Rise of the Fakes

March 1, 2006
An increase over the past decade in production of counterfeit electrical products puts distributors and the rest of the supply chain at risk.

You're walking down the street in a big city. A man in an alley offers to sell you a gold Rolex watch for $50. Having some time to kill, you stop and look. Sure looks authentic, diamonds flashing in the sun, but being the shrewd, worldly businessperson you are, you of course entertain no delusions that it's a genuine Rolex. Still, you might think about buying one just for the fun of seeing the expressions on your friends' faces. What would be the harm?

Back at the office, you check your e-mail. There's a message from someone saying he's a distributor of electrical products overseas. He has some overstock of name-brand electrical equipment and he's looking for a buyer. He quotes prices far below your U.S. wholesale cost. He includes a link to his Web site. The company appears to be legitimate, and pictures on the Web site show products identical to ones on your warehouse shelves, with all the logos and certification marks. Your margins have taken a beating lately. Being the shrewd, worldly businessperson you are, you can't help but consider making a deal that could allow you to get your price down below your closest competitor and still turn a nice profit. What would be the harm?

Actually, the harm could be substantial. Long associated with knock-offs of high-dollar consumer items, traffic in counterfeit goods has escalated in recent years and has spread into markets where it was never a concern before. Just in the past 10 years or so, counterfeit electrical products have begun appearing in markets all over the world. Driven in part by advances in technology, traffic in fake name-brand products is expected to continue growing rapidly. To protect their customers, their markets, their supply chain partners and themselves, electrical distributors need to be aware that they can either be part of the problem, or part of the solution.

Figures on the scale of global traffic in counterfeit goods are hard to come by, but some estimate it's a $500-billion-per-year business growing at a rate of 20 to 25 percent. Electrical products account for only a fraction of a percent of that market, but their potential for health and safety implications put them in league with counterfeit pharmaceuticals, automotive parts and safety products as sources of heightened concern among customs officials, testing labs and law enforcement bodies the world over.

The electrical products seized as counterfeits are predominantly consumer items, including power strips, surge protectors, extension cords and batteries, but shipments of counterfeit circuit breakers, fuses, industrial control relays, lamps and electronic lamp ballasts, smoke detectors, receptacles, ground-fault circuit interrupters, conduit fittings, telecommunications cables and electrical connectors also have been found.

Counterfeit power strips marked for 12-gauge wire have been found to actually contain thin 24-gauge wire and caught fire under normal use. Counterfeit circuit breakers that looked indistinguishable from a name-brand breaker have been found to have nothing but a switch inside.

The direct threat to the health and safety of users of such products is clear, but the potential damage to players up and down the legitimate electrical supply chain is also significant. A distributor who sells a counterfeit product that malfunctions and causes injury or damage stands directly in the path of a product liability lawsuit with no manufacturer's deep pockets to back him up, says Clark Silcox, general counsel for the National Electrical Manufacturers Association (NEMA), Rosslyn, Va.

“If the manufacturer can show that it didn't make the product, the manufacturer is off the hook, and it's the wholesaler and retailer that are on the hook,” he says.

Counterfeits damage the supply chain as a whole by driving down prices and taking sales that would otherwise have gone to legitimate manufacturers. They also tarnish the reputations of everyone associated with a product that fails to perform as expected. Manufacturers whose products are being copied are often hesitant to publicize the fact out of concern that customers will lose confidence in buying the branded product. Indeed, the electrical manufacturers contacted for this article declined to comment on their anti-counterfeiting efforts. Some referred us to Silcox at NEMA, who said that many of the top electrical manufacturers are taking steps to protect their intellectual property from the threat of counterfeiting.

The recent increase in counterfeit electrical products is driven by several factors. In part, it's an unfortunate side-effect of the globalization of trade. Manufacturers shifting their production operations to developing countries where intellectual property rights enforcement lags behind more developed countries create an opportunity for counterfeiters by promoting the development of manufacturing capacity in the form of equipment and workforce training. A failed relationship with an offshore manufacturer can turn legitimate production toward the production of knock-offs. There have also been instances of plants producing legitimate products by day and counterfeits by night.

Another driving force is the constant advance of technology. Contract manufacturing plants are constantly improving their ability to create — or reverse-engineer and recreate — anything a client wants in short time frames at low cost. The quality of the duplication has gotten so good that in some cases even the intellectual property owner is hard-pressed to identify the fake without breaking it open and testing it. Computer graphics technologies make it easier than ever to create authentic-looking labels that are precise duplicates of name-brand labeling.

A man caught by U.S. Customs officials last year importing counterfeit electrical receptacles was questioned about how and where the fakes were made. He told them he went to a home center in the United States, bought a name-brand receptacle, shipped it to a plant in China, said “make this for me,” and they did.

The rush of technological innovation puts pressure on brand-name manufacturers and certifying organizations to stay a step ahead. Underwriters Laboratories Inc. (UL), Melville, N.Y., builds sophisticated identification systems into its labels to make it readily apparent what is real and what's not, says Brian Monks, UL's director of anti-counterfeiting operations.

The Internet has been a huge boon for counterfeiters by allowing them to reach an international market at very little cost. Online auction services such as eBay, while providing distributors and end users valuable access to legitimate discontinued, surplus and overstock items, also can be manipulated by those bent on misrepresentation and fraud. A search for “circuit breaker” on eBay early this month returned 8,494 hits, most of which are presumed to be legitimate, but the potential for counterfeiters is certainly there.

The speed with which products can be shipped around the globe adds further to the problem. Air freight leaving China today arrives in New York tomorrow. The creation of free trade zones where import-export operations are streamlined adds to the ease with which products can be moved from country to country. Counterfeit products often are mixed in with legitimate products and follow a circuitous route to their destination.

“These are sophisticated criminals. They're very organized. They operate much like a drug-smuggling operation,” says Monks. “A shipment doesn't necessarily go from the host country to its final market. It might go to Panama first, then Canada, and then into the United States, and the paper trail is cleaned up a little bit at each stop.”

Counterfeiters are quick to seize an opportunity, and any situation where demand significantly outstrips supply is a prime target. Doug Geralde, director, Corporate Audits and Investigation, for CSA Group, a testing and certification organization based in Toronto, expects to see an influx of counterfeit electrical products and other building supplies in Mississippi, Louisiana and Texas as that area rebuilds from last year's hurricanes.

“Katrina and Rita created a prime spot for counterfeit products to fill a void,” Geralde says. “We're very concerned about that marketplace, because the usual checks and balances are not in place. Everything's devastated, so people aren't asking where something came from, they just need it now. If they're putting in products that are inferior, we might have fires and injuries and fatalities a short time down the road.”

The United States actually ranks low among destination markets for counterfeit products due to active customs oversight and stringent intellectual property laws, according to Silcox. Distributors in countries with more porous borders and less aggressive enforcement are losing significant market share to dealers of counterfeit products. Some of the products seized at U.S. ports have actually been bound for countries in Latin America, which along with countries in Asia, the Middle East and Africa, are prime markets for counterfeit merchandise, he adds.

Those who work to stop counterfeiting face an incredibly difficult challenge. Working independently and through international groups such as the International Anti-Counterfeiting Coalition (IACC), Washington, D.C., Silcox, Monks and Geralde work closely with governments, customs officials and law enforcement around the world to educate them about how to spot counterfeit products and to help them track down and prosecute counterfeiters.

Finding the counterfeiters is one thing. Holding them accountable can be quite another. Most of the counterfeit goods on the market come from China, so significant anti-counterfeiting efforts are concentrated there. The Chinese government is active in its pursuit of intellectual-property violators, but with such a vast, populous and rapidly industrializing nation to police, it's difficult to catch and prosecute the criminals.

Anti-counterfeiting efforts in China have recently gotten a boost from legitimate Chinese manufacturers whose products are now being counterfeited, Silcox says. Earlier this month, Silcox was part of a joint delegation from NEMA and the Gas Appliance Manufacturers Association heading to Shanghai to present a program on intellectual property protection. The program, which also featured attorneys specializing in intellectual property rights and representatives from the U.S. Embassy and manufacturing companies, was developed to share ideas and techniques with Chinese government agencies. It was based on the success of a similar program last year in Beijing in which NEMA partnered with its counterpart Chinese electrical manufacturers association to discuss their common problems combating counterfeiters and how they go about enforcing their rights, Silcox says.

UL, which has had offices in China for 30 years, has been aggressive in working with Chinese law enforcement to find manufacturing facilities there that produce counterfeit products and shut them down and intercept shipments of counterfeit goods, says Monks.

A lot of work goes into trying to raise awareness of the problem, which can be a challenge. Counterfeiting is commonly viewed as a commercial, essentially victimless crime when compared to drugs and terrorism. For three years, NEMA has been working with the U.S. Congress to pass legislation that would strengthen laws against counterfeiting and piracy.

Early in March, the “Stop Counterfeiting in Manufactured Goods Act” achieved final passage by the House and Senate. President Bush is expected to sign the bill into law. The Act addresses two objectives, says Silcox. First, it overturns an appeals court decision finding that fake labels, tags, boxes and cans do not violate criminal law against counterfeiting. In the electrical industry, it would mean producing or trafficking in fake UL, CSA and other labels becomes a criminal offense. Second, it strengthens remedies for counterfeiting. It allows law enforcement to seize product if it's shown to be counterfeit, even if it's not yet proven in court, to seize and destroy machinery and tools used to make counterfeit products, and to seize money gained in the sale of counterfeit products.

“Our goal is to give the government every weapon it needs to go after these guys, so they know they're going to suffer a lot of pain for trafficking counterfeit goods,” Silcox says.

The legislation will also help the U.S. Trade Representative press for more intellectual property rights protection in negotiations over free trade agreements in Central America, Singapore and Bahrain, he adds. “In those agreements' sections on intellectual property rights, each trading partner agrees to improve its own internal laws dealing with counterfeiting and piracy. We would like to mandate the same tough level of deterrence and enforcement as we'll have in our own law.”

Domestically, what the anti-counterfeit crusaders need most are the eyes, ears and attention of people knowledgeable enough to spot a counterfeit product when it crosses their path. That's where electrical distributors can be of great assistance. Distributors and contractors, along with dealers of used and surplus equipment, are the places where counterfeit products are most likely to enter the supply chain. They are also the people most likely to notice subtle variations in product and packaging that could signal that a product is not what it appears to be.

As production and importing of counterfeits continue to grow and as counterfeit products become increasingly difficult to detect, distributors will need to be more vigilant than ever when it comes to whom they choose to do business with. Distributors know the authorized channels where they can be assured of buying legitimate product. They know the prevailing pricing levels in their markets. Any deal involving an unfamiliar source or an unusually good price may be a red flag that signing the deal could do more harm than good.

Surplus on the Front Line

Perhaps no one in the electrical supply chain is more aware of counterfeit products than surplus equipment dealers. They routinely buy outside the traditional, authorized channels, picking up surplus, obsolete and used equipment and returning it to service. This makes them one of the most attractive venues for producers and importers of counterfeit devices to get their products into the mainstream of the channel.

Surplus dealers buy from anyone who has product, which requires them to be exceptionally shrewd, observant and vigilant about whether the seller is representing the products truthfully. The opportunities for getting duped come every single day.

Fortunately, many also have the expertise to tell the real products from the fakes. Many surplus dealers refurbish and remanufacture the products they buy and sell, which means they've seen pretty much every product broken down to its component parts. They test everything they buy before selling it — even the new equipment — and in the course of testing discover many anomalies.

David Rosenfield, president of Romac Supply, Commerce, Calif., has seen all kinds of funny business. He's bought 70A F-frame breakers that had been relabeled as 200A breakers — the housings were identical coming out of the factory, and he only discovered the discrepancy by testing. He's bought lighting breakers on eBay that turned out to be counterfeits, identified because they were missing some of the real manufacturer's typical marks. Sometimes the discrepancies are as subtle as a slight variation in the shape of a handle or the size of a terminal.

“The typical distributor doesn't have the hands-on knowledge of the product to be able to spot the fakes,” Rosenfield says. “That's why you have to know whom you're doing business with.”

When Rosenfield discovers a bogus product, he tries to determine whether the problem is a big one, such as a counterfeiter producing hundreds of fake products, or just a one-time opportunist. If it's a big operation, he gets the original manufacturer of the genuine equipment involved, as well as law enforcement.

He also takes the product with him to the next meeting of the Professional Electrical Apparatus Recyclers League (PEARL), an association he helped create nine years ago in a bid to raise the standards and professionalism of surplus dealers. At the meeting, he holds a seminar to show other PEARL dealers how he determined that the product wasn't genuine. This sharing of knowledge and best practices helps to protect the whole market from the influx of fake products.

“We know the dirty part of the market better than anybody,” Rosenfield says. “Work with us to educate the market, to elevate the safety of the market as a whole.”

Distributors may not have the detailed knowledge of the products that a conscientious surplus dealer who remanufactures equipment has, but there's a lot they can do to protect themselves from the hassle and potential liability presented by counterfeit products:

  • Know your supplier. Manufacturers can assert that the best way for a distributor to avoid the risks of buying counterfeit products is to never buy outside the established supply chain, or from anyone but the original manufacturer. That's fine, but the gray market exists for a reason, and if legitimate product is out there from gray market sources, distributors will use it to provide their customers with products unavailable elsewhere, and to help their bottom lines. The key is to practice the same kind of due diligence on your source as you do on any potential business partner.

  • Put procedures and policies in place for verifying the source of your products when buying outside the authorized channel. Make these policies known to your customers. This will provide transparency for your customer and some peace of mind for yourself.

  • Make your purchasing people responsible for ensuring the legitimacy of the sources they use. This could include random audits to track products back through the supply chain.

  • Look for things that seem just a little off. Some tip-offs include obsolete packaging, UL labels on packaging but not on the product itself, part numbers that are outdated, the same serial numbers on all the products and packages missing documentation. If there's any question about a product, contact the original manufacturer and clarify things before you sell it. If there's a question about a UL or CSA mark, go to their Web sites or call them and check it out.

  • Beware of deals that seems too good to be true!