Overloaded: Counterfeit & Substandard Goods Swamp Developing Economies

We at EBN have been exploring the issue of social responsibility for a while in some of Barbara Jorgensen's columns, but I would like to take the conversation further by looking at the issue of counterfeiting and substandard goods as an offshoot of this topic. (See: Continental Divides, Don’t Dictate – Collaborate, and Profitability Needn’t Be Sacrificed for Social Responsibility.)

Counterfeiting is an outright crime that allows a manufacturer to take advantage of and piggyback on the goodwill already created by another company's brand and identity. But how should we classify substandard goods? Should this be merely a crime, or is it also a moral problem for the entire society?

Interestingly, both counterfeiting and the incidence of substandard goods in global commerce have increased exponentially with the rise of China as the world's production center. It is tempting to say there is a negative side to the high level of outsourcing to China, as the country ranks among the world's greatest exporter of counterfeit goods, even as it is a supplier of quality goods as well. Apparently, 64 per cent of seized articles within the EU came from China, which includes 81 per cent of counterfeit electronics. (See China tops the list of counterfeit goods in Europe and A serious problem for everyone.)

The problem is worse in developing economies. More than 80 percent of electronics, mobile phones, equipment, and manufacturing tools that flow into most developing countries are made in China, and a good percentage of them are either counterfeit products or duplicates of dubious quality. As a matter of fact, the term “Made in China” in certain parts of the developing world has become synonymous with substandard products.

Apart from the impact of counterfeit goods, there are also close imitations of brand-name products, including tags like “SONNY,” instead of {complink 5114|Sony Corp.}, or “LG,” with a logo different from that of {complink 3074|LG Electronics Inc.}, which are usually lower-quality goods with packaging similar to the original.

The issue of substandard products is to me a greater problem for the electronics industry, corporations, and consumers. It is true that original equipment can be expensive, sometimes too expensive for young companies, so it is quite tempting to look for cheaper alternatives, which, most of the time, turn out to be either counterfeited or substandard products. The equipment or component purchased for about 20 to 50 percent less in many cases has a shorter lifespan or performs poorly.

The performance of some of these substandard goods in the long run actually make them more expensive to the small organization trying to save costs by using them, while also limiting its chances of competitiveness on the market, damaging its reputation, and reducing its efficiency. George Karalias of Rochester Electronics is planning to handle these issues, as he mentioned in his column here, but I plan to probe more into the substandard goods problem in future articles.

Is this as huge a problem as I think it is? And what measures or regulations are in place to control the flow of substandard goods?

10 comments on “Overloaded: Counterfeit & Substandard Goods Swamp Developing Economies

  1. AnalyzeThis
    October 29, 2010

    Is this as huge a problem as I think it is? And what measures or regulations are in place to control the flow of substandard goods?

    Of course it's a huge problem. But this has been a problem for as long as there has been economic trade. It's nothing new.

    Measures and regulations? Sure, they're nice to have, but will they solve or even reduce the problem? I doubt it. And the problem is only exacerbated in developing economies because there may very likely be not enough legitimate supply to meet demand anyhow.

    If there is potential profit to be made off the sale of substandard or counterfeit goods, there will always be people who will find a way to take advantage of that opportunity. Yes, it's a problem now with electronics, it was a problem years ago with watches, it was a problem hundreds of years ago with street vendors selling fake jewelry.

    There will always be a demand for bargains.

  2. DataCrunch
    October 29, 2010

    James, this is a huge problem and product counterfeiting is a big business, which is estimated to cost hundreds of billions of dollars annually. Counterfeiting impacts the economy in so many negative ways: consumers are exposed to potentially serious health and safety risks; retailers and manufacturers are affected by the costs of recalls and the loos of reputation due to merchandise returned due to substandard quality, plus the additional costs of trying to enforce anti-counterfeiting measures through the supply chain, and of course major revenue loss.

      Also, It is estimated that 750,000 jobs in the US have been lost due to counterfeiting. 

    As for what anti-counterfeiting measures are being taken to try and combat this global threat, coincidentally just a few weeks ago in early October, the US Trade Representative’s office released the first public copy of the latest “Anti-Counterfeiting Trade Agreement (ACTA)” which was finally made public after a long period of negotiations.    The main purpose of ACTA is to establish an international framework to combat the spread of counterfeit goods globally and to increase cooperation and enforcement efforts.

    What impact measures like this will actually have is yet to be determined.  What I also found interesting were the countries and groups of countries involved in the negotiations that lead to latest ACTA document:

    Australia, Austria, Belgium, Bulgaria, Canada, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, the Republic of Korea, Latvia, Lithuania, Luxembourg, Malta, Morocco, the Netherlands, New Zealand, Poland, Portugal, Romania, Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, the United Kingdom, the United Mexican States, the United States, and the European Union

    Which important country is missing?

    For those interested in getting a closer look at the text of the agreement, it can be viewed here:

  3. AnalyzeThis
    October 29, 2010

    Counterfeiting impacts the economy in so many negative ways: consumers are exposed to potentially serious health and safety risks

    That's certainly true, especially when you're talking about the dangers of counterfiet medication.

    Producing a cheap, barely-working iPhone knockoff is one thing, but producing useless or outright harmful medicine… well, that's obviously an order of magnitude worse.

    Again, another problem that hits the developing world harder, but one which Americans are not immune to. We've all received spam mail ads for sleazy online pharmacies, and the reason we do is because there's a market, there are people out there that actually utilize them. For some reason, I am very skeptical of the quality of their merchandise.

    Anyhow, will be interesting to see how much and what kind of media coverage ACTA gets when (if?) it goes through. But as Dave pointed out, there does seem to be that one significant, glaring omission…

  4. Ariella
    October 29, 2010

    The dangerous ramifications of counterfeit medicines was touched on back in 1949 in the movie The Third Man. Sick children who were given diluted antibiotics either died or were damaged for life. In that case, it was not individuals but hospitals and clinics that were hoodwinked.  While generics that use the same ingredients as name brands can be just as effective, and some insurance drug coverage really pushes for generics, diluted ingredients are another story.

  5. bolaji ojo
    October 29, 2010

    Knock-offs have been around for as long as there have been something worth imitating. That history is here to stay. However, the danger is growing that the stakes are getting higher and higher with potential dmanages not just to a business but also to people. Recent reports indicate that counterfeit goods have been built into critical medical equipment, causing them to malfunction, and they've been identified in the military and aviation supply chain. The risks to people and governments are growing and efforts must be combined to fight the problem.

    The challenge is that suppliers of high-tech components would never be caught dead discussing the likelihood of their supplies being tainted. They know the problem exist but can't or won't admit to it because it would reflect poorly on them. So, they proceed with efforts to fight the problem at their company level and hesitate to team up with other victims. Component distributors, on the other hand, readily talk about this because a clean supply is critical to their business and they can also use this as a weapon to fight for the exclusive rights to represent suppliers and have buyers procure components only from “franchise” distributors. Can anyone blame them? No.

  6. Backorder
    October 30, 2010

    I think the problem of counterfeit products is hard to eradicate. There are couple of factors. One, it is very easy to reverse engineer and then duplicate a product down to packaging and similar branding(SONNY?). Secondly, there are takers. There is only a small percentage of buyers who actually dont realize that it is a counterfeit product. In developing countries where a lot of these “made in china” products find market, people have an opinion that technology is overpriced by standard brands and a similar functionality can be developed at a lower cost as well. This is where Chinese products enter. And they are not always of very poor quality, sometimes serving pretty decently and hence gaining word of mouth marketing. Although, as far as semiconductors are concerned and especially the medical industry manufacturers are wary of fake products. Thet take the precaution of supplying through authorized disties only and rarely go for chinese alternatives.

  7. Barbara Jorgensen
    November 2, 2010

    I read an interesting article yesterday–

    It doesn't look to me as if 1-Source is an authorized distributor, but it is taking advantage of VisionTech's problems to promote its own “anti-counterfeiting” measures. These measures include buying an inspection company headquartered in China–which, BTW, is where the parts that got VisionTech in trouble came from.

    Don't get me started…..

  8. tioluwa
    November 2, 2010

    As hopeless as the problem of counterfeiting is, i believe it can be reduced, though not totally eradicated. However, i don't think there is a global solution that can solve it.

    Each market for counterfeit products has its unique properties and challenges. counterfeit drugs need to be tackled differently from counterfeit electronics, and these even need to be addressed differently based on the country and region.

    In a developed world (its obvious that things work differently in developed and developing economies) laws, regulations and the likes could work, but in developing economies, regulations don't work, because there are not enough affordable alternative to the counterfeit goods.

    In the case of developing countries, first there must be a development of affordable alternatives before the counterfeit market can be tackled, else, it would amount to a pointless battle.

  9. Hardcore
    November 3, 2010



    There are some interesting points of view from various people,

    but I think a valuable point has been missed.

    One issue is that 'many' of the so called counterfeits are not actually 'fake', which may account for why some manufacturers are less talkative on the subject.

    Certainly in China there are outright cases of fakes , consider the situation recently at “sparkfun”

    Now the interesting pint here is the Xray pictures,  there has been a 'deliberate' attempt to make the part look like a genuine part, or it is another IC  functional part that has been re-branded.

    Then we have issues related to outright fraud:

    (Seriously I cannot believe people would actually send cash to people registered with gmail addresses)

    The above cases are obviously outright fraud.

    Then we can consider  the issue of 'dummy parts'  or pre-production parts, which some manufacturers provide to allow profiling of solder processes without the destruction of genuine parts (unfortunately many of these 'genuine dummy' parts look very realistic)

    other situations are less clear and consist of  're-branding' of  genuinely manufacturers parts.

    In some of these  manufacturers parts are covered by NDA and proprietary data sheets that outline the defects in the parts. (Nand-flash memory is one area where this is rampant)

    A purchase of such material , followed by a 'laser etch' of the top surface of the package, then provides the opportunity to 'rebrand' with a laser.

    The issue is not  that the goods are fake, but that they are 'genuine' defective parts supplied into the market by semi manufacturers attempting to maximize their bottom line, worse still these parts have passed completely through the correct distribution channels.

    The only way to sort out such parts is to have  deep analysis performed by the actual manufacturer, since  the silicon belongs to them.

    Then there is the 'filter down' system, very common in China.

    A manufacturer buys parts from a supplier  but during their incoming IQC, defective parts are replaced  by the manufacturer at a given % without the need to return sub-spec parts.

    These sub spec parts are then supplied into the market at a lower cost and re-enter the process, where they are screened by the next level down.

    Defects are again returned to the market. and so… on , until the absolute dregs of functionality are left, at this stage the parts are bought by the 'Kg'

    Even at this level there is still an outlet for these parts, many end up in substandard products proceed by small factories selling onto E-bay.

    Again Nand-Flash memory is one such component.

    Even more worrying is that in some cases the integral manufacturing ID, is non-functional, or the ID is that of a 'competitor' who has supplied a short fall of dies to be packaged up into another competitors package (all perfectly legitimately), but then when things go wrong with such parts, everyone involved denies responsibility.

    Before the market can be cleaned up, the manufacturers first need to get their house in order.



  10. tioluwa
    November 4, 2010


    interesting angle to the issue, you raised some issues that i didn't know about.

    and yes, i totally agree with you, alot of house cleaning on the part of manufacturers will be needed to tackle the issues.

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