Xiamen, a city of 655,000 people on the South China Sea, is across the Formosa Strait from Taiwan. Its port is the 10th largest in the world in terms of volume of goods shipped to the U.S., and many Taiwanese businesses have moved there since mainland China opened itself to foreign investment. Many of those businesses are golf-related. "Ten years ago 70 to 80 percent of the counterfeits and illegal knock-offs were made in Taiwan, and only 20 to 25 percent in China," says Callaway's Herrington. "But since 1992 or '93, when the Taiwanese government began to enforce intellectual property laws, and Taiwanese labor costs rose in relation to China's, those percentages have flip-flopped. Now 70 to 80 percent of the counterfeits come from China, financed by Taiwanese investors."
Theft of intellectual property is illegal in China, but its prosecution is selective. A counterfeiter might be arrested after failing to pay off a government official or after a U.S. company protests so vehemently that an example must be made. And if convicted, the worst punishment a counterfeiter suffers is a modest fine.
Yarn-Way Enterprise Co. is one of the companies that relocated to Xiamen from Taiwan. Yarn-Way makes graphite shafts, producing some 450,000 a month, and Liou is one of its most valued customers. Liou flew to Xiamen on his second morning in China, and Yarn-Way sent a car to meet him at the airport. He gave Andy Zhu, the sales representative who handles his account, a long triangular cardboard box he had carried all the way from the States. Inside was a TaylorMade wedge. Within minutes a graphics designer at Yarn-Way had downloaded the logo from the TaylorMade shaft onto a computer screen and was making minor design and color alterations to it. He incorporated the word Integra into the logo and then submitted it to Liou for approval. The altered logo would be applied to the graphite shafts Yarn-Way was making for Liou's Integra line. "All you have to do is make a few changes to keep anyone from suing you," Zhu said of equipment that walks the fine line between what's legal and what's not.
In the afternoon Liou visited another of his vendors, the Aetenshun Casting house, where Ram, Tommy Armour, Hippo, Dunlop, Maxfli and Integra club-heads are made. The factory is far out in farm country, where bicyclists laden with boxes of vegetables pedal incongruously past Aetenshun's guarded iron gate. Along one wall of the factory's formal conference room was a display case of the dozens of clubheads made by Aetenshun. As Liou surveyed them, he picked out two TaylorMade driver heads, casually identifying them as counterfeits. The manager of the factory feigned disbelief until Liou pointed out an imperfection in the lettering and noted the hollow sound emitted from the head when he pinged it. The manager, recovering, said that now he remembered. Those two TaylorMade heads had been a gift. He couldn't remember who'd brought them.
"The company that really should have its antennae up now is Nike," Liou said later. "It's a hot brand with an expensive product, and it's new to the business."
Mike Kelly, the business director for Nike Golf, says one of the steps the company has taken to discourage counterfeiters is to put ultraviolet markings on its shafts, so U.S. customs inspectors can identify them as legitimate with the wave of a black-light wand. Serial numbers are engraved on the hosels too, and according to Kelly, Nike plans to put a serial-number checking system on its website.
Such a system would certainly have helped Scott Fong, a computer engineer in Rocklin, Calif., who logged onto eBay last summer and purchased what was described as a set of new Callaway X-14 irons. His winning bid? A hefty $725, for clubs that would have cost $1,040 at retail. When the irons arrived, they were in their original packaging, individually wrapped. But Fong, a 16 handicapper, noticed some slight imperfections in the CALLAWAY lettering. Worried, he took the irons to the practice range and discovered that he had more trouble than usual hitting them straight. When he compared them with Callaway demos at the clubhouse, he found that his clubheads were slightly larger than the demos'. He contacted Callaway, which put Stu Herrington on the case.
Fong sent Herrington the clubs he'd bought, and Herrington confirmed that they were counterfeits. The seller, who was from Toronto, was eventually raided by Canadian police, and his eBay auction was shut down. But how many other buyers had he hoodwinked? And what about the dozens of other eBay sellers who peddle illegal knockoffs? "We took down 618 Internet auctions in 2002 and 60 in the first six weeks of 2003," says Ken Parker, corporate counsel for Callaway. "Not a day goes by that we don't deal with it."
All of which has raised the cost of legal clubs. Who's the victim of counterfeiting? The legitimate manufacturer and, of course, the consumer. "Our product development group spends one third of its time studying other patents and establishing and enforcing our own patents worldwide," Nike's Kelly says. "Plus, we constantly monitor the Internet. Then there's the cost of adding the serial numbers and ultraviolet codes and of establishing a serial-number checking system. All that gets passed on to the consumer."
Why, then, do all those U.S. clubmakers continue to use Chinese foundries, whose track record in protecting intellectual property rights is so horrendous? "If we didn't, your $400 driver would cost $1,000," says Barney Adams. "Making a golf club is still very labor intensive. We understand the risks of doing business over there. We do the best we can to minimize them, and we move on."