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Insight: Fake Apple store cuts to core of China risk to brands

To match Reuters Life! CHINA-APPLE/FAKE
To match Reuters Life! CHINA-APPLE/FAKE

By Jason Subler

SHANGHAI (Reuters) - A fake Apple store in China, made famous by a blog that said even the staff working there didn't realize it was a bogus outlet, is probably the most audacious example to date of the risks Western companies face in the booming Chinese market.

Few products have captured the imagination of Chinese consumers quite like Apple's iPhones and iPads. Demand is surging across the country of 1.3 billion people, even hundreds of miles away from the tech giant's official stores in Beijing and Shanghai.

That marks a huge opportunity for Apple to sell its iconic products, but it also leaves the most valuable brand name in the world vulnerable to the sort of scam perpetrated by the fake store in Kunming, in southwestern Yunnan province.

Complete with the white Apple logo, wooden tables and cheery staff characteristic of real Apple stores worldwide, the Kunming copy left even regular industry watchers startled at the elaborate fake.

"I'm not aware that there have been actual fake stores like that before," said Bob Poole, vice president of the China operations of the U.S.-China Business Council in Beijing.

"If your products are being sold as fakes, then your reputation goes down and people are going to be less willing to buy. We have to maintain active vigilance."

Apple has authorized close to a thousand resellers in China to sell its goods. They are required to comply with certain standards and rules on store layout and customer service to get the rights to sell such items as Apple's iPhones and iPad tablet computers.

The Cupertino, California-based company, which global brands agency Millward Brown says has the world's most valuable brand worth some $153 billion, has just four official stores in China, two of them in Beijing and two in Shanghai.

In spite of the number of resell outlets, many more copycats have popped up. They often sell real Apple products, obtained from illicit channels, such as smuggling, or through the grey market via Apple agents and distributors.

The blogger who made the store an overnight online sensation said the Kunming store was a "beautiful rip-off" and the salespeople "all genuinely think they work for Apple."

The bogus store, where staff admitted to Reuters Friday was not an authorized reseller, cuts to the core of the risk big brands take in China.

The widespread unauthorized reselling even of real consumer goods means it is more difficult for companies like Apple to manage their brands and risks undermining their longer-term plans to make inroads into the country.

"It's becoming more of a problem I think," said James Roy, a senior analyst with retail consultancy China Market Research in Shanghai.

"A lot of foreign brands are increasingly really seeking to set up a real retail presence in China, not just selling to resellers or through franchisees," he said.

DIFFERENT FROM PIRACY

That China is a hotbed for piracy is nothing new. Multinational companies have long seen problems such as intellectual property theft and unclear regulations as the price of doing business in the world's fastest-growing major economy.

The United States and Europe have persistently pressed Beijing to do a better job of enforcing intellectual property rights and stamp out the production of everything from fake DVDs to medicine.

An increasing number of U.S. companies in China say the enforcement of intellectual property rights has deteriorated in the last year, an annual survey by the American Chamber of Commerce in Shanghai released in January showed.

China has said it is cracking down, particularly on piracy, and Western companies have claimed some victories.

This week, Baidu Inc, China's biggest search engine, agreed with top music studios to distribute licensed songs through its mp3 search service, ending a legal dispute over accusations the company encouraged piracy.

The less-publicized phenomenon of unauthorized vendors setting up shop to peddle real products has grown alongside China's manufacturing prowess. Many of the factories that produce brand-name goods on contract have been known to do extra runs of the goods to make extra cash, analysts say.

Paul French, chief China analyst at retail consultancy Access Asia, said Apple had two choices to clamp down on fake stores.

"One is they either have to police their operations better, or two, they have to sell everything through their own stores and cancel their reseller agreements," he said.

China's high import duties on many goods have also encouraged the likes of the fake Apple store in Kunming, analysts suggest.

Shop owners can buy everything from computers to cosmetics at significantly lower prices overseas, smuggle them into the country, and undercut the prices of official Chinese retailers.

Vendors often turn to Chinese students studying abroad to buy products in the United States, Hong Kong, Australia and other countries.

Internet "bulletin boards" are full of advertisements soliciting interested parties, who can earn 100-200 yuan ($15-30) in fees per iPhone or iPad they manage to sneak past customs agents when returning home for the summer or winter break.

LOSS OF CONTROL

At first glance, it might appear that companies would not mind having their products bought in other countries or obtained through other means and resold in China through resellers, as it helps drive sales but with less expense and hassle over customer service.

After all, building up a retail presence in a country as vast as China takes time and is expensive. That's why many companies have sought to expand their presence through licensees.

The problem is, any negative experiences customers have with service at unauthorized resellers can backfire on the brand because customers relate their disappointment with the product.

"People might have a bad experience, they might blame the brand," said Roy.

Many Western brands are now opting to take back control of their operations. It may mean a more measured pace of expansion, but it gives a company greater control.

Starbucks last month took back control of its retail stores in southern China, having worked in the past through a joint venture.

While the issue of unauthorized retailers has not yet garnered the same attention as piracy, China has made efforts to crack down on such activities, stepping up screening to try to catch smugglers.

But if Beijing's track record with combating piracy is any guide, analysts say, it is unlikely that fake stores -- Apple or otherwise -- will be stamped out anytime soon.

"China has very low penalties. It's almost considered a good business deal to get caught, then move and set up shop again," said Poole of the U.S.-China Business Council.

(Additional reporting by Jane Lee in Shanghai and Beijing newsroom; Editing by Neil Fullick)

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