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The global trail of bogus goods generally begins in workshops in the Chinese provinces of Guangdong, near Hong Kong, and Zhejiang, south of Shanghai. Both regions are centers for legitimate manufacturing of leather goods, so getting raw materials and other supplies is relatively easy. (Some luxury companies, like Coach, manufacture in China, while others, like Louis Vuitton, are manufactured only in Europe and the U.S.) "The machines that companies use as legitimate manufacturers are also available to the bad guys," says Timothy Trainer, president of the International AntiCounterfeiting Coalition. The factories disguise the contents of containers with foodstuffs or other consumer products like lingerie. For those brave enough to risk it, it's a spectacular investment, with as much as a 1,000% return--better than drug trafficking. A 40-ft. container filled with fake bags can turn a profit of $2 million to $4 million. And counterfeiters save the roughly 50% of that revenue that luxury houses would invest in innovation and marketing.
On the Chinese end, the luxury-goods companies try to take legal action against the big production centers and close them down. But crackdowns on the fake factories are complicated by widespread official corruption and a general disrespect for copyrights that extends far beyond the luxury goods industry. More than 90% of all CDs, DVDs and computer software sold in China are pirated, according to various trade groups. Trade restrictions have loosened since Beijing joined the World Trade Organization in 2001, making it easier for Chinese manufacturers to escape government scrutiny. At the ports, investigators say, the counterfeiters who get caught can often buy their freedom by bribing Chinese customs agents.
Once the goods hit the U.S., there's little deterrent. "In narcotics, they get 20 years to life," says Pat Stella, U.S. customs assistant special agent in charge of New York City. "But a guy caught on Canal Street in the morning is back on the street by the afternoon." Customs officials have been working to increase the penalties, tacking on other charges like money laundering, which can increase a sentence to 10 to 20 years.
For the luxury-goods makers, it's a high-stakes battle. Louis Vuitton's Murakami bag, for example, generated more than $300 million in sales last year. It's hard to quantify exactly how much money a luxury brand loses to counterfeiting, since investigators and manufacturers say most people who buy fakes wouldn't pay for the real thing anyway. The larger risk is that the brand will get devalued. Brandmakers fight counterfeiting "not because they feel this will steal a genuine quantifiable sale from them," says luxury-goods analyst Andrew Gowen of Lazard & Co. in London, "but because of the overexposure of the brand."
Chemise Lacoste recently commissioned a poll in 12 markets to study the impact of counterfeits. When asked how they felt about the proliferation of fake luxury items, most respondents said the prevalence of a widely copied product considerably eroded the image of the authentic brand; 76% said the growing abundance of forged items and logos made buying the original far less alluring.