The good, bad and ugly

Vendors and law enforcement agencies are cracking down on counterfeit and grey market operations, yet these operations continue to witness explosive growth across developing nations. We speak to industry experts to understand the challenges this creates for the sale of original products and how they can be addressed.

Counterfeit trade and grey market operations are no longer restricted to high end products such as fashion, bags, watches etc. Over the last few years, the world has witnessed a steady increase in the sale of counterfeit hardware and pirated software. Simultaneously, we have witnessed a steady upsurge in grey market shipments of smart phones, tablets, printer consumables among a host of other technology.

It may be interesting to some that two separate terms are used for  what many seem to think is the same problem.

While the ‘grey market’ involves the trade in legal goods using channels that are not authorised by the manufacturer of the products, counterfeit refers to unauthorised manufacturing and sale of inferior quality goods or ‘fakes’ using a prominent brand logo or name.

“Counterfeit trade is a growing, profitable parallel industry. The issue is so profound that most vendors have a dedicated anti-counterfeit budget to fight and counter the production capabilities of counterfeits and curb their inroads into the local markets. Across the IT sector specifically, due to the pace of innovation and complex demands from products the barrier to entry is quite high. This is perhaps why we see that the most commonly impacted categories are optical disc storage media, tape storage media and consumables such as inks and toners. Counterfeit traders particularly eye the consumables that require a low initial cost yet represent large volume sales,” says Lancy Mohan Menezes, business unit head, print and supplies at Emitac Distribution.

“In the Europe, Middle East and Africa (EMEA), in general, counterfeit print cartridges for HP laser and inkjet printers mostly originate from Asia Pacific and increasingly from Middle Eastern and Eastern European countries. In some countries, counterfeit products are imported. In others, they are produced and distributed on a large scale within the country itself. Counterfeiters typically build their business exclusively on counterfeit products and often use an entire illegitimate distribution network, including resellers and retailers. In other countries, infringers are often running legitimate businesses with original printing supplies but, in parallel, they also distribute and sell counterfeit products. Some countries such as the UAE also function as transport hubs for counterfeits due to their large ports and extensive transportation links,” adds Ernest Azzam, Laser and Enterprise Solutions business manager at HP Middle East.

Jimmy Joseph, AEC Product Sales Manager, Omnix International, an authorised distributor of Autodesk solutions, agrees:  “The proliferation of fake counterfeit items has become a key concern across both the local and regional markets. These items have also developed sophisticatedly, leaving consumers confused and hard to distinguish which items are real or fake. This problem has largely affected the printer consumables segment, where a lot of fake cartridges, printer heads and even computer software have flooded the market,” he says.

Root cause analysis

Industry experts believe that lower income and less educated buyers combined with massive internet penetration across the globe fuels the demand for illegal products. In addition, distributors and resellers are drawn to this market in a bid to stay competitive.

According to a recent KPMG study that surveyed 43 authorised distributors and resellers, including 15 European outlets, found that although almost 92% cited purchasing counterfeit products as a significant risk due to poor quality and support, 71% claimed it was necessary to purchase grey-market items to be competitive on pricing and fulfilment. Still 81% of distributors said their competitive position would improve if grey-market activity was eliminated, analysts said.

Ironic as this may seem, experts believe that a majority of resellers involved in grey market trade either do so because they are unaware of the harm it can cause to the brand and their own organisation or  do so to make quick profits.

“The size of this market can vary with the macroeconomic environment and product supply vs. demand, among other factors.  Resellers are drawn to this market because it can be lucrative.  Generally speaking, the more demand there is for a product, the greater the grey market for that product.  During tough economic times, budgets get stretched and the grey market can appear attractive to those looking for lower cost products which on the surface meet their needs,” says Karim Kattouf, program manager, Brand Protection – Middle East, Saudi Arabia and Turkey at Cisco.

Analysts also believe that the stringent government regulations can also boost grey market trade especially across countries where corruption, bureaucracy and monopolies are a given. Grey market trade is also seen to increase in countries plagued by war, political upheaval or natural disasters.

Niranjan Gidwani, deputy CEO at Eros Group adds another interesting perspective: “The countries that delay or restrict the launch of popular products or solutions often witness a significant spike in grey market trade. Price isn’t the only factor because for instance, we have witnessed in the UAE that the official price of a product once it is launched is much lower than what was initially offered in the grey market. This is because while official channels work on correct pricing the grey market works on demand. The greater the demand, the higher the price,” he says.

A recent news release in a prominent local newspaper quoted the CEO of a prominent electronics retailer as saying, “Max Electronics will sell the new iPads on the grey market, but we will not be buying directly from overseas. The price in the UAE is expected to be double what Apple has quoted in the US. This lends credence to Gidwani’s remark.

Resulting doom

The repercussions of purchasing grey market goods are far reaching. Trade in counterfeit, grey market goods affects technology brands their customers and the nation’s economy in general.

“The price advantages on grey products cause massive problems for distributors as they affect the purchasing habits of resellers, who overstock and in some cases sell at lower prices to stem losses. At times it creates an uncertainty in the market for pricing levels that are not realistically achievable by distributors. In turn, it affects the customer channel for resellers, who lose their business to the ones purchasing from grey suppliers,” says Faisal Jamal, COO at Despec MERA.

Hendrik Verbrugghe, marketing director, Canon Middle East, says, “This creates major confusion in market with two prices or sometimes three prices present in market for the same product. In any given condition ‘grey’ prices are lower than regular prices, thus creating pressures on local margins. Often, this means losing out on the customer who may resort to purchasing a product through an alternative route or worse purchases a counterfeit.”

According to Eros’s Gidwani, the grey market doesn’t just eat into the company’s sales but hampers customer care. “Many a time we have seen that products bought in the grey market are brought to service centres for repairs which cannot be done without warranty and that irks the customer. But that is a price you have to pay when someone makes a purchase from the grey market,” he says.

“The fact that it is labelled ‘grey’ and not ‘black’ is the decisive factor. A grey product does not mean that the product is fake but it just means that it has been purchased outside of an authorised sales channel. So, despite the fact that buying these products isn’t illegal, consumers may end up with other problems such as the lack of warranty without which authorised dealers will not accept grey products. The UAE has an open policy toward importing products; companies can import products even if they are not the licence holders,” says Dan Smith, head of integrated marketing for the Middle East and Africa region of Xerox’s Developing Markets Operations.

“The use of pirated software entails risks of different types both on the technical level and the legal front. For instance, the software may  have in-built malware that can affect your systems, it may not be compatible with other programs or devices or may even damage the system or device. In addition, using pirated software puts an organisation at risk of being charged for copyright infringement,which can lead to both financial losses and damage to the firm’s reputation,” says Naser Samaenah, regional license compliance manager, Adobe Systems MENA.

On the vendor side, the use of counterfeit and grey market products represents a huge challenge with these products and solutions becoming harder to identify with displays of branding and high tech specifications. ‘Grey’ trade cuts into the revenue of hundreds of legitimate dealers, suppliers, and manufacturers. For these legitimate companies, the losses are huge and damaging because they now have to shell out additional resources in educating the market about the disadvantages of purchasing from the grey market or buying a counterfeit. If they don’t invest in customer awareness, they risk losing out huge sums in revenue as customers have a tendency to seek lower prices on the latest products and solutions. In addition, lacking customer awareness may also lead to damage to a legitimate dealer or manufacturers reputation due to lacking warranty or technical support for grey market and counterfeit goods.

In a sort of ‘cascading  effect’ the loss of revenue to legitimate businesses as a result of increasing grey market and counterfeit trade also affects the country’s GDP and ability to generate foreign investments. This in turn affects the government’s ability to invest in infrastructure and other citizen services.

Geared for a fight

“The grey market has always been an issue, in the channel, for consumers, enterprises, vendors and the government.  Now with a tough economic situation some channels choose to leverage their activities in one market to gain an advantage in others.  Vendors typically do not allow this type of activity due to the efforts to put into developing channels across countries that they believe are most suitable for the respective market aimed at serving customers in the best possible way.  This is not just a channel issue but also a vendor issue where products have been keyed or developed for that market based on dynamics or peculiarities of the region. More must be done in collaboration between the channel and vendors to stamp this activity out,” says Smith.

Xerox has implemented a number of initiatives to contribute to the fight against ‘grey’ trade. The company works with law enforcement officials, such as customs and excise as well as legal counsel internationally to investigate any developments in the grey and black market. According to Smith, Xerox has also appointed an Internet monitoring firm to search out websites that advertise Xerox products without the proper authority or violate Xerox trademarks. “These investigations are carefully monitored and yield important finds. We have also implemented holograms and tracking data on all Xerox products to help establish authenticity of the goods. In addition, Xerox is a member of the Imaging Supplies Coalition (ISC), a trade association of imaging companies that band together to educate customers on counterfeiting issues. Wholesalers, dealers and consumers may also submit questionable goods to the ISC for authentication by the manufacturer,” he says.

To help its channel partners, Xerox has a series of Compliance Officers who work with the partners to ensure that counterfeit and grey market consumables are identified and appropriate action is taken.  The company also invests in regular partner trainings to help the channel relay their knowledge of the ‘grey’ market and its disadvantages to their own customers.

Similarly, Canon has an IP and legal team based in Europe with representatives across the Middle East region who organise custom seizures and random checks to ensure that the activities of the channel are thoroughly supervised.

HP’s Azzam says that the company actively fights manufacturing and fraudulent sales of printing supplies across the globe by partnering with law enforcement authorities. Together, they identify and seize counterfeit products, cut off distribution routes and prosecute fraudsters.

“HP works with policy makers and non-government bodies such as Business Action to Stop Counterfeiting and Piracy, (BASCAP) to toughen applicable laws and enforcement capacity. We also proactively educate our employees, salesforce, channel partners, customers and the public to encourage them to protect themselves from fake print cartridges and consequent legal action,” he says.

Azzam adds, “Since last year, in the U.A.E. the total number of seized counterfeit printing items destined for HP printers is over two million. In addition, according to the Imaging Consumables Coalition of Europe, Middle East and Africa (EMEA), counterfeit products account for about 8% of revenues generated by imaging supplies sales in EMEA That’s a significant figure and indicates that counterfeit trade is still booming and counterfeiters have targeted the Middle East and UAE for their operations.  As the seizures indicate, HP and law enforcement are fighting back successfully. HP is confident that its successful collaboration with the U.A.E. authorities has weakened local counterfeit operations. It’s important to ensure that there’s ongoing pressure to identify, capture and prosecute counterfeiters wherever they are.”

Menezes from Emitac, which is a prominent value added distributor for HP imaging and printing solutions, says that over the years the company has taken due to care to ship every product with an authorised distributor sticker to establish brand authenticity and origin.

Despec MERA organises training events with its vendor to educate partners on anti-counterfeit. “Furthermore with our local availability in more than 10 local warehouses across Middle East and Africa we hope that by investing in having stock locally it gives the channel the opportunity to buy genuine products locally. To further add to the confidence, vendors constantly run promotions or boosters to encourage the market to purchase from authorised sources,” says Jamal.

“Vendors in the region run major campaigns to educate customers and interact aggressively with law enforcement agencies to curb the trade of counterfeits in particular. Joint seminars and trainings are held to create awareness and develop product champions to address this issue at every level and ensure that the consumer gets the right products. In addition, vendors are making efforts to unite their channel under loyalty programmes that offer them a whole host of incentives and support while educating them to promote the cause for legal channels and original merchandise,” says Menezes.

Despite these significant efforts experts believe that the industry  needs to take stringent measures to crack down on the sale of counterfeit products and seriously curb the growth of the grey market.

“While the situation is improving a whole lot more needs to be done. Heavier penalties and more frequent checks on unauthorised channels are needed in order to make any difference to the grey market. We need to understand that while counterfeiting is illegal worldwide, they grey market isn’t. Some countries do permit the import of goods even without the licenses to do so. I fear that this form of trade will only continue to increase and hinder the legal channels if we don’t start prosecuting people with heavy penalties,” John Spoor, channel sales manager, MEA at GFI Software says.

Cisco’s Kattouf also believes that the future of the grey market and counterfeit goods completely depends on how effectively the entire community combats it.

Mohammad Mobasseri, senior VP at Comguard, adds, “Although there have been significant efforts on the part of law enforcement agencies to crack down on counterfeit products, these efforts have been in spurts. We need to see more co-operation between vendors, resellers and customers. Customers must be aware that as long as there is a demand, there will be a supply of counterfeit products in the market place.”

“Grey” market is different from “Counterfeit”, says Canon’s Verbrugghe. With the Euro crisis and Dollar value steadily falling, Verbrugghe says that Canon anticipates an increase in grey market. “With time if the crisis deepens then we can see an increase of 10 to 15% from current level in next 12 to 18 months. The good news is that the sale of counterfeit products will continue to decrease as the market will show a willingness to pay a premium up to 10% to 20% for original “grey” products in comparison to a counterfeit,” he explains.

“With regular shrinking margins in IT distribution, the price attraction will continue to lure the resellers to buy from grey sources. I don’t believe we will see an eradication of either grey or counterfeit in the coming months. However, with right efforts we may just see the situation change for the better,” concludes Jamal.

As Neelesh Bhatnagar, CEO at Emax believes, the UAE has the legal infrastructure to spot and crack down on grey market activities yet there is long way to go.  Can vendors and distributors weed out the grey market and parallel imports with the help of local authorities? Jury is still out. //