Spotlight - Forging ahead: Spirits counterfeiting in China
China's entry into the WTO has been a catalyst for further growth in imported spirits but the likes of Diageo and Pernod Ricard are not the only ones eyeing the growth potential. Counterfeiters are also seizing the opportunities presented by China's growing market for Western drinks brands. Dominique Patton reports on the problem and some of the solutions being implemented to tackle it.
Peter Mandelson, the EU trade commissioner, warned last month that not enough was being done to stem the "tidal wave" of counterfeit products reaching Europe from China. But the problem could be much worse for those attempting to build sales in the Chinese domestic market itself.
China is emerging as one of the fastest-growth markets for international spirits companies, but as sales increase, so does the risk of damage by counterfeit products. "The counterfeit problem is increasing as the popularity of Western spirits increases," says Jamie Fortescue, director general of the European Spirits Organisation (ESO).
The organisation expects about EUR200m (US$288.6m) worth of European-style spirits to enter the Chinese market this year, up from around EUR10m in 1999. Demand has been rising rapidly since the removal of import tariffs after China entered the WTO, making the drinks more affordable at a time when incomes in the country are also growing significantly.
But China's counterfeiters are also keen to profit from the growing trade. The ESO estimates that one in four spirits brands claiming to be of European origin sold in China is counterfeit. That could translate to a loss of EUR50m for the European spirits industry, says Fortescue, although it is not known whether these products are selling at the same price as the genuine brands.
The financial loss is perhaps not the most serious consequence however. Local spirit producers know only too well how much damage a dangerous fake beverage can cause. Wang Lei, assistant manager at the Shanxi-based Fenjiu Group, says the 27 deaths caused by fake alcohol in Shanxi province in 1998 still continue to dampen consumers' appetite for other brands from the region.
"The fake alcohol case in Shuozhou shocked the whole country," he says. "Our company has been trying to promote our image and crack down on fake spirits but some consumers are still biased against alcoholic drinks produced in Shanxi."
Now there is evidence from consumer surveys that many of the most popular international whisky brands are facing the same problem. Marketing consultancy Data Driven Marketing Asia recently surveyed 200 whisky consumers in four cities across China.
"Several of the foreign brands of whisky, particularly in the second tier cities, were well known and liked by consumers but would not be considered as there were perceptions that much of the product in the market was counterfeit," says director Sam Mulligan.
Diageo, owner of whisky brands such as Johnnie Walker, and Pernod Ricard, producer of China's market leader Chivas, are known to be extremely concerned about the impact of counterfeiting in China, but are reluctant to discuss the precise scale of the problem and its effects on their business, or whether the situation is getting worse.
However, Mulligan believes the problem is very serious. His research suggests counterfeiting operations in China are large in scale. Counterfeit whisky purchased from several urban markets across China was found to be identical in laboratory tests commissioned by his firm. This indicates that the fake liquid was mixed and produced at one location and then distributed across China. "Not a small achievement even for legitimate businesses in China," he says.
Recent efforts by Diageo suggest it is worried about counterfeiting. The firm has supplied its 'authenticator' technology to four government-run centres around the country as part of a 'national Scotch whisky verification network'.
Since its launch in May, the initiative has been "very successful", according to a statement from the group. "In a survey, most of the consumers interviewed said that they had become more confident in buying or consuming our products when they learned about this network," the company reports.
The Scotch Whisky Association (SWA) also claims to be making progress on counterfeiting after initiating a series of meetings with the local authorities. "We enjoy very good working relationships with them and these have delivered significant results," the Scotch whisky trade body says.
The association is focusing on improving legal protection, hoping for approval of geographical indication (GI) for Scotch whisky in China. But there is, as yet, no precedent for a foreign GI in China, and legal experts in China say it is not the laws that are lacking in the market but rather the enforcement of them.
Huang Zhen, an intellectual property rights specialist at law firm Gide Loyrette Nouel, says: "Chinese laws are mostly well drafted and close to international levels. The problem is in their implementation. If you really want to have an impact on counterfeiters, you have to go out there and seize the products."
The SWA says its work with officials led to joint investigations of 50 suspect products in 2006, seizing stocks and destroying them. But Zhen believes it is going to be tough to stamp out all counterfeiting activity when fake products reach China's farthest corners and central government policy is not always enforced at the provincial level.
The risks are not enough to dampen enthusiasm for the Chinese market however. Dark spirits are seeing their strongest growth spurts in years in China, thanks to their position as a status symbol among the growing middle class. Flavour innovations such as mixing whisky with cold green tea and other popular soft drinks are expanding appeal to youngsters at fashionable nightclubs in cities like Beijing and Shanghai.
This is encouraging new entries to the market. A relative newcomer to the scene, US group Bacardi, has recently sponsored a series of rock concerts in Beijing to promote its brand. It is also running tasting events for Dewar's whisky. It remains to be seen how long its brands will hold up against the counterfeits. "We haven't found any counterfeit products of our brands yet," says Bacardi brand manager Mark Chen. "But that could be because we're not that big in the market yet."
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