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Fake Dr. Dre's Beats Headphones Bonanza

By Johan Nylander for CNN | 10/14/2013, 3:57 p.m.
In an attempt to trick customs officials, counterfeiters send fake Beats in two boxes; the outer box, on the right, has a made-up name to hide the real goods. Photo by Johan Nylande/CNN.

SHENZHEN, China (CNN) -- Three weeks ago, hip-hop star Andre Young -- better known as Dr. Dre -- made news as his Beats Electronics line, a maker of premium headphones, was valued at more than $1 billion thanks to an investment from the Carlyle Group.

But the former N.W.A. rapper is not the only one profiting from his headphone line. Across the Pearl River Delta in southern China, counterfeit Beats are flowing out of factories, assembly workshops and shops, attracting businesspeople that sell the headphones on global markets.

A CNN reporter approached wholesale companies about buying in bulk in order to learn how the underground sale of knock-off headphones works. "Business is very good," said a woman, who, with her family, runs a wholesale company selling copied headphones in one of Shenzhen's many mega-malls. "You buy cheap from me, you sell expensive in your home country, we all make a lot of money," she added.

To prove her point, she shows an Excel spread sheet on her laptop listing customers from all over the world: Italy, Denmark, United States, Canada, Dubai, Russia and more. She said she recently sold a large amount of counterfeit Beats by Dr. Dre for $50,000 to a British businessman who sent them to the UK by jet -- which is considerably more expensive than container ship -- and sold them as originals.

While top-line Beats headphones retail for $400, the Shenzhen operators interviewed sell knock-off versions wholesale for $70. "A lot of people are making a lot of money on Beats right now," she said.

Factory owners here have a nose for what's hot and what's not. Nearly 70% of all fake goods -- including DVDs, clothing, and electronics goods -- seized worldwide from 2008-2010 came from China, according to the World Customs Organization.

And looking at the shops in Shenzhen's Huaqiangbei commercial district -- a destination for buying electronics, especially fakes -- Beats by Dr. Dre are definitely hot, prominently displayed next to iPhones, Samsung gear and Nikon cameras. To look at them, some are clearly fakes with poor packaging and logo color schemes that are wildly different from those well-known products.

Rise of high-priced headphones

Behind the shops and inside small rooms around the district, workers in their early 20s can be seen busily assembling counterfeit goods, such as smartphones and iPads. The long corridors are filled with cigarette smoke that drifts out from the tiny workshops as deliverymen rush by with their arms full of electronic components. Everywhere you hear the sound of packing tape being wrapped around cardboard boxes.

The counterfeit boom is fed, these days, by the rise of high-end headphones that Dr. Dre's audio products helped kickstart with the launch of Beats in 2008, analysts say. Just a few years ago, few people would be ready to pay several hundred dollars for a pair of headphones. Now, with celebrities like Lady Gaga, Justin Bieber and P. Diddy putting their names to signature pairs, Beats is the hottest brand for stylish music lovers.