Counterfeit Cosmetics from China to Usa

CALIFORNIA ST ATE UNIVERSITY SAN MARCOS

PROJECT SIGNATURE PAGE

PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE

MASTER OF BUSINESS ADMINISTRATION

PROJECT TITLE: Countetfeit Cosmetics from China to the United States

AUTHORS: Clara Arias

PRESENTATION DATE: August 3, 2020

THE PROJECT HAS BEEN ACCEPTED BY THE PROJECT COMMITTEE IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION.

Name of Project Advisor

Eric Rhodes Ericen Rhodesc Rh (Augt>ti 3, 2020eJ08:23 PDT) 08/03/2020 PROJECT ADVISOR SIGNATURE DATE

Name of Second Reader . �os/4eet:q-uc,/u,, Mohammad Oskoorouch1 Mohammad Oskoorouchi (Aug 3, 202008:47 PDT) 08/03/2020 PROJECT SECOND READER SIGNATURE DATE

COUNTERFEIT COSMETICS FROM CHINA TO USA

GBM 685

MBA International Business

Presented by: Clara Arias Rodríguez

COUNTERFEIT COSMETICS 1

Table of Contents

Abstract ...... 2 Overview of the Cosmetic Industry ...... 2 Description of Project ...... 5 Illegal Money ...... 6 Lessons Learned ...... 6 Skills to be Used in the Workplace ...... 10 Experiences Related to Academic Program ...... 12 Illegal Employment in the Illegal Market ...... 13 Cost of Monitoring and Enforcing Laws Related to Illegal Goods ...... 14 Potential Solutions ...... 14 What Would be Done Differently ...... 17 GBM 685 Experience & Overall Education ...... 17 Overall GBM 685 Evaluation ...... 18 References ...... 19

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Abstract

The purpose of this project is to compile all the skills and learning acquired from conducting research on the U.S. economic and social impact caused by counterfeit cosmetics imported from China. This reflection will be submitted to Global Business Management faculty advisor, in partial fulfillment of the graduation requirements for the degree of Master of Business Administration.

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Overview of the Cosmetic Industry

The world has been preoccupied with beauty since ancient times because humans are visual and social beings. People started using cosmetics and makeup long ago since the Egyptians times, which included dark eyeliner to improve their complexion. The today beauty industry has grown to be the most popular among the mainstream media, and it is one of the most profitable ventures. The cosmetic industry is one of the sectors with the highest annual growth in the economy. Improving physical appearance to achieve certain stereotypes, especially female ones, creates a need for consumption that leads these companies to achieve unattainable sales figures in many other sectors. From a commercial point of view, it is an industry that generates benefits in a large part of the market, since these products affect laboratories, pharmacies, perfumeries, supermarkets, health professionals, beauty advisers and health authorities.

The beauty industry is broad, and it involves both products and services, such as barbers and hairdressing (Bian & Moutinho, 2011). The main beauty products in the US market include hair care like shampoo, shower products including soaps, oral care like mouth wash, and color cosmetics such as facial makeup products. It has created employment for millions of people across the world, and in the united states alone, the beauty service sector alone employs over 670,000 people.

Distribution Channels

Traditionally the cosmetic industry distribution channels focused sales through pharmacies, special beauty stores, and salons. Today with improved technology and e-commerce, direct sales from manufacturers to customers have increased at a rapid rate. According to 2017 statistics, online sales for beauty products had a growth rate of 15.6% in the U.S. e-commerce market (Statista, 2020). The beauty industry is anti-cyclical, and therefore, customers will still purchase luxury beauty products, even during an economic downturn. The industry continues to flourish today is attributed to the millennial generation who are widely known for giving much attention to physical wellbeing. Research shows that millennials perceive self-care as a coping method against difficult economic and political situations.

Revenues

In 2018, the global cosmetic industry achieved revenues of $507.75 billion, 1.8% more than the previous year, and 25 billion more than in 2011 (IBISWorld). The same study estimates that at the by 2025, the income of the cosmetic industry in the world will be about 758.45 billion dollars, growing at a rate of 5.9%.

Trending Brands

The most popular cosmetic companies worldwide are Johnson & Johnson, L’Oréal Paris, Gillette, Neutrogena, Nivea and Chanel, Inc. There are also many emerging companies that have COUNTERFEIT COSMETICS 4 experienced a tremendous growth since their first appearance in the market. Some of these brands are Kylie Cosmetics and ColourPop.

Composition and Characterization of Cosmetic Products

Companies that are part of the cosmetic industry are in charge of producing new products in authorized facilities for their control. In order for a new product to be released, it must go through the following phases: 1. Galenic development: It is based on studies prior to formulation, formulation development and pilot production of the product.

2. Manufacturing: Once the studies are correct, the product is manufactured in batches.

3. QA: Physical, chemical and microbiological control of the product, as well as its efficacy and safety.

Only when the product is safe and after it has been tested, it can finally reach end consumer.

Natural Cosmetics In recent years, new makeup varieties have fueled consumer demand. Promises such as younger looking skin, and the development of environmentally friendly and eco-friendly products, make it possible to increase the profitability of the sector. Companies seek to increase their market share by investing in research and development, allocating part of their income for this in order to keep up with these product lines and relevant in the market.

This branch of the cosmetic industry seeks to achieve the same goal of improving physical appearance, but in this case using only natural ingredients that are far from chemical or synthetic elements. It is a branch that is gaining popularity because it produces non-aggressive compounds to human skin, avoiding risks of disease, allergy or rejection. In addition, these are products that protect the environment and are completely cruelty free.

Target Market Today, women between 20 and 64 years old continue to represent the highest percentage of the market, being more than 68%. However, in recent years the sector has undergone changes where male segment has been increasing year by year. Thereby, many manufacturers have found such segment has great potential for development, as male awareness of personal care increases every day.

Threat of Substitutes

It is fair to say that the main competitor of a makeup brand would be another beauty company; but there is something more threatening: “Fake-up Cosmetics”. It is not a secret, just as there is COUNTERFEIT COSMETICS 5

piracy of music, movies and clothing, there is also counterfeiting of cosmetics and makeup brands. At first glance it may seem innocent, especially when we are not aware of the dangers and harm that buying fake cosmetics can cause to our health. Many cosmetic companies, either emerging brands or inclusively the ones already established, are directly affected by the smuggle of cosmetic products.

Description of Project

Background

This project was done with the mere purpose of gathering solid information about the repercussions counterfeit cosmetics from China could bring not only to the U.S. economy, but also to the consumer’s health. As a graduate student specializing in International Business, I had the opportunity to see in several of my classes, a variety of successful agreements between different companies from around the world. Most of these agreements and deals were related to the exportation of goods and services from different countries to the United States. The Asian continent has been of my personal interest since I can remember; I was always impressed by the huge number of items people in Asia are able to fabricate and distribute to different countries. China as the U.S. number one trade partner has contributed positively to the economy of America; but I have always been inquisitive about the existent smuggling issue involving these two countries. My research guided me to focus on the below factors in order to explore the issue and find the possible solutions experts have undertaken in order to solve this problem that is definitely an international issue.

China as Major Base

China is widely known as a major base for counterfeits products, which causes harm to the economy of other nations. In 2015, about 20 percent of cosmetic products from China were counterfeit. According to 2013 records, 63% of seized fake products originated from China which 21 percent were from Hong Kong, an administrative region under China's administration. The United States ranks the first among the counties hit hard by the counterfeit products from China.

Effects of Counterfeit on Brands in the USA

Genuine brand owners admit that counterfeiters diminish the status and the value of a brand is diminished by the availability of fake cosmetics in the market. Brands lose sales to counterfeiters and also loses the goodwill because customers blame the genuine manufacturers when they fall victims of fake cosmetics. The brands are also impacted in regard to the added costs incurred in safeguarding and enforcing intellectual property rights.

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Illegal Money

Reports from OECD estimates that counterfeits account for over 3.3 percent of the value of international trade (OECD, 2019). Due to the complexity of the counterfeit market, it is challenging to states the actual value of counterfeit products in the economy. It is termed as one of the most lucrative businesses which take advantage of uninformed customers and exploit their financial position.

Illegal Employment in the Black Market

Analysis records that the illegal business has coasted an estimate of 2.5 million jobs globally, in which 750,000 jobs were located in the US. As counterfeit products continue to grow, more people will continue to lose their jobs in the US and around the globe. The end of illegal jobs in the counterfeit market would impact positively to the economy of a country.

Lessons Learned

Supply Chain

During my research, I found out that in the cosmetics industry, just as in any other sector, an efficient supply chain management is vital to achieve a competitive advantage and the correct management of retail requirements to help meet supply and demand challenges. Due to the nature of the industry, customers are looking for products that are trending today, even if they are going out of fashion soon, thus companies need to ensure that products are always available for purchase and that their strategies for marketing and demand forecasting ensure that the right product mix is in the right distribution channels and at the right time.

Cosmetics supply chain is impressive. It can flexibly incorporate innovations while facing complex challenges like fluctuations in raw material prices, high-precision production processes, novelty-hungry customers and fashion trends. Constant innovation and short product life cycles make demand extremely volatile. This has raised the need for the planning of production processes to be created with efficient strategies and for factories and their production lines to be fully automated.

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The supply chain for the cosmetic industry is relatively easy to follow, as illustrated below:

While researching, I noticed many cosmetic companies talked about the need of improving some stages of their supply chain. When it comes to improvements, I believe that there is always room for improvement, thus all stages can always be improved. For example, when it comes to cosmetics, the possibilities of components are endless. The raw materials can always have a better quality. The same philosophy can be applied to the manufacturer, as the overall manufacturing process is one of the most important steps of the supply chain, especially in the cosmetics industry. As an example, one of the most recent applications is using cotton gloves when caps are being put on lipstick or when packaging’s are being closed so that there are no fingerprints left on the product. This is a small change that has a big impact on the overall quality and appearance of the product. In addition to this, other changes such as using more sustainable or recycled materials for the packaging can be applied. In relation to distributors, this is a crucial stage of the supply chain for the cosmetics industry. It is very important that the transportation (whether it's a truck, a boat or a plane) has the right conditions such as a certain temperature and humidity. Otherwise, the products could melt, deteriorate or develop fungus, especially in countries with higher temperatures. When it comes to consumers, Mac Cosmetics Inc started offering its customers the possibility of returning empty makeup containers such as an empty lipstick bullet, and when a certain number of containers has been returned, they can redeem it for another product. This way, the company doesn’t only save money, it also motivates customers to buy more as they’ll practically get a product for free. On the other hand, I believe that all stages are essential. For this reason, missing any of such stages could result in a less efficient supply chain.

Strategic Operations-Distribution

Most commercial cosmetic brands tend to sell their products through different channels of distribution such as department stores, supermarkets and pharmacy & drug stores. While on the other hand, sophisticated brands only sell their merchandise through their own website and or at their departmental location. These luxury brands are most exposed to be counterfeited by smugglers that make use of their online logos and watermarks of receipts to easily replicate them for their own purposes. It has been reported that sailing of counterfeit beauty products from China is highly facilitated by heavy internet advertising and online sales. Ecommerce sites such as Amazon, Walmart, and eBay contribute to the thriving of counterfeiters online and make it hard to enforce anticounterfeit regulations. For instance, Amazon site accounts for over a third of online cosmetics sales in the US, which poses a high health risk to consumers (Bian & Moutinho, 2011). Customers are not able to distinguish substandard products because they look like the COUNTERFEIT COSMETICS 8

exact copy of the brand name items. Marketing of fake products as genuine one violates trademarks and also infringes on copyrights. Counterfeits cause harm to both genuine brands and the consumers; to firms, they cause economic and reputation damage.

Problems Faced by the Industry

As stated before, counterfeiting is one of the main issues the cosmetic industry in the United States is constantly facing. This is in fact an international matter, since most of these illegal products come from different parts of the world, especially from China. Industries across the world lose billions of dollars annually due to counterfeiters. In the last decade, the market of the counterfeit product has greatly grown due to the complexity and illicit nature of the market. Operators of counterfeit beauty products maximize their benefits and mainly target the most vulnerable countries, especially the less economic states in Asia and Africa. This cost impact on the global economy and, in particular, the victim country in different ways. The most common impact is that industries that are in direct competition with counterfeiters lose sales. In addition, counterfeiters may flood the market hence creating the barriers for genuine producers to access the market.

Countries suffer both tangible and intangible losses because foreign investors refuse to manufacture their products in countries implicated in counterfeiting because they are not confident that their intellectual property rights will be safeguarded (OECD 2012). Therefore, such countries lose foreign knowledge as well as direct foreign investment. Again, if many products from such countries gain a reputation for poor quality, the country suffers from export losses for genuine products. Increase counterfeit in the global market also discourages innovation and it discourages genuine investors from investing their resources in new products. Fake cosmetics products are usually sold through secret channels, and operators do not pay taxes hence resulting in financial losses to a country’s economy.

Customers who purchase counterfeit products and use them thinking they are authentic tend to form a poor opinion of the authentic products. Other risks associated with fake products include health risks on users, economic loss, loss of public funds, and intensified criminal activities. International Chamber of Commerce statistics shows that companies lose an estimate of 12 billion dollars every year due to counterfeit products despite the numerous efforts to curb the issue.

Counterfeits beauty products are the most relevant challenge of the genuine brand in the cosmetic industry. It acts as a hidden competitor of luxury and original brands. Brands are negatively affected by the increasing proliferation of counterfeit cosmetics in the market. This is because fake cosmetic products bear a trademark that is similar to the original brand. In modern society, product protection in digital marketing is challenging, and therefore, customers unknowingly purchase fake products to support a brand (Bian & Moutinho, 2011). Once customers discover that a product is fake, they tend to warn friends and family and stop spending money on that brand. Most consumers do not have the ability to identify the origin of a product or the genuineness of the ingredients used. Also, about 80 percent of counterfeiters victims COUNTERFEIT COSMETICS 9 believe that it is the brand themselves that is not doing more to protect them from threats. Researchers state that consumers' behavior is driven by perception, which acts as the basis for purchasing decisions. Perception is the grand image or how the customers view a brand.

Research has revealed that customers knowingly purchase counterfeit beauty products despite them being aware of the potential consequence they pose on health and loss of profits to the manufacturers (Bian & Moutinho, 2011). A recent study shows that 70 percent of fake product consumers believe that the counterfeiters' products do not affect the value and status of original brands (Bian & Moutinho, 2011). The increasing demand for counterfeit products by the consumer remains to be one of the reasons why counterfeits are widely spreading. Customers also believe that fake cosmetics are worth the money they pay for them because they are a low- grade version of the original products. There are many TV shows and series that promote awareness about fake beauty products; I personally watched the series called Broken on the Netflix platform. There was a particular episode explaining that the demand for counterfeit beauty products initially developed from the demand increases. The episode explained that fake cosmetics are high in dangerous and toxic substances for the skin. In addition, they can become so harmful that they can cause skin disorders such as dermatitis, allergies, eye infections or blemishes. Fake cosmetics, unlike original ones, are not subject to the strict sanitary controls required by law. Therefore, they lack any sanitary registration number. The episode emphasized that such cosmetics have neither been tested before marketing, nor are they controlled before, during and after the production process. The documentary also explains how the police in both the United States and China cannot properly remove all counterfeit products from websites and other markets. There is only one solution and it is just a matter of responsibility. Consumers should be more conscious when buying cosmetics since they are exposed to severe health conditions. Another aspect that caught my attention was the transformation that the cosmetic industry has undergone in just a few years and how the figure of influencers and social media have completely changed the communication between products and the way of reaching potential customers.

Careers Related to Cosmetic Industry

There are many careers related to the cosmetic industry; if someone is passionate about beauty products then becoming a chemist would be an option. Many people opt to study cosmetic chemistry, which is the science that generates new cosmetics. Basically, cosmetic chemists develop improved, safer and novel cosmetic products for the public to use. These professionals can work on projects such as creating a moisturizer that does not clog the pores of the skin, a blush with a softer texture or a mixture of fragrances that use a new perfume or cologne.

All cosmetic chemists hold at least a bachelor's degree in chemistry, biochemistry, chemical engineering, or a related field. Many of these professionals, especially academic or senior researchers, have a master's or doctorate in cosmetic science. Students typically specialize in a specific area related to cosmetics at a graduate school, such as the use of polymers and colors, emulsions, and humectants in products such as soaps, moisturizers, lipsticks, and lip balm. According to Zippia “The Career Expert”, the national average salary for a Cosmetic Chemist in COUNTERFEIT COSMETICS 10

the United States is $62,202 per year or $30 per hour. Those in the bottom 10 percent make under $46,000 a year, and the top 10 percent make over $83,000.

Another position related to the cosmetic industry is becoming an industrial sales manager; in this case, these professionals are in charge of supervising and leading the activities of the sales department. Their job is to coordinate and monitor the activities of all employees. The manager is responsible for maximizing the sales of a company, for which he or she establishes real goals to be pursued with determination to achieve the increase in the income of the corporation. In addition to this, their role is important for the success or failure of a company, since they are fundamental pieces in the achievement of the sales objectives that will drive profits. It is estimated that these professionals earn around $95,000 per year within the United States.

Starting your own cosmetic line could be an entrepreneurial career that definitely applies to the cosmetic industry. Often, creative entrepreneurs decide to exploit their talent by fabricating unique products to sell them and eventually create their own brand. These people end up earning around $43,240 per year when they do it as a side job; while on the other hand, those who dedicate full time to their business, expect earnings of about $70,000 to $150,000 per year.

Most Rewarding Factor

It is nearly impossible to report on everything I learned from this project, but I can say that one of the most rewarding lessons was definitely learning about the tremendous consequences of supporting the clandestine market. It is impressive to know that the value of imported counterfeit products in such a market is worth approximately 750 billion dollars per year, with the United States being one of the hardest-hit countries. Being informed about these illegal activities helps me spread awareness and encourage people to be more responsible when buying not only cheap beauty products but any other suspicious item.

Skills to be Used in the Workplace

Organizational Skills

I believe I have developed various skills during the process of completing this project; I have also put into practice and reinforced some other abilities gained in the past. One of the competencies I reinforced was the organization and planning of a project. I learned to set goals and priorities when starting to write about my chosen topic. I definitely took advantage of my time in a more efficient way to be able to coordinate each step in the research process. The objective behind this skill was learning how to organize my project so that I didn’t miss an essential aspect. The project has been a challenging task for me, since proposing a topic and making sure it is coherent in its entirety, having “all ends tied” is not easy. However, being able to experience a true involvement in the research really enhanced my learning experience. COUNTERFEIT COSMETICS 11

The advantage of this ability in the workplace is that it eliminates unnecessary inefficiency and would definitely enable me to effectively perform my assigned tasks. It is an important skill that will help me promote the overall goals of both my job position and profession. It is also important to become an organized individual and show productivity while performing job duties, this could influence positively on how employers would recommend me to other entities.

Personal Skills

I also developed personal skills by focusing my project in an international issue. Thinking globally allowed me to see the cosmetic industry in the global aspect; I was able to identify the interdependence of the different structures of the organization and how changes can affect such an entity. This skill is essential to understand the relationships between individual business and industry, the community and the implications of politics, social and economic relations. I also practiced integrity and professional honesty by choosing informative resources wisely and giving credit to the authors when making use of sources. I also learned to be patient and realistic by understanding that not all outcomes are perfect; some information I wanted to report about was restricted for security purposes. This also applies in the workplace; being able to respect the privacy of an organization and all employees is vital so that relationships within the company flow correctly.

Political and Cultural Knowledge

Embarking on this project taught me that the business market moves the world; it gives people the opportunity to learn about other areas and is directly related to finance and international relations; allowing me to acquire a complete knowledge of the commercial sector in which I would be happy to work in the future. Researching on the relationship between China and the United States, opened my eyes to discover the different business opportunities available in the United States and abroad; having in mind the importance of building international networking. Also, an important factor I learned is that owning an import/export business, will definitely increase the possibilities of relationship between one country and the world.

Decision Making

Among all skills I developed throughout the process of this project, the following on the list is the ability to make decisions. During my research, I noticed many of the suppliers are from China, thus they tend to fabricate these products and ship them to other countries, in this case to the United States. It is known that suppliers in China do not really make use of counterfeit cosmetics, their only purpose is to sell without consuming. Many of the people involved in selling counterfeit beauty products were suddenly arrested and ended up losing all products which were probably their main source of income. Smugglers ignore the risks of selling illegal products; they do not care about other people’s health nor they care about the country’s economy. If people were to think about their decisions before acting, we would probably deal with less social issues. What a reseller should consider in this case is to first make good research about the product he or she is interested in selling, then get to know the supplier and if applicable COUNTERFEIT COSMETICS 12

think about traveling to the country of production and meet the manufacturer in person. Thinking critically is the first step to make the right decision, and it is a skill that should be developed in order to experience success in the workplace.

Negotiation

Researching about the cosmetic industry taught me about negotiation within this sector. I first learned to focus on evaluating the beauty industry. When entering such an industry, the first step is to analyze competition; existing competitors could generate scenarios that minimize the profitability of an emerging business. Given this, entering players should build relationships with their customers; in addition, international ties can be strengthened, taking into account that consumers are looking for a well-known brand. This means, cosmetic lines are encouraged to think globally in order to gain popularity among their target market. Also, being able to negotiate with clients is an advantage considering that they have great power. Specifically, with prices which can be adjusted according to demand. It could also be a gamble, since the company may not reach the goal set due to an unforeseen demand. It is also important to know how to negotiate with suppliers so that changes in their prices are achieved. Sometimes, the stronger suppliers manage to influence prices through acts of manipulation in the national and international market. This due to centralized processes and a limitation in supplies.

Entrepreneurial Purpose

Knowing more about the beauty industry motivated me to consider starting my own cosmetic line here in the U.S. Reading about organic beauty products inspired me to focus my business idea on ethics, respect and social responsibility by only selling natural and cruelty free beauty products. As I researched, the global cosmetics market is focused on innovation based on current consumer trends and their concern for health and well-being; concepts linked to natural, clean, vegetable, and sustainable products. The natural cosmetics market offers the opportunity to propose a business model that respects our planet in all its magnitude, taking care of our health. In fact, major brands in the cosmetic sector are increasingly linked to concepts of sustainability and social responsibility. Thinking about a natural cosmetics business is an opportunity to contribute to a fairer and more sustainable world.

Experiences Related to Academic Program

Economic Impact on Genuine Firms

During the research process of my project I found many factors that relate to my academic learning during this year in the specialized MBA program. One of them is the economic harm in the marketing aspect of firms producing authentic products, since it is increasing greatly today. Firms invest a large number of resources in advertising their beauty products and services and developing a good reputation. Perfume, appearance, texture and absorption are differentiating factors between cosmetic products, but also the experience or memories they evoke. In addition, COUNTERFEIT COSMETICS 13

extrinsic characteristics such as price, packaging, practicality, design or claims are also elements that influence when choosing one product or another on the shelf All these activities are conducted because it is a crucial element in today's marketing economy. Primarily the impact of counterfeiters depends on whether the consumers are convinced that the owner of the trademark produces fake products (Fink et al., 2016). For many beauty products, there is not sufficient information for the consumers to establish the quality of the potential purchase. Therefore, companies packaging attaches trademarks because it acts as a guarantee that a particular product is from their preferred producer.

Trademark contains important information because it reduces expenses of searching and ascertaining for a particular quality of a product (Fink et al., 2016). It also enables high-quality producers to differentiate themselves in the market. Counterfeit products compete unfairly with genuine products in the market resulting in loss of profits, diminishing the incentive to invest, and employee layoff. Legitimate cosmetic producing brands are also affected because they lose the ability to collect premiums of branded goods, which results in diminishing innovations as brand owners are reluctant to invest in creative products.

Counterfeiters use forge firms’ trademarks, logos, and designs to produce a product that is closely identical to the original and confuse consumers. In deception counterfeiters, customers believe that they are purchasing legit products. Customers who fall victim later realize that the fake beauty product value is less than the price they paid for and may tend to avoid that particular company's products. In other cases, there are customers that are able to differentiate quality products from non-quality products but end up buying counterfeits items knowingly (Fink et al., 2016). It is common when purchasing status cosmetics products that display manufacturers' names convey a high relative standing in society. Counterfeit of status tend to reduce the prestige value of the original products. The producers of luxury beauty products and consumers are highly impacted by the abundance of counterfeit products as they lose status value.

Illegal Employment in the Illegal Market

It is argued that counterfeit products business creates employment for people involved in the distribution chain from production supply until they reach consumers. Illegal employment mainly offered to non-skilled personnel of underage children. Some employees are involved in the trafficking of the products to the market. Counterfeit cosmetics production also provides jobs to wholesalers and producers who play a vital role in the supply chain. Most producers in China have agents overseas in destination countries with great political and market connections. In countries such as China, with a high population, workers are readily available at a very low cost. The availability of cheap labor has helped to create the competitiveness of imports of beauty products from China to the United States and the entire the world.

Counterfeiters earn hefty profit-making the illegal business more profitable than the original production. This explains why China has the largest source of illegal cosmetic products globally. However, counterfeit products' market impacts lead to loss of genuine employment. Counterfeiting has resulted in an immeasurable impact on the rate of employment in the US and many other countries across the world. Analysis records that the illegal business has coasted an COUNTERFEIT COSMETICS 14 estimate of 2.5 million jobs globally, in which 750,000 jobs were located in the U.S. As counterfeit products continue to grow, more people will continue to lose their jobs in the U.S. and around the globe. The end of illegal jobs in the counterfeit market would impact positively to the economy of a country.

Cost of Monitoring and Enforcing Laws Related to Illegal Goods

The counterfeit business also affects the countries where the products are sold in terms of job losses, lost tax revenue, and missed sales opportunities. The governments spend a lot of resources in funding police, investigators, and judicial authorities in enforcing and dealing with counterfeiters (OECD 2012). Counterfeits cosmetics have had disastrous impacts on health safety and are linked to cancer. It has also caused social problems by attracting criminals who derive huge profit from the trade and use it to finance other global crimes.

In 2016, the OECD estimated the value of counterfeit products to be approximately 250 billion dollars per year (OECD, 2019). Statistics also show that counterfeit trade has risen over the last few years, and now its value is 3.3 percent of global trade

As we see, this market is highly invasive across all sectors of the country's economy, especially the finance sector, since there is a huge amount of loses because of the high quantity of money that goes directly into the smugglers business. The illegal business represents a multi-billion- dollar industry that continues to grow day in day out. United States government dedicates a considerably high budget value to secure their borders where tons of goods come in through. Securing national land borders is also vital in preventing illicit products and criminal business activities across America. In the fiscal year 2020, the budget allocated for border security through CBP was as follows: 5 billion dollars was budgeted for the construction of about 200 miles border wall (FY, 2020). 163.6 million dollars was allocated for hiring and equipping additional border patrol officers and staffing US staff personnel to curb illegal activities along the border. The government has also allocated more funds in the procurement of aircraft, surveillance technologies, and maritime vessels to facilitate the detection of southern border common in the trafficking of illegal products.

Potential Solutions

This section was intended to talk about the problems I encountered during the process of completing my project. Being honest, I didn’t find any major issues, and this is mainly because my project was based on research and it didn’t involve any social and or technical interaction. Instead, I wanted to use this space to talk about the potential solutions to the counterfeit issue between China and the U.S.

It is known than more cases of counterfeit make up products flowing from China continue to flood in the U.S. market. These products contain dangerous chemicals and low-quality ingredients, which poses both long-term and short-term detrimental effects on consumers. One of the ways to combat counterfeit beauty products is by educating consumers on the harmful effects of such products. Some consumers consider it okay to purchase counterfeit goods while others buy them unknowingly. COUNTERFEIT COSMETICS 15

Authorities should alert consumers on the dangers associate with buying fake products. Consumers should be informed that the carcinogens contained in the fake makeups are dangerous and may cause toxicity to internal organs such as kidneys (Alğın Yapar, 2017). Researchers have also revealed that some products contain potential infection-causing bacteria that can cause burning or scarring of the users' skin. In addition, the products are produced in unhygienic laboratories, which lead to increased contamination of the products reaching the market.

Through the following simple steps, people can recognize if a beauty product is fake. The key is in the price, marketing, information and packaging as well as in the characteristics of the product itself.

Price: It is essential to detect whether a product is fake or not. Be wary of any product that has a very striking discount.

Marketing: Cosmetics of this type are usually marketed at unauthorized points of sale such as unauthorized websites or street vendors.

Information and packaging: They usually have differences in packaging from the original product. The clue to recognize them is usually the typeface, color, etc. What is most striking is that, many times, they are not usually packaged nor do they usually contain information about their elaboration and manufacturing batch.

Features: When people open a fake cosmetic, they find the unpleasant surprise that neither the color nor the smell of the cosmetic is the original. This means that in addition to being a health risk, its effectiveness is nil.

Consumers should be educated about the potential infections likely to occur around delicate organs such as eye infections. Apart from health effects, consumers ought to be informed on the social and economic effects associated with the counterfeit market. For instance, counterfeit items causes loss of jobs, the collapse of genuine companies, and loss of revenue. Such information could be published in newspapers, magazines, and social media sites. A campaign against counterfeit make up products could increase knowledge among civilians and help to curb the increasing effects of this illegal industry.

Individual companies and the entire cosmetic industry also have an active role in combating counterfeit products in the market. Firms should ensure that they protect their products in various ways, such as researching and implementation technical anticounterfeit measures, including security devices, smart packaging, and watermark (Kim & Kim, 2005). The management team should ensure that the strategic information is not leaked to the public by establishing a tough rule and educating employees on confidentiality principles data protection. The cosmetic industry must cooperate and share information among all stakeholders, law-making bodies, and enforcement agencies.

What can small and big cosmetic companies do? COUNTERFEIT COSMETICS 16

According to Beauty Business Journal, manufacturers of cosmetic and health products face a serious problem. As mentioned before, due to the nature of the products, it is impossible to distinguish between real and fake only by appearance, so in general, the only way to identify a fake product is by paying attention to packaging, which can sometimes look almost like the real item. However, some consumers are willing to overlook slight differences in packaging. Usually the most distinctive feature between counterfeits and genuine product is the price. But even here, criminals have gotten smarter, often dropping the price below recommended retail price to be attractive, but not enough to raise suspicions.

Bigger brands obviously have more resources at their disposal to deal with counterfeiting incidents. MAC is one of the world's most counterfeited brands, and its parent company, the Estée Lauder Global Security division, is at the forefront of fighting the illegal sale and distribution of counterfeit products, having confiscated more than 2.6 million makeup items in 2016. (Suiters 2017).

Online marketplace sites, such as eBay, are using strong detection, enforcement tools, and relationships with brand owners, retailers, and law enforcement agencies to combat counterfeiters and present customers with a reliable shopping experience. Many of the counterfeit products originate from China, and producers may be nearly impossible to trace, but the technology could be part of a solution. Code reader and radio frequency identification are widely used in China's pharmaceutical, alcohol and food industries to track products from the factory to the consumer. Along with blockchain, a digital ID or code is scanned every time the product changes hands.

Counterfeit beauty products, just like other forms of counterfeit products, is an international crime that could effectively be dealt with through cooperation of world agencies and organizations. The world governments have the mandate to protect the rights of ownership of intellectual property, and therefore China and the U.S. should work together to stop the issue. China's leniency in curbing the production of counterfeit products has made it difficult for countries to overcome the effects of the black market. The federal agencies responsible for American borders such as the Immigration and Customs Enforcement's (ICE) and Customs and Border Protection (CBP) should ensure no criminal activities are conducted at the US borders. They also have the responsibility to prevent cosmetic products that violate the US copyrights and registered trademarks from access to the US market (Homeland Security, 2020).

Multi-brand online stores like Amazon, are just platforms where the seller is able to be in contact with the buyer, these brands do not directly sell the products, anyone can create a free account and start selling their products, they can create fictitious names, false comments, false locations and anything you can imagine. When it comes to products purchased online, users consider these to be interesting offers. As I have said, buying fake cosmetics through e-commerce is easily avoidable, using only the official online stores of reputable brands and, when you see something suspicious just do not buy it. Try not to fall for discounts; stop buying those products that offer more attractive discounts than usual.

Since the market of the counterfeit product is intensified by e-commerce, congress should draft a law that creates a modernized e-commerce enforcement framework and also reexamine the legal COUNTERFEIT COSMETICS 17

framework regarding nonresidential importers. The secret services investigator should intensify its operations to safeguard the U.S. financial system by enforcing counterfeit laws protecting communities from substandard products. The agency applies improved technologies and partners with both the private and public sectors throughout the country and across the world. The market network for counterfeit makeup products is multidimensional detrimental to the U.S. economy; unless it is reduced, the country will continually ensure health risks and economic damage.

Ongoing surveillance and working with government agencies appear to be the most effective defense against scammers, so far. But as long as some consumers are prepared to buy a 'brand- name' product for a third of the retail price at a market stall or any other unreliable source, there will always be a market for counterfeiters. It is a global problem that needs collective solutions. Counterfeiting can never be completely eliminated, but it can be discouraged through law, technology, and culturally sensitive tactics.

What Would be Done Differently

If I had the project to do over again, I would probably add many factors. One of them is incorporating real surveys to my research; this is an idea I had since the beginning of the project. I thought about going to any mall or even to the school campus and see if I was able to interview people on their cosmetic preferences. I wanted to get their reactions and a valid justification for their preference. One of the purposes of this idea was to see how many people actually buy fake beauty products. At the end I was not able to do it due to the COVID-19 pandemic; I could have done it through social media but I wouldn’t be able to notice a reaction and not many people are willing or committed to participate virtually.

If I could do the project again, I would have started brainstorming two months ago and probably pay more attention to timeliene so that I had time to proofread all over again and make sure my paper is out of errors. I could have also added many more visuals to make the paper look fresher and informative. Also, I would have liked the idea of experiencing this project abroad; learning how to negotiate from a different perspective and adding more value to my project.

GBM 685 Experience & Overall Education

The GBM 685 experience had a great impact on my education, it definitely benefited me in many ways; both educational and personal. This last class reinforced all the knowledge I obtained throughout the past year; It motivated me to show and use all the concepts I learned in the MBA program. It has been without a doubt one of the best projects that I have had to carry out during my career as a student. I feel lucky to have been part of this class and although it was a very different course because there were no lectures at all. I am amazed at everything I learned through the process. Among all lessons learned, something essential was the importance of being responsible. Since supervision during this experience was minimal, it was perhaps possible to falter in the process, but that didn’t happen, on the contrary I took the right path and managed to finish my work. COUNTERFEIT COSMETICS 18

This final experience project enhanced my capacity to think analytically. It helped me find clear and precise proposals for the solution of certain problems; I learned to recognize the specific needs to develop new or alternative responses. The process gave the impression of a sort of training and a mix of all courses taken during the MBA program.

Overall GBM 685 Evaluation

If I were to rate my GBM 685 experience, I would say a B reflects the overall experience, taking into account the work done and the time dedicated. I personally believe this was a challenging but rewarding experience; being able to participate in a project of this kind has been very enriching and interesting since the beginning. As I mentioned before, due to the pandemic I was not able to incorporate some other important information I had planned, but other than that I am really happy I got the opportunity to experience this fleeting odyssey. Everything flowed just nicely since the beginning; directions were provided in the most perfect way, all instructions were clear and they were simple to follow. I liked how we were provided with a guideline to follow while writing our paper; it really helped to stay organized. The deadlines for deliverables were fair and contributed to the process of brainstorming for my final paper. COUNTERFEIT COSMETICS 19

References

Alğın Yapar, E. (2017). Intellectual Property and Patent in Cosmetics.

Bian, X., & Moutinho, L. (2011). Counterfeits and branded products: effects of counterfeit

ownership. Journal of Product & Brand Management.

Homeland Security (2020). Combating Trafficking in Counterfeit and Pirated Goods Report to

the President of the United States. Rtrived:

Fink, C., Maskus, K. E., & Qian, Y. (2016). The economic effects of counterfeiting and piracy:

A review and implications for developing countries. The World Bank.

FY (2020). The fiscal Year 2020 Budget in Brief.

Kim, J., & Kim, H. (2005). Anti-counterfeiting solution employing mobile RFID environment.

World Academy of Science, Engineering and Technology.

OECD (2019). Global trade in fake goods worth nearly half a trillion dollars a year - OECD &

EUIPO.

OECD (2012). The Economic Impact of Counterfeiting.

Statista (2020). Cosmetic USA. Retrived: