Counterfeit high-tech products that are flooding global markets have devastating effects not only for brand owners, but the economy.
Consider these statistics: The U.S. Chamber of Commerce estimated that intellectual property theft costs domestic businesses $200 billion to $250 billion a year in lost revenue, and has resulted in a loss of 750,000 jobs in the U.S. alone. In 2003, the Business Software Alliance estimated that a mere 10% reduction in software piracy could add $400 billion to the lawful, taxable, global economy. In turn, this would lead to the generation of over 1.5 million jobs, as well as $64 billion in additional taxes.
Yet it would be a mistake to discuss the cost of counterfeiting merely in economic and financial terms. Fake technology also presents big safety risks. In some cases it can undermine national security.
Information technology is essential to systems as varied as those controlling air traffic, financial and telecommunication networks, and military weaponry and intelligence gathering. Counterfeit networking hardware frequently does not meet the quality standards of genuine equipment, has a much higher failure rate, and often fails upon installation—or shortly thereafter. When they flop, entire systems in which they are embedded may malfunction, too. Faulty counterfeit networking hardware can be a nightmare to troubleshoot and fix.
According to Dan Baldwin, assistant commissioner of U.S. Customs and Border Protection, entire bank branches went offline for days in 2004 after the failure of fake wide-area-network interface cards installed in routers. In the same year a government agency conducted a network upgrade to its North American weather communication system using counterfeit network hardware. The network hardware and the entire communication system failed upon installation.
Preinfection of counterfeit devices
One of the most notorious areas that counterfeiters exploit is the provision of hard-to-get and obsolete parts. Their victims are industries exempt from Restriction of Hazardous Substances laws such as military, aerospace, and health care, which often require parts that have been discontinued by manufacturers.
Counterfeiting could potentially serve to carry out wide-scale disruption and espionage. An adversary could use counterfeit parts to gain access to otherwise secure systems, triggering an intentional system failure. Why send malicious code over the Internet if you can preinfect devices? Cases have included hard drives preinfected with viruses and the discovery of malware in hundreds of USB memory sticks, GPS devices, and other plug-n-play devices.
Counterfeit goods could leave secure systems open to attack through hidden backdoors for unauthorized remote access, logic bombs, and self-modifying codes—making them a major concern in the fight against cyberterrorism.
The impact of counterfeiting is always greater than the value of the counterfeit product itself. It hurts not only vendors, but entire industries, the economy, and national security. Directly or indirectly, it impacts all of us.
Another myth worth busting is the notion that China is responsible for all of the world's counterfeit problems. Counterfeiting is truly a global problem. According to Research And Markets, China is the top source of counterfeit electronic components; approximately 10% to 40% of electronics goods in China today are believed to be fake. Yet the estimated figure across the Middle East is 20% to 40% and across Eastern Europe, 10% to 40%. Other Asian countries—including Korea, Vietnam, and India—and some South American countries significantly contribute to the overall intellectual-property-infringement problem.
In July 2009, a VietNamNet reporter followed a technician to witness how a "BlackBerry dolly," a knockoff of Research In Motion's (RIMM) BlackBerry, is reproduced in Vietnam. In some 10 minutes, a phone was fully assembled for about $110 in components. In April 2009, Hewlett-Packard (HPQ) disclosed that it had discovered fake ink cartridges in Bahrain, Yemen, and Saudi Arabia.
Africa: China fakes' prime corridor
HP's revelation gives the lie to another myth about counterfeiting—that enforcing intellectual property rights in developing countries is a waste of time and resources and just creates negative publicity. Many brand owners may perceive enforcing intellectual property rights in some countries as a waste of time because of legislative and administrative hurdles. Some hesitate to take action because they fear publicity.
Take the continent of Africa, for example. The World Customs Organization now regards African countries as the main concern in Europe's fight against unsafe and counterfeit goods. Most fakes still originate in China, but Africa is now the main transit route to Europe.
Brand owners have opportunities to help shape legislation, especially in developing countries, to remove trade barriers that trigger counterfeiting. While doing so, they can create positive publicity and brand awareness. Regional organizations can be instrumental because they wield significant influence over regional governments. No effort is wasted in trying to stop counterfeiting.
Users and purchasers who believe it can't happen to them have fallen for what may be the most prevalent counterfeiting myth. Because counterfeits are sold through the same channels as secondary market and gray market goods, any buyer who purchases outside a vendor's authorized distribution chain faces a much higher risk of acquiring counterfeits. According to a study by the U.S. Commerce Dept. Bureau of Industry & Security, the number of counterfeit incidents reported by survey participants (including original component manufacturers, distributors, brokers, circuit board assemblers, prime contractors and subcontractors, and Defense Dept. agencies) climbed from 3,868 in 2005 to 9,356 in 2008, an increase of more than 140%.
Many brand owners offer verification tools to buyers and end users—including Web-based serial number verification, reseller authorization verification, and software product-key verification. Buyers should purchase only from suppliers authorized by the manufacturer. Authorized channels generally don't sell via online auctions because their authorizations often prohibit them from doing so. Not least, the biggest indication that a product might be fake is its price. If a product is being sold at a rock-bottom price, something may well be different.
If you don't take precautions, it can happen to you.