Counterfeit products are exploding on Amazon

A recent WSJ article highlighted a fact that confirms much of what we found in our study of counterfeit products in the supply chain a year ago:  if you’re buying on Amazon, beware of counterfeits.  Too cheap means too good to be true.

A Wall Street Journal investigation found 4,152 items for sale on Amazon.com Inc. ’s site that have been declared unsafe by federal agencies, are deceptively labeled or are banned by federal regulators—items that big-box retailers’ policies would bar from their shelves. Among those items, at least 2,000 listings for toys and medications lacked warnings about health risks to children.

The Journal identified at least 157 items for sale that Amazon had said it banned, including sleeping mats the Food and Drug Administration warns can suffocate infants.

Our study, funded by the Center for Advanced Purchasing Studies, explored how this is likely just the tip of the iceberg, as counterfeiting is pervading multiple sectors.

Production levels equivalent to an entire factory’s monthly production are coming in container loads through the Los Angeles port, including food, liquor, and cigarettes. The outer wrapping and tax stamps on these products are professional and look like the real things to the untrained eye.  YouTube videos show how real cans of Budweiser are being “refilled, resealed, and resold” from a factory in China.  Other products that have been counterfeited include consumer staples such as laundry detergent, baby formula, and other products that use packaging collected from trash cans – cleaned up, repacked with fake product, and resold.  Other industries affected by counterfeiting include electronic components, aircraft parts, industrial equipment, and multiple other industrial applications. Even recycled goods may be collected, shipped to China, stripped down, cleaned up, relabeled, and sold into the market as original product.  (A common example of this includes printed circuit boards, which are recycled and sold back through distributors to government agencies.)  Even natural products are suspect; logs may be harvested in the United States, shipped to China, processed as plywood using formaldehyde, and then imported and used to construct houses in the U.S.   Even though such products are not counterfeit, they are fraudulent, as they do not meet the housing code requirements for items that are used in home construction.

Why is counterfeiting becoming such a massive problem?  Professor Wilson of Michigan State University notes that the explosion of counterfeiting is occurring for several reasons.  First, most companies don’t know (and often don’t care) about the origin of their product components.  Intermediary components are invisible to the general public, with the exception of ingestible products (food and drugs), which have recently become a bigger priority.  However, supply chain executives who are brand owners have a responsibility to address this issue, and focus on mapping and monitoring their supply chain, something sourcing professionals often refer to as supplier relationship management (SRM).  One of the first rules of SRM is to know who you are buying from and who is in your supply chain.

A second reason counterfeiting is on the rise is that e-commerce sales is exploding, making it easy for criminals to exploit consumers through online counterfeit sales.  The majority of counterfeit products are marketed through an online presence; so tracking down the origin of products sold on the internet is difficult.  The general acceptance of online purchasing by consumers, combined with the financial rewards and minimal risks to the counterfeiters selling online, is one of the reasons for the explosion in sales of counterfeit goods.  Not surprisingly, most of these sites are based in China.  Some of the most prolific websites for counterfeit goods include Taobao in China, with approximately 130 million daily users, as well as Alibaba and AliExpress. When consumers complain about these products (when many of them fail and do not comply with their promised performance), warranty claims are often disappointing. Brands will often respond that “you purchased this product through an unauthorized distributor, and it is not our product.”  The adage of “buying it at a price that is too good to be true” is often a reality.

This leads to an important conceptual outcome from our CAPS Research study, which is to think of counterfeiters as competitors for your product in the market. A study participant who worked extensively with a large film producer discussed this paradigm as a way of thinking about the problem. The film producer had problems prosecuting and investigating counterfeiters of digital movies. Digital vendors of their products are everywhere in the world, and they recognized early on that prosecuting these individuals in China and other places was fruitless. By thinking of counterfeiters as competitors, however, it changed the way they attacked the problem. They recognized the need to find new ways to deceive and disguise the content, as law enforcement was not an effective source of protection. Even when prosecution occurred, the criminals paid the fines and went back to their old lanes of supplying product to customers. To truly protect the product requires steps to interdict the market in a way that counterfeiters cannot profit from.  The solution in this case was relatively simple. Executives recognized that customers weren’t trying to avoid paying for movies – they simply didn’t want to wait for the product to come out on DVR, they wanted to view the content as quickly as possible. This simply meant rethinking the go-to-market strategy. It became clear that consumers are willing to pay for the product in a format that can be downloaded immediately and watched even while it is in theaters, and before it is released. In fact, this created a premium market that did not exist before, allowing the product to get to market faster, and essentially interdicted counterfeiters. Of course, the volume of counterfeit product still exists.  This example shows how creative strategies are needed to truly combat counterfeiting in the supply chain.

A third reason why counterfeiting is on the rise is attributed to consumer behavior and a lack of education about the problem.  Most people don’t care if their product is counterfeit, and they don’t mind paying less even if it does violate intellectual property rights.  Most people would argue, “You can’t die from buying a fake T-shirt or downloading an unauthorized album.”  Well yes, you can actually – if the profits finance terrorism or organized crime like drugs, vice, and illegal arms.  Which is not all that uncommon.  Clearly, the lack of awareness on the part of consumers as well as enterprises along the entire supply chain is a factor to consider

This awareness also has to go beyond the perception that counterfeiting is limited to fake plastic toys and shoddy fake luxury handbags.  In fact, counterfeiting is pervasive, and it is occurring in just about every industry where there is a shortage, where products are expensive, and where criminals can make money quickly by selling fake goods – and then disappear.  Counterfeiting criminals are producing fake airbags for cars, poorly produced engine parts for jet fighters that don’t meet FAA requirements, and fake parts for your vehicle, putting everyone at risk when we travel by car or commercial airlines.   Worst of all are fake pharmaceuticals, which can have deadly effects.  It has been estimated that 80 percent to 90 percent of the pharmaceuticals in Africa, for instance, are counterfeit.  The World Health Organization also estimates that counterfeit drug sales total about US$75 billion per year, and those drugs typically don’t contain any active ingredients, and may be mixed with ingredients like lead.  But nobody really knows for sure just how bad the situation really is.

In this environment, complacency breeds the growth of counterfeiters’ illegal activity.  These criminals are aware that organizations that do nothing allow counterfeiters to profit at the expense of those organizations. For this reason, there is a need for a collaborative effort that spans multiple parties in the supply chain, which are all actively impacted.   A core premise for this study is that a single enterprise acting alone will have no effect on this crime.  Criminals benefit when law enforcement, regulatory bodies, government entities, and private-sector industries act in silos, do not share information, and are unable to react quickly to information.

 

The results of the study found that a multilayered strategy is needed to address the counterfeiting problem that adopts multiple approaches and engages the entire organization. The study provides a set of recommendations to address the issue.

  • Initially, a global team must be established composed of key sector leaders, supply chain leaders, and distribution executives.
  • Establishing metrics is important to help define how “success” is measured. The size of the counterfeit problem must be estimated, and the return on investment approximated. This can help define the need for a team of experts to work in this area, leading to a set of performance metrics that are aligned with business objectives and outcomes.
  • An estimate of the “current state” should be developed. How big is the problem?  This is a logical follow-up step related to defining the right metrics and goals for attacking counterfeiting.  It is important to select goals that can be achieved in the short-term, focusing first on high-impact areas that are hurting customers and sales targets.
  • Strategies should be employed to “slow down” counterfeiting activity. This may include collaboration with key partners, redesigning segments of the supply chain, or conducting market monitoring with key retail partners.
  • Marking products with key tracking technologies may be an important solution. While such markings can be replicated by counterfeiters, they will at least provide a means to track products that might be counterfeit in the supply chain.
  • Next, key focal product segments should be targeted, and a system for identifying products through product trademark registration with customs authorities completed. Law enforcement should also be contacted and trained on how to recognize counterfeit product in the target category.
  • Finally, supplier partners should be contacted and rewarded for helping address the problem.

In the end, combating counterfeiting is not a supply chain problem, it is not a legal problem, nor is it a packaging and covert marking problem.  It is a global problem – one that impacts all organizations – large and small.  All business functions need to be part of the discussion, not just a single brand security function.  Failure to do so will simply allow counterfeiting to continue to grow.