Is It the Real Thing?
Winter 2010
By Paul F. Nunes and Christopher Donnelly
Counterfeiting is a bigger problem than you probably think.
PAUL F. NUNES is executive director of research with the Accenture Institute for High Performance in Boston and co-author of Mass Affluence: 7 New Rules of Marketing to Today’s Consumer. CHRISTOPHER DONNELLY leads Accenture’s retail practice for management consulting in North America and has led research studies on counterfeiting in pharmaceuticals.
The word counterfeiters calls to mind some immediate images: Chinese factories cranking out halfhearted knockoffs of Yves Saint Laurent handbags, shadowy men forging passports in shady back rooms, North Korean technicians plotting to destabilize the U.S. economy with briefcases full of bogus $500 bills.
But piracy goes far beyond the obvious and the malevolent, to products that you’d never expect would fall victim—B2B components as well as couture consumer goods. If your brand is worth anything at all, someone will surely try to steal it.
More than lost revenue is at stake. Counterfeit brand-name medicines threaten the health of people all over the world, with an estimated 700,000 deaths a year attributed to fake tuberculosis and malaria drugs alone. In Panama, 115 people died after taking cold medicine that contained an ingredient found in antifreeze. In Nigeria, tainted teething medication killed eighty-four children. And in the United States, where the drug supply is considered safe, authorities have uncovered caches of a wide range of fake prescription drugs, including Viagra, Lipitor, and Tamiflu.
It gets scarier. Inspectors have turned up counterfeit parts in nuclear reactors, commercial aircraft, and New York City subway cars, buses, and taxis. In 2008, the Aerospace Industries Association rang the alarm bell, calling for standards to prevent counterfeit replacement parts from winding up in space and defense systems.
In short, counterfeiting is a big problem for society as well as for the legitimate companies that each year lose hundreds of billions of dollars in sales. Reliable statistics on this illicit business don’t exist. But the International Chamber of Commerce’s Counterfeiting Intelligence Bureau estimates that fakes account for 5 to 7 percent of international trade, or about $600 billion annually. While some observers dispute this estimate, it’s hard to argue with U.S. Customs and Border Protection, which says it seized more than $270 million in counterfeit and pirated goods in fiscal 2008 (ending in September), up 38 percent from the prior year and nearly three times the value of goods seized in 2003. China, predictably, was the top source of bogus products.
Lost sales and threats to public safety aren’t the only issues. For the companies whose products are copied, fakes can seriously damage carefully cultivated reputations. Customers who buy fakes often receive products of poorer quality than they expect—without the warranties that accompany the genuine article. Governments that tax the sale of legitimate products lose revenue while spending more money on law enforcement. Evidence suggests that profits from counterfeiting are used to finance other crimes, including terrorism.
What Can Companies Do?
The good news is that companies can craft strategies to effectively combat counterfeiting by using new technology, old-fashioned detective work, and a little psychology. The solution is to target both sellers and buyers of counterfeit goods with a strategy that mixes offensive and defensive measures: defend, detect, doubt, and discourage.
To defend themselves, companies must fortify their supply chains, combining tracking technologies with human reconnaissance to monitor the process from the raw-material stage, through production and distribution, all the way to the point of sale. To detect fakes, manufacturers need to give wholesalers, retailers, and consumers information and tools they can use to authenticate products. To cast doubt about fakes and make them less desirable to consumers, companies must educate buyers about the dangers that bogus products pose to both individuals and society. And to discourage counterfeiters, they need to raise the risks and costs of producing fakes.
This four-pronged approach addresses the reasons for the increase in counterfeiting in recent years: global supply chains with more weak links for counterfeiters to exploit, digital technology that makes possible near-instant copying, free-trade zones that allow shipments of illegal goods to move around the world, and increased Internet sales. For a 2008 report, the European Alliance for Access to Safe Medicines calculated that three out of five drugs it purchased online were fake or substandard.
Such an approach can also help legitimate brands reduce the risk that contract manufacturers they hire in China and other low-cost countries will produce extra or inferior goods to sell on their own. It can help companies stay a step ahead of today’s increasingly sophisticated counterfeiters, who have gotten better at mimicking product design, packaging, and even anti-counterfeiting measures such as holographs. In one especially shocking case, Japanese electronics maker NEC uncovered a ring of counterfeiters who had set up what amounted to a parallel company, copying NEC products and developing some of its own, including home entertainment centers and MP3 players. The counterfeiters carried NEC business cards, issued warranty and service documents, and even emblazoned their factories with bogus NEC signs.
Enlisting consumers in the battle is a crucial—and potentially controversial—part of any comprehensive approach to fighting fakes; some managers will no doubt balk at the idea of devoting resources to efforts to change consumer attitudes, especially in a recession. But we believe it is essential to reverse the trend of rising demand for counterfeit goods. In 2007, 22 percent of U.S. respondents to a Gallup survey said they had “personally purchased, copied, or downloaded” products they knew or suspected were not genuine in the previous year, up from 13 percent in 2005. Other studies suggest that the percentage of people who see nothing wrong with buying fakes is even higher. With people increasingly seeking bargains—and looking to keep up appearances on reduced budgets—it’s likely that demand for counterfeit goods has grown. By taking action in these four areas, companies can begin to make a difference now.
Defend: Fortify the supply chain.
The first line of defense is to tighten control over the supply chain, beginning with raw materials and components, which must be authenticated. A study by Accenture and the U.S. Chamber of Commerce of best practices by American companies recommends that manufacturers purchase raw materials and components from only authorized suppliers whose facilities and documentation can be audited periodically. Ingredients and components need to be tested regularly to ensure that they meet the manufacturer’s standards. If your number of suppliers makes responsible auditing a daunting prospect, consider consolidating them.
The recall in 2008 of tainted heparin blood thinner, which was linked to sixty-two deaths and hundreds of allergic reactions in the United States, underscores the importance of authenticating ingredients. The heparin that the manufacturer, Baxter International, obtained from a Chinese supplier—through a murky chain of subcontractors—was contaminated with a chemically altered substance that mimicked heparin and, according to Baxter, slipped through its standard quality testing. The company now faces numerous lawsuits.
It’s also important to train staff at factories and other points in the supply chain to detect fakes. Even waste products must be tracked and traced, since counterfeiters monitor scrapyards and reclamation centers looking for inferior goods discarded by legitimate manufacturers.
Tracking and tracing products as they move from the factory to the point of sale is best accomplished by combining human surveillance with technology that can detect fakes. Purdue Pharma, which makes OxyContin, not only requires employees to show ID cards but verifies their fingerprints before allowing them to enter its manufacturing facility’s most secure areas, according to the Accenture/Chamber of Commerce study. Armored vehicles with global positioning systems deliver products, with the backing of surveillance teams on the lookout for potential threats.
Purdue Pharma also uses a radio frequency identification (RFID) system that combines the ability to trace a product after it leaves the plant with an anti-counterfeiting feature: labels that shift color when viewed from different angles, making it tougher and more expensive for counterfeiters to copy the packaging. In an RFID system, each package is tagged with a tiny radio frequency chip containing essential data in the form of an electronic product code. The goal is to enable manufacturers to track each medicine’s chain of custody as it moves through the supply chain, providing a “pedigree” as required under federal and many state laws. Wholesalers and pharmacists can also use the system to authenticate packages and detect fakes.
Pfizer, which says that authorities in forty-one countries seized more than 8.6 million fake versions of its tablets in 2007, uses RFID technology on all of the packages of Viagra the company sells in the United States. The company is working with wholesalers, pharmacies, customs offices, and law-enforcement agencies to increase inspections and improve surveillance of distributors and companies that repackage its products.
Officials at the U.S. Food and Drug Administration, which has encouraged the use of RFID technology, had hoped that an electronic system to track and authenticate drugs would be in place by now. But the technology hasn’t been widely adopted, due to concerns about patient privacy, potential security breaches resulting from counterfeiters hacking into the database, a lack of standards, and cost. Another drawback is that the systems track only packages—not the pills themselves.
To solve that problem, security companies have developed a variety of ways to tag products, including drugs. In June 2008, a company called NanoGuardian announced that the FDA had approved a client’s use of its NanoEncryption technology, which allows a large amount of data to be incorporated onto individual tablets, capsules, and the caps of vials of medication; the company didn’t identify its client. The FDA has also been looking at inks, pigments, flavors, and other physical-chemical identifiers.
A company called Cellular Bioengineering is developing tiny silicon-dioxide tags, which it calls TruTags, to give products a unique light signature. The company says the edible tags can be used to track and authenticate drugs, food, consumer goods, and industrial products and raw materials, including chemicals. Royal Dutch/Shell, meanwhile, has successfully used markers from Authentix, a pioneer in the field, to weed out wholesalers it suspected of mixing less-expensive gas with its Shell brand before distributing it to gas stations.
So-called 2D bar codes can also play a role in the battle against bogus products. These matrix-like codes can hold much more information than vertical bar codes, allowing companies to better track millions of items in their supply chain. AstraZeneca, for instance, has tested putting what it calls a “unique carton number” in the form of a 2D bar code on packages of Nexium gastrointestinal medicine it sells outside the United States. When the code is scanned, the serial number is checked against a database. If the same number pops up a second time, investigators are alerted. AstraZeneca also adds another layer of security in the form of a tamper-evident seal that has a hologram on it as well as a two-dimensional bar code printed in ink invisible to the naked eye.
Makers of luxury goods, which have long relied on their designs and craftsmanship to distinguish their products from fakes, are also turning to technology. Fendi has been stitching holograms with encrypted codes visible only with a special magnifying device into the linings of its handbags, boots, and suits. The holograms contain a wireless tracking device that allows Fendi to tell whether a product is being sold in an unauthorized store.
Detect: Help victims spot fakes.
Authentication techniques such as those described above can help wholesale distributors, retailers, and consumers detect fakes. The trick is finding techniques that are easy for customers to use but hard for counterfeiters to copy.
One solution is to use digital identity codes such as those developed by Certilogo and offered in Italy. High-end balsamic-vinegar producer Acetaia San Giacomo, for instance, prints twelve-digit ID codes generated by Certilogo on the labels it puts on its vinegar bottles. At stores where the vinegar is sold, consumers can verify the product’s authenticity by sending text messages on their cell phones to a number set up by Certilogo. The system has the added benefit of giving Acetaia San Giacomo a way to engage its consumers, who can use the code to sign into a special section of the company’s website, called Balsamic Track, to learn more about the vinegar. Producers of Bordeaux wines are using a similar system from a Swiss company called Algoril.
Another solution to the problem draws on a product that most everyone carries around, even in developing economies: mobile phones. For example, a start-up called mPedigree has developed an application that would allow users to send a text message to authenticate that purchased pharmaceuticals are the real thing. The company is working initially with the government of Ghana, where counterfeit medicine accounts for as much as half of the drugs sold in pharmacies. For the technology to work, drug companies need to add special codes to their packaging, under panels that consumers scratch off. They would then send the code via text message to the manufacturer and receive an immediate response stating whether the product was valid or not, with the manufacturer bearing the cost of the texts.
It’s more challenging to help consumers figure out whether products offered online are genuine. The National Association of Boards of Pharmacy verifies that sites that sell prescription drugs are legitimate. Several services certify the authenticity of other types of online merchants. But buyers often have to rely on dealer-reputation ratings on auction and business-to-business websites and consumer ratings on sites such as BizRate.com and Yahoo! Shopping. Manufacturers can give them a hand by posting tips on how to tell the difference between their products and fakes, on eBay, social-networking sites such as Facebook, and their own websites. Drug maker Roche Laboratories’ site, for instance, describes what to look for when purchasing Tamiflu.
Microsoft, which provides a way for customers to validate its software online on its website, hosts a blog on eBay that, among other things, explains how to tell if software is genuine before a sale, including what questions to ask sellers. Consumers who suspect they have purchased pirated software are encouraged to notify the company online, via e-mail, or by phone. The blog goes on to note that, using evidence developed from tips from hundreds of Microsoft customers, the FBI and China’s Public Security Bureau were able to crack a $2 billion piracy ring in 2007.
Tips on spotting fakes can also be posted on websites and in publications devoted to everything from watches to sneakers, on trade-group websites and on YouTube. To note just one example, the Electrical Safety Foundation International, working with the National Electrical Manufacturers Association, is working to publicize the dangers of counterfeit extension cords, power strips, and other electrical products—and to educate the public about how to spot fakes.
Doubt: Make customers think twice.
Consumers are more likely to purchase counterfeit or pirated products, particularly fashion items, if they see little downside to doing so. Here’s where psychology comes in. Legitimate manufacturers need to give consumers a reason to resist the temptation to buy cheap knockoffs.
Depending on the product, manufacturers might play up the health or safety risks of bogus products. They can also focus on the dangers to society of promoting criminal or unethical behavior, which can be especially effective with young people and members of religious groups concerned about issues such as child labor.
The International AntiCounterfeiting Coalition’s College Outreach Campaign relies on the power of peer pressure and an appeal to college kids’ strong sense of social justice to spread the word that counterfeiting isn’t cool. Students in marketing and public-relations classes are provided with fictitious case studies and other materials, then asked to create a communications plan to raise awareness about the unintended consequences of counterfeiting.
The result? At Hunter College in New York City, students launched pages on MySpace and Facebook that stressed the connection between counterfeiting and organized crime, as well as counterfeiters’ exploitative use of labor in developing countries. At the University of Miami, more than 1,300 students joined the “Don’t Fake It” Facebook group. And at Ohio State University, students spread the message linking counterfeit products with crime and human indignity in a campaign that persuaded 79 percent of the student body to agree that buying fakes is wrong. Program sponsors have included Rolex, Coach, Abercrombie & Fitch, Limited Brands, and Perry Ellis.
Manufacturers are looking to reach more than college students, of course. This year, the Federation of the Swiss Watch Industry and the Fondation de la Haute Horlogerie launched an ad campaign aimed at persuading consumers that “Fake Watches Are for Fake People.” The ads feature a fake watch displayed on a mannequin’s wrist. “Be authentic. Buy real,” the caption says.
While trade groups often develop messages like these, Harper’s Bazaar has taken a leading role in fighting fakes in the fashion world. For the past five years, the magazine—with a clear stake in the legitimacy and survival of high-end fashion—has tried to make fakes less appealing to consumers by playing up the connection between counterfeit fashion and child labor, drug trafficking, and terrorism. In addition to publishing articles on the subject, it hosts anti-counterfeiting summits and the www.fakesareneverinfashion.com website, which invites consumers to turn in their fakes.
One of the more inventive approaches to persuading the public to avoid fakes was taken by South Africa’s Anti-Piracy Foundation, which in 2006 had people posing as street vendors sell bootleg DVDs of the Oscar-winning film Tsotsi—except that, after a few minutes of viewing, the movie was replaced with a message: “Thank you for buying this DVD. Your R40 has been donated to the Anti-Piracy Foundation. Piracy is a crime.” One goal was to shock consumers into changing their behavior; another was to flood the market with enough of the anti-piracy versions to make people hesitant to buy a fake for fear of getting one that would stop and show the group’s message.
Offering incentives can also help companies win consumers’ cooperation. The Business Software Alliance offers cash rewards to individuals who report software piracy under its “Know it, Report it, Reward it” program. The group, which paid $136,100 in rewards to forty-two people in 2008, says the program has raised awareness of the risks of using illegally copied software, including compromised computer performance, security breaches, and financial penalties.
Touting the ways in which a brand ensures its products’ authenticity can also give the manufacturer an edge over competitors, since by implication, competing brands don’t offer buyers the same level of certainty. In Brazil, where motorists grouse over diluted gasoline, Royal Dutch/Shell promoted its efforts to fight fraud by tagging its gas, using the slogan “Shell DNA.” In 2008, Swiss watchmaker Vacheron Constantin attracted a lot of attention with the introduction of a model that it says can’t be counterfeited. The watch, which sells for $29,000 to $60,000 depending on how it’s customized, uses layers of invisible UV marking, laser perforations of some watch parts, special inks, and other measures typically used for the highest-security purposes: to secure passports and currencies such as the euro and Swiss franc.
Discourage: Increase the business and legal risks for counterfeiters and reduce their profits.
These strategies, if executed effectively, will discourage counterfeiters and those who help them distribute and sell fake products. If legitimate supply chains are tightly managed and products have unusual design and tracking features, it will be harder and more costly for counterfeiters to make credible fakes. By educating consumers about how to spot fakes and giving them a reason to avoid these products, companies can reduce demand for counterfeit goods.
But companies can do more to discourage current or would-be counterfeiters—they can also use the full force of the law to add to the risk of illegally copying products and reduce the potential profits. A critical first step is to register intellectual property for patents, copyrights, and trademarks, not just in the United States but in the European Union and countries such as China, where many counterfeiters operate. Companies should also record their trademarks and copyrights with customs officials and provide them with information about how to detect fakes.
Although anti-counterfeiting laws have been strengthened and penalties increased, it remains tough to enforce intellectual-property rights around the world. That could change if the United States, the European Union, and other governmental entities can reach agreement on the Anti-Counterfeiting Trade Agreement they have been negotiating to establish international standards for enforcement. But manufacturers still need in-house investigators and lawyers who can work with private investigation firms and law-enforcement agencies around the world. In-house investigators can work undercover to develop leads from informants about factories that are producing fakes. They can prowl flea markets and trade shows, searching for illegally copied goods. To keep counterfeit sneakers from entering the United States, sneaker maker New Balance’s full-time investigators monitor Pacific Rim regions where shoe counterfeiting is popular and regularly get involved in raids on factories and distribution centers. French luxury giant LVMH Moët Hennessy Louis Vuitton SA has been able to seize counterfeit products in China, Korea, Thailand, and other countries, thanks to the efforts of a team of sixty full-time staffers who work on anti-counterfeiting activities with outside investigators and lawyers.
Internet monitoring can be handled internally or farmed out to services such as MarkMonitor that locate bogus goods being sold online and notify online retailers like eBay to stop listing fraudulent offers. Working with MarkMonitor, Under Armour, a maker of athletic apparel, was able to remove more than 21,000 items with an estimated value of $2 million from 9,800 listings on e-commerce sites. Acushnet, which makes Titleist golf balls and clubs, was able to stop 10,500 online auctions of fakes between January and August of 2008. And in 2007 alone, e-commerce investigators for LVMH’s Louis Vuitton brand successfully shut down more than 750 websites selling fake merchandise.
Lawsuits against third parties can also be used to discourage retailers, landlords, and others from doing business with people who sell counterfeit goods. LVMH and other luxury brands have won court rulings against landlords in New York’s Chinatown and in Beijing’s Silk Street shopping mall for allowing vendors to sell counterfeit goods.
In recent years, LVMH has also won a court judgment against Google for selling its brand names to other advertisers. In France, the company won a groundbreaking court victory over eBay for doing too little to stop online auctions of counterfeit products (though Tiffany lost a similar case in the United States). And in the United States, Wal-Mart Stores agreed to pay LVMH an undisclosed sum to settle a lawsuit alleging that its Sam’s Club warehouse stores sold counterfeit Fendi handbags and wallets.
Rival brands can also work together, sharing information or jointly funding investigations that lead to raids on producers and distributors of fake goods. U.S. golf-equipment makers, for example, joined forces five years ago to push for action, and in early 2009, a complaint from what’s known as the U.S. Golf Manufacturers Anti-Counterfeiting Working Group prompted Chinese authorities to seize nearly ten thousand pieces of counterfeit golf equipment in Beijing. The haul included illegal copies of products made by all six of the group’s members—Acushnet, Callaway Golf, Cleveland Golf/Srixon, Nike Golf, Ping, and TaylorMade-adidas Golf.
A golfer using a fake driver won’t suffer anything worse that a shot duck-hooking into the woods. But it’s no exaggeration to say that the problem of counterfeiting can be a matter of life or death. And even when lives are not at stake, livelihoods are. Companies must fight back. They need to guide their customers, helping them separate the wheat from the chaff and educating them about the pitfalls of buying fakes. They also need to take on the makers and sellers of counterfeit goods, pressing legal cases and tightening up their supply chains.
It may not be possible to eliminate counterfeiting entirely. But by implementing a strategy of offensive and defensive measures, companies can effectively reduce the flow of fake products and protect their brands. 
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