Fighting fakes: The scary truth about counterfeiting in manufacturing

The specter of counterfeiting’s safety and business threats is growing. Here’s how some companies are fighting back.

By Sheila Kennedy, CMRP, contributing editor

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Counterfeit, fraudulent, and suspect items (CFSI) pose a serious threat to industry. Fake parts used in products such as pumps and turbomachinery threaten user safety and performance as well as the reputation and profitability of affected suppliers.

How big of a problem is it? What’s being done to fight it? What actions can you take now to combat it?

We asked these questions of a cross-section of industry stakeholders: a university professor and researcher, a plant practitioner, a parts manufacturer, a producer of pumps and electrical products, a distributor of automation products, and an industry group advocating for innovation in fighting counterfeiting. Here’s what they had to say.

The problem may be bigger than you think

The International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP) summarizes the problem thusly: “The massive infiltration of counterfeit and pirated goods drains $1 trillion from the global economy and robs over 2.5 million jobs. Unsafe and ineffective products now pose a risk to millions of consumers, while governments, businesses, and society are being robbed of hundreds of billions in tax revenues, income and jobs.”

The problem is growing at a rapid pace, as evidenced by a new study published by the Organisation for Economic Co-operation and Development (OECD) titled “Trade in Counterfeit and Pirated Goods: Mapping the Economic Impact.” The April 2016 report states that trade in counterfeit and pirated goods grew from $250 billion (US) annually in 2008 to more than $461 billion in 2013. That’s roughly an 80% increase over a five-year period.

The issue of CFSI is significant in industrial capital projects, says Makarand (Mark) Hastak, professor and head of construction engineering and management and a professor of civil engineering at Purdue University. He studied the topic while participating in a Construction Industry Institute (CII) special research team on mitigating counterfeit materials threats. The team’s findings were published in September 2014.

“Our surveys indicated that 28% of the respondents have experienced CFSI, while 62% of these incidents were never reported to any external agency outside their companies,” says Hastak. “The known cost impact of CFSI per incident, according to the respondents, ranged from $100,000 to $28 million.”

He notes that of those respondents reporting incidents, 83% claimed project delays for varying periods of time as a result of counterfeit or fraudulent products. “Therefore, we observed a significant but not completely known risk associated with CFSI in the capital projects,” adds Hastak. “The consequences of risks associated with CFSI range from fatalities to injuries, project delays, quality compromise, (and) cost overruns.”

Companies like Roquette, a starch producer and biorefinery, are taking notice. “I have randomly checked Grade 316 stainless-steel parts in our storeroom and had a magnet stick to them,” says Phil Beelendorf, maintenance technology senior manager at Roquette. “In both cases where this occurred, purchasing had substituted knockoff parts.”

He believes counterfeiting is becoming a bigger issue for two reasons: The global marketplace is bringing in more players every day, and purchasing departments are pressured to continually lower the cost for what they pay for goods and services.

“In many cases it comes down to business ethics,” remarks Beelendorf. “People need to conduct business with the highest ethical standards and partner with suppliers who do the same.” He adds: “Intellectual property or confidentiality agreements can be signed, but they are really difficult to enforce.”

He notes that the temptation might exist for some end users to reverse-engineer OEM products to save money on material purchases. (If the patents have expired, this could be a legitimate practice.)

Legitimate providers feel the impact

Manufacturers of products for OEM and after-market customers are increasingly addressing this risk. “Many of our customers have been cheated by the counterfeiters,” says Clayton Tharp, brand protection manager at SKF. “They are cheated by being sold product that they believe is genuine SKF. The performance of their equipment suffers, and the SKF brand is damaged when the product does not perform to their expectations. We see this in every market around the world.”

Bearings are a prime target for counterfeiters. Contrary to what most people think, the counterfeit bearings do not represent production overruns or product stolen from legitimately operating factories, explains Tharp. “The counterfeit product comes from one of many bearing factories, mainly in China, that produce unmarked bearings of unknown quality,” he says. “They are then sent to a branding shop to be marked with the SKF logo and designation and then put in counterfeit packaging that has been made to look just like real SKF packaging.”

It’s not just the product and packaging being mimicked. “The counterfeiters work hard to look like legitimate suppliers,” cautions Tharp. “They have very nice websites with photos of warehouses and factories to make them look trustworthy. They will provide certificates and other forged documents to make it seem they are an authorized or trusted source for our product.”

At Eaton, a provider of power management products and services, attention to this concern is great. “Counterfeits … damage our brand reputation with inferior products of poor quality attempting to trade off of our brands,” says Daniel Kalka, intellectual property counsel at Eaton. “But the biggest concern is public health and safety.”

Counterfeit parts may be used to refurbish old pump housings or motor cores, explains Kalka. Often, these refurbished pumps or motors are then sold as new, which is unlawful. The old, refurbished pumps or motors can cause injury or property damage when they fail or malfunction.

“In both our electrical and industrial sectors, we have seen returns of refurbished pumps that have failed and electrical products that have failed, causing damage and downtime,” remarks Kalka.

In contrast, Gary Marchuk, director of business development at AutomationDirect, says that the risk of counterfeit parts is a rare issue at his company. AutomationDirect’s business model may be the reason: The company sells only completely manufactured parts, not individual components that could be counterfeited. Additionally, its vendors test for counterfeit components prior to delivery, Marchuk says.

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