Doing Copy Business In China
China's iClone
The little gadget was bootleg gold, a secret treasure I'd spent months tracking down. The miniOne looked just like Apple's iPhone, down to the slick no-button interface. But it was more. It ran popular mobile software that the iPhone wouldn't. It worked with nearly every worldwide cellphone carrier, not just AT&T, and not only in the U.S. It promised to cost half as much as the iPhone and be available to 10 times as many consumers. The miniOne's first news teases—a forum posting, a few spy shots, a product announcement that vanished after a day—generated a frenzy of interest online. Was it real? When would it go on sale? And most intriguing, could it really be even better than the iPhone?
I made a hastily arranged flight to China to find out. Ella Wong, a marketing manager at Meizu, the Chinese company building the new phone, had invited me to come to the annual Hong Kong Electronics Fair only days before it began this April. We had been trading e-mails for weeks, negotiating access to the miniOne and the operation that produced it. Meizu cloned Apple's iPod Nano last year, establishing itself as a significant force in a music-player market far larger than Apple's: international consumers who had little access to either Macintosh computers or the iTunes music store. The miniOne was going to be on display at the fair, and Jack Wong, Meizu's CEO, would also be there. If I made a good impression, I would be invited to the company's headquarters and research facility on the mainland. "You'll be warmly welcome," Wong wrote me.
My journey was more than a pilgrimage born of techno-lust (though there was an element of that as well). Nearly every type of product can be—and is—cloned in China, sometimes so well that the ripped-off manufacturers inadvertently service the fakes when warranty claims come in. Cloners make air conditioners with the LG brand name in the country's remote west, along what was once the old Silk Road trading route. But cloners don't have to sell their wares under the same brand name: In Anhui province, near the Yangtze River, one of China's biggest auto manufacturers builds a part-for-part replica of a top-selling Chevrolet model, then slaps a new badge on the car. In the south, one cloning operation didn't just copy a technology company's product line—it duplicated the entire company, creating a shadow enterprise with corporate headquarters, factories, and sales and support staff.
But the miniOne represents the vanguard of this cloning revolution. Meizu isn't aspiring merely to copy the designs of a Western manufacturer on the cheap. The company plans to give the miniOne capabilities beyond the original. Does this signal the start of something bigger in China—the years of reverse engineering serving as a de facto education for the engineers who will soon transform China into a design and engineering powerhouse? Is China on the cusp of going legit?
Several hours after I arrived at the Hong Kong Electronics Fair, I finally found Meizu's (maddeningly unlisted) booth and asked for Ella Wong. She was sitting at a table, talking to a pair of potential customers. When she finished, I introduced myself. "Thanks for making this happen," I said. "Would this be a good time to start talking about the miniOne, or to make arrangements to meet Jack Wong?" I handed her a business card and a stack of magazines with stories I'd written. She thumbed through a few pages and smiled. "The phone? Mr. Wong? Oh, that may not be possible," she said. Silence. What about our e-mails, the conversations, the invitation? She was struggling to be polite. It isn't customary in China to be forced into an outright yes or no. "Come back," she said, "maybe in September."
Counterfeit Road
Sitting in a ground-to-a-halt taxi during rush hour along Beijing's third ring highway (five encircle the city; many more are under construction) gives a visitor plenty of time to rubberneck. The cars are familiar: Volkswagen, Honda and Toyota all have a presence here. But even vehicles with unfamiliar names cut recognizable silhouettes. There's a small SUV, emblazoned with the Laibao brand name, that looks like a twin sister to Honda's CR-V. Although the Geely Meerie is copied from a Mercedes C-class, it costs only 120,000 yuan, or about $15,000.
But at the sweet spot of the Chinese car market are vehicles that sell for around $5,000, just shy of the average middle-class Chinese family's annual income. When you're stuck in traffic, you're surrounded mostly by the ruler in that category: the Chery QQ.
The QQ is a part-for-part reproduction of a car known, depending on where it is sold, as the Chevy Spark or the Daewoo Matiz (the genuine vehicle is built as part of a joint venture between General Motors and the Korean company). Sparks are sold all over the world—in the U.S., an upgraded $10,500 variant called the Aveo is cheaper than any other car you can buy. But when the $5,000 QQ first appeared in 2003, GM—and American officials—were astonished. "If you didn't have name tags on the cars, you couldn't tell them apart," said Congressman James Sensenbrenner of Wisconsin after a 2004 trip to China. "It's such a good knockoff that you can pull the door off the Spark and it fits on the QQ, so close that the seals on the doors match right up."
The ability to clone such technologically sophisticated products is a recent development in China. A report issued by the consulting firm A.T. Kearney breaks the growth of China's cloners into five distinct periods. The first, in the 1980s, was primitive, consisting mostly of cheap textile knockoffs like Mickey Mouse shirts. The second, starting around 1990, still involved clothing and accessories, but with enough authenticity—high-quality Nike and Reebok fakes led the way—to be accepted as handy substitutes by thrift-conscious Westerners. By the middle of that decade, Chinese copiers had moved from basic trademark infringement into low-end technology products: Duracell batteries and DVDs. From there, the study says, an era of "advanced technology piracy" began. Functionally close-to-the-mark products like Callaway golf clubs and counterfeit automotive safety glass appeared in 1998. By the millennium, piracy had reached levels of refinement that saw China offering functional duplicates of Intel processors, Viagra tablets and Bosch power tools.
In many ways, this is similar to the path industrial powerhouses like Japan and South Korea have taken. China has gone from making only cheap, toss-away goods, like budget toys and portable CD players, to creating alternatives to nearly every one of the West's most admired brands. But China is unique in that—as with its modernization in general—it's doing so at an accelerated pace, going from shoddy to quality in little more than a decade.
How to Clone Anything
The easiest way to clone a product is to use a "ghost shift": A factory contracted to make legitimate goods moves to 24-hour operation, churning out copies—some made with inferior materials, and others exactly the same, designed to be sold on the black market—from midnight to morning.
The only problem with ghost shifts is that they can't run full time. In the mid-'90s, developers began to build shadow factories—identical plants, often constructed from the same blueprints legitimate manufacturers used to launch their ventures. Sometimes the plans were sold by managers at the genuine facilities. Other times, local officials and organized crime conspired to create a second set of blueprints.
As technology companies became aware of the extent of the cloning problem, many began to use selective outsourcing. Less-secret components would be built in China, while more proprietary items, like circuit boards, might be manufactured domestically. Even so, sometimes a company's products are cloned even if it has no working relationship with China at all. The Thomas G. Faria Corporation, an American company that builds dashboard gauges for boats and military Humvees, discovered an entire plant in China dedicated to cloning its product, even though it had never done any manufacturing overseas, or even outside of Connecticut, where it is based. The clones were found all over the world, and although they worked poorly, they looked the part. "These clones bear our name and address," David Blackburn, the company's CEO, told the U.S. China Economic and Security Review Commission. "The label . . . contains our catalog part number and the initials of a calibrator, as well as a final tester."
Cloners look for opportunity first, and manufacturers often give it to them, often in the form of a hot product that is released in a limited number of markets. Desire spreads worldwide, and the cloners are ready to fill any gaps that emerge in supply or distribution. (That's what's happening now with the iPhone, which for nearly a year will be sold in North America only.)
In November 2005, LG Electronics, a Korean company that is the world's third-largest mobile-phone maker, released a device that in many parts of the world was as anticipated as the iPhone was here. The "Chocolate" features a slide-out keypad, a large color screen and a very Apple-like navigation wheel; it plays music as readily as it makes calls and sends text messages. LG has sold 10 million of them worldwide—the same quantity Steve Jobs has set as the initial iPhone goal.
LG's phone began to sell out as soon as it was released, but it took four months for the Korean electronics giant to release a version for China. By then, it was too late: A doppelgänger Chocolate had hit the market first, and had become the preferred choice for Chinese shoppers. Quality wasn't an issue. The fake phone was "exactly like the real one in design," a company spokesperson told Chosun Ilbo, Korea's largest daily newspaper. "Chinese people think it's LG electronics that manufactures the fakes."
Last year, fed up with a torrent of bootleg cellphones that was costing the company a billion dollars a year, Samsung hired investigators to trace the phones back, through multiple supply channels, to their manufacturers. The results of that investigation, along with analysis done by independent researchers, uncovered some of the technical strategies undertaken by reverse-engineering operations.
The cloners start by deciding what phones would be most profitable to clone. They then learn everything they can about the device. They attend trade shows, furiously snapping photos of not-yet-released products until someone notices and shoos them away. They will be first in line to buy the new product whenever it hits stores. And they will look for shortcuts, such as a patent filed in China that can act as the beginning of an actual production guide.
The cloners hire a team of between 20 and 40 engineers to begin decoding the circuit boards. At the same time, coders start to develop an operating system for the phone with a similar feature set. (The typical cloner either uses off-the-shelf code, writes something entirely new, or modifies a publicly available Linux-based system.) Both processes take about a month. By then, ancillary items—plastic casings, accessories, manuals and packaging—are ready as well. Full production begins at another factory, one that is already building phones, within about eight weeks from the time the engineers are hired. After a run of about 30,000 units, the cloners move the operation to a new facility in order to avoid detection.
Samsung was impressed by the efficiency of the cloners, so much so that the company offered them jobs. The cloners said no. Earning about $1.25 per phone, the cloners said, they found it easier and more profitable to make fakes. The only known result of the investigation? Samsung now takes care to release products in China shortly after they come out in Korea. Its only defense is to give cloners a smaller window of opportunity.
Company Copy
In 2006, NEC, one of the 25 biggest consumer-electronics firms in the world, went public with the results of a two-year investigation. The company had been receiving complants about products it didn't even make: DVD players, cellphones, MP3 players. Investigators from International Risk, a private security firm employed by NEC, ultimately uncovered a shadow version of the company operating out of corporate offices in China, with ties to more than 50 manufacturing facilities. "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," says Steve Vickers, the former Hong Kong police inspector who was in charge of the investigation for International Risk. Executives had their own NEC business cards and e-mail add-resses. They had marketing plans and distribution networks in place. Some "company" facilities even had electronic signs bearing huge, lighted NEC logos. Most bold of all, the bogus NEC actually charged the manufacturers it worked with royalties on its designs.
The investigation led to raids last year on 18 of the manufacturing sites and the seizure of nearly 50,000 fake products. Yet the factories themselves are still operating, just not using the NEC name. The ringleaders of the scam have yet to be caught; like the Samsung copiers, they are thought to still be making fakes.
Death to the Bootleggers
The Chery QQ demonstrates more than just the skill of modern cloning. It also illustrates the danger. Easy-fit doors and rearview mirrors aside, there are differences—scary differences—between the Spark/Matiz and the QQ. As news of the copycat car spread last year, a German automotive club conducted and videotaped a comparative crash test between the two vehicles. When the Matiz hits the barrier, the front end crumples. The rear of the car bucks upward and then thuds back to the ground. An impact chart shows serious yet nonfatal injuries to both the driver's and passenger's head and legs (the chart distinguishes impact with color: the redder the deadlier). The Chery hits the obstacle at the same speed. The rear end of the car lifts higher than the Matiz and begins to rotate. The driver-side door pops open. Hood, engine and roof crumple into the passenger compartment. The frame buckles, bringing the vehicle flat to the ground. On the impact chart, the driver's head, neck and chest are brown and red: not survivable.
Over the past few months, concern over the safety of Chinese copies, as well as legitimate products with Chinese ingredients or brand names, has become more real to consumers in the U.S. In June, the FDA warned consumers about Chinese-made toothpaste, millions of tubes of which were on-sale in the U.S. The substance in the toothpaste—diethylene glycol, a toxic component of antifreeze—had been used as a substitute for glycerin, a common sweetener. A similar substitution killed about 100 people in Panama last year.
Ironically, well-publicized, embarrassing cases like this could actually provide some of the impetus necessary to vault China into the sixth stage of cloning—making better-than-real products. "If Western-style controls are put in place, that's just another way the infringers will learn how to do a better job of what they do," says Danny Friedmann, a Dutch intellectual-property expert who runs a blog called IP Dragon.
Although there have been legal victories against cloners, most of the time they have been minor and fleeting. Last year, Sony won a lawsuit against a Guangzhou company that was copying the company's camcorder batteries. In another of the most watched cases, Prada, Chanel, Gucci, Burberry and Louis Vuitton sued Beijing's organized "Silk Market," one of the city's most well-visited locales for fake goods, and shut it down. Despite the low monetary damages—$75,000 for Sony, and $12,500 in the Silk Market affair—the victories were hailed by some as part of a growing recognition in China that counterfeiting needs to be halted. The cases demonstrated the "strong resolve of the Chinese authorities in protecting intellectual-property rights," says Tan Loke Khoon, head of the intellectual-property practice in Hong Kong and China at the law firm Baker & McKenzie, which brought the two lawsuits.
But on my visit to Beijing, the Silk Market hadn't just reopened. It had expanded, turning itself from a seedy array of tiny stalls into a full-fledged modern shopping mall: a forbidden city of fakes. That's part of the dilemma in "fixing" the counterfeit problem, Friedmann says: "There's an impression that China is strongly controlled by the central government. The truth is that there's power everywhere. China is filled with 'little emperors' who can do whatever they want."
Yet when a cloner is brought to justice—especially if the case makes headlines, embarrassing the Chinese authorities—punishment can be both swift and harsh. On May 29, Zheng Xiaoyu, the former head of China's FDA, was sentenced to death after taking the equivalent of $850,000 in bribes. The bribes were given in part to secure the approval of a counterfeit antibiotic that later killed 10 people in 2006. The Chinese court said the sentence was warranted and that Zheng had "endangered public life and health," as well as "the efficiency of China's drug monitoring." According to Jiang Zhipei, a Chinese supreme-court justice specializing in intellectual-property cases, punishments like this show that "the judicial system is working actively to make people aware of how important this is." Zheng was executed on July 10.
Growing Beyond Fakes
The end of Chinese cloning will come when Chinese products become good enough to stand on their own, just as Japan's did in the 1970s and Korea's did in the 1980s. The difference is that China is moving much faster toward this goal than Korea or Japan ever did. Less than a year ago, the Chery QQ was junk. On July 3, Chery and Chrysler announced an agreement to build Chery vehicles that will wear the Dodge badge. Chrysler will sell the cars in Eastern Europe and Latin America beginning next year, and in 2009 will bring them to Western Europe and North America. The deal grew from Chery's plan to improve quality by outsourcing engineering and design to Western companies. There's little doubt that Chery will learn from its new partners.
An important factor in this transformation is China's improving consumer economy. Just as the Chery deal made the news, the Beijing government instituted a nationwide minimum wage. Although the move was made as a response to rising food prices, it increases production costs for Chinese manufacturers, forcing them to move away from rock-bottom products. In cities, Chinese paychecks have already risen fast enough to create a thriving consumer class. As those consumers demand better products, China's manufacturers will begin to develop items that meet export standards.
Take, for example, the iPhone. The key to its simple interface is a screen that responds to several touches at once. It makes rapid text entry possible and allows keyboard-and-mouse-type navigation through Web pages and the phone's built-in applications. The screen is built by a German company called Balda, but the technology itself, licensed to Apple's supplier, is neither American nor European. It was originally developed to aid in the rapid input of Asia's huge, character-based alphabets. It comes from China.
The Next iClones
Copies of the iPhone are now dividing into two categories: the inspired-bys and the wholesale duplicates. The first category includes work-alikes manufactured by well-known cellphone makers, like HTC—one of the largest manufacturers of smartphones—and Sun Microsystems. HTC announced that it will be bringing its "Touch" model to the U.S. this fall. In May, Sun CEO Jonathan Schwartz followed in the footsteps of Steve Jobs (and Meizu's Jack Wong) by displaying his own one-off version of a touchscreen prototype at a software-developers convention. Sun's chairman, Scott McNealy, had no qualms about making the iPhone comparison: "We have our own shirtsleeve version of Steve Jobs announcing a phone," he told the audience.
The number of duplicates is also growing. Although Meizu may have gone silent because of fears of an Apple lawsuit—after my visit in Hong Kong, they stopped responding to my e-mails and phone calls—other companies are moving ahead. A few days before Apple's launch, an online video surfaced depicting a sleek new product called the P168 [watch the video below]. The phone came in a black box, marked with both the iPhone and the Apple logos. The video showed the phone being unpacked and operated (the start-up screen also featured the Apple branding). There were features that the iPhone didn't have, such as the ability to operate on two different networks at once; six speakers; and, addressing a major prerelease complaint about the iPhone, a removable battery. I asked my translator if she could find one on the street. They weren't available in Beijing—yet—but a few weeks later, a friend discovered one in Guangzhou. The manufacturer of the P168 wouldn't comment for this story, but the hardware was real, and it worked.
Neither the miniOne, the P168 nor even HTC's model are likely to carry the mystique or quality of the iPhone. But that's not really the point. Those phones will be available to millions more consumers than Apple's product, at a lower price. The rest of the world will accept the clones as if they were the original. That will make them no different than a flood of Chinese products—cars, pharmaceuticals, food, appliances—that are emerging from the shadows and climbing the learning curve to the point that they will no longer be clones at all. They'll be the real thing.
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