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Asia has long been the manufacturing hub of choice for many western brands seeking to take advantage of cheap labor. The inevitable byproduct of this are the markets that sprout up in these countries offering copies, counterfeits and defective or pilfered merchandise at a significantly lower price than the genuine article. Asia’s street market stalls are packed to the rafters with popular “brand” name goods from shoes to backpacks to clothes, handbags and accessories. That ski jacket you bought at home for $150? You could have had the same for $10 at the market in Phnom Penh. Need a dress? There is a “Macy’s” in a tiny Saigon shop house. In Thailand’s Patpong district you can shop for a Gucci handbag or a Rolex watch ten feet away from throngs of topless dancers.
Fake it ‘til you make it
The OECD estimates that product piracy leads to annual losses worldwide of $200 billion in revenue. But many of those “sales” are chimera, used to justify government intervention to drive sales that would never have happened in the first place. The more pressing concern for companies is the thriving market for “branded” knock offs which have the effect of diluting hard-won brand equity. Companies spend billions to position their brand in the minds of consumers, and as branding is mostly about perception, paying top dollar for the real deal where fakes abound makes consumers uneasy. As emerging economies become attractive markets in their own right, brands are taking a harder line, putting pressure on local governments to crack down on copyright infringement and piracy. The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) was instituted in 1994 as an international agreement administered by the World Trade Organization (WTO), setting forth minimum standards for intellectual property (IP) regulation between WTO Members.
An embarrassment of riches
Kunming, China made news recently when a local electronics chain was discovered to be operating fake Apple (NASDAQ: AAPL) stores, which were quickly shuttered by local authorities. Apparently the shops so accurately replicated the design and customer experience of real Apple stores that even some real Apple employees were fooled. Hunger for Apple products in China is so intense that the 900 authorized stores are not able to satisfy the demand: a good problem to have, but a problem nonetheless. Piracy these days is no longer limited to ripping off a product design to make a low cost alternative. Brand experiences are being replicated as well. Another unauthorized store, also in Kunming, has exactly re-created the Ikea shopping experience, complete with an in-store restaurant offering minced pork and eggs instead of Swedish meatballs.
It’s a small world after all
Perhaps no brand in history understands this better than Disney (NYSE: DIS), owner of perhaps the most copied and illegally reproduced intellectual property in history. It would be practically impossible to walk through any market in any city in Asia without seeing a Disney character emblazoned on everything from underwear to plastic cups and children’s toys. Understandably, the company takes the problem very seriously, and is rumored to have even sent a representative to the remote island of Saipan to deliver a cease and desist order to a small ice cream shop that had drafted Donald Duck as its mascot. Despite Disney’s hardline stance and massive efforts to curtail unauthorized use of its intellectual property, the appeal of Mickey Mouse in Asia is simply too huge to control. In many parts of Asia retail sales are outpacing the west, growing by an average of 6% a year between 2010 and 2014. Access Asia estimates that retail revenues in China doubled between 2006 and 2010, surpassing the $1 trillion mark. According to a survey conducted by the Grey Group, 77% of Vietnamese consumers prefer Western brands. As Asia’s middle and upper classes continue to grow, brand consciousness is becoming more pronounced. Those who can afford it want to flaunt it, and only the best will do. And “the best” usually means top western brands.
Recognizing changing trends toward more locally focused brands in a fast-growing market; Levi Strauss launched their Denizen brand in 2010 featuring a style more suited to the Asian esthetic and, at $40-$60 a pair, a more palatable price point. The line is sold in China, South Korea and Singapore. In 2011, Prada chose to host its IPO in Hong Kong, following just days after US luggage maker Samsonite International made its debut on the Asian exchange. In 2011 China’s luxury goods market was estimated to total US$100 billion, up from just US$12 billion in 2010.
I want a new drug
The trend is not limited to fashion. Pharmaceutical sales in ASEAN are projected to exceed $20 billion in 2014. As the west continues its long malaise, drug makers are looking to Asia for a cure to falling revenues. Abbott Laboratories (NYSE: ABT) already generates 34% of its revenues from Asia and emerging markets and is actively seeking to grow that number. Johnson & Johnson (NYSE: JNJ) is close behind at 29%. But in a market where low incomes drive consumers to generic labels, the challenge for multinational pharmaceutical companies is to develop new products and branded generic products targeted to the Asian market. As Asia’s economies continue to expand, demand for higher-end brands will continue to grow. And as more companies move in to take advantage of this fertile new opportunity in Asia’s uber-brand-conscious culture, the necessity for brands to protect their investment has never been greater. Imitation may be the sincerest form of flattery, but flattery doesn’t pay the bills.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Abbott Laboratories, Walt Disney, and Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.