The Problem Of Genuine Fakes

Updated: Apr 12 2004, 05:30am hrs
Last weekend while travelling out beyond Kalyan, which is some distance out of Mumbai, I came across the town of Ulhasnagar(1991 population 3,68,772). The gentleman I was travelling with reminded me of the old story of how Made in USA was the terminology used to describe the flourishing fake consumer goods enterprises that existed in the Ulhasnagar Sindhi Association. He went on to indicate that it was in the by-lanes of the clusters of buildings that stood around the main road that you found these goods many years ago. These died a natural death as genuine fakes flooded the market. Ironically, however, its not just the USA thats in trouble, its also the entire Indian industry thats in serious trouble because of the increasing presence of genuine fakes.

But what are genuine fakes I first encountered them when Id gone to China last year to buy furniture for a retail chain I worked for, and wrote about it in this column on September 15, 2003. Essentially, genuine fakes are non-licensed/unauthorised production of a companys product, but by the same supplier that produces for companies.

So, for instance, if a manufacturer in China is producing a range of Lacoste T-shirts, the way this would be done would be for the company to source the cloth for the manufacturer, and then get him/her to cut the fabric in a certain style and then stitch themhalf the USP of top labels, believe it or not, is in the distinctive cuts. The number of Lacoste labels stitched on to the tees would probably be kept under lock and keyin the sense that the supervisor would probably count the number of tees and release only that many Lacostes. So far, so good.

What happens after the supervisor has left, however, is a different story. Night life in industrial China, it appears, is not about discoing or beering after work hours, but to set up a new parallel line for genuine fakes.

After all, the manufacturer knows the cuts, by now he also knows where the company is sourcing the fabric from, the labels arent too difficult to procure (especially if theyre being made by another Chinese supplier), and so before you know it, youve got a genuine fake, as opposed to the non-genuine stuff from the likes of the USA manufacturers. Thats why I, and millions of others like me, was able to pick up Polo shirts for my husband at 40 Rmb ($5), and Tommy Hilfiger jeans for my son at 40 Rmb and Gucci ties at 10 Rmb.

This problem of genuine fakes, till now a problem for just those manufacturers who produced out of China, has become a very serious problem for Indian manufacturers as well. To save costs, almost all big labels, whether in pharma or in FMCGs, get their products manufactured by small producers. Smaller producers pay lower wages to their workers, have lower overheads, and very often if companies want to chase various tax breaks (producing in hill states like Himachal and Uttaranchal gets you an excise concession since last year), the only way to get them is to get production outsourced from small units who migrate to these states very much in the manner of jhoom cultivators.

Well the problem now is that, exactly like it happens in China, these third-party manufacturers start producing genuine fakes after theyve finished with the legal production. What complicates things is that Company X (the third-party manufacturer for Company Y) also knows the distribution chain of Company Y, and has access to all the raw material suppliers for Company Y as well. So, getting the fakes into the supply chain is relatively easy. I was in Kalyan to meet with a third-party manufacturer for a firm I consult with, and he gave me details of various third-party suppliers who did genuine fakes in their off hours.

How serious the problem of fakes is can be seen from a recent CII study where it was estimated that 20-25 per cent of pharma products in the market today are fakes, as are 40 per cent of automobile parts, and anywhere between 5 and 15 per cent of all FMCG products. This is Indian industrys big dilemma. In order to cut costs, and increase distribution reach, it needs to get increasingly large parts of its production outsourced.

But the very people it gets outsourcing done from are, often enough, producing genuine fakes that cut into the parent firms marketsin the case of pharma firms, the fakes are even giving the companies a bad name as even a slight variation in the active ingredients lower the efficacy of the medicines dramatically. From outsource or perish, the issues rapidly becoming one of outsource and perish.

Namita Jain is a retail consultant. She can be contacted at