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Global Cost of Counterfeiting Reaches $1.8 Trillion

Counterfeit goods are steadily infiltrating the apparel and accessories sectors, leading to annual losses as high as $1.8 trillion—2 percent of global economic output—and China is largely to blame for the influx.

Fake goods now account for 10 percent of global trade, with 67 percent of those goods coming from China, and production is showing no signs of slowing.

E-commerce is also adding fuel to the counterfeit fire. Last year, the sale of counterfeit goods online alone increased 15.6% online brand protection firm NetNames noted in its latest report, “Counting the Cost of Counterfeiting.” Counterfeiting and piracy are estimated to cost G20 governments and consumers more than $125 billion each year and have destroyed 2.5 million jobs worldwide.

The cost of counterfeiting has grown at an alarming rate in the last two decades—in the 80s, the cost was estimated at $30 billion, it grew to $200 billion by the 1990s and it has multiplied nine-fold since then.

NetNames CEO and the report’s co-author Gary McIlraith said, “Counterfeiting has been with us for centuries, but today it is exploiting the high-growth potential of the Internet. Counterfeiters have proven every bit as adaptable and creative as big business, with the Internet allowing them to refine approaches, increase reach, and target the lucrative world of online buyers.”

And though most of those online buyers look at counterfeiting as morally wrong, high demand for branded goods at low prices means 28 consumers unknowingly buy fake goods for every one that does so intentionally.

Of consumers who purposely buy counterfeits, 19 percent do it because the original is too expensive and 22 percent look to digital piracy when there isn’t a legal alternative.

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“Counterfeiting creates a heavy financial burden for brands – eroding profitability, market share and outside investment,” the report noted. Besides killing 10 percent of top-line revenues, the fake goods force brands to invest more to quell the problem instead of investing in future innovations.

Brand reputations are also on the line. Seventy-eight percent of consumers said they would shun a brand if they ended up on a bogus website, even if the brand had no part in the negligence.

“Counterfeiters have been quick to exploit the high-growth potential of the digital world,” the report noted. Because of the Internet, they can target e-commerce via rogue websites and with content that mimics that of genuine brands.

Since 2012, 1,829 Internet domain names have been seized for selling counterfeit products, and 432 million Internet users and 13.9 billion website views were for pirated content in January 2013 alone. Alibaba, often lambasted for purveying fakes, recently said it took down 114 million websites in just 10 months to combat the problem.

“The online sale of pirated and counterfeit hard goods…will soon surpass the volume of such goods sold by street vendors and in other physical markets,” according to an Office of the United States Trade Representative (USTR) statement.

The top five most frequently counterfeited items are watches, handbags, perfume, sunglasses and footwear, and retailers are suffering losses between $300 and $400 million each year because of copycat sellers.

Luxury brands are among the worst-affected sectors for counterfeits and 70 percent of luxury brand owners say loss of revenue from fakes is one of the biggest Internet-related challenges they face. Nearly one-third of paid search advertisements for designer handbags direct users to fraudulent sellers and counterfeit designer clothing was the most common article seized by EU customs in 2013, accounting for 12 percent of all seizures.

Looking ahead, 3-D technology could further blur the lines between physical and digital counterfeiting. With 3-D printers, physical objects can be transferred as digital files that can then be fabricated by anyone with a 3-D printer, which could lead counterfeiters with easy access to new markets to bypass customs entirely.

NetNames estimates intellectual property losses due to 3-D printer counterfeting could reach $100 billion by 2018.

When it comes to taking action against fakes, new technologies like RFID and digital authentication will be key to helping brands protect themselves against counterfeiters. And online anti-counterfeiting strategies should now be essential for every brand to maintain its reputation and customer base.

10 things brands can do to combat counterfeits

  1. Educate customers on how to identify and avoid fakes
  2. Appoint dedicated brand protection managers to raise awareness of the challenge both internally and externally
  3. Pool resources with other brands and industry bodies to increase influence
  4. Take a multi-layered approach to exploiting new anti-counterfeiting technologies and systems
  5. Set up dedicated webpages to help consumers determine fakes and report them
  6. Take centralized control over domain names to quickly respond to cybersquatters, typosquatters (URL hijackers) and rogue e-tailers
  7. Actively monitor online reseller prices for significantly lower rates
  8. Develop proactive strategies to ensure your legitimate brand channels are easy to find
  9. Audit online threats and profile key infringers and take appropriate action
  10. Consider bringing in outside experts to monitor threats and enforce against infringements across all your online channels.

“From counterfeit goods and grey-market products that use the Internet as a shop window, to fake components and ingredients infiltrating global supply chains, or digital piracy and illegal downloads, modern counterfeiting represents an evolving landscape that can take many forms,” McIlraith said. “Today, no brand is immune.”