It’s Cheap,

But Is It Real?

therealreal.com

larry fisher writes about business for The New York Times and other publications.

Published October 20, 2017

 

Some millennia ago, an enterprising soul affixed a mark to his clay pots, and branded consumer goods were born. A day later, a rival potter copied the mark, launching the counterfeit products industry.

The trade in counterfeit goods may even predate the counterfeiting of currency. Pliny the Elder (A.D. 23-79) warned of counterfeit opals, and archaeologists have unearthed ancient forgeries of Roman bricks, Chinese pottery and other early branded goods dating back thousands of years. As the Economist Intelligence Unit put it, “Before people carried counterfeit handbags, smoked illicit cigarettes and used synthetic methamphetamines, there were bogus spices, stolen antiquities and smuggled whiskey.”

Policymakers and law enforcement have battled counterfeit goods ever since, with little success. A report for the International Chamber of Commerce in 2011 estimated that the total value of counterfeit and pirated goods was as much as $650 billion per year and projected that this figure would grow to almost $1.8 trillion by 2015. Now a host of technology companies, from tiny start-ups to mighty IBM, promise brand protection services to stem the flow of knockoff Nikes and counterfeit commodities of all kinds. Indeed, it is provoking an arms race in which increasingly sophisticated counterfeiters are facing off with the makers of the real things.

The Numbers

The market for knockoffs is broad as well as deep. No product, it seems, is too large (construction cranes) or too small (rice). (The latter, by the way, is made from various grain remnants; reports of plastic rice have thus far been debunked.) Consumer electronics knockoffs are particularly popular: the OECD reports that one in four video game consoles is counterfeit, along with one in five headphones, one in six smartphones and one in seven memory cards and solid state memory drives. Counterfeit auto parts are also a huge business — think airbags, brake pads and tires — and so are pharmaceuticals, from the statin Crestor to any number of very expensive chemotherapy drugs.

China claims the dubious distinction of world market leader in counterfeit goods, accounting for a remarkable 87 percent of products seized at U.S. ports. But the Americas, Europe, Africa, Australia and New Zealand are all producers and consumers of false goods.

Technology’s Ambiguous Role

In recent years, technology has been a boon — to the counterfeiters. The internet gives any producer of fake goods instant access to the global market. Online retailers, including Amazon, Alibaba and eBay, have provided a frictionless distribution network despite their well-publicized efforts to stem the illicit trade. And 3-D printers let even mom-and-pop operators copy sophisticated products with remarkable accuracy. Do vendors of brand protection and secure solution providers stand a chance?

“I spoke at a couple of conferences run by people who make the tech solutions, and what surprised me was the absolute faith placed in their ability to solve the problem,” Tim Phillips, author of Knockoff: The Deadly Trade in Counterfeit Goods, told me. “I was always careful to point out the massive economic incentives for the people who wish to find a way around these fixes. Maybe it’s an insight into the way we tend to see tech, as a sort of omnipotent force that we hope can disappear problems for us, so that we don’t have to think about the social/economic causes of those problems.”

Fisher Lawrence Counterfeit 1

Data? What Data?

Alert reader, did you stumble over the stats above? Maybe you should have. Put in perspective, $1.8 trillion is bigger than the GDPs of Russia, Korea and Canada. It’s nearly twice the defense budgets of the United States, China, Saudi Arabia and Russia combined. So, it is reasonable to ask, how solid is that number? The answer is no one knows — which is another way of saying, “Not really.”

In the absence of a Counterfeiters Industry Association trumpeting its record revenues, researchers make do with an array of survey techniques, forensics and guesswork. Some counterfeit experts say the ICC’s number is much too high, that the real figure is probably just $500 billion or so, give or take a few fake Rolexes. Others say the actual number is undoubtedly higher because only a small fraction of counterfeit goods are seized.

“Everyone quotes numbers like they absolutely know what they’re talking about,” said Alan Zimmerman of the City University of New York, who has written extensively about counterfeit trade. “The FBI was quoted thousands of times on the Internet, and the General Accounting Office asked them: ‘Where did these numbers come from? Where does the original number come from?’ Nobody knows.”

Cigarettes are one of the mostly commonly counterfeited consumer goods, so tobacco companies have sought to ascertain the global cost to their brands. “Cigarette companies did the most scientific study,” Zimmerman said, with a pinch of irony. “They did discarded-pack studies; they went around and actually picked up garbage and tried to extrapolate from that the counterfeit cigarette market.”

One reason that counterfeit sales are hard to quantify is that the terminology is squishy. There is a wide range of illicit products sold, everything from cheap knockoffs that everyone knows are fake to sophisticated copies that can even fool the pros. Indeed, some counterfeits are virtually identical to the legitimate product because they are made on the same assembly lines after hours.

“‘Counterfeit’ is a very well-known term, but there are challenges with that,” explains Andrew Stevens, an analyst with the Gartner Group. “In some companies’ eyes, or from some outside observer’s perspective, counterfeit has to do with intellectual property issues, not with fake or substandard products, or products purposely made to deceive the public into buying them. You may well find that ‘counterfeit’ does lock itself in as the terminology of choice, but there is a lot of consensus around the use of ‘fake.’ People understand what it means.”

Call them what you like, counterfeit products are everywhere, and Stevens counts himself among those who say the published estimates are, if anything, low. “In my experience, the ones you see are the tip of the iceberg,” he said.

 

Cigarette companies did discarded-pack studies; they went around and actually picked up garbage and tried to extrapolate from that the counterfeit cigarette market.

 
Policy and Policing

Like reliable estimates of the phenomenon, examples of effective public policy against counterfeiting are hard to come by. Most countries have laws on the books that bar the manufacture and sale of counterfeit goods. But many of these laws have no teeth: enforcement is inconsistent and brand owners often prefer to ignore the crime because the cost of pursuing can be higher than the expected benefits.

“If you just use the United States as an example, we have a policy and we do have enforcement of intellectual property, but we still have a huge problem of counterfeit and pirated products,” said Peggy Chaudhry at the Villanova School of Business. Even where enforcement is vigorous, the counterfeiters are more numerous and more agile. “It really is a hydra,” Chaudhry said. “If Interpol and other enforcement agencies shut down one of these sites, they can readily sell from another.”

To be sure, some countries do better than others at limiting the counterfeit goods trade. The Economist’s Illicit Trade Environment Index scored 17 economies in Asia-Pacific on the extent to which they enable illicit trade. Australia and New Zealand had the cleanest scores, while institutionally weak countries, including Myanmar, Laos and Cambodia, scored the worst. But there are some surprises here, too. Hong Kong, which has historically been a mecca for counterfeit goods, now ranks in the top five in the region for enforcement of laws against fakes. China remains in the bottom half of the index, but it is making an effort to improve its standing in order to protect its role in legitimate global manufacturing.

Well-intended policy is one matter, enforcement is another. Unlike the production or use of counterfeit currency, which undermines the authority of the state and is pursued with the full force of government, fake goods merely violate trademark law. Overworked customs agents may spot shipments of counterfeit goods, but unless the rights holder files charges, there is little law enforcement can do. That means it is up to the rights holders to pursue justice.

“Counterfeiting hasn’t really been taken seriously for a long time,” said Robert Peeters of the multilateral World Customs Organization. “Some companies ignore the fact that there is counterfeiting happening. Even when I come back to them with the counterfeits, they say it isn’t an issue.”

In the absence of strong enforcement, one alternative is to cut off counterfeiters from the global payments system. The International Anti-counterfeiting Coalition, a Washington-based nonprofit that historically focused on legislation, now works with rights holders, credit card companies and PayPal to block payments on suspected counterfeit goods. The IACC said the program has terminated over 5,000 individual counterfeiters’ merchant accounts, which has affected over 200,000 websites. Separately, the IACC has partnered with Alibaba, the giant online mart that has been a major conduit for counterfeit goods. The organization claims that some 6,800 sellers’ storefronts have been closed and permanently banned, and nearly 200,000 infringing product listings have been removed.

“We’re the experts on identifying counterfeit goods,” said Robert C. Barchiesi, the IACC’s president, who is a former officer with the New York City Police Department. “You can’t expect Visa or Mastercard to be experts on that, but they’re experts on their end. If you bring those expertises together, it’s a winning hand.” The crack cocaine trade “in New York City when I was there looked like a never-ending problem, and look at it now. The same thing will happen here.”

There’s an App for That

But like the war on drugs, the fight against counterfeit goods is replete with small victories even as the larger trend is one of unabated growth. While the IACC boasts about blocked payments and Interpol publishes regular reports of counterfeit products seized, the trade mutates and moves around. For every shipping container full of knockoffs that is seized, how many more pass through customs unexamined?

“You have to keep in mind that customs searches less than 5 percent of everything that comes in,” Chaudhry said. “If you look at enforcement, it is a really low percentage of goods coming in daily that actually gets some kind of scrutiny.”

In this environment, a broad spectrum of businesses are eager to help — for a price. Brand protection software and services claim to rapidly discover, monitor, measure and proactively guard brands online. Providers of secure solutions offer technological authentication tools ranging from holograms to RFID chips to mass serialization. Track-and-trace capabilities have become an integral part of supply chain management. IBM made headlines when it signed a deal with Walmart to apply blockchain — the buzzword technology that makes Bitcoin transactions verifiable without third-party participation — to track product shipments.

Many companies now have brand protection officers; conferences and consultants abound. There is even a new school at Michigan State University, the Center for Anti-Counterfeiting and Product Protection, with its own quarterly journal, The Brand Protection Professional. “It’s multi-disciplined, and it needs to be,” explained Leah Evert-Burks, the journal’s editor. “You’re looking at three different fronts: supply, or the source factory, in which you can conduct raids or factory audits; distribution — the borders, working with customs of every country, enlisting distributors or retailers — and demand: educating consumers on what counterfeiting is, that it’s not a victimless crime, that it’s tied to organized crime and violations of human rights.”

Most brand protection products and services focus on helping rights holders identify the source of counterfeits and get them out of the supply chain. One of these is Red Points, a Barcelona-based start-up that monitors the web for counterfeit goods and pirated content. It seeks out impersonations, web pages and fake profiles in social networks that provide illegal copies of genuine products, fake apps that impersonate genuine brands in order to sell illegal products or commit fraud, and cybersquatting, the fraudulent registration of domain names that reproduce registered trademarks. Red Points claims a 96 percent success rate in turning detections into removals.

“The client has a dashboard where they see all the incidents we are finding, all the reporting, and they can validate if it is an infringement or not,” explained Laura Urquizu, Red Points’ chief executive. “We have takedown tools to process a request to the host or website. They remove it within hours.”

But when asked for the names of companies whose losses to counterfeits declined meaningfully thanks to Red Points, Urquizu demurs. Clients don’t want their stories told, she said, and I found this response common among brand protection vendors. Presumably, no one would buy their products or services if they did not work — or at least not more than once — but performance metrics are missing in action.

“What has really surprised me is the sheer scale of the problem, and the lack of activity from institutions and governments,” Urquizu added. “The big companies can afford to have inside teams, but most subject to the problem don’t even know there is a solution.”

Fisher Lawrence Counterfeit 2

One area where governments have stepped up, albeit belatedly, is in pharmaceuticals. Until recently, the United States was awash in counterfeit, stolen, adulterated and diverted drugs. It was so easy to obtain a license to distribute pharmaceuticals in some states that many former narcotics dealers — convicted felons — moved into the trade. The counterfeits sold through licensed pharmacies and even hospitals, but every attempt at regulation was put down by industry lobbyists.

Change only came after a scandal not directly related to counterfeiting: a meningitis outbreak in 2012 killed 64 people because a compounding pharmacy that wasn’t licensed to make its own drugs sold a contaminated product routinely used in outpatient surgery. In response, Congress passed the Drug Quality and Security Act, which, among other things, established requirements to facilitate the tracing of prescription drugs through the distribution chain. Every manufacturer and repackager was obliged to affix a product identifier on each package sold. The European Union adopted a comparable measure at the end of 2013, and similar laws have been passed in many countries, from China to Brazil to Turkey.

High-value products like computers and automobiles have always been identifiable by serial number. And customers are already familiar with the technology that FedEx and UPS employ to provide a unique tracking number for each envelope or package they ship. But putting a serial number on every packet of pills and every vial of vaccine is an order of magnitude more challenging. Pfizer and GlaxoSmithKline have both turned to an Oslo-based company, Kezzler AS, that has developed a proprietary process for generating billions of codes that can be applied to any kind of product.

By applying a unique encrypted identity to every package, Kezzler can show, in real time, exactly where and when a product went awry. The system never references a scanned code against a stored number, but rather applies an encryption algorithm to verify that the code is valid and could only have been generated by the Kezzler platform. The operation takes only a second or two, regardless of how many products have been scanned or where the customer is in the world. Because there are no numbers stored in a database, the system scales to the billions or trillions of codes.

“We believe, and pride ourselves in saying we have military grade encryption,” said Thomas Kormendi, Kezzler’s chief executive. “We used to say unhackable, but it’s very hard to say that, although it would be very, very difficult. We have a number of wins,” he allows, but many are covered by nondisclosure agreements. “One of the big ones we can talk about is we have joined up with one of the world’s biggest packaging companies, Amcor, to do any kind of food packaging, pharmaceuticals, blister packs.”

The drawback to encryption systems like Kezzler’s is that someone in the field, whether a customer or a customs agent, has to scan the product to see if it is genuine. How many customers would actually bother to do that? Could a busy customs agent keep track of all the different apps?

Ian Lancaster, a British-based specialist in authentication technologies, said it is unrealistic to expect consumers to download the necessary app (out of 20 or 30 similar ones), scan products before purchase and alert store owners (who may be complicit in the counterfeit trade) when they spot a fake. “If I had a dollar for every clever, and I genuinely mean clever, ingenious, technology solution that has been invented over the last 20 years for authenticating genuine goods, but the company has then folded because they never could make inroads, I’d be a damned sight richer than I am now,” Lancaster said. “They are too expensive, or rather too expensive in the perception of brand owners.”

One helpful measure is a World Customs Organization program called IPM, which integrates many of the most common detection and authentication tools from secure solution providers like Kezzler so that an agent in the field doesn’t have to guess at which one to use. “IPM will tell him how to authenticate a product,” explained Peeters of the WCO. “It’s important to have this technology in the hands of the customs officer who is at the container site.”

Of course, counterfeiters can get around this tool by shipping directly to customers, a strategy enabled by the same technology that makes shopping on Amazon so easy. “I’ve seen dramatic shifts from containers to direct shipments,” said Barchiesi of the IACC. “Now you have to track individual parcels.”

 
The WCO estimates that 40 percent of all goods sold online are counterfeit, and in some categories the number is even higher.
 
How Worried Should You Be?

The WCO estimates that 40 percent of all goods sold online are counterfeit, and in some categories the number is even higher. Chances are, you’ve already purchased counterfeit goods, knowingly or otherwise. I suspect the MacBook power adaptor I bought online is not genuine, and a quick Google search suggests I have good reason to wonder. But it works. The prescription drugs I have ordered online from Canadian pharmacies trouble me more.

Not only do counterfeiters operate multiple websites, they have become adept at copying the look and feel of legitimate ones, so that consumers have no clue. Some even operate help desks, so that customers can get answers about using their bogus products.

“The sophistication with the counterfeiters now is not just around the physical product, it’s around the services,” said Stevens of Gartner. “They are mimicking a web portal that the manufacturer uses for authentication. In the same way the manufacturers close gaps, the counterfeiters themselves are going through their own continual review process to make sure their products are watertight as well.”

Stevens said he has become more cautious in his own purchases, particularly online. “You can’t be paranoid about every single product that you buy. But certainly for me, when it comes to food, medicines, I’m very cautious,” he said. “You’re never sure what’s around the corner.”

main topic: Business
related topics: Global Economy, Trade