Interesting Investments: Counterfeit Designer Bags
Are products made during “third shift” just trademark infringement or actual counterfeiting? Either way, both are illegal!
Before we get into the meat of this article, a disclaimer: No, I don’t recommend actually investing in counterfeit designer bags. This column isn’t as much a “you should invest in this” as it is a history of interesting investments, such as cell phone air time that can be used to launder money. In this case, the investors are factory owners. With that said, let’s look at third shifts and counterfeit bags that could fool all but the most practiced of dealers.
The Third Shift
To set the stage, imagine you are a Chinese factory owner. You have been contracted by Coach (COH)to produce 10,000 designer handbags. When your workers are done, you still have the materials to make more. Your contract is done; the materials can be thrown out. Except you have the workers who know exactly how to make the real thing, the machines that made the real thing, and the materials used to make the real thing. Why not simply make more and sell them out the back door, on the street, to tourists and locals alike? There might not be the same quality assurance, but what does that matter when there is money to be made?
Known as the “third shift,” “midnight shift,” or “ghost shift,” this is exactly what happens in some less scrupulous overseas factories. The workers take on an extra shift for more money, while the factory owners profit. And while it is not limited to designer handbags, it’s where the best counterfeits come from.
It’s not a new phenomenon, either. As the earlier Fortune article detailed, Too Inc. (ASNA), which runs the Limited Too line of clothing, discovered TJ Maxx (TJX) was stocking far more garments than Too, Inc. ordered from its factories in Asia. During a lawsuit to stop the sales, lawyers weren’t sure if the clothes were true counterfeits or the product of a third shift. The case settled in 2003, but not before a judge declared that third-shift goods were trademark infringement, but less serious than actual counterfeiting.
“You’ve taught a company to produce something,” an anonymous China-based investigator told Fortune, “and perhaps that’s all those people know how to do. Just because you have agreements doesn’t mean those people are going to stop doing what they’ve learned.”
A Global Industry
In 2016, counterfeit goods was a global industry worth about $461 billion, so why wouldn’t a factory owner with questionable morals and definite means want a slice of the pie? In 2013, as much as 2.5 percent of the world’s trade was counterfeit goods, equivalent to the entire economy of Austria.
There’s also a market for people specifically looking for high-end counterfeits, with some 3 million consumers buying fake goods each year. As we discussed in a previous article, Coach’s Birkin bags start at $60,000 and can retail for around $200,000. Plus, over the past 35 years, their value has outpaced gold. It doesn’t take a supply chain management genius to see that there could be a demand for knock-offs in order to artificially inflate social standing. After all, people are always looking for less expensive versions of designer clothing. For the much lower cost of $900, you can look like you have a highly coveted Birkin bag, without paying the full cost for a real one. So what if the stitching is slightly off in the corners? Have any of your friends seen a real Birkin bag to compare it? Or, you could simply pass it off as a curiosity and conversation piece.
The Legal Side
There is, of course, a dark side. Counterfeiting and trademark infringement, after all, are both illegal. In 2010, the BBC reported that Louis Vuitton initiated 10,637 aids and 30,171 anti-counterfeiting procedures worldwide, which resulted in the seizure of thousands of counterfeits.
In December 2016, a woman was found buying designer handbags from major department stores, and then returning counterfeits to TJ Maxx. The store, along with Neiman Marcus, lost about $400,000 in the scheme. Praepitcha Smatsorabudh was sentenced to 33 months in prison, $403,250 in restitution, and will likely be deported to her native Thailand as a result.
Because of counterfeiting, people train in how to spot counterfeit goods of high-end products. They look at minute details, tiny imperfections that reveal a lack of quality, even down to fake authenticity cards. Labels may not be perfectly straight; stitching can be sloppy. Plastic can be used in place of metal.
The next time someone stops you on the street of New York City and asks if you want a mostly fake designer handbag, pause for a second. It could very well be nearly, illegally, the real thing.
Originally posted on Equities.com