This is a 2-part series. Part 1 focuses on the current practices of anti-counterfeiting in the auto parts industry. Part 2 will cover how brand owners can strengthen their anti-counterfeiting program.
Automotive OEMs and original equipment suppliers (OES) are facing a huge and growing problem owing to rampant counterfeiting of auto parts. Fake auto parts are costing the global auto parts industry billions of dollars annually in lost sales. The impact is not restricted to money alone as brands built on innovation and massive R &D and marketing efforts are seeing their reputations damaged. The safety of their customers and their passengers is put at risk because of sub-standard parts.
“About 1 in 5 accidents in India result from the use of counterfeit parts.”
The risk from counterfeits has increased for Auto OEMs as they have been forced by recent regulator judgments (CCI order) to distribute their genuine spare parts in the open market vs. their own Franchise Workshops. The open market is inherently riskier and this development underscores the need for a stronger brand protection program.
The current State of Brand-Protection in the Automobile Industry
Despite having a substantial negative impact on revenue and risk to the safety of the customer, the automobile sector is one of the less secure industries from a brand-protection perspective.
1. Anti-counterfeiting technology
Automobile industry currently has low adoption rates for robust anti-counterfeiting (AC) technology amongst both OEMs and OESs, leaving a vast majority of brands unprotected. The customer has little, or no means to differentiate a genuine part from a fake.
Even the brands which have invested in AC technology have overlooked some critical limitations of the technology they have chosen.
a. Most auto parts which have invested in an AC technology have added some security features to their MRP labels. However, this does not protect against ‘Refill’ or ‘Reuse’ type counterfeiting, where counterfeiters just put in a fake product in a used genuine box. This gives a false sense of security to the customer as the genuine MRP label (with the security features) on the box is intact.
b. Security features on the MRP label typically consist of a simple holographic strip. While unit costs drive this decision as holographic strips are quite cheap, they are also relatively easy to copy as they use basic features and hologram masters for these are easy to recreate.
c. Some brands have used serialisation technology where there is a UIN (unique identification number) on the MRP label. This is verified using either SMS or scanning (if it is a QR code) with a custom-built app or a scanning app that takes the user to a micro-site which verifies the UIN.
UIN is not a secure method of protecting against counterfeits (Ref. White Paper). A serial number/ QR code on a pack can easily be copied and replicated across many fakes. Typically low verification rates (5-7%) allow all the remaining fakes carrying genuine codes to escape detection.
Also, there are challenges of genuine codes on fake products being verified before the genuine product itself, leading to false negatives for the genuine product.
d. A combination of holographic strip and UIN on MRP label - this is more secure than the two individually. However, it still does not address the problem of fake products reusing genuine packaging.
a) Most Brand owners are apprehensive in communicating “how to verify” information to their customers and value chain as they feel they might be seen as the one with the 'problem of fakes'. This severely limits the impact of their anti-counterfeiting technology as customers don’t know how to tell the difference between genuine and fake products.
b) Those Brands which do decide to engage their customers/ value chain are limited by budget and resource constraints to mount an effective 'how to verify genuine' communication program.
Communication then becomes a typical Tick-the-Box exercise with one web page dedicated to on-pack security features buried deep inside the brand website. This is quite hard to find as the website is more focused on brand messaging and products. We have even seen many brands having out-dated information on anti-counterfeit features which were just never updated.
Adoption of these apps is also limited since brands are wary of communicating too widely and customers are not keen on downloading multiple apps to verify different auto parts of different brands.
Our interaction with brand owners also suggests that these apps focus just on users being able to verify products. There is limited functionality in their ability to allow users to report back to the brand or link back to any analytics which can be used by brands for strategy development or enforcement action.
d) Some brands rely on enabling easy verification using any scanning app. In this case, the UIN QR code on the label has an embedded URL and when the user scans it, she is directed to a microsite which verifies the code as genuine.
However, this is a risky method due to the ease with which a counterfeit webpage with very similar web addresses as a genuine brand webpage can be set up. These are designed to look identical to real ones, and verify all scans as genuine. The counterfeiter just prints his own QR codes on fake products which directs all users who scan the code to this counterfeit webpage.
Successful enforcement action can act as a strong deterrent to counterfeiters engaged in manufacturing or distribution of fake products.
a) Many brands struggle with a coordinated enforcement response as they do not have a streamlined lead capture and lead management process. As a result, information from potential hot spots is intermittent and anecdotal and brands respond in a reactive and ad-hoc manner. Even if they do take enforcement action, these are seldom strategic and therefore not very effective.
b) Counterfeit incident reports that brands do receive are non-standard and need constant back and forth to gather additional information before it can even be evaluated for further action. The response of brand owners to such reports slows down as a result and many times, it is too late as such intelligence is highly time-sensitive.
c) While some brands do take enforcement actions, there are many brands which do not have the resources or the experience to take action against counterfeiters.
d) We have even come across several brands who do not believe that they have a counterfeit issue at all, and therefore no action is required. In these times, when even a moderately successful brand has to struggle with a problem of fakes, such brands are more likely to have gaps in their understanding of the market
As is evident, while the counterfeit issue is an existential threat to auto component manufacturers’ reputation and revenues as well as their customers’ safety, there are many gaps in their collective anti-counterfeiting efforts.
Our next piece in this series will offer a few suggestions which have proven to be very effective in clawing back revenue from counterfeits and protecting brands from future attacks. These are drawn from best practices across industries.
Tanmay Jaswal is the Founder of Chkfake, a start-up that is disrupting the anti-counterfeiting industry by creating an eco-system of all stakeholders to join the fight against fakes together. The Chkfake mobile app allows users to verify genuineness of any product irrespective of category or brand.
Tanmay has 26 years of global experience in business leadership, marketing and strategy in companies like Coca-Cola and Shell and is an acknowledged authority on brand protection. He has headed the brand protection function for Shell globally and has extensive experience in this space over the last 8 years.