The world’s largest Adidas flagship superstore opened on July 5, 2008 in Sanlitun, Beijing. The 3,170 sq meter 4-story facility is—1.5 times larger than that on the Champs-Elysées in Paris. The launching of the new store may be a celebration for becoming the official sportswear sponsor of the Beijing Olympic Games.

The Adidas China portfolio has been expanding rapidly in recent years. According to the Wall Street Journal, Christophe Bezu, the Head of Adidas Asia Pacific said that by the end of this year, the company’s market sales in China would overtake that of Japan, thus becoming the second largest market for the company, following the U.S. market. Towards the end of last year, profits from China also overtook Japan and some European countries, becoming Adidas’ rainmaker.

Amid their global business, the Chinese market has been undeniably satisfactory. However, as brand awareness increases with Chinese consumers, the company has also caught the attention of infringers. In a garment market not far from the new Sanlitun store, fake goods bearing Adidas’ “3-stripes” and “trefoil” can be bought for a pittance. The flourishing knockoff market actually reflects the popularity of the products. Nevertheless, witnessing product infringement is by no means a pleasant experience. So how is Adidas dealing with the infringements and protecting their IPR?

IP strategy focused on global cooperation

Rayan Tai is the Senior Trademark Counsel for the Asia Adidas Group. According to Mr. Tai, Adidas’ IP work is under the centralized management of its European headquarters. The company’s internal lawyers, managers, and legal staff are responsible for all aspects of the global IP related issues, from the applications of patents and trademarks to execution. Regardless of the country, Adidas’ IP department works as a team. Mr. Tai further explained: “Many enterprises operate independently in different markets. The Chinese company is responsible for the Chinese market, and the companies in Europe or America focus on their own respective market. There is no communication among them. However, the situation with Adidas is different. Our IP staffs in different markets often communicate with one another. Accordingly, a clear and consistent opinion can be reached with regard to the overall target.” For Adidas, regional IP strategies are not conducive to the brand protection because conflicts are inevitable during the confrontation of brand and regional interests. In most cases, the brand interest will be sacrificed for the short term financial gain. Furthermore, counterfeiting is a global problem, and cracking down on counterfeits requires a global solution. Based on this concept, Adidas developed their IP strategies with the European headquarter as the center.

It is Mr. Tai’s belief that working as a team can help maintain the exchange of information between team members. While the staffs are well aware of local IPR protection problems, they also have become familiar with IPR problems in other areas. For example, what counterfeits are sold in which country, the quality of the counterfeits, the arrangement of transportation, the problems that occur more in retail or online sales. Thus, the IP staff in different areas can work together to deal with the IPR challenges that Adidas encounters in the global market, and find the appropriate solutions.

Problems with the Chinese market

1. Problems in production and sales

The Adidas IPR staff in China includes five members. Their main task is to implement IP strategy developed by headquarters, but based on China’s current situation. Cracking down on counterfeits is an essential part of their mission. According to Mr. Tai, generally speaking, the counterfeiting that Adidas encounters in other Asian countries mainly focuses on production, while in the west, counterfeiting mainly focuses on the import or sales. However, both problems exist in China. In recent years, as Adidas has expanded in China, factories and retail markets that manufacture and sell counterfeit goods have sprung up throughout China. Therefore, in order to protect customers and guarantee Adidas’ business development on the mainland, the problems should be handled simultaneously.

2. Indirect infringement brings more impact on the brand

In fact, apart from cracking down on counterfeits, many anti-infringement actions are also an important part of Adidas’ work in China, such as investigations of fake products, dealing with unfair competition, imitating famous brand and trademark indirect infringements. Mr. Tai said: “Compared with counterfeits, infringements have more impact on our brand value. Because trademarks and high quality products are the ultimate reflection of our brand value and it is also the reason why customers like Adidas. People all know that the ‘3-stripes’ is the trademark of Adidas, but if counterfeits bearing ‘2 stripes’ or ‘4 stripes’ appear in the market, customers will get confused and end in mis-purchasing.”

Mr. Tai believes that the Chinese customers are still not very familiar with Adidas. It is very likely that they will be misled by certain information when purchasing Adidas products. Adidas once encountered an awkward situation in Southern China. A company claimed to be a famous German company established in 1948 in their advertisement and completely copied Adidas’ history in their promotion campaign. “This kind of action has very negative impact on us. It makes people wonder if Adidas is introducing a new trademark. Therefore, what we should do is to carry on the battle against the unfair competition of selling counterfeits and infringements against the Adidas brand”. Mr. Tai said.

3. Critical situation of online counterfeits sells

Apart from traditional IPR problems, Adidas has been faced with new challenges including Internet infringement. Mr. Tai said, “China’s science and technology has seen rapid development in recent years. More and more people are using the internet and online shopping is flourishing. The situation of online counterfeits sells is inevitably escalating.” According to Adidas’ research, all the Adidas products sold on the internet in China now are counterfeits. Adidas has never authorized any dealer to sell their products online as stated clearly in the distribution contract.” Mr. Tai warned Chinese customers: “Do not purchase Adidas products online.”

Three years ago, whenever Mr. Tai had time to be online in the office, he would send warning letters to people who sold counterfeits online and asked them to stop their acts of infringement. A year later, due to the growing workload, Mr. Tai passed this work to his colleagues. This year Adidas had to hire a law firm in Guangdong specializing on the cracking down of counterfeits on the internet. According to Adidas’ requirement, the law firm had to appoint at least 12 people to do the job. Each person is required to work at least 40 hours a week sending warning letters to Taobao.com, Paipai.com and other websites selling bogus goods and asking them to stop their infringement acts.

Adidas sends out tens of thousands of warning letters monthly. As to the effect of the warning letters, Mr. Tai admitted that the website could only close down the online stores that sell counterfeits. However, opening an online store is extremely easy. The banned counterfeits seller can simply register a new account and carry on while with practically no risk. Internet infringement is a new trend and is becoming increasingly evident. Adidas needs to figure out how to deal with this challenge and concurrently needs support from the Chinese government.
                                 
IPR protection strategy for the Chinese market
 
1. Distinguish original from fake with the help of unified labels

In the field of IPR protection and counterfeits combating, the most important issue is to distinguish original products from the fakes. How is Adidas dealing with this problem? Mr. Tai responded with check the labels. He explained, in order to gain support from law enforcement with regard to cracking down on counterfeits, Adidas’ products have to be coherent and the labels have to be consistent so that it can be explained simply and clearly to law enforcement officials, which products are original and which products are fake. Currently, Adidas is using a globally unified label, developed by the European headquarter in 2002. The label includes not only the product number, factory number, production date and sizes in different countries, but also a dot pattern. Although the pattern does not seem to be out of the ordinary, each dot has its special meaning, known only to the Adidas staff.

Mr. Tai said, “We are very confident about the label because it took years to develop and will be adjusted constantly after a certain period of time. Most importantly, the label cannot be counterfeited. Even if the counterfeiters attach the scanned label on the fake products, it is very easy for us to detect.”

2. Work with the customs to protect IPR

Over the last two years, the number of the counterfeiting factories has decreased because of the Adidas’ crackdown; the figure for 2007 was around 100. As for this change in trend, Mr. Tai explained, “Adidas is increasingly conscious that China’s problem is not only the problem of production. Of course, most of the counterfeits are produced in China. But we should also be aware that the demand for counterfeits does not end in China. If these counterfeits are to be exported, their flow is most likely controlled by counterfeiters outside China. Therefore, in order to raise the risk of counterfeiting, an active cooperation with customs is needed.”

Adidas started filing applications to customs for trademark protection from 2001 to 2002. It was among the first foreign brands seeking customs protection in China. According to Mr. Tai, “Adidas communicates regularly with customs and organizes relevant trainings to teach customs officer’s methods of distinguishing original and fake products. After a few years of working together, the cooperation between Adidas and the Chinese customs is becoming much smoother. In recent years, the annual number of confiscated cases at customs reached 150 to 200. By analyzing these cases, Adidas has discovered that most of the counterfeits are exported to Latin America and Africa. This information provides helpful reference for the future IP strategy adjustments.”

3. From cracking down on production to retail, wholesale and storage & transportation

Statistics compiled by Adidas indicate that among all the products, sports shoes and sports wear suffer the most from counterfeiting. Mr. Tai said: “Five years ago we intended to put the emphasis on protecting the mainland market and kept on cracking down on the counterfeits production lines. Around 300 counterfeiting factories were shut down every year. However, we gradually realized that due to the shere number, it is extremely difficult to crack down on the counterfeits production lines in the mainland. Currently, counterfeiting factories can be found in provinces such as Fujian, Zhejiang, Guangdong, Sichuan, etc.” After a few years of hard work, Adidas’ anti-counterfeiting efforts in China have made some progress. In the meantime, Adidas realized that putting the energy solely on cracking down on factories made little impact on the overall market environment. If a factory was closed, its orders simply go to another factory. It is impossible to track down the endless flow of the counterfeits and therefore hard to evaluate the effect of shutting down counterfeiting factories. On the other hand, the budget for anti-counterfeiting is limited. The budget for China is only part of Adidas’ global IP management strategy. Therefore, to crack down on counterfeits effectively, the working strategy needs adjustment constantly.

Anti-counterfeiting efforts from many companies include the targeting of factories without exception. They believe that these facilities are the root of the problem. However, Mr. Tai thinks otherwise. His belief is that the source is retail. Where there is a demand, there is a supply. The determining factors are based on the conditions of the market economy. “I think in order to deal with counterfeits, the first step we need to take is to solve the problems of retail, transportation, and wholesale. Because if the wholesalers and the retailers dare not stock counterfeits, customers do not buy counterfeits, there won’t be any orders at all. If there is no order, there won’t be production. So I believe cracking down on the retail, wholesale and storage & transportation of the counterfeit goods is a very good plan.” Mr. Tai said. 

The financial benefit that comes from counterfeiting is the reason why so many people engage in it. “However, there are both risks and benefits when engaging in counterfeiting activities. If the benefits outweigh the risks, surely there will be people doing it; if the risks outweigh the benefits, there will be fewer counterfeiters. So what we should do is to raise the risks and lower the benefits. Let the counterfeiters stop their counterfeiting activities voluntarily. This is also one of our work targets this year in China.” Mr. Tai commented, “We can’t solely rely on seeking legal protection whenever we encounter a problem. We have to learn to evaluate the risk/benefit ratio from an economic perspective. We need to control the whole trade flow and make sure that no fake, smuggled goods or any products without Adidas’ authorization are involved in the trade. Accordingly, there will be more and more authentic products on the market. The wholesalers and retailers who rely on selling counterfeits will in turn lose the market and in the meantime the counterfeiting factories will not receive any orders. ” 
                 
4. Strengthen IPR protection

Currently, Adidas has applied for more than 300 trademark registrations in China, covering more than 10 categories. With regard to the trademark protection, Adidas’ efforts have also been highly effective. The most successful is the handling of the “3-stripes” counterfeits. In May of this year, Adidas won a lawsuit against American footwear retailer Payless and was compensated US$300 million. Payless was selling fake Adidas sports shoes, including counterfeits bearing “2 stripes”, “3 stripes” and even “4 stripes” marks. In China, Adidas has also strengthened trademark protection in recent years. Recently in a civil trademark infringement case, the Shandong Yantai Court determined in the first trial that the “3-stripes” is a trademark of Adidas, and the infringing manufacturer and retailer should bear the legal liability.
   
 5. Customers as important alliance

In recent years, Adidas has cleared many counterfeits from the market, especially in Europe, America, and China. Adidas considers consumers as their important allies. Regarding restriction of counterfeit imports, customers in Europe and America have given Adidas great help; and concerning export restrictions, Chinese customers have been supportive. “Of course you can still find counterfeits in China. However, compared to five years ago, the amount of counterfeits has been decreasing. ” Mr. Tai commented, “counterfeits can actually be found anywhere in the world. In China, Adidas has managed to keep the general market clean with the hope that the customers who intend to buy authentic products will not end up purchasing fake products.”

 6. Brand protection focused on the 2008 Olympics

In 2008, the brand protection project concentrated on the Olympics, and the focus of Adidas. Mr. Tai said, “Sports marketing is very important to Adidas. This is also, why Adidas puts so much energy in participating in large sporting events. The 2008 Beijing Olympics is the largest sports marketing event that Adidas has ever participated in. A special Olympic team has been set up to provide detailed forecasts and arrangements for Olympic related issues. In China, aiming at the Olympic IPR protection, Adidas’ main task relies on market protection and cracking down counterfeits and infringements.”

From its beginning to today, Adidas has been able to maintain the leading position in the industry and actively engage in cracking down on counterfeits. The company has upheld founder Adi Dassler’s footwear philosophy—product technology innovation is the engine for expanding markets and raising brand awareness. Confronted with increasingly keen market competition, Mr. Tai believes that innovation and design is the key to Adidas’ success. Now that the design and quality of its counterfeits has been greatly improved, in order to keep the leading position, the most important work of Adidas is to keep the high quality of the products, including the quality of packaging and labels, to distinguish its original products from the fakes.

(Translated by Elina Cai)