Fighting fakes: The scary truth about counterfeiting in manufacturing

The problem may be bigger than you think

The International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP) summarizes the problem thusly: “The massive infiltration of counterfeit and pirated goods drains $1 trillion from the global economy and robs over 2.5 million jobs. Unsafe and ineffective products now pose a risk to millions of consumers, while governments, businesses, and society are being robbed of hundreds of billions in tax revenues, income and jobs.”

The problem is growing at a rapid pace, as evidenced by a new study published by the Organisation for Economic Co-operation and Development (OECD) titled “Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact.” The April 2016 report states that trade in counterfeit and pirated goods grew from $250 billion (US) annually in 2008 to more than $461 billion in 2013. That’s roughly an 80% increase over a five-year period.

The issue of CFSI is significant in industrial capital projects, says Makarand (Mark) Hastak, professor and head of construction engineering and management and a professor of civil engineering at Purdue University. He studied the topic while participating in a Construction Industry Institute (CII) special research team on mitigating counterfeit materials threats. The team’s findings were published in September 2014.

“Our surveys indicated that 28% of the respondents have experienced CFSI, while 62% of these incidents were never reported to any external agency outside their companies,” says Hastak. “The known cost impact of CFSI per incident, according to the respondents, ranged from $100,000 to $28 million.”

He notes that of those respondents reporting incidents, 83% claimed project delays for varying periods of time as a result of counterfeit or fraudulent products. “Therefore, we observed a significant but not completely known risk associated with CFSI in the capital projects,” adds Hastak. “The consequences of risks associated with CFSI range from fatalities to injuries, project delays, quality compromise, (and) cost overruns.”

Companies like Roquette, a starch producer and biorefinery, are taking notice. “I have randomly checked Grade 316 stainless-steel parts in our storeroom and had a magnet stick to them,” says Phil Beelendorf, maintenance technology senior manager at Roquette. “In both cases where this occurred, purchasing had substituted knockoff parts.”

He believes counterfeiting is becoming a bigger issue for two reasons: The global marketplace is bringing in more players every day, and purchasing departments are pressured to continually lower the cost for what they pay for goods and services.

“In many cases it comes down to business ethics,” remarks Beelendorf. “People need to conduct business with the highest ethical standards and partner with suppliers who do the same.” He adds: “Intellectual property or confidentiality agreements can be signed, but they are really difficult to enforce.”

He notes that the temptation might exist for some end users to reverse-engineer OEM products to save money on material purchases. (If the patents have expired, this could be a legitimate practice.)

Legitimate providers feel the impact

Counterfeit large-bore spherical roller bearing (source: SKF)

Manufacturers of products for OEM and after-market customers are increasingly addressing this risk. “Many of our customers have been cheated by the counterfeiters,” says Clayton Tharp, brand protection manager at SKF. “They are cheated by being sold product that they believe is genuine SKF. The performance of their equipment suffers, and the SKF brand is damaged when the product does not perform to their expectations. We see this in every market around the world.”

Bearings are a prime target for counterfeiters. Contrary to what most people think, the counterfeit bearings do not represent production overruns or product stolen from legitimately operating factories, explains Tharp. “The counterfeit product comes from one of many bearing factories, mainly in China, that produce unmarked bearings of unknown quality,” he says. “They are then sent to a branding shop to be marked with the SKF logo and designation and then put in counterfeit packaging that has been made to look just like real SKF packaging.”

It’s not just the product and packaging being mimicked. “The counterfeiters work hard to look like legitimate suppliers,” cautions Tharp. “They have very nice websites with photos of warehouses and factories to make them look trustworthy. They will provide certificates and other forged documents to make it seem they are an authorized or trusted source for our product.”

At Eaton, a provider of power management products and services, attention to this concern is great. “Counterfeits … damage our brand reputation with inferior products of poor quality attempting to trade off of our brands,” says Daniel Kalka, intellectual property counsel at Eaton. “But the biggest concern is public health and safety.”

Counterfeit parts may be used to refurbish old pump housings or motor cores, explains Kalka. Often, these refurbished pumps or motors are then sold as new, which is unlawful. The old, refurbished pumps or motors can cause injury or property damage when they fail or malfunction.

Customer opens counterfeit bearing (source: SKF)

“In both our electrical and industrial sectors, we have seen returns of refurbished pumps that have failed and electrical products that have failed, causing damage and downtime,” remarks Kalka.

In contrast, Gary Marchuk, director of business development at AutomationDirect, says that the risk of counterfeit parts is a rare issue at his company. AutomationDirect’s business model may be the reason: The company sells only completely manufactured parts, not individual components that could be counterfeited. Additionally, its vendors test for counterfeit components prior to delivery, Marchuk says.

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Tackling the problem from many fronts

Many products and parts manufacturers and industry groups are working to alleviate the problem. Eaton, for its part, has a zero-tolerance policy on counterfeits. “Eaton has processes in place to monitor our supply chain and has taken steps with the legal authorities, including the Department of Homeland Security, ICE, and Customs as well as the U.S. Patent and Trademark Office to prevent counterfeits from entering the market,” says Kalka.

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SKF’s daily anti-counterfeiting efforts are on two main fronts. The first involves supporting authorities in legal actions, as in a U.S. Customs and Border Protection seizure, a raid on a counterfeiter’s warehouse, or other actions, says Tharp. The other main focus is awareness.

“My team, SKF Group Brand Protection, works to educate our distributor partners, OEMs, and end users about the counterfeit market and the dangers it presents,” Tharp explains “We do training online and in person for our distributors, and we regularly meet with customers to educate them as well. We spend a lot of time assisting customers through verifying the authenticity of products.”

In addition, SKF works closely with the World Bearing Association’s Stop Fake Bearings program to raise awareness about the problem and provide tools and education to mitigate counterfeiting risks.

Alibaba Group, which was suspended earlier this year from the International AntiCounterfeiting Coalition in part because of member concerns about inadequate anti-counterfeiting efforts, launched a new IP Joint-Force System in July to facilitate the identification and removal of fake goods from its e-commerce sites. The new system expands upon the company’s 2015 Good Faith Takedown program for brands that submit valid counterfeit complaints.

Industry advocates and research groups also are taking action. Fiatech is an international community of capital asset stakeholders using innovative practices and technologies to drive industry improvements, and one of its active projects addresses anti-counterfeiting measures.

“The urgency to prevent counterfeits is not nearly as high as it should be,” comments Reg Hunter, senior program director at Fiatech. “It’s easy to be in denial about the risk of counterfeiting.” The organization’s Global Material Information (GMI) project, which Hunter leads, aims to develop a globally accessible product information database that in turn can provide a framework for identifying and reducing the potential for counterfeit materials to infiltrate the supply chain.

The GMI database will provide a complete source of product information owned and maintained by the suppliers. It simplifies the selection of common capital project materials by allowing side-by-side comparisons, materials authentication, and verification of interoperability, in addition to anti-counterfeiting provisions.

“As a result of this project, ThomasNet added a field for serialized data in its materials database,” says Hunter. “Suppliers that generate and permanently attach RFID ‘birth certificates’ to their products can upload that information into the system, helping to identify counterfeit and suspect materials before they enter the supply chain.”

To help manufacturers, utilities, and other capital project stakeholders reduce their exposure, the CII research team of which Purdue’s Hastak was a member proposed a framework that includes the identification, assessment, mitigation, and communication phases of CFSI risk governance. CII member companies and other interested parties can use this framework to improve their internal risk management practices.

Also included in the team’s recommendations is a proposed catalog of risk mitigation strategies. “Some of these strategies are already applied within the capital projects industry and its different sectors,” says Hastak. “But this catalog can serve as a reference to tailor different mitigation strategies and address the issue of CFSI.”

Actionable anti-counterfeiting advice

Buyers of pumps, turbomachinery, and other products prone to counterfeiting should also actively engage their suppliers for assistance. “Determining if a product is genuine or counterfeit is difficult, so we ask anyone with a question about the authenticity of one of our products to use our SKF Authenticate app or send photos along with proof of purchase to [email protected],” says Tharp.

The best way to safeguard authenticity is to source from distributors that are authorized by SKF, he adds. “If you have a question about who the authorized distributor is in your area, contact SKF or check our website.”

Eaton takes a similar approach. “The best advice I can give to our customers is to purchase our products through our authorized channels and distributors, since many counterfeits are sold on the internet and at flea markets,” advises Kalka. “If the price is too good, there may be something wrong. And carefully examine the labels, package and product for misspellings, poor grammar, or other discrepancies that make the product suspect.”

He refers to this as minding the 3 Ps: price, place, and packaging. Be wary if the price is too good, if you are not purchasing through the manufacturer’s normal channel, or if the packaging is suspect. “Don’t be afraid to contact the manufacturer or view the manufacturer’s website for advice on identifying authentic products,” adds Keaton.

Finally, an observation from Roquette’s Beelendorf bears repeating: If everyone remembered the golden rule and sold their products and services by their own merit, counterfeit parts would be less of an issue in the marketplace.

According to Gary Marchuk, deception is usually employed on simpler components such as board-level