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updated 2/1/2004 10:55:44 PM ET 2004-02-02T03:55:44

The nerve! The pirates of Shanghai are knocking off entire motor vehicles.

Piracy is such a way of life in China that people are surprised when a movie, software package or handbag bought there is not ripped off. Now you can add, to the list of counterfeit goods, passenger cars. Months before General Motors began selling its $7,500 Chevrolet Spark in China in December, a $6,000 knockoff version, the Chery QQ, with the same grinning front end but missing some subtle details (like an airbag), was cruising Chinese streets. Even more galling: The manufacturer of the pirated version was partially owned by GM's Chinese business partner.

Counterfeiting--usually just of parts--is driving carmakers crazy in China. Replacement parts like oil filters, headlamps, batteries, brake pads, fan belts, windshields and spark plugs, packaged with fake logos, are turning up all over the world, including the U.S. The carmakers say safety is at issue. GM says it has come across brake linings made of wood chips and cardboard that could burst into flames with heavy use and coolant that can eat through a car's radiator in 48 hours. Also very much at stake: profit margins. Replacement parts are to car companies what popcorn is to movie theaters. It's how they pay the rent.

Ford Motor says counterfeiting costs it $2 billion a year in sales. Counterfeiters are using computer scanners to duplicate trademark labels and slap them on fake goods, says Ed C. Wetter, manager of Ford's global brand protection program. Ford recently raided a Chinese factory and turned up 7,000 sets of counterfeit brake pads destined for Egypt, each stamped with a replica of Ford's blue oval. A legitimate set of pads for a Ford Taurus would cost the equivalent of $47 in Egypt; the phony ones might go for $30.

Manufacturers are stepping up their countermeasures worldwide. GM says it is investigating something like 400 counterfeiting schemes and seized or destroyed $180 million worth of counterfeit goods. But counterfeiters just move and reopen elsewhere, says Philip F. Murtaugh, chairman of GM China. What about jail sentences? In Taiwan, says Ford's Wetter, those few offenders sentenced to prison can reduce their terms for $30 per day. Lawsuits? Often a waste of time. Toyota recently lost a closely watched case in China against a Chinese engine manufacturer whose brand logo was nearly identical to Toyota's.

"Accepting this kind of practice in China is condemning China to remain an underdeveloped country," fumes Nissan Chief Executive Carlos Ghosn.

Still, going after the bad guys is tricky, given that the bad guys are often tight with the government, and the government is a business partner you don't want to offend. GM's trouble with the fake Spark probably had its roots in Korea, shortly before GM and other investors bought the assets of bankrupt Daewoo Motors in October 2002. The Spark is a replica of the Daewoo Matiz. One of GM's co-investors in Daewoo is Shanghai Automotive Industry Corp. Shanghai Autoalso happened to own a 20% stake in SAIC-Chery Automobile Co., a fledgling government-sponsored company that began producing cars in 2001. It is possible that Daewoo insiders sold the design specifications for the Matiz to Chery engineers before the sale to GM was final.

GM executives did not storm off to court about the fake car. Instead, they are in a parley with Chinese government officials.

© 2012 Forbes.com

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