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The fight to stop the manufacture and sale of counterfeit electrical products involves the whole industry. Electrical distributors, being the primary access point by which legitimate product moves from the manufacturer into the installer’s hands, are uniquely important in attempts to win this fight. Electrical manufacturers are cautiously hopeful that real progress on this front is finally being made.
The true size of the problem is difficult to gauge, but U.S. Customs and Border Protection (CBP) made 22,848 seizures in 2012, across counterfeit goods of all kinds — ranging from pharmaceuticals to handbags to circuit breakers — worth more than $1.26 billion annually, based on manufacturer suggested retail price. Among CBP’s broad categories, seizures of electronics (including electrical equipment) are rising fast, and now stand behind only clothing and accessories as the largest category of counterfeit products seized.
Worldwide, estimates of the size of the counterfeit market are in the neighborhood of $500 billion, or around 5% of world trade, and it’s expected to grow to as much as $1 trillion by 2015, a number Tom Grace, manager of anti-counterfeiting and brand protection for Eaton Corp., Cleveland, finds very plausible. “I know what I find. And what you don’t find is what you need to be more concerned about,” he says.
Although the overall problem is still growing, some major prosecutions in the U.S. electrical market over the past few years have had an impact, sending a warning to anyone who might want to get into the counterfeit business. In November 2012, Elod Tomas Toldy, owner of Pioneer Breaker and Control Supply, Austin, Texas, was sentenced to a year and a day in prison and $59,653.97 in restitution for selling counterfeit breakers following an investigation by U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI).
Those kinds of results, and the ongoing pursuit and prosecution of counterfeiters and their sales channel have begun to make an impact, says Brian Monks of UL. “I’m not going to declare victory, but we are moving the needle. It is still a rampant crime, and it’s near impossible to stop it because of the economic incentives, so I don’t think we’re winning. I’m hoping to stay at par.”
Schneider Electric has seen a significant drop in counterfeit Square D circuit breakers in the U.S. market, says Tracy Garner, Schneider’s program manager, Anti-Counterfeiting & Unauthorized Distribution. She got involved in Schneider’s anti-counterfeiting efforts around 2005, at a time when counterfeiting of Square D QO-series circuit breakers was raising concerns. “We were involved in civil litigation – 13 civil lawsuits against twenty-some different companies. As result of those legal actions and messaging, I feel like in U.S. we’ve pretty much conquered the problem with regard to Square D circuit breakers.”
Garner is now involved in anti-counterfeiting efforts globally, across all Schneider brands. Although the gains in the U.S. have been encouraging, counterfeiting in the other countries where Schneider operates continues to be a problem, she said.
Raising visibility about the problem of electrical counterfeits and providing organizations such as customs officials, distributors and consumers with the information they need to help in the fight is a major effort across the industry.
Like many manufacturers, Schneider has information on its website showing how to distinguish genuine products from fakes and ways to report suspect equipment. Schneider’s U.S. reporting site also offers a reward for information leading to legal action against someone making or selling counterfeit breakers.
The Electrical Safety Foundation International (ESFI), a non-profit set up to spread information on electrical safety to the general public, is taking a lead role on education within the industry as well. ESFI worked with the National Electrical Manufacturers Association (NEMA) in 2008 to produce an eight-minute video titled “Counterfeits Can Kill” that contains footage of some examples of dangerous counterfeit electrical products and outlines specific recommendations for manufacturers, distributors, government officials and consumers.
ESFI is now spearheading an effort — built on an earlier campaign called “Operation: ACT” — to gather support for a survey that would generate statistically significant data on the scope of the problem in the U.S. electrical industry, says Brett Brenner, president of ESFI. “We need to get a scope of what electrical counterfeit means to people in their daily lives.”
Underwriters Laboratories (UL) is a long-time leader in pursuing and suing electrical counterfeiters and educating law enforcement about the problem. This work is critical to preserving the value of its UL mark, an effort led by Brian Monks, UL’s vice president of Anti-Counterfeiting Operations. Working with international police force Interpol and a variety of other law enforcement organizations, UL has been convening meetings and training customs officials around the world. Since 2007, UL and Interpol have hosted an annual IP Crime Conference to train law enforcement on intellectual property rights (IPR).
Monks sees education as the key to addressing the problem of counterfeits. “We can’t arrest our way out of this thing — we can’t lock everyone up, but can change some minds,” he says.
Manufacturers are also constantly working to inform and educate customs officials to help them identify IPR violations in products as they move through ports. Garner of Schneider says if the customs officers know what to look for and what shouldn’t be there, they can help keep an eye out. For example, if a shipment with Square D circuit breakers arrives at the Port of Newark, she says, Customs will notice. “There shouldn’t see any Square D circuit breakers coming through Newark. That ought to raise a flag.” Schneider manufactures most of its Square D breakers in Mexico. “We have one port of entry that the circuit breakers come through, and the rest of them shouldn’t see these.”
The vast majority of the counterfeit product seized in the U.S. has been traced back to China. An estimated 72% of what CBP classifies as Consumer Safety and Critical Technology goods come from China and another 12% from Hong Kong. Seizures of infringing goods in 2012 from China and Hong Kong totaled $1.1 billion as valued by manufacturer’s suggested retail price (MSRP), a 10.4 percent increase over last year.
Therefore, it’s a welcome sign Chinese authorities are stepping up their involvement in international efforts to stop counterfeiting. Monks of UL says its IP Crime Conference last year hosted the largest delegation of Chinese police ever convened outside of China.
Chinese authorities’ interest in IP enforcement is not just a sign of international cooperation, it’s driven more by rising concern about IP rights within China, where a fast-growing middle class is pushing demand for consumer goods and Chinese manufacturers are increasingly concerned about protecting their own intellectual property.
Efforts to stop counterfeiting focus heavily on labeling, where there’s an arms race of sorts between manufacturers and certification labs on one side and counterfeiters on the other. UL has state-of-the-art labels using holographic technology and color-shifting ink. With a special polyester lens that UL makes available to pretty much anyone who asks, you can check whether the mark is genuine. Manufacturers likewise have intricate protocols for labeling and bar-coding products. They make this information available through their websites, and distributors would do well to check those sites often, since the labeling practices change.
Counterfeiting is a business. It funds other kinds of organized crime, and the counterfeiters study their market to identify the weak links and exploit them. The expanding use of e-commerce gives them certain advantages — it’s relatively effortless to throw up a website — but most of the seizures focus on the brick-and-mortar physical operation, says Monks of UL.
Distributors are a focal point in this campaign because if a counterfeiter seeks to slip fake goods into the market as legitimate, distribution is the way those legitimate products get into jobsites and factories. Due diligence among distributors and among procurement engineers at large industrial, utility and data center operations can do more than just about any other single factor to keep counterfeit electrical products out of the market, says Grace of Eaton.
Talk of counterfeits inevitably turns to the role of what Grace calls “independent resellers” — known to most of the industry as surplus dealers or electrical equipment recyclers. Many distributors have taken high-profile stands against sourcing product from anyone other than their manufacturer. But there are times when any distributor has to buy from a surplus dealer or independent reseller to get something that’s not available from the factory. Unfortunately, there are also some who will buy outside their own channel to lower their costs.
Eaton is one of the few electrical manufacturers willing to admit publicly that the electrical industry has a legitimate place for aftermarket and refurbished discontinued products that are nonetheless critical parts of legacy electrical systems. Because these companies are not authorized by the factories, they’re in a position to discover sources of counterfeit. Grace says some important discoveries of counterfeit products have started with a surplus dealer calling him and asking him to check the legitimacy of something they bought.
Brenner of ESFI would like to see more distributors stake their reputations on their position as the authorized source of product. Authenticity and trust are valued highly in the U.S. market, more so than in some others. Anecdotal reports say in Mexico’s electrical market it’s assumed that over half of the products in circulation are not what they purport to be, and sellers of legitimate product are at a constant price disadvantage that makes it hard for them to compete.
Of course, the even greater issue is that when that device fails, someone may be injured or killed, all for the savings of a few percentage points on the distributor’s original purchase. That’s hardly a price worth paying.
“At the end of day, distributors have a responsibility to purchase from the right places,” Brenner says. “They can’t expect manufacturers to hold the bag if the product is counterfeit. A lot has to do with the education of distributors to understand they have a big role to play. They could polish up their value statement and tell customers, ‘I’m the one keeping you safe, keeping the liability away from you. You’re getting your product from someone who will stand behind it.’”