The automotive industry is just one of several experiencing an inexplicable surge in parts piracy. Severely bogus and often times completely sub-par and unsafe, many products are finding their way into the hands of unknowing consumers whose lives are suddenly being put at risk. The almighty dollar outweighs consumer safety and public health for those involved in counterfeiting and pirating fake products. And these manufacturers, most of which are in China, will continue to make money as long as there are suppliers falling for the ‘offer you can’t refuse’ line.
Many experts say that counterfeiting is considered one of the greatest crimes of the 21st century and its putting many industries to shame.
Counterfeiters will dupe just about any brand name that exists — from watches and handbags to apparel and books, from tennis shoes and oil filters to pharmaceuticals and yes, even entire vehicles. “It’s more profitable than narcotics,” says attorney Harley Lewin. “And, your partners won’t kill you.” Lewin serves as chairman for law firm Greenberg Traurig’s Trademarks and Global Brand Strategies of Intellectual Property department. He represents companies in the retail sector, including various automotive clients, engaging in anti-counterfeiting efforts. With almost three decades of experience, he has seen his fair share of damage — with legitimate manufacturers carrying the heaviest burden.
Shrinking profit margins, increased warranty costs, financial investments in intellectual property protection and brand damage aren’t the only issues legitimate parts suppliers are dealing with due to parts counterfeiting. Paul Foley, vice president of MEMA’s (Motor & Equipment Manufacturers Association) Automotive Aftermarket Suppliers Association, doesn’t hesitate when stressing that consumer safety has become of utmost concern. “This is not a victimless crime. There are several cases of tires and windshields and brakes that have been counterfeited with damaging, and sometimes fatal, results. Especially in some other countries, where laws are less discriminating, you really get some flagrant cases.”
In most situations, these products look almost identical to the original but are usually full of error, almost always inferior and hardly meet the appropriate standards. An MSNBC report says GM has come across brake linings made of wood chips and cardboard that could burst into flames with heavy use. It was noted that a mother and her child in Saudi Arabia died due to bogus brakes. GM also found coolant that could eat through a car’s radiator in 48 hours. Counterfeit oil filters made in Taiwan had old rags and perforated food cans as their filtering elements. Fully assembled counterfeit engines that were being sold as originals had only a handful of new components. There have been gasoline filters without check valves and gas caps that leaked in rollovers.
GM raided a facility in September 2001 that was producing several branded glass windshields. It was being exported all over the world and did not contain the shatterproof safety elements that protect passengers in the event of an accident.
Bogus business ventures
So, how did this dilemma become a dilemma? Dan Chow, law professor at Ohio State University College of Law and anti-counterfeiting advocate and expert, thinks that the dramatic increase in commercial piracy is directly linked to the great surge of foreign direct investment (FDI), where companies are setting up joint ventures and subsidiaries overseas, as well as investing great resources in technology and research transfers. “Globalization was inevitable — you can’t stop it and most companies don’t feel they have a choice.” In order to be competitive in this marketplace, among others, companies have been forced to take advantage of economies of scale. But, as Chow puts it, this “globalization and the increase in FDI has given people unprecedented access to something they wouldn’t have gotten their hands on generally.”
This globalization is ultimately what has led to product diversion, says Timothy Trainer, president of the International Anti-Counterfeiting Coalition. Product diversion happens when a domestic organization puts its technology (and trust) in an overseas manufacturer, which does exactly what they are asked and then some, producing additional inventory to brand and sell through underground channels.
The problem with this is that the counterfeiter does not make it his or her interest to be concerned with good quality materials, quality control, research and development or advertising and marketing. They simply make money by stealing the identity of genuine manufacturers.
Seong Rhee, vice president of technology and sales for Honeywell Friction Materials, says there was a case in which some manufacturers actually purchased boxes of their Bendix branded brake pads, opened the boxes and replaced half the product with phonies. This enabled the counterfeiter to sell twice as much product and make more money.
Explosive growth
The World Customs Organization estimated total trade in all counterfeit products exceeded 6 percent of global trade last year, amounting to a heaping $500 billion.
Chow says that U.S. Customs reported the seizure of $94 million total in counterfeit products in 2003. And since it is likely that they only inspect a fraction of the items coming into the United States, this number, in reality, is just a sliver of what gets into our economy. “If the $94 million is only 10 percent of what really should be seized,” speculates Chow, “then it’s a billion dollar a year problem.” Most information suggests, though, that it’s much larger than that.
Brian Duggan, director of International Programs at MEMA, believes that the dearth of seizures is “out of proportion to the seriousness of the problem.” But Custom’s main focus is not to stop the sale of counterfeit goods. “Their top priority is preventing terrorism — they’re doing what they are supposed to,” explains Chow. He thinks there are other means needed to bring this growing sham to a grinding halt.
Principle manufacturing centers include Taiwan, Korea and China, with the Middle East serving as a distribution hub for counterfeit products from the Far East, Europe and North America. China, however, seems to have become the “Godfather” of counterfeiting — and is the mastermind behind the crisis. Most of its manufacturers have little qualms about garnering profits through completely illegitimate channels.
Of the $94 million in seized product, more than 80 percent can be attributed to China. Lewin says that based on his experience, more than 15-20 percent of China’s gross national income is derived from the sale of counterfeit goods. Some speculate that up to 30 percent of all goods sold in China are counterfeit. The World Trade Organization estimated that $16 billion worth of counterfeit goods were produced in China — and that was seven years ago; that number is sure to have grown since then. It has been said that in the Chinese city of Chengdu, 80 percent of automotive parts from 30 separate outlets were counterfeit, according to a GM report.
In September 2003, Aftermarket Business reported that counterfeiting of automotive parts was costing the industry $12 billion. Duggan estimates that the U.S. aftermarket eats up a quarter of that. “As Chinese manufacturers build their capacity, they have become more proficient at counterfeiting parts…and they are ripping people off up and down the supply chain.”
And, based on several interviews, it seems relatively easy to do so. Duggan told us that some counterfeiters will produce a large quantity of unbranded product and then ship it to the United States, where it is branded and boxed. “They have partners in the U.S. who are willing to create boxes, labels and other significant trademark logos and emblems.” These printers brand the items as if they were real and then try to sell stock to distributors. And distributors seem to be taking the bait. Products that are hard to identify pose the biggest problem, says Lewin. “When you have a starter, rotor, wiring harness or starter motor, any are subject to be unlawfully made because there isn’t much to identify them — it may only be the casing or the boxes they’re coming in.”
But for those products that do require extensive identification, model numbers and product SKUs aren’t as hard to obtain as one might think. Lewin describes a case he worked on in which an India-based counterfeiter decoded his client’s internal computer system, which gave them complete access to product numbers, codes and details. “This counterfeiter suddenly had diagrams and warning labels and we had to move quickly.”
Often times, the counterfeiter will manufacture and stock a slew of unbranded products in their inventory. Chow, who recently testified before the Senate on behalf of Procter & Gamble, recalls a case where a parts maker would wait until they received an order before branding and immediately shipping the product out. So, even though they had a large inventory of counterfeit products, it wasn’t branded and therefore, wasn’t considered illegal in the eyes of Chinese law officials.
Dan Chow explains that there seems to be a tolerance for counterfeiting among the general population and law enforcement in China. “There is an obvious economic benefit that helps certain regions [in China] so there is a greater tolerance for it than in the U.S. Plus, what’s being counterfeited and pirated is often times foreign brands.” He further explains that this helps separate the Chinese manufacturers from any safety issues that may arise: basically, what they don’t know won’t hurt them. This is extremely detrimental for those purchasing certain products — like pharmaceuticals and automotive parts — since the use of inferior products can have devastating results.
Though there currently seems to be far more cases where illegitimate business people get away with counterfeiting, there are instances where people do get caught. Trainer also recently testified before the U.S. Senate Committee on the Judiciary and reported that an auto company’s raid of a Chinese auto parts factory uncovered 7,000 sets of counterfeit brake pads, which were intended for export to Egypt. This one raid represented almost $330,000 in potential losses. Another auto industry member reported raids that resulted in the seizure of counterfeit windshields and suspension control arms valued at nearly $4 million.
Ford said in a February 2004 Forbes article that counterfeiting costs them over $2 billion in sales annually. They describe one incident in which more than 7,000 sets of counterfeit brake pads, each stamped with the infamous blue Ford oval, were confiscated after a factory raid in China. The OEM says sophisticated counterfeit manufacturers were using computer scanners to replicate their trademark labels.
A presentation prepared by Tom Strohm, former general director of marketing for GM’s Service and Parts Operation, states that GM has seized or destroyed $180 million worth of counterfeit products, all part of more than 475 raids conducted by the company, governments and local police forces.
Many think that China’s induction into the World Trade Organization will help calm the counterfeiting waters, but some disagree. Law professor Chow explains why: “Under China’s pre-WTO legal regime, only state trading companies were able to export product. If you were a counterfeiter, you had to find a state trading company to transport your goods. Now, China has eliminated this monopoly so anyone can export products … In the short term, this will likely make the problem worse.”
Lackluster laws
All the raids that have been initiated don’t equate to much when it comes to criminal or even civil prosecution. Recently, a group of European and Japanese automakers, including Audi, BMW, Daimler-Chrysler, Mitsubishi, Toyota and Volvo, won a judgment against a company producing phony windshields bearing various automotive brand names. A court fined the manufacturer, Jieyang Kentong Automobile Glass, $12,000 — which is actually considered a substantial fine for piracy in China. This is hardly reason to celebrate. The company had been raided three times in two and a half years and was allowed to continue making windshields.
Gao Feng, the head of China’s anti-counterfeiting police unit, was quoted by CBS News as saying, “We don’t want to ignore counterfeiting, but for those foreign companies, when they enter the Chinese market, I’m afraid they should also pay some cost due to the realities of China.” This jaded attitude is at the core of what is driving counterfeiters to continue making phonies.
Rhee of Honeywell says that any legal action taken in China is very time-consuming, frustrating and not very fruitful. “These are usually relatively small operations, and by the time you can take legal action, they shut down their operation, move to another location and change their name.”
Chow explains, “On the enforcement side, it’s easy to bring about action.” Manufacturers usually work with private investigators and other officials until they have proof their product is being counterfeited. At that point, they hand the case over to Chinese law enforcement and it’s what happens here — or the lack thereof — that creates this never-ending frenzy. “The penalty isn’t strong enough. There is this incredible surge in enforcement activity, but it’s not resulting in deterrence. [Counterfeiters] are not afraid of what’s going on,” Chow adds. Plus, he explains, the relationship between the police and counterfeiters is nothing short of friendly. “I remember going on a raid one time in which the counterfeiter and the local enforcement officials seemed to know each other very well. He said hello. He actually served tea to us when we went and seized the product and carted it off. Of course, I was outraged at the time,” Chow told CBS News during another interview.
Trainer adds to this, explaining that there are instances when a factory has been raided several times but the equipment is neither seized nor destroyed so counterfeiters are able to resume business as usual almost immediately. “Even when someone is sentenced to jail, it’s hard to confirm if they ever serve time. This is part of the overall dialogue that we are encouraging to take place between the U.S. and China governments.”
Links to organized crime
Trainer says there are just too many loopholes in the system that are facilitating the problem’s growth. “First of all, you have very imaginative, creative and sophisticated counterfeiters operating in the world, and they’ve learned how to circumvent the law.” It’s a very profitable business for anyone involved in criminal activity.
Brian Duggan says, “At the root of counterfeiting is large scale organized crime. This is not a legitimate business, and most people involved are trying to generate money for other illegal activity. It may be difficult to document, but counterfeiting truly has much larger implications.”
Business Writer Paul Geitner backed this up when he reported in a recent AP article that terror groups are now turning to counterfeit goods to finance their operations. Interpol Secretary General Ronald Noble cited the seizure of $1.2 million worth of counterfeit German brake pads and shock absorbers in Lebanon last year resulted in a subsequent inquiry that suggested the profits were destined to support a terrorist organization. In another situation, Danish Customs intercepted containers of toiletries and shampoo “allegedly sent by members of Al-Qaida.” Though some may disagree as to whether or not terrorism is driving the upward trend in counterfeiting, there is no argument that this kind of activity works its way into some really distasteful hands at the end of the day, says Lewin, who adds that counterfeiting creates an underground economy that everyone pays for. “Legitimate tax payers end up sharing a large portion of the burden.”
Dan Chow suggests that because counterfeiting is such a highly lucrative activity, any organized crime, including terrorist organizations, could be drawn to it. “What’s driving the industry is profit. I don’t think there is a systematic link to suggest that terrorism is making the industry worse.”
But Interpol Secretary General Ronald Noble says, “there’s evidence and it’s increasing.”
Can we curb counterfeiting?
One such law that may help create stronger provisions in international agreements is called the “Stop Counterfeiting in Manufactured Goods Act.” Introduced by U.S. Representative Joe Knollenberg, this bill, if passed, would allow those who participate in counterfeiting in any way, either by creating labels, manufacturing, trafficking or distributing product, to face criminal or civil prosecution, or in some cases, both. It would also provide the mandatory destruction of machinery, tooling and supplies used to produce counterfeit goods. Trainer says that they are trying to amend the bill so that goods can also be seized even in instances where there isn’t enough evidence to find a company or person guilty. He explains that many times, even though counterfeit goods have been discovered, there is not enough evidence to find the person or company liable. They want to be able to confiscate everything — products,
tools and machines — to ensure that the manufacturer can’t continue making bogus parts.
Trainer believes that once stronger domestic criminal remedies exist, it will drive the U.S. to seek similar agreements with its international trading partners.
MEMA is also working hard to help eliminate the issue and recently organized a conference in Dearborn, Mich. with speakers from the Department of Homeland Security, FBI (Justice Department) and Immigrations and Customs Enforcement. (This issue closed before the actual event occurred.) Their goal is to help increase training and resources, as well as educate the industry regarding the seriousness of the problem. Most experts said that there are clearly some distributors and retailers in the aftermarket that are knowingly participating in the sales of counterfeit goods and will continue to do so until everyone in the industry addresses the magnitude of this grotesquely large problem.
For honest distributors and jobbers, MEMA says helping to stop the problem is as simple as looking for things out of the ordinary. If you buy a branded product from someone outside your normal channel, double check their background and be sure they are a legitimate supplier. If they are not, notify the original manufacturer and let them investigate the matter. You may also want to notify legal authorities in your jurisdiction. Don’t play the “what I don’t know won’t hurt me” game. Selling counterfeit parts is illegal and could put your business and your customers at risk.
Lewin describes a case where a New York-based supplier responded to a procurement request from the Turkish government. “This guy created everything from phony letterhead to phony product packaging to make it look like he was buying name brand product,” describes Lewin. After investigators and law enforcement were given a tip, the owner was arrested and faced criminal and civil prosecution. U.S. Customs even filed a lawsuit because the counterfeiter had generated fake documents and forms for shipping internationally. He also spent some time in jail. “He paid a quarter-million dollars in damages and fines,” remarks Lewin. “He’s been out of business for a couple years now and we’re pretty satisfied with the outcome.”
Until the law begins penalizing those involved in counterfeiting, these efforts will continue to equate to millions of lost dollars for major manufacturers. It also “ends up being a cost to distributors, jobbers and consumers because property protection investments now have to be figured into the price of the original product,” says Trainer. And that’s something that surely doesn’t rest easy with most in this very competitive, yet slow growing, industry.
