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Last Updated: Friday, 16 March 2007, 00:31 GMT
Fake scotch alarm clouds global success
By Gavin Stamp
Business reporter, BBC News

Glen Highland Green, a bogus Chinese product which purported to be scotch whisky
The industry wants bogus products off the shelves as soon as possible

Scotch whisky firms should be toasting themselves soon with figures set to show they sold a billion bottles overseas last year for the first time since 2001.

The industry is thriving.

Companies such as Diageo - the firm behind Bell's and Johnnie Walker - are investing heavily in production to meet growing global demand and even planning to open new distilleries.

But although it is bullish about its future prospects, the industry is all too aware of one potential cloud on the horizon.

Distillers have been fighting counterfeiters for more than 50 years.

Chinese wealth

The temptation to exploit the industry's unrivalled reputation for quality and brand association by passing off bogus products as being of Scottish origin is nothing new.

But what is worrying is that the battle to protect scotch's reputation from such fraudulent activities is now at its fiercest in two of its most important markets: China and India.

Chinese exports have been expanding at more than 80% a year while the Indian market boasts almost limitless potential for growth despite the fact that high import tariffs currently restrict scotch to a minimal market share.

Chinese model poses with Lamborghini
Growing Chinese wealth is a magnet for firms but also brings problems

But of the 50 counterfeiting cases that lawyers for the trade body the Scotch Whisky Association are pursuing at any one time, many involve either China or India.

The common denominator linking these cases is the rapid economic growth enjoyed by both countries, which has boosted personal wealth and given more people a taste for and the means to acquire a variety of luxury goods, including whisky.

This has, in turn, fuelled a rash of rogue products with seemingly innocent but strictly bogus identities such as Glen Highland Green and Red Scot.

Scottish imagery

Common features of such products, says the Scotch Whisky Association, include "the use of Scottish imagery, what is perceived as a Scottish name, or the use of an age statement on a label suggesting that it is a matured product when it was distilled six weeks ago".

In both these cases, the bottles were quickly identified and removed from sale while their producers were ordered to destroy or relabel stock and subsequently fined.

Leading scotch whisky brands such as Dewar's and Glenfiddich
Every time the consumer buys a bottle which is not genuine, they may be put off Scotch whisky
Campbell Evans, Scotch Whisky Association

Much of this "passing off" is extremely crude, but the industry knows that it has to crack down on it now or inevitably risk it becoming far more sophisticated in the future.

Although the whisky industry's intellectual property is protected under global trading regulations - enforceable by the World Trade Organization (WTO) - it is conscious that this is not always sufficient to ensure prompt action.

With that mind, the industry has been lobbying the Chinese authorities to write specific legal protection for scotch into its domestic law, a move strongly backed by UK ministers.

Should that happen, and the industry says the signs are encouraging, scotch would become the first foreign product in China to be legally denoted as a geographical indication of origin.

This would recognise it can only be made in Scotland and define other key features such as the raw materials used, length of the maturation process and minimum bottling strength.

Speedier enforcement

The significance of this, a decision on which may be imminent, for tackling counterfeiting would be enormous.

"Getting product removed from the market is key," says Campbell Evans, the Scotch Whisky Association's director of government and consumer affairs.

"We can already achieve that but it is a long process and it is a question of making that easier.

"If we get that firmly in legislation, you have got a bit of paper you can say to a court that's what the law says, not just that these are the WTO commitments you must make."

Sales of scotch have grown from virtually nothing to more than 50m ($100m) in the past five years, despite its popularity being largely limited to consumers in Shanghai, Beijing and Guangzhou.

Picture of various malt whiskies
US: 372m
France: 255m
Spain: 240m
South Korea: 155m
Taiwan: 102m
Germany: 59m
China: 45m
Source: SWA - 2005

China is a vital market for scotch if it is to sustain its reputation as a truly global product while the industry says Chinese firms and society in general will also benefit from such a move.

"It can't come too soon," Mr Evans acknowledges.

"This is about protecting the scotch whisky industry and about protecting Chinese consumers and the Chinese government, because every time an illegal bottle is sold, the government loses revenue," he says.

"Every time the consumer buys a bottle which is not genuine, they may be put off scotch whisky."

Indian tax row

Foreign firms have become used to counterfeiting in China, where piracy is rampant and government efforts to tackle trademark rip-offs and other abuses are frequently criticised.

But distillers face a unique situation in India where a punitive tax system is exacerbating the problem: import tariffs are set at 550% compared with 10% in China.

There is now as much fake scotch circulating in India, equivalent to 500,000 cases a year, as legitimate product, a state of affairs that the industry lays at the government's door.

"Scotch is unaffordable and inaccessible to ordinary Indian consumers," says SWA public affairs manager David Williamson.

"But there is demand in the market which drives the grey market."

Man counting rupees
The industry says exorbitant Indian tariffs are fuelling illegal sales

The European Union is soon expected to make a formal complaint to the WTO about India's tariff regime, which it believes is unfair and discriminatory.

This should force a resolution to the long-running dispute within a year and, the industry hopes, provide a platform for reducing counterfeiting and boosting legitimate sales.

"If the tariff came down to a reasonable level, you'd remove the incentive for the grey market," David Williamson says.

"There are benefits there for everyone but the smuggler who, at the moment, has a ready market of people who want to try international brands."

Jobs boost

Efforts to protect scotch from exploitation are also moving up a gear closer to home.

Members of the European Parliament are currently considering proposals to revise the European Union's 18 years old regulations governing spirits, to incorporate a clearer definition of scotch and its unique distilling requirements.

Momentum is also growing behind calls for domestic law to be tightened to ensure the labelling of different whisky categories, such as malts and blends, is consistent and to provide specific protection for regional whisky brands such as Speyside and Islay.

Such action is welcomed by Scottish politicians who believe tackling unfair practices is essential to ensuring the health of the industry and protecting jobs.

"The industry is doing much better than it has been for a generation," says Brian Donohoe, Labour MP for Central Ayshire, home to many of Scotland's leading distilleries.

"In India and China, we are looking at two of the biggest potential markets in the world and at this stage it is important we get that sorted out."

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