Knocking off the counterfeiters

Shortly after one of the world’s largest electronics OEMs moved the manufacturing of a low-cost product to China, someone copied and launched it in the local market. The OEM first learned of the fake when it received service calls from places where it hadn’t marketed the product. The counterfeiter had sold the device under the OEM’s brand with the OEM’s support phone number printed on it.

This is a classic example of the perils of manufacturing in China, says Charlie Barnhart, a consultant with Technology Forecasters, who won’t disclose the name of the OEM. This example also illustrates one of the many ways OEMs learn that their products have been knocked off.

There was a time when electronics were just too complex to be copied, but as engineering expertise spreads worldwide, counterfeit printers, network interface cards and other electronics are joining Gucci bags and Rolex watches as popular knockoffs, according to a recent study, “Managing the Risks of Counterfeiting in the Information Technology Industry.” Conducted by KPMG for the Alliance for Gray Market and Counterfeit Abatement (AGMA), it concludes: “Despite IT products’ sophisticated design and complex manufacturing, counterfeiting is a growing problem. As many as 1 in 10 IT products sold may be counterfeit.… In some specific product cases the percentage of counterfeits may, in fact, be even higher (e.g., network interface cards). Conservatively estimated, this equates to about $100 billion of global IT industry revenue is lost to counterfeiters annually.”

Gary Matuszak, a KPMG consultant who worked on the study, says he was surprised by the magnitude of electronics counterfeiting. “And not just by virtue of our own estimate but others as well. The International Chamber of Commerce, for example, estimates that counterfeit goods of all kinds account for 6 percent of all world trade.”



Matuszak was also surprised to find that 66 percent of all counterfeits seized at the U.S. borders originated in China. Thanks to China, some electronics companies are paying closer attention, Matuszak says. He says larger companies understand the risks and issues better than smaller companies.

AGMA members and others have devised a set of best practices to prevent, detect and stop counterfeiting. Strategies include educating your company and its partners about counterfeiting, assisting and working with government agencies to stop counterfeiting when it’s discovered and using software to anticipate and detect problems.

The first measure is for top executives to take the matter seriously.

“You really need a high level of sponsorship for any programs you launch,” says Nick Tidd, president of the AGMA and vice president of North American channels for 3Com, one of the AGMA’s founding members. He argues that counterfeiting is everyone’s business, not just the supply chain’s. “Companies have to create teams in sales, legal, finance and the supply chain to deal with this.”

The KPMG study notes several ways to mitigate counterfeiting. Among them: use radio frequency identification (RFID) and other producttracking technologies; coordinate with trade groups, international organizations and business partners to respond to counterfeiting; partner with and assist police agencies in detecting and busting counterfeiters; and strengthen contracts with partners to require more and better audits.

3Com now uses holographic labels, which are nearly impossible to replicate, on its products and tells customers to look for them as a sign of authenticity. Tidd says that other companies, notably Hewlett-Packard, also an AGMA member, use RFID tags. HP is also mentioned in the KPMG report for detecting counterfeiting and then working with local authorities in five countries to bust a counterfeit manufacturing ring and several front companies.

New software tools can help. For example, startup New Momentum recently launched hosted software and services for a variety of supply chain functions, including an anti-counterfeiting package. Called predictive market intelligence, it helps companies determine where counterfeiting may have occurred.

Using Web-bot technology, the software accumulates a vast database of both structured and unstructured data related to the supply chain and inventories. Through its analytical parsing technology, it can alert users to places where prices have dropped or inventories have bulged, strong indicators of counterfeit activity. Several AGMA members are among the early adopters of the software.