An increase in production of counterfeit electrical products over the past decade puts the industry’s 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 with diamonds flashing in the sun. But being the shrewd, worldly businessperson you are, you entertain no delusions that it's genuine. 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 and includes a link to his Web site. The company appears to be legitimate, and pictures on the Web site show products identical to the ones you're installing — complete with all the logos and certification marks. Being the shrewd, worldly businessperson you are, you can't help but consider making a deal that could allow you to lower your next bid significantly. What would be the harm?
Actually, the harm could be substantial. Long associated with knockoffs of high-dollar consumer items, traffic in counterfeit goods has escalated in recent years, spreading into markets where it was never a concern before. In the past 10 years alone, 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 unfortunately expected to continue growing rapidly in the future.
Although figures on the scale of global traffic in counterfeit goods are hard to come by, some estimate it's a $500-billion-per-year business, growing at a rate of 20% to 25% annually. Electrical products account for only a fraction of a percent of that market; however, 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.
Stakes are high. 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. For example, 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, for example, 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.
Consequences for electrical contractors using counterfeit products could be similar. Although much is yet to be seen — as far as how litigation precedents play out in the courts — electrical contractors purchasing counterfeit electrical products could potentially be exposed as well. If they bought the product on good faith from an authorized distributor or other reliable source, for example, their exposure to liability would mostly likely be minimal. Those choosing to buy outside the traditional supply chain should be more wary. A good rule of thumb: Beware of any deal that seems too good to be true.
Whether you're a distributor or a contractor, 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.
What's driving the deception. The recent surge 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, creates 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 knockoffs. 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. In fact, 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 their name-brand counterparts.
When 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 (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.
Areas of weakness. 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.
The speed with which products can be shipped around the globe only adds 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, following a circuitous route to their destinations.
“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. 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 continues to rebuild from hurricane devastation.
“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, injuries, and fatalities a short time down the road.”
Combating counterfeiters. 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, track down counterfeiters, and prosecute them.
Finding the counterfeiters is one thing. Holding them accountable is 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 criminals.
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 2006, the “Stop Counterfeiting in Manufactured Goods Act” achieved final passage by the House and Senate. President Bush followed suit by signing the bill into law shortly thereafter. 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, allowing 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,” he says. “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. 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 more difficult to detect, distributors and contractors will need to be more vigilant when it comes to whom they choose to do business with. 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.
Doug Chandler is the executive editor of Electrical Wholesaling magazine.
Sidebar: 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.
“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.”