Fighting fake in the Middle East market

According to several IT vendors, counterfeiting is no longer the nemesis it once was and the channels peddling fake goods are being defeated. But is that really the case? We attempt to shed some light on an industry problem that just refuses to disappear. GITEX Times’ Andrew Seymour separates fact from fiction in the world of fake products.

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By  Andrew Seymour Published  April 19, 2007

|~|fflex200.gif|~|Francois Feuillet, general manager at Lexmark’s Middle East operation.|~|According to several IT vendors, counterfeiting is no longer the nemesis it once was and the channels peddling fake goods are being defeated. But is that really the case? We attempt to shed some light on an industry problem that just refuses to disappear. GITEX Times’ Andrew Seymour separates fact from fiction in the world of fake products. According to several IT vendors, counterfeiting is no longer the nemesis it once was and the channels peddling fake goods are being defeated. So why then did nine out of every 10 respondents to a recent ITP online quick poll claim that counterfeit IT products are more readily available in this region than in the past? We attempt to shed some light on an industry problem that just refuses to disappear. There isn’t a single vendor out there that can afford to take counterfeiting lightly, particularly given the potential economic implications at stake. A reputation that has been built over a period of years can suddenly be destroyed, and profit levels eroded, if a batch of fake goods finds its way into the market. What’s more, every dollar that falls into the hands of the counterfeiters deprives authorised go-to-market channels of additional income. Counterfeiting can massively compromise brand equity and credibility, especially if buyers do not realise they are handling a rogue product. As soon as the item experiences any problems, the possibility of the consumer associating that brand with poor quality immediately increases tremendously. “At the end of the day, if the product goes wrong and the reseller has either got away or is not providing the service, it creates a very bad name for the brand,” said Sumit Kumar, regional manager MENA at networking vendor US Robotics. A study conducted two years ago by auditors KPMG and the Alliance for Grey Market and Counterfeit Abatement (AGMA) estimated that as much as 10% of all technology products sold globally were counterfeit, illustrating the scale of the problem. Translated into value terms, more than US$100 billion of global IT channel revenue is lost to counterfeiters each year. “In the Middle East it is difficult to estimate the size of the problem but we do feel that compared with other regions like Europe it is slightly higher,” admitted Sidney Pereira, consumables product manager at the Middle East arm of imaging and electronics vendor Canon. “We have carried out raids in Saudi, the UAE and Egypt so I guess we have come across this problem in quite a few places. Lebanon is another one as well; it is not restricted to one place.” Anecdotal evidence suggests that counterfeiting is more widespread in the larger Middle East markets where the intricacy of local channels, coupled with the extra resources it takes to efficiently police these environments, makes identifying the perpetrators an arduous task. Ranjit Gurkar, general manager at Brother Gulf, cites Egypt and Saudi as markets where the manufacturer has witnessed a higher percentage of counterfeits. “Egypt is very high,” he revealed. “To a certain extent — and it’s also true about Iran — the problem is at the consumer level. They see the low prices as a bargain until they begin having copy quality problems and request replacements or warranty claims. Only at that stage do they face the music and realise that it is not worthwhile in the long term.” It has to be said that local authorities throughout the region are working increasingly hard — particularly at customs level — to get a handle on the problem, but some markets are confronted with a tougher task than others. Dubai’s status as a global distribution centre, for example, places intense pressure on the local customs authorities, especially when it comes to keeping track of re-exported products. With such high volumes being moved each day, several vendors insist that Dubai has become a favoured transit route for fake kit targeted at markets such as Europe and Africa. Counterfeiting remains an industry-wide problem affecting everything from the networking hardware sector to low-end computer peripherals, accessories and CPUs. Even counterfeit rechargeable batteries for products such as digital cameras and video cameras are known to have found their way into the market just recently. “Counterfeiting is all about money and it’s all about margin, so there’s got to be enough of a margin, or enough volume in what you are counterfeiting, to be able to make money,” said Edward Hardcastle, regional director at the Dubai operation of global intellectual property consultancy Rouse & Co International. “Counterfeiters don’t have all the research and development costs or the creative design costs. But they have still got to have the plant to make the product and they must buy the packaging and so on,” he added. Certain items still remain more vulnerable to counterfeiting than others, particularly if they possess strong brand recognition and can be reproduced at low cost. This includes software, of course. Piracy places a huge burden on legitimate software channels and swipes billions of dollars from the industry in the process. Although piracy levels have been dropping around the region over the last couple of years, the last major study by IDC showed that the rate in the Middle East was an alarming 22 percentage points higher than the global average. It’s not only software vendors that are devoted to protecting their intellectual property rights (IPR). Networking vendor Cisco has a brand protection team of almost 40 people dedicated to overseeing corporate governance, channel governance and counterfeit issues across the globe. “We are seeing a number of products counterfeited, but I wouldn’t say there is a preferred product that is targeted,” said Mike Watson at Cisco’s Emerging Markets brand protection group. “We haven’t seen our high-end products counterfeited as yet though,” he added. The printer market is notorious for being a victim of counterfeiting, although it is not the hardware that remains a problem. “When you are talking about counterfeiting you have to separate the printers from the supplies,” said Francois Feuillet, general manager at Lexmark Middle East. “I would say that because of the technology involved and the fact that we produce at very low cost, it is nearly impossible for printers to be counterfeited. I have never encountered any counterfeit hardware.” Indeed, it’s the production of counterfeit ink cartridges — which illegally carry a vendor’s trademarks and packaging, and contain an inferior product — that gives printer manufacturers their biggest headache. Sources in the market claim fake cartridges can be procured in China for little more than a dollar and resold for a price seven or eight times that figure in markets such as the Middle East. It may seem a small sum, but for illegitimate resellers capable of shifting thousands of units at a time it is an attractive business. The impact this has on the overall market is highly damaging, according to Gurkar at Brother. “In terms of the extent of the problem I would say that for all machines that were introduced in the market more than three years ago, more than 50% of the consumables sold in the market are counterfeited,” he said. Data from the Imaging Consumables Coalition of Europe — an anti-counterfeiting industry body made up of printer vendors — suggests that counterfeit imaging products represent 7% of an EMEA imaging consumables market estimated to be worth almost US$40 billion. One dilemma facing the industry is how to overcome the increasingly inventive methods deployed by the perpetrators of this crime. “The counterfeiters are using pretty sophisticated tactics now,” admitted Pereira at Canon. “What used to happen is that we would look for customs to identify shipments where the entire product was coming through. But we have now found out that the counterfeiters are importing the components separately. In a toner box you typically have literature, packing material, shrink wrap and then the box itself. These products are coming in through different channels and then getting assembled locally within the country.” Mobile phone vendor Motorola even recently admitted that its own technicians occasionally have trouble distinguishing a genuine product from a fake due to the quality of the reproduction. Often they are forced to strip the product down to seek the answer.||**||Grey days|~|ciscofake200.gif|~|Guido Romagnoli, channel director for the Middle East and Africa region at Cisco liaises closely with the vendor’s partners.|~|Gurkar at Brother also says that investigations into the components used in fake products offer an intriguing insight into how counterfeiters make their money. “Take samples of counterfeit fax machine film rolls that are used in the thermal transfer process which we have picked up and sent to the laboratories,” he said. “We have found they are being retailed for half the price, but the length of the film roll is exactly half that of the original! There is no way that a consumer can measure that.” While counterfeiting and grey marketing are entirely separate subjects, the two are routinely linked to one another. As well as referring to authorised distribution channels selling outside a designated territory, grey marketing can also be used to describe the flow of legitimate products through unauthorised channels. These channels are seen as an ideal route by counterfeiters who know that the grey marketer is unable to gauge how much volume the manufacturer is producing and therefore can’t assess if the product is grey or counterfeit when experiencing increases in activity. So who exactly are the companies dabbling in counterfeit product? Authorised resellers that obtain counterfeit stock — knowingly or unknowingly — or underhand traders looking to make a quick buck? According to one cartridge manufacturer it is more likely to be the latter. “If I look at our legitimate resellers then they tend to have good relations with our distributors so we don’t really come across any problems,” commented the source. “It’s mainly the fly-by-night traders who deal in this. And if it’s a middleman who buys from the source and redistributes to the smaller people then it’s very difficult to trace them.” Hardcastle at Rouse & Co says counterfeiters generally start off by making low quality fakes that lack detail when it comes to the packaging. However, he says it is quite easy for them to get it sold in the market because people think it is old stock or they don’t know the genuine product well enough. “As the brand owners and the market become more sensitive, counterfeiters tend to improve the quality of the packaging so that it is identical to the real product and therefore it becomes harder to tell the difference,” explained Hardcastle. “Usually the longer that a counterfeiter has been in the business for a particular product, the better his product will be because he will invest as he is making more money out of it. He’ll invest in improving the plant and the equipment.” OEMs are taking a variety of different approaches to combat the counterfeiters, starting on the manufacturing floor where policies are put in place to ensure that anti-counterfeiting production techniques are strictly adhered to. Making sure that this is being enforced by contract assembly partners, which may be responsible for overseeing packaging and security labelling, is vitally important too. The use of holograms, for instance, has become a popular mechanism to indicate a product’s authenticity, although it isn’t necessarily foolproof. “The problem is that unless the consumer has a device with which they can differentiate between an authentic hologram and a fake hologram it can be difficult to tell the difference,” conceded Gurkar at Brother. Beyond that lies the process of education. It is becoming increasingly common for vendors to address the issue of counterfeiting at the point of destination — the end user. Many consumers do not understand the significance of intellectual property rights, which is why vendors such as Microsoft regard high-profile end user campaigns that raise awareness or appeal to an end-user’s conscience as valuable exercises. This is also evident at channel level where several vendors, particularly in the hardware space, are stressing the importance of buying through authorised partners. “We are trying to make sure that people are aware of the Cisco authorised channel partner programmes through which we strongly recommend they buy their products to be more assured of receiving genuine products,” explained Guido Romagnoli, channel director MEA at Cisco. He says the company’s Gulf operation is liaising closely with its colleagues in brand protection to develop programmes that promote the role of official distribution partners. This is particularly important for markets in Africa where the distribution structure may not be as established and resellers are accustomed to sourcing products from places like Dubai. “We now have distributors in the African continent so I think it’s a two-fold issue,” said Romagnoli. “On one side there is the governance of course, but it’s also about making sure that the channel is visible — that resellers know where to buy legitimate products and where to get their discount, rebates or promotions.” Lexmark, too, is looking to utilise its partner schemes to better understand how widely the sale of counterfeit products is impacting its business in the Middle East. Regional boss Feuillet reveals that the company is currently pioneering a channel programme that “rewards fidelity” by promising financial incentives to resellers that submit sales-in and sales-out data. “As we manage the prices in our region, anyone selling at a low price without being on our radar screen in terms of being rewarded or being supported will automatically raise suspicion,” he said. Other vendors, meanwhile, recommend alternative measures. Several years ago, USRobotics saw its OEM products become a target for counterfeiters, particularly in markets such as Kuwait and Saudi Arabia. However, MENA boss Kumar claims a concerted effort to alert partners to the perils of counterfeiting has contributed to a marked decrease in the problem. “We have been educating our channel partners on the service side and warranty of the products, which will not be there in the counterfeit products,” he explained. “Sometimes when you have counterfeit products in the market you can also drop the price considerably. This makes the counterfeit products unprofitable and not worth bringing in, which helps a lot.” The ongoing work of a number of lobby groups in this region is also a key factor in addressing counterfeiting, particularly as they promote the sharing of knowledge and encourage affirmative action when necessary. As the Middle East market evolves and more vendors increase the amount of resources they have in the region, there is a higher chance that the counterfeiters will find it more difficult to penetrate the market. Addressing the problem from a central location always has its drawbacks, whereas a strong and visible local presence makes it easier to transmit a consistent anti-counterfeiting message and monitor what is happening in the market. The Middle East channel has a huge role to play in eradicating counterfeit products from the market, but it must understand that the nature of the threat is constantly changing. ||**||

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