50 electronics factories in China, Hong Kong and Taiwan.

In the name of NEC, the pirates copied NEC products, and went as far
as developing their own range of consumer electronic products -
everything from home entertainment centers to MP3 players. They also
coordinated manufacturing and distribution, collecting all the
proceeds.

The Japanese company even received complaints about products - which
were of generally good quality - that they did not make or provide
with warranties.

NEC said it was unable to estimate the total value of the pirated
goods from these factories, but the company believed the organizers
had "profited substantially" from the operation.

"These entities are part of a sophisticated ring, coordinated by two
key entities based in Taiwan and Japan, which has attempted to
completely assume the NEC brand," said Fujio Okada, the NEC senior
vice president and legal division general manager, in written answers
to questions.

"Many of these entities are familiar with each other and cooperate
with each other to develop, manufacture and sell products utilizing
the NEC brand."

NEC declined to identify the companies for legal reasons.

Officials from branch offices of the Chinese State Administration of
Industry and Commerce in southern China confirmed that counterfeit
goods carrying the NEC brand had been seized in raids on a number of
factories and that investigations were continuing.

Some technology companies have been criticized for piecemeal and half-
hearted attempts to protect their intellectual property, but Okada
said NEC was prepared to take proactive measures to defend its brand.

NEC had not previously made public the piracy in order not to
compromise its investigation.

NEC said it would continue collecting evidence to support further
criminal complaints. It was also planning to start civil lawsuits
against some factories while negotiating with others.

Steve Vickers, president of International Risk, a Hong Kong-based
company that NEC hired to investigate the piracy, said documents and
computer records seized by the police during the factory and warehouse
raids had revealed the scope of the piracy.

These records showed that the counterfeiters carried NEC business
cards, commissioned product research and development in the company's
name and signed production and supply orders.

He said they also required factories to pay royalties for "licensed"  
products and issued official-looking warranty and service documents.

Some of the factories that were raided had erected bogus NEC signs and
shipped their products packaged in authentic looking boxes and display
cases.

NEC said about 50 products were counterfeited, including home
entertainment systems, MP3 players, batteries, microphones and DVD
players.

Many of these pirated items were not part of the genuine NEC product
range.

The investigation also revealed that fake goods from these factories
were on sale in Taiwan, mainland China, Hong Kong, Southeast Asia,
North Africa, the Middle East and Europe.

In some cases, they were being sold alongside legitimate NEC products
in retail outlets.

Vickers, a former senior Hong Kong police officer, said he believed
that the NEC case demonstrated how piracy is evolving from
opportunistic and often shoddy copying of branded goods to highly
coordinated operations.

"On the surface, it looked like a series of intellectual property
infringements, but in reality a highly organized group has attempted
to hijack the entire brand," he said. "It is not a simple case of a
factory knocking off a branded product. Many of them have been given
bogus paperwork that they say gives them the right to do it."

An official for a Chinese economic inspection team in Zhuhai in the
southern Chinese province of Guangdong, who would give his name only
as Zeng, said the managers of one factory that had been raided
insisted they had a license to manufacture NEC goods.

He said that Chinese officials were seeking clarification from NEC and
that the investigation was continuing.

The counterfeiting attack on the NEC brand comes as the Chinese
government is coming under intense international pressure to crack
down on rampant intellectual property theft. The U.S. government and
American businesses complain that the Chinese efforts to combat piracy
have so far been ineffective.

Gregory Shea, president of the U.S. Information Technology Office in
Beijing, which represents more than 6,000 technology companies, said
it was clear that the top Chinese leaders understood that intellectual
property rights contributed to economic growth.

"We commend that, but we do recognize nonetheless that the situation
is not improving on the ground," he said. "It has not turned the
corner."

In response to the losses suffered by Japanese companies, Tokyo has
called on China to crack down on piracy.

Japan last year joined the United States in filing a formal request
under World Trade Organization rules calling on Beijing to detail
efforts it was making to enforce intellectual property rights.

But piracy experts say privately that strained Chinese-Japanese ties
complicate Tokyo's efforts to support Japanese companies operating in
China.

While intellectual property violations continue, there are clear signs
that China is responding to international pressure.

In the lead-up to the visit of the Chinese president, Hu Jintao, to
the United States this month, Beijing began a publicity campaign to
draw attention to what it said was an intensified crackdown on
intellectual property theft.

And, while Hu toured technology companies in the United States, the
Chinese leader reinforced this message.

After a visit to the Microsoft headquarters in Seattle on April 18, Hu
said the protection of intellectual property was crucial for China's
future.

"It is necessary to create a favorable investment environment, good
and fast development, and for China's own innovative capability," he
said. "We take very seriously our promises to enforce our laws on this
issue."

Senior Chinese officials acknowledge that trademark violations occur,
but they argue that local manufacturers were sometimes duped into
producing pirated goods.

At a media briefing in March, the Chinese deputy minister for customs,
Gong Zheng, said many factories produced goods under license to be
exported and sold under a company's brand.

"Its easy for them to be deceived or lured by foreign traders to
manufacture and export infringing goods," he said.

Vickers agreed that Chinese factories were often just part of the
problem.

"The factory in China sometimes appears to be the bad guy, but often
the bad guy is someone behind the scenes and they are often not in
China," he said.

The first phase in NEC's effort to disrupt the counterfeiters began
early last year when evidence that the piracy was coordinated from
Taiwan was handed over to authorities on the island.

Prosecutors in the southern city of Kaohsiung issued warrants for the
local police to raid a warehouse and offices in the area where
investigators seized 60 pallets of counterfeit goods, mostly audio
products, carrying the NEC brand.

Evidence collected in these raids also implicated factories in
mainland China, according to people familiar with the investigation in
Taiwan.

Officials at the Kaohsiung District Court said the case was still
under investigation.

Beginning in November, the Chinese economic authorities coordinated
further raids on nine factories in the cities of Guangzhou, Zhongshan,
Zhuhai and Shenzhen in Guangdong Province.

Vickers said many multinational companies were now facing similar
challenges to NEC as piracy expanded and became better organized.

"The reality is that factories in China will produce what they are
asked to produce," he said. "The challenge is finding out who placed
the orders and who funded it."

Copyright © 2006 The International Herald Tribune