Parts counterfeiters doing big business

How parts counterfeiting works
1. An unwitting or unscrupulous factory, typically in an emerging market, loosely replicates a part using cheaper materials and lower overhead costs.

2. A criminal middleman, often part of an organized crime ring, has the part packaged to imitate an established brand.

3. The counterfeiting distributor either supplies the parts to an established network of accomplice retailers or hawks the parts to unsuspecting retailers through misrepresentation.

Fake parts, real pain

A panel of service parts manufacturers will discuss “Counterfeiting: What It Means To You” on Friday, Nov. 1, at the Automotive Aftermarket Products Expo in Las Vegas.
The panel will consist of representatives from the Big 3. It will meet at 7:30 a.m. and at 4 p.m.

Acting on complaints from U.S. trade officials, Chinese police in September raided and shut down an auto glass factory in China’s Guandong Province. The reason: The factory allegedly was producing low-quality windshields for counterfeit sale under the labels of established parts manufacturers.

In an era when some of the world’s biggest suppliers are having trouble turning a profit and maintaining the value of their stocks, a most improbable complication is rearing its head: Counterfeiters are chiseling in to their aftermarket auto parts trade.

The U.S. Federal Trade Commission now estimates counterfeiters are siphoning off $12 billion a year in sales worldwide. If accurate, that volume equals one-tenth of the U.S. aftermarket parts industry. General Motors believes that $1 billion a year is being made on fake AC Delco parts alone.

Inside the U.S. market, the problem is relatively mild, according to investigators. Most of the counterfeiting here has centered on auto accessories such as wheels, wheel covers and interior trim items. But overseas, especially in emerging markets in Asia and the Middle East, counterfeiting is growing unchecked.

“We estimate that the top 10 counterfeiters in the Middle East are now doing as much business as we are over there,” says Tony Bol, manager of global investigations for GM.

Locking arms

On Oct. 19, the Big 3 united for a new approach to the crime war. The service parts operations of GM, Ford Motor Co. and DaimlerChrysler AG created a “Global Industry Network,” a consortium that will investigate and share intelligence about counterfeiting activities in markets around the world. The network will share resources, work together with local law enforcement officials, help make the public aware of the crime, and simply make each other aware of counterfeiting evidence when it surfaces.

Independently, GM’s Service Parts Operations is hiring additional investigators and assigning a “brand protection” manager in every market to monitor the activity.

Learning of the crime is one of the biggest challenges, says Jay Goodwin, senior manager for parts sales and marketing operations for Mopar Parts, the aftermarket component brand of DaimlerChrysler.

“A lot of times, people aren’t even aware that a crime has been committed,” Goodwin says. “A counterfeiter pulls up behind a retail store with a truckload of what looks like Mopar parts. He tells the retailer it’s a production overrun and offers it to him for half of what he usually pays. The retailer stocks the items and sells them.”

In the end, Goodwin says, the person who gets burned is the consumer who discovers that the parts are junk. Unfortunately, that consumer may assume that the culprit was the manufacturer whose name was on the package.

“This isn’t just an issue of stolen sales,” Goodwin says. “It’s an issue of brand protection for us. You have criminals out there putting terrible products into boxes and selling them under our brand name.”

Who’s guilty?

Separating the criminals from the victims will be another hurdle for the group. It’s clear that using a box designed to look like AC Delco’s trademark red-white-and-blue packaging, bearing the Delco retail name and purporting to be a Delco product is a violation of trade law. But the question is, where does the crime trail start?

According to GM’s Bol, it often begins with an unwitting — perhaps unscrupulous — manufacturing company in a low-wage market such as China or Turkey. The factory accepts an order to reproduce an item as cheaply as possible. Brake pads are made out of steel wool and sandpaper. Trim panels are made using pressed wood and low-grade vinyl. Windshields, like those from Guandong Province, are made without safety engineering to make the glass shatter correctly.

The manufacturer might argue that he is simply an entrepreneur attempting to produce a product at a lower cost than the competition. He might even argue that the effort to shut him down is just the market giants attempting to eliminate low-cost competition.

Organized crime

The new U.S. coalition isn’t inclined to agree. They believe the factories typically are part of an organized crime group, engaging in schemes ranging from fake auto parts to money counterfeiting and laundering or other crimes. In 1994, Bol’s group nailed a parts counterfeiting ring in Houston that was operating 14 or 15 criminal activities. The outfit was using counterfeit packaging and shipping labels, and even had duplicated AC Delco’s design on retail racks, Bol notes.

Often, the retailer is itself part of the criminal group. Two years ago, Mopar managers in Beijing and Taipei were alerted to a ring of retailers selling what looked like Mopar-brand goods at far below established market prices. Chinese police conducted two days of raids and shut down 80 retail shops. The shops were even using Mopar signs.

Who’s in?

Another uncertainty is how widespread the fight against counterfeiting will become. So far only the Big 3 have stepped into the fray. But about three-fourths of the industry’s 100 biggest makers of original-equipment parts are prominent in the world aftermarket business. All of them are susceptible to the problem, notes Neal Zipser, a spokesman for the Motor & Equipment Manufacturers Association, a trade group representing 700 U.S. suppliers.

“If they don’t get the big Tier 1 suppliers on board, then it’s going to be difficult to make real progress,” Zipser says.

Others in the industry have been stewing over the issue. In August, 14 major producers attended a Detroit gathering on counterfeiting. Most of those in attendance acknowledged that counterfeiting is a problem. But not all of them are ready to step forward in the fight.

“I think some of them aren’t sure what to do,” Bol comments. “The last thing they probably want to do is advertise to the world that there might be parts out there with their name on them that aren’t any good.”

You can reach Lindsay Chappell at lchappell@crain.com

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