The $6 Billion Scam: Inside the Battle to Shut Down Golf's Black Market
Of the measures golf equipment manufacturers have taken to crack down on the booming counterfeiting business, none is more dramatic than the raids they spring on unsuspecting shops and factories in China. GOLF MAGAZINE joined a recent ambush for a never-before-seen look at a seedy and sprawling industry.
On a smoggy winter morning in Dongguan, China, an industrial boomtown two hours north of Hong Kong, a black sedan with tinted windows slowed to a crawl along a gritty commercial drag. It was a street like many others in the low-slung urban center, its sidewalks crowded, its storefronts cramped and fluorescent-lit. But its proximity to a leafy country club lent its retail operations a distinctive slant. Arrayed along the strip, within blocks of one another, stood more than a dozen golf equipment shops, all advertising the latest models by the leading brandsclubs, hats, shoes, gloves, balls, you name itat bargain-basement prices that seemed too good to be true because they were.
The sedan kept rolling, past the Lotus Golf Centre and the Green Grass Golf Shop, a tiny corner store with a Titleist banner stretched proudly on display. A few doors down, near the Qun Xin Golf Shop, the sedan stopped and its driver, Jason Yao, checked his cellphone.
"These guys don't know it, but we've been watching them," he said. "That's okay. They'll find out soon."
As if on cue, a fleet of blue and white vans sped around the corner and pulled up to the curb. The van doors swung open and out rushed a squadron of uniformed officials. Yao killed his ignition and followed close behind.
Several alert shop-owners, seeing what was coming, switched off their lights and pulled down the metal curtains that hung above their doorways. But most were caught red-handed.
"They're not fakes! They're not fakes!" a flush-faced merchant cried in Mandarin, as Yao and the officials began emptying his shelves, carting off armloads of fairway woods and irons.
Yao ignored him.
"I don't feel bad for guys like that," Yao murmured, when the man was out of earshot, his shop stripped bare. "They act like they're innocent, but they're not."
In the bluntness of his speech and the firmness of his manner, Yao, who is 37, betrays a bureaucrat's insistence on by-the-books procedure and a sheriff's zero-tolerance for scofflaws. Both are handy traits, given his job. As a point man for the Acushnet Company in its escalating battle against golf equipment counterfeiting, Yao is an enforcer on a wild frontier, deputized to crack down on a crime that costs U.S. manufacturers an estimated $6.5 billion a year.
Every month, teamed with Chinese government inspectors and local police, Yao takes part in raids of retail shops and factories around mainland China, nipping at a problem with complex roots and global reach. Their target is a shadowy network of counterfeiters and their middlemen, who, abetted by the Internet, operate pipelines that run from China through wide swaths of the golf world. Authentic in appearance, if not performance, the fake goods they produceoutgrowths of increasingly sophisticated reverse-engineeringcrisscross the continents at the speed of broadband. Though the bogus equipment rarely makes it into golf shops in the United States, it still floods across the border and into golfers' hands. It is not uncommon for ersatz versions of the latest Cleveland wedges, say, or the newest Callaway irons, to turn up on eBay or other online auction sites weeks before the real things land on U.S. shelves.
Unwittingly, American consumers purchase tens of millions of dollars worth of golf counterfeits a year. Faced with this assault, the major golf equipment-makers have joined forces to combat ittraining federal customs agents to sniff out fakes, hiring private eyes and lobbyists to work the trenches overseas. Their efforts have yielded some headline results.
This past fall, authorities in England arrested the ringleader of an online operation suspected of trafficking in millions of pounds worth of fake golf products. Less than a week later, in a separate case, another English online seller of counterfeit Titleist equipment was sentenced to two-and-a-half years in prison for his role in the crime. Even in China, where golf counterfeiters are often met with no more than a hand-slap and a fine, convictions have been levied. Last November, in a case watched closely by the industry, two men charged with manufacturing, distributing and selling fake equipment received three-and four-year prison terms, respectivelyChina's first prison sentences for golf counterfeiting crimes.
"We've made some progress," Yao said. "But we'll never be able to stop the problem. We can only hope to control it."
A Chinese-born and U.S. trained attorney, Yao spent eight years fighting counterfeiting in the cosmetics industry, until 2004, when he signed on as Acushnet's chief legal counsel in China. His is a rare golf-related job that carries physical risk. In remote regions of the mainland, where entire local economies often depend on jobs provided by counterfeiting factories, employees don't take very kindly to outside intervention. They circle the wagons, and often respond with force. Undercover agents, dispatched to the hinterlands to infiltrate illegal operations, have been beaten, stabbed and even murdered. Yao himself has received death threats. He uses aliases. On surveillance runs at markets known for selling fakes, he carries a video camera in his breast pocket, disguised as a ballpoint pen.
In addition to the danger, Yao confronts the challenge of golf's low ranking on China's anti-counterfeiting priority lista frustrating but understandable fact. Of the estimated $600 billion in counterfeit goods traded annually around the world, golf equipment is a very small range ball in a very large bucket. Compared to phony pharmaceuticals, which pose a threat to public safety, or knock-off cigarettes, which represent far larger sums of money, fake drivers and irons receive scant attention from the Chinese government. Unless a raid uncovers an exceptionally large stash of counterfeit golf products, the case is handled as an administrative matter, not a criminal one. It invariably gets buried in bureaucracy, not pursued by prosecutors or police.
As a result, Yao's work can often seem like a game of Whack-a-Mole: he knocks down a target, and it pops up somewhere else. "What I would like to see is the total criminalization of counterfeiting in China, no matter how small, no matter what kind," Yao said. "Unless the punishment is severe, there's not enough reason to stop."
By late morning the Dongguan raid had spread from the city's commercial center to a drab residential neighborhood a half-mile away. Police stormed up the stairwell of a dingy beehive complex and banged on the door of a third-story apartment. When no one opened the door, they kicked it in. One of the apartment's occupants, a wiry, mustachioed man who looked to be around 40, tried to flee. He got as far as the hallway before the cops corralled him and dragged him back inside.
It was a small, squalid apartment, cluttered with the mechanisms of a bare-bones manufacturing plant. In a tiny bedroom, beside a child's bed covered with mosquito netting, stood a wooden desk that doubled as a work station, stocked with acetone and assorted tools: pliers, a vice, a circular saw. By counterfeiting standards, it was not the mother ship, just a ramshackle middle-man operation. But it was one of many around the country, and its modest scale hinted at the problem's broader scope. Scattered on the bedroom floor, and in other tiny airless rooms of the apartment, were hundreds of fake golf club components, emblazoned with the markings of well-known brands: Mizuno grips; TaylorMade Burner shafts; Ping G15 driver heads and ironsthe building blocks for enough phony equipment to stock dozens of pro shops in the United States.
Questioned by police, the wiry man identified himself and three other residents of the apartment: his wife and their two sons, all working together at the home-based business. One of the sons, a boy of no more than 10, stood in the living room, planted between the cops and an old computer. "Leave this," the boy said. "I use it for my school work."
The police brushed him aside and confiscated the machine. Beside the monitor and hard-drive was a cardboard box stacked with pink orders forms. Among the hundreds of sales listed was one for a set of graphite-shafted Callaway X-22 ladies' irons, 4-iron through pitching wedge. Priced at 480 yuan, or roughly $70, they'd been shipped off to a buyer for some $700 less than the authentic retail price.
"COSMETICALLY, THEY DID a pretty good job on this one," Jeff Colton said. It was a cloudless morning in Carlsbad, Calif., and Colton stood on the range at the Callaway Performance Center, a sophisticated club-fitting facility, waggling what looked like the company's newest driver, the carbon-fiber FT-iZ. Billed as the "longest, straightest" Callaway driver ever, the 2010 model was still weeks away from its official release date. But its shady dopplegÃ¤nger had already made its way into Colton's hands.
Like thousands of other fake clubs delivered every year to the major equipment companies, the counterfeit FT-iZ had been sent to Callaway by a disgruntled consumer, who had purchased it online from a third party believing it was real. Less frequently, but still often enough to be a serious worry, consumers trade-in fakes at retail shops, whose unsuspecting staff put them up for sale.
"You see why this is a problem," said Colton, Callaway's senior vice president. "It damages consumer confidence, and it damages our brand."
A trained physicist, and Callaway's former head of product development, Colton stared grimly at the imitation, then grabbed an authentic FT-iZ.
"See here" he said. "Most people wouldn't notice this."
He turned both clubs on end to reveal their soles.
At first glance, there was no telling: same shape, similar coloring and markings. But on closer inspection, subtle differences appeared. On the fake, the word "Callaway" looked squatter, and the company's V-shaped logo was set at a different angle. More telling, rather than bother trying to replicate the FT-iZ's carbon-fiber technology, counterfeiters had simply slapped a decal on the sole that bore a close resemblance to the real club's patterned look. When Colton swung the two clubs, further inequities emerged. One was made of sturdy, light-weight composites, the kind of space-age alloys used on rocket ships and race cars; the other was forged from crude aluminum and steel.
"The weighting's all off," Colton said of the bogus driver. "The shaft's much softer. You can't feel where the clubhead is."
By fluke of fate, clubmakers concede, there's a chance that a consumer could wind up with a counterfeit that performs adequately. But almost without exception, the opposite occurs. At the performance center, machine tests corroborated Colton's assessment: using the same ball, under the same conditions, the counterfeit FT-iZ produced slower ball speeds, greater spin rates and wider shot dispersions than the authentic version. Similar tests on other Callaway clubs (X-22 irons; FT-iQ drivers) and their fraudulent counterparts yielded similarly divergent results.
"Worst part is, unless you have the real ones in front of you to compare them, you might not know the difference," Colton said. "What's the natural reaction? You end up blaming yourself or the company whose name is on the club."
While the battle for brand protection is hardly a new fight for the major manufacturers, its frontlines are ever-shifting. Time was, for instance, when the chief industry concern wasn't counterfeits but knock-offs, cheap alternatives to leading brands that made no pretense of being the real things. In the mid-1990s, a knock-off club called the Big Brother became a common stand-in for the Big Bertha; the King Cobra inspired a popular stunt-double known as the King Snake.
By decade's end, knock-offs were so widespread that the major brands launched a joint campaign to stop them. With the help of police raids and patent attorneys, Operation Teed Off all but squashed the knock-off market. But copycats kept at it. Driven underground, they turned to counterfeits instead.
Around the same time, counterfeit production began moving from its former home in Taiwan to new locations in mainland China, powered by a vast and low-paid labor pool. In a country where the minimum wage is roughly $140 a month, many workers carry two jobs: at a legitimate factory by day, and a counterfeiting plant by night. Given the lean salaries, it's tempting to sell secrets, and that often happens. Clever engineers, handed a stolen blueprint, can produce slick-looking fakes with astounding speed.
The big equipment companies spend thousands of man-hours trying to staunch the flow of counterfeits by monitoring the Internet and alerting sites that run online auctions. In 2009, Callaway put a halt to an estimated $1.3 million in suspicious equipment sales on eBay alone. But for each transaction stopped, thousands of others escape into the ether.
"It's so widespread, it's unbelievable," says Steve Gingrich, head of global law enforcement for Cleveland Golf. "We have guys out there who are making a living on just our hats."
BY EARLY AFTERNOON in Dongguan, the scene on Lian Feng North Street, in the city's golf-rich shopping district, had taken on the look of a chaotic rummage sale. Of the 17 golf shops operating on the street, 11 had been raided, their contents pulled from shelves and piled onto the sidewalk. Jason Yao knelt down and sifted through the merchandise. A half-baked attempt at a TaylorMade R9, the company's latest adjustable driver, bore faithful brand name markings, but there were no weights or screws to adjust the head. A "Footjoy Weathersof" glove came wrapped in a clear package that promised "perfessional natuye feel knowledge."
Yao recognized the error, but he wasn't amused. While such gaffes might draw a chuckle from American consumers, they were apt to go unnoticed in a nascent, non-English-speaking golf market like China. "In the end, Chinese are practical people," Yao said. "If we see something that costs $50 instead of $500, we're going to buy the $50 one, without thinking too much about where it came from."
Yao receives such bargain offers all the time. On his routine tours of golf retail shops, he finds counterfeit versions of $400 Titleist drivers on sale for $30. In a prelude to a bust, he once paid $100 for a fake set of $700 Titleist AP2 irons.
Under Chinese law, if the value of the golf equipment seized in a raid surpasses 50,000 yuan, or about $7,000, the case can be treated as a criminal matter. But that rarely happens. More often than not, government officials keep control of the cases, and use them to collect revenue in the form of fines. Whether the Dongguan raid would lead to any charges had yet to be determined. Yao suspected that it wouldn't. The decision, he said, might not come for months.
As Yao strolled along the sidewalk, the same flush-faced storeowner who'd pleaded with him earlier paced beside him. Though the man looked stressed, he didn't appear worried about potential jail time. He seemed more concerned that he would lose his merchandise.
"That one's not a fake either," he said as Yao picked up a club, purportedly a Titleist Vokey sand wedge. "Please, let me keep it. I paid good money for it."
Yao held out the club to check its weighting, and squinted in the sunlight at its engravings. He couldn't be quite certain, so he opted to bring it back to his office, then send it out for testing to see if it was real.