The Automotive Aftermarket Parts Exposition (AAPEX) has been an important event in the industry for some time, but it may have unwittingly become more pivotal as a result of show floor events.
When a crew from Tenneco Automotive dispersed through the lower level of the show in Las Vegas last month, they weren’t looking for customers, or even supply partners. They were looking for counterfeiters.
And they found them.
“We discovered a number of parts with our brand name on the product,” says Jim Lewis, chief engineer for the company’s Milan, Ohio facility. “We buy rubber and we manufacture rubber,” he continues–which further complicates matters, as it was important for him to determine whether the marks were genuine or counterfeit. “We found products that had our number and our [Rubber Manufacturers Association] code on them, and from there we went to the show officials.”
With the assistance of show officials, Lewis and company marched up to four booths in succession. The exhibiting companies were from China, India, and Korea.
When Lewis first identified the four suspect companies, each characterized themselves as primary suppliers of the products. Later, the story changed.
“When we confronted them,” says Lewis, “somebody gave it to them, they’re sorry, it wasn’t their product.
“It was,” says Lewis, “a little different story.” Of the four suppliers, some were more forthcoming in allowing the product to be seized, while others required some more convincing, but it was a situation that Lewis had come prepared to address.
“I was at the show last year and we identified two suppliers with counterfeit product. This year we went prepared to be on the lookout. We were looking for intellectual property violations.”
The concept of intellectual property–the use of trademarks and the like–is at the root of the issue of counterfeiting. Simply copying a part is not the same thing.
“We saw a lot of knockoffs and lookalikes [at the show],” says Lewis, “but from a legal standpoint, there is not a lot we can do about it.”
Add brands, identifying marks, and packaging, and you are into a whole new realm–and one to which companies in the aftermarket are increasingly paying attention.
While the products in question in the Tenneco case–rubber bushings–don’t fall into the high profile category, the raid on these products does represent the most public episode in the aftermarket to date in the increasingly furious battle against counterfeiting across all industries.
While most people equate counterfeiting with money first, the concept has been widely adopted in a number of product categories. Probably since the first designer animal skins were created, the knockoff, selling for less, has been a reality. Often, though, these are lookalikes that may drive designers to distraction, but don’t necessarily steal market. When you buy a “Rolex” watch from a street corner vendor for $10, you’re doing so in full knowledge that it is not the real thing. As a result, the real market impact is generally regarded to be negligible. Counterfeiting in its most damaging form is something different.
“I attended a conference in October,” says Lewis. “I had my eyes opened a little bit. It is not a small problem”–organizers of the event put the cost at some $12 billion in the aftermarket alone–“and I don’t think that there is any product or industry that is exempt from it.”
At that conference, entitled “How to address a $12 billion problem,” held in Dearborn, Mich., a group of about 100 lawyers, brand managers, marketing executives, and top level managers gathered in an inconspicuous room at the Dearborn Hyatt to talk about just how bad it can get. They came to talk about counterfeit parts. And that means they came to talk about China.
China is the largest source by far of counterfeit auto parts–parts produced offshore and branded in a way to masquerade as the original equipment part. A pie chart of the source of counterfeit parts portray China as the Pac-Man of parts counterfeiting.
“China manages to keep its 1 billion citizens from having free access to the Internet. They have people standing at Internet cafs monitoring what is going on,” said Mike Castellano, Tax and Trade Council, Office of Sander Levin. “They have the will and resources to shut things down at will. It think we should all lose patience with China on some of these issues.”
Privately, aftermarket manufacturers say that the fact that the good guys and the bad guys are often the same guys–the Jekyll and Hyde nature of the problem–complicates matters immensely. What do you do when your best supplier, or your best customer, is also the worst offender?
Lacoste, and its famous crocodilian logo, recently sued a Singapore firm, Crocodile International, for continued copyright infringement. It is a good example of how complicated the issue is. Crocodile is a going concern in China, with retail outlets operating under its own brand.
Lacoste has had a stormy relationship with the Hong Kong firm since it began selling Lacoste’s products there, where Crocodile had already registered a similar logo.
In 1980, the French company registered its trademark in China and enlisted Crocodile as the sole distributor of Lacoste products in Hong Kong, enabling the Hong Kong firm to sell its left-facing crocodile wares and Lacoste’s right-facing ones in separate, adjacent stores. The uncomfortable alliance fell apart when Crocodile set its sights on the mainland Chinese market. When it registered its trademark there, Lacoste cried foul. The two recently agreed to settle out of court, but there may still be more fireworks in the wings, as Crocodile has pledged to countersue despite the reported settlement.
Now, a shirt is one thing, but auto parts are another, right? Perhaps beyond the scope of a counterfeiter?
One presenter at the Dearborn conference told a tale of a trip to a Chinese airport, whereupon he spied a fleet of Boeing 707 airplanes.
Mark Turnage, CEO of Applied Optical Technologies LLC, a firm that designs systems to combat counterfeiting, says he mentioned that he wasn’t aware that China was such a large buyer of Boeing airplanes. “I was told, they’re not. They’re knockoffs and the only way Boeing found out about them was when somebody called looking for parts.”
Currently, General Motors is alleging that one of its partners in China is copying two cars it is building under licence, with only slight changes, and marketing them as its own.
In view of this, knockoffs of auto parts would seem a simple task.
It is no secret to the aftermarket that original equipment makers can at times defend their intellectual property rights and copyrights vigorously. Ford Motor Company has, perhaps, been the most vigorous.
From fighting “counterfeit” body panels through heavy advertising campaigns, to combing the aisles of trade shows in search of companies that might deign to exhibit products with a Ford logo, the blue oval has played Blue Meanie to many sectors of the aftermarket.
“All I can say is that it is a team effort within each company to combat this problem,” says Susan McFee, trademark counsel, Ford Global Technologies LLC, Ford Motor Company. “That is how we at Ford approach it. We have the parts brand protection group; that is our lead in anti-counterfeiting efforts.”
Most tips, she says, come from the sales force. And, judging from the consensus at the conference, many of the biggest manufacturers and sellers of counterfeit parts are the licensed manufacturers and distributors respectively.
Take a factory in some far-off land, for example. For two shifts, it produces products for a manufacturer, which are then distributed by that manufacturer. A third shift, however, ships the same product out the back door and sells it at a huge discount into the marketplace. This is called “diversion.” Perhaps this is taken as end of lot, or stock lifted from another player, hence the discount. It may, in fact, be illegally produced product, though indistinguishable from that produced legitimately.
The more commonly understood concept of counterfe
iting, i.e. product of lesser quality, produced outside the legitimate supply chain but using the trademarks of the legitimate product, is a factor too. This is what Tenneco was kicking back at, and they are not alone.
“The Commission of European Communities stated that between 5 and 10 percent of vehicle spare parts sold in Europe are counterfeit,” says Tom Strohm, general director, marketing, ACDelco in Grand Blanc, Mich. “The CEC also states that counterfeit spare parts were found at all price levels and with all types of cars, and noted that arrests had increased by 59 percent and convictions increased by 50 percent.” Strohm indicated that seizures in Europe had increased by some 900 percent, and that the impact of counterfeit parts was hard to underestimate.
Decreased customer satisfaction due to inferior quality, warranty claim rejection, and safety issues topped his list of negative fallout, at least economically. But he added a list of more heinous outcomes.
These included transmission fluid made from a cheap grade of crude oil, dyed red; antifreeze/coolant that ate through aluminum within 48 hours; gasoline caps that leaked in a vehicle roll-over situation; brake linings made of compressed woodchips, or cardboard, or compressed grass (which burst into flames when the brakes were applied).
Obviously it is in the best interests of manufacturers to bring to light the worst outcomes, but this does not make them any less relevant. It is also true that sometimes it is just a battle to ensure that the investment in engineering, research and development is not lifted whole, along with the profits to pay for them.
“It has had a dramatic effect on remanufacturing,” says Joe Plomin, senior vice-president and general manager, Delco Remy, which just recently launched a suit against several companies in the U.S. The action, alleging the infringement of patents, takes issue with the manufacture and importation of products, mostly from China. “What we have done is to go after the importer of record, whether a distributor, agent, or other. We don’t have a lot of hopes of chasing the base manufacturer in China.” Combating this issue involves court action, but also planned design changes to keep ahead of the competition, whether legitimate or not. “We have done a significant amount of competitive analysis of counterfeit products,” he says. “The imported counterfeit products look virtually identical, but we typically find a 20% to 30% improvement in performance with our product. We have also found that the customer is willing to pay for the improvement in reliability.”
Plomin says that counterfeiting of product threatens the very foundation of remanufacturing, namely a 20% to 30% price differential versus new OE. “If the product subverts that price differential, that subverts our ability to go to market. Comparing the sub-par performance of counterfeit parts is important to put before customers. And if you incorporate our ongoing product change strategy”–combined with what he calls a “strategic” approach to pricing–“it makes it difficult for the counterfeiters to keep up.”
In addition to bringing lawsuits against companies at the manufacturing level, Delco Remy is also delivering cease-and-desist notifications to more than 30 smaller manufacturers and distributors who are involved in similar practices. Major national distributors and retailers, who may have unsuspectingly purchased patent-infringing parts from the companies named in the complaint, are being advised of the lawsuit.
Ultimately, according to several individuals wrestling with the issue, the courts tend to be a blunt instrument when attempting to apply a North American understanding of intellectual property rights to offshore producers. The issue is further complicated by concerns that a heavy-handed approach could damage relationships with existing large customers. Plomin says that this is a situation that needs to be addressed.
“I think that is something that I am interested in seeing [the Motor Equipment Manufacturers Association] embrace, that says that despite our close relationship with major distributors, we need to be aggressive in protecting our copyrights and to put those groups on notice.”
“It is a whole lot easier to copy than design,” says Tenneco’s Lewis. Even when you’re talking about the ubiquitous rubber-to-metal bushing, he adds, there is more to it than meets the eye. “On the surface it is simple, but there is a lot of engineering. There is a lot more to it than round black rubber.”