Counterfeit parts

Counterfeit and gray market automotive components are a growing concern and an expensive problem. Besides creating financial losses for legitimate manufacturers, the use of poorly constructed counterfeit, fake and knockoff parts increases costs and shop time due to reduced life, failures and breakdowns because they don’t hold up or perform like genuine parts.

Since these parts typically are not built to OEM specifications to deliver consistent and reliable performance, they can lead to other mechanical problems and system breakdowns. All of which negatively impact fleet and shop productivity and profit.

In addition, those who sell and install poor quality and/or imitation parts can damage their reputation, or worse, face liability issues should a product failure have catastrophic consequences.

“Few manufacturers worldwide are equipped to manufacture, or approve for sale, OEM-quality commercial vehicle replacement components for aftermarket use,” says D. Mike Pennington, senior director, global marketing - communications, for ArvinMeritor. The company is a premier global supplier of a broad range of integrated systems, modules and components to original equipment manufacturers and the aftermarket for the transportation and industrial sectors.

“Many manufacturers don’t have the engineering expertise, the understanding of the part’s original design or the quality manufacturing processes to match the exacting performance specifications of an OE component. They cannot match the safety, reliability or durability of the original.

“To keep costs attractively low, unapproved parts may use cheaper materials and lower grades of metals that can lead to component failures,” Pennington goes on. “If untrained labor is used, error-prone manufacturing can result. Quality standards simply do not exist at some low-cost manufacturing facilities. And there is no after-sale support. ‘Buyer beware’ applies to parts dealers and distributors as well.”

LARGE COST

Numerous government agencies and industry sources estimate the total global cost of all counterfeited products to be between $600 billion and $650 billion per year, says Steve Handschuh, president and COO of the Automotive Aftermarket Suppliers Association (AASA), the only trade association that exclusively represents the North American aftermarket supplier industry.

In 1981, when auto parts and other sectors faced a major global counterfeiting problem, the Automotive Aftermarket Industry Association (AAIA) estimated that counterfeiting cost the global automotive parts industry about $12 billion a year and, conservatively, cost the United States some $3 billion, says Lee Kadrich, AAIA vice president, government affairs and trade. At that time, annual aftermarket parts sales were $54 billion versus around $388 billion today.

AAIA is an association that represents organizations that manufacture, distribute and sell motor vehicle parts, accessories, services, tools, equipment, materials and supplies.

“The distinctive trademarks - signs, wording, colors, figures and so on - that have been developed and registered by U.S. companies are brands representing genuine products,” Kadrich says. “Counterfeit trademark is defined as a mark that is identical or substantially indistinguishable with the registered trademark. Counterfeiters steal these trademarks to mark their fake products because they know buyers want the quality products represented by U.S. trademarks.

“The terms used to discuss the problem are important, and one can interchange counterfeit with words such as fake or bogus.”

There is an important distinction between re-engineered aftermarket products and counterfeit products, Kadrich points out. “Unless someone has stolen a company’s trademark or its patents, trade secrets or other intellectual property, there is no legal impediment to its products competing with OEM parts for aftermarket sales. Independent aftermarket suppliers, with quality production techniques and sophisticated testing, have succeeded in supplying replacement parts. The market is a harsh judge, and those companies with poor performing products will fail.”

“Successful American auto parts brands are the envy of the world,” he notes. “Whether U.S. companies supplied world markets exclusively from North America, or also used foreign-based production, pirates would still want to exploit stolen U.S. trademarks to reap huge profits.”

CRIMINAL ACTIVITY

Counterfeiting is criminal activity which the FBI has labeled the “Crime of the 21st Century,” says AASA’s Handschuh. It is extremely difficult to quantify the economic and industry-wide costs because of the illicit nature of counterfeiting and piracy, Kadrich says. Because of the significant differences in types of counterfeited and pirated goods and industries involved, no single method can be used to develop estimates.

Handschuh says data from the Center for Automotive Research (CAR) shows the motor vehicle parts supplier industry produces $388 billion in sales annually and employs 686,000 people. The $3 billion in sales lost to counterfeiting can translate into 5,000 to 6,000 lost jobs directly in the supplier industry and nearly 28,000 indirect jobs lost - positions at businesses supporting supplier companies. The average median income in the parts supplier industry is $46,000, so the resulting job losses can translate into $230 million to $275 million in lost taxable income.

Lost sales of automotive parts also occur in overseas markets where counterfeiters have for many years preyed on the trademarks of respected American suppliers.

The greatest cost of counterfeiting and intellectual property rights (IPR) violations go beyond lost sales and manufacturing. “These fake parts pose a serious safety threat to the unsuspecting repair professional who installs them, to the unsuspecting driver who has counterfeit parts on his vehicle and to everyone traveling our nation’s roads and highways,” says Handschuh. “Counterfeit parts also damage a legitimate company’s good name and reputation, and can lead to product liability claims.”

Back in the 1980s, the tools for tracking and fighting counterfeiters were primitive compared to what technology provides today, says Kadrich of AAIA. The industry began pushing for stronger U.S. laws, as well as a new international agreement, to deter counterfeiting.

AAIA and other groups succeeded in securing passage of the 1984 Trademark Counterfeiting Act, he says. The law, for the first time, made counterfeit trafficking a federal crime punishable by fines and imprisonment and greatly beefed up civil suits for damages caused by counterfeiting.

AAIA was also involved in getting a1994 global accord by nations to provide intellectual property rights (IPR) protection. However, Kadrich says “ineffective and uneven enforcement by some countries means that overseas counterfeiters are still actively stealing sales from U.S. parts makers.”

To address the serious issue of counterfeiting and other IPR violations within the automotive manufacturing community, AASA, the Motor & Equipment Manufacturers Association (MEMA) and its affiliate associations - the Heavy Duty Manufacturers Association (HDMA) and the Original Equipment Suppliers Association (OESA) - created the Brand Protection Council in 2004. It provides a forum for manufacturers to discuss counterfeiting and other IPR violations with a focus on North America.

The Brand Protection Council, MEMA, AAIA and others played a role in the 2006 passage of the Stop Counterfeiting in Manufactured Goods Act. It extends the authority of federal seizures to include the tooling, equipment and supplies used to produce and traffic counterfeit goods, in addition to the goods themselves. It also mandates the destruction of equipment and materials used for making and packaging counterfeit goods and strengthens penalties for counterfeiters.

AAIA, the Brand Protection Council, MEMA and others also played a role in the passage of the Prioritizing Resources and Organization for Intellectual Property Act (PRO-IP) of 2008. This law helps bolster the effectiveness of the government’s intellectual property protection efforts.

All of these efforts have paid off, says Handschuh of AASA, who points to a report from the Bush Administration’s Departments of Homeland Security and Justice that show significant improvements in measures of IP enforcement increase during the last five years of the Administration. The Department of Homeland security reported seizures totaling $200 million in Fiscal Year 2007, a 27 percent increase over 2006. The Department of Justice reported a 33 percent increase of criminal cases involving IPR violations from 2006 to 2008.

The Obama Administration also has affirmed its commitment to fighting IPR violations and counterfeiting, Handschuh notes. “Our association’s staff in Washington, DC, is working with the Administration to continue the fight against counterfeiting.”

In addition, AASA and MEMA have spearheaded efforts to raise industry awareness of counterfeiting at trade shows throughout the world. These industry gatherings present a prime opportunity for the global motor vehicle parts industry to speak out against counterfeiting.

“We have instituted proactive anti-counterfeiting efforts in conjunction with the Automotive Aftermarket Products Expo (AAPEX), held annually in Las Vegas, and PAACE Automechanika, held annually in Mexico City,” says Handschuh. “Activities include hosting an annual Webinar on protecting intellectual property rights at the show; onsite security; and legal teams to deal quickly and efficiently with infringers and violations.”

AAIA co-owns AAPEX and as such partners with AASA on the anti-counterfeiting efforts at the event.

AASA and MEMA collaborate with CLEPA, the European association of automotive suppliers and JAPIA (Japanese Auto Parts Industry Association) in anti-counterfeiting activities at Automechanika Frankfurt (Germany), Automechanika Shanghai (China) and other international shows and exhibits.

TECHNOLOGY IMPACT

Technological advances, such as computers, copiers and scanners, have contributed to counterfeiters’ sophistication, particularly in counterfeiting of labels and packaging.

“While technology has helped counterfeiters, the flip side of that coin is the technologically-enhanced response of law enforcement in deterring counterfeiting and the benefits of elegant supply chain management systems in the private sectors,” says AAIA’s Kadrich. “There’s also high-tech product markings and readers used to ensure legitimate shipments.

“It is a long way from 1981, when our association waged the anti-counterfeiting fight with self-correcting typewriters and not even a fax machine.“

Often, identifying counterfeit, fake and knockoff parts is difficult because they are designed to look like almost perfect replicas of the genuine product and are packaged, labeled and distributed as genuine replacement parts. Some steps being taken by U.S. suppliers to spot such products, observes Kadrich, are recording their registered trademarks with the U.S. Customs and Border Protection (CBP) and continually providing this information to help CBP officers stop counterfeit parts from entering the U.S. market.

“Advances in computer technology have broadened the capabilities of even the least tech-savvy user, but the same programs which benefit businesses and casual users also are available to criminals,” says Jack Cameron, vice president, programs and member services, AASA, and group executive of the MEMA Brand Protection Council. “These programs can be used to duplicate logos, packaging and other trade materials.

“In addition, advances in manufacturing technology allow unscrupulous manufacturers in certain countries to ‘reverse engineer’ legitimate parts and components, and create illegal, unsafe fake parts,” he points out.

FAVORED PARTS

While no parts are immune, counterfeited parts tend to be the most frequently replaced parts - such as brake pads, oil filters, spark plugs, etc., and are often safety-related, says Cameron. (See Table 1 - Most Commonly Counterfeited Parts, Components & Accessories.)

Using these counterfeit parts can have serious consequences, says Cameron. Here are just a few, as noted by vehicle testing experts:
Counterfeit oil filters can cause sudden engine failure.

Counterfeit suspension parts and wheels break when made of substandard material.

Vehicle hoods without crumple zones penetrate the passenger compartment.

Counterfeit brake pads, made of grass clippings and saw dust, have caused fatal accidents.

Counterfeit windshields without safety shatterproof glass cause injury or death.

FOREIGN PARTS

The majority of counterfeit auto parts in North America are imported, with the majority produced in China, concur AAIA’s Kadrich and AASA’s Cameron. China accounts for more than 80 percent of the goods seized at U.S. borders, notes Cameron.

“China joined the World Trade Organization (WTO) in 2001 and the Obama Administration has continued the Bush Administration’s excellent efforts pressing China to comply with its commitments to protect IP,” Kadrich says, although progress has been slow.

Other countries reported as major producers and exporters of counterfeit goods include India, Pakistan, Russia, Taiwan, Korea, Uruguay and Vietnam.

“The Congressional Research Service concludes that compared to foreign countries, counterfeits produced in the United States are estimated to be relatively low,” says Kadrich. “Given production costs in the U.S., I think this is especially true for auto parts, although there is production of counterfeit packaging and labels.”

Adds Cameron of AASA: “Even though the industry estimates millions of counterfeit auto parts enter the United States every year, only a fraction of them are ever detected by U.S. customs. This is no surprise considering that nearly two million entries per month are logged at 302 different U.S. ports.

“Local police and courts in some countries are hesitant to pursue counterfeiters, particularly when powerful state-owned enterprises are involved or a local economy may be negatively impacted,” he continues. “Some examples include state-owned factories which began copying foreign brands to use excess production capacities after legitimate sales of their own goods fell, and the mixing of fake goods into legitimate product shipments.”

Probably the greatest factor in the spread of counterfeit goods has been the explosion of global Internet sales, observes Cameron. “Worldwide e-commerce has had a huge impact in accelerating the pace of all counterfeit products, including automotive parts. Online auctions and other sites that link sellers to buyers have made the counterfeit parts trade an international problem of potentially epic proportions.”

Cameron says the Internet poses many threats, including:

Pure counterfeit product or direct knock-offs.

IPR violations related to proprietary or patented designs related to the manufacturing of the product.

Trademark infringement of not only the product itself but also related products such as apparel, decals or anything with a logo.

Violations of supplier agreements by contract manufacturers selling around the owner of proprietary or second party-owned tooling known as diversion.

Adherence, or lack there of, to distributor agreements which limit sales by geographical or territory boundaries, known as “gray market.”

PREVENTION MEASURES

There are some things maintenance managers, repair professionals and do-it-yourselfers can do to avoid purchasing counterfeit parts, says Cameron. Among them:

Purchase brand name parts made by full service aftermarket suppliers who stand behind their products from trusted parts resellers.

Research the parts before purchasing by talking to repair professionals or searching on the Internet.

Remember the old adage: If a deal seems too good to be true, it probably is. Always be suspicious of brand name products available from an unfamiliar source at bargain pricing.

“Maintenance managers also should be aware that any state, local or government agency can investigate suspected counterfeit parts sales,” he says. “However, law enforcement agencies can only investigate the offenses they know about. So, it’s up to all of us in the industry to let them know about suspicious products.

“Another resource for maintenance managers is the full service automotive aftermarket suppliers who manufacture quality parts,” goes on Cameron. “Nobody knows their products and trade dress better than the manufacturer,” adds Cameron.

The parts distributor should be contacted immediately to check out any suspicious parts, adds Kadrich of AAIA. Distributors can examine the parts and boxes to determine if it is or is not their parts.

To help avoid counterfeit parts, parts buyers should know what intellectual property rights their existing and prospective suppliers hold, he says. Suppliers should register their trademarks and patents in the U.S. and ensure that they are registered in foreign markets of interest to them.

Information on taking advantage of the various tools for protecting IP, as well as other government assistance, is available at www.stopfakes.gov.

“It’s important for everyone to remember that counterfeiting is a serious crime,” stresses AASA’s Handschuh. “While it may seem harmless enough to purchase a ‘knock off’ piece of designer luggage or DVD of a popular movie, remember that every counterfeit product steals good manufacturing jobs.

“In our industry, counterfeit parts pose serious threats to the health and safety of repair professionals, as well as vehicle owners and passengers,” he says. “A fake suitcase that breaks is an inconvenience. A fake part that fails could take someone’s life.

“The real key to fighting counterfeit automotive parts is awareness throughout the supply chain - and reporting suspicious products.”

Over the past 26 years, Congress has legislated a number of important tools to fight counterfeiting, says Kadrich. These laws have made for more effective enforcement and seizure activities, but penalties for counterfeiting and IRP violations have not been as aggressively pursued or accessed. (See Table 2 - Dollar Value of IP Penalty Amounts Assessed and Collected by U.S. Customs and Border Protection.)

“While I feel the public and private sectors could have made more effective use of the laws, I am more confident going forward that the PRO-IP Act will lead to their fuller use,” he says. “I am bullish it will marshal more resources to boost the effectiveness and coordination of anti-counterfeiting forces, including CBP, the Justice Department, the FBI and state and local law enforcement agencies.

“I feel this way because the law ensures that IP protection will remain a top priority with a Senate-approved White House-level U.S. Intellectual Property Enforcement Coordinator. This is a permanent position and Victoria Espinel is the first appointee.”

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