- Gray Market and Counterfeiting: A Cancer in China's Fire Fighting Market
Gray Market and Counterfeiting: A Cancer in China's Fire Fighting Market
Illegal brokering of products represents a competitive drain on both the manufacturer and authorized distribution channel. This practice threatens to undermine the integrity of the legitimate sales channels, leads to customer satisfaction issues, and violates the contractual
agreements between manufacturing companies and their distribution partners.
Every foreign company that has done business in China has encountered some form of gray market or counterfeiting involving their products or designs. A basic understanding of both is critical to the industry, purchasers, users, investors, and other stakeholders. The group that is greatest effected by gray marketing or counterfeited products are firefighters. They rely on the equipment daily, trusting that their leaders made smart purchasing decisions to protect their lives and allow them to do their job well.
Part of China Fire Bulletin's mission of helping to improve the fire service, worldwide, is to help our readers understand the dangers of gray marketing and counterfeiting and provide them the knowledge and tools they need to combat this cancer and make smarter, responsible decisions for themselves and their teams, all of who's lives are depending on it.
Why is there a need for this CFB column?
Reducing counterfeiting and gray marketing activity is important for maintaining the highest possible standards of product quality and reliability and ensuring that customers' service and support requirements are met.
The financial impact and customer satisfaction issues resulting from gray and counterfeit market could be significant.
The inherent value of fire fighting brands is strengthened when products are delivered through approved distribution partners, ensuring the highest quality product and best possible service and support for the customers.
In addition, by addressing unauthorized gray market activity, a level playing field is created for authorized distribution partners.
Once products become diverted, they are often misrepresented and unsuspecting customers have no assurance that the products they're buying are new, genuine, and will be supported with warranty and qualified service when necessary.
What are the goals of this new CFB column?
To protect the authorized distribution channels and intellectual property of authorized goods in order to improve customer satisfaction and preserve brand integrity.
To achieve these goals, CFB will engage in the following activities:
Promote channel compliance and risk assurance
Develop and encourage industry best practices for brand protection and related issues
Investigate all legal avenues to deter criminal activities that feed gray market and counterfeit goods
Educate the industry, customers, investors, and other stakeholders
Enlist decision makers, manufacturers, and other stakeholders
What is gray marketing or illegal brokering?
The gray market is the unauthorized sale of new, branded products diverted from authorized distribution channels or imported into the country for sale without the consent or knowledge of the manufacturer. It is the unauthorized sale or improper diversion of new products obtained under deceptive circumstances. This would mean new, branded products being diverted from authorized distribution channels or imported into the country without permission of the original manufacturer.
Isn't the gray market fueled by internal sales program and policies at the manufacturers?
Gray market goods are shopped globally for best prices. They can move through multiple tiers before they actually reach the end-customers. Often times a shadow inventory will exist inside and outside of authorized distribution channels making it difficult to forecast true demand. Resellers may abuse discount programs that are legitimately crafted by manufacturers to compete in the global marketplace. These sales programs can be exploited and targeted for weaknesses that exist inherently in some of these programs.
Individual manufacturers need to look internally to understand how products are moving through legitimate channels and if possible to verify legitimate customers. Manufacturers can look at the terms and condition of contracts with their channel partners, put discipline around internal business practices to close loopholes that may be exploited, and pursue litigation against companies that willfully abuse practices, breach contracts and provide fraudulent information.
Where does the gray market happen in the distribution cycle?
Gray marketing can occur anywhere in the distribution cycle. It can occur when a broker poses as a reseller, when a reseller who acts as both a broker and a value-added reseller acts outside terms and conditions of distribution contracts or special discount programs. It can occur in every touch point in the distribution model. It can also occur when a past authorized reseller is de-authorized by the manufacturer, but continues to pose as an authorized reseller.
Counterfeit product is the making or selling of unauthorized copies of merchandise. The counterfeit goods may be marked with a "counterfeit mark" made to appear like the genuine trademark of the good. A counterfeit mark is a false mark that is used in connection with the trafficking in goods or services that is identical with or indistinguishable from a genuine mark. In the case of fire fighting technology, counterfeit products can be comprised of individual components, whole parts, finished product, packaging, documentation, marketing and even the cartons and boxes that finished goods are shipped in.
How does counterfeit product get sold?
Counterfeit product initially will be sold through tightly held broker networks established by the counterfeiter. Beyond those brokers, counterfeit product many times will then enter the gray market infrastructure thus causing confusion at the fire bureau and a higher risk that the channel and end users may be subject to purchasing and receiving non-genuine goods, potentially and likely compromising the safety of the firefighters who will use them.
What is the counterfeit situation in the Chinese fire market?
The challenges of counterfeit products in the Chinese fire market are unique because of the decision makers lack of experience with the long-established brands that have existed in foreign markets for many decades or even centuries.
At the 2013 Beijing Fire Show, for example, it was clearly on display. The main, ground floor was full of manufacturers of long-term well established brands, and their local authorized representatives. On the lower floor were hundreds of companies, many offering counterfeit products and supporting gray market distribution. Without any monitoring of this by organizers, or an established method of recourse for show participants, this phenomenon has gone unaddressed despite it being often discussed and despised in boardrooms around the world.
How do I know if I am at risk for purchasing counterfeit products?
By purchasing products through authorized channels or other means of distribution established by the original equipment manufacturer or directly from the manufacturer you greatly increase your assurance that you are receiving genuine, new and factory warranted product. Most manufacturers have listing of authorized dealers available on their websites.
In any case, during a purchasing tender for your fire department, demand presentation of an authorized distribution letter from the manufacturer or from their exclusively authorized China distributor., and their sub-dealers if applicable.
Purchasing team at XFD must conduct quality control of their sources if they wish to keep their firefighters safe from counterfeit products and unserviceable gray marketed goods.
Multi-tier authorizations, of both the country distributor and their authorized "sub-dealers" will ensure long-term product service and support capabilities, product quality and performance, and firefighter safety.
Impact of Gray Market and Counterfeit Product FAQ
Why is it important for the fire department to buy from an authorized channel?
It is important for the fire department to purchase from legitimate distribution channels as authorized by the manufacturer in order to maintain the highest possible standards of product quality and reliability and to ensure that customers' service and support requirements are met. The buyers and users at the fire department will surely judge the brand of the equipment they purchase based on its performance, quality, serviceability and cost of ownership. Manufacturers make great efforts to evaluate and qualify their authorized distribution partners to ensure that you (the customer/user) receive not only the best products they can offer but also the best possible after-sales experience.
Example: Recently, there have been some reports of service and parts of some imported fire apparatus brands being prohibitively expensive or simply unavailable, leaving relatively new apparatus inoperative for long periods of time. It is impossible to think that every apparatus manufacturer could afford to open a factory-owned service facility in every country, every market that they operate. The global fire apparatus market is not large enough to support such investments. They, instead, strive to build networks of authorized distributors for sales, service, and training, and support within the assigned, authorized market. Some apparatus brands, whether foreign or domestic, are better at this than others. Considering life-cycle costs in your department's purchasing decisions will help to identify authorized distribution channels, who will most likely be those who have enough confidence and security in their authorizations that they make the investments required to deliver the capability to service what they sell and provide warranties on the products they deliver.
Anytime products are purchased outside the authorized distribution channel, there is risk that the customer is buying counterfeit or substandard products, including products that may have been altered in some way, or used products represented as new.
Further, gray market products can be mishandled or damaged during multiple shipments all around the world, which would cause additional customer satisfaction issues. Manufacturers cannot protect against mishandling when the product leaves the authorized channel.
In certain instances, this may also void the manufacturer's warranty, thus disappointing consumers and hurting the manufacturer's reputation.
How does gray marketing increase the risk of counterfeit product being sold to end customers?
When product leaves the authorized channel, manufacturers lose the ability to ensure through its contracts with channel partners that the highest possible standards of product quality and reliability are maintained. Thus, products moving through the gray market are at risk for modification use in counterfeit products. Also, there is a risk that the product may be tampered with. For example, component parts are removed and sold separately, then replaced with counterfeit parts that could fail.
What is the impact of the gray market on authorized distribution partners?
The illegal brokering of products represents a competitive drain (loss of profitability) on both the manufacturer and authorized distribution channel. This practice threatens to undermine the integrity of the legitimate sales channels, leads to customer satisfaction issues, and violates the contractual agreements between manufacturing companies and their distribution partners.
What is the impact of the counterfeit products on authorized distribution partners?
When counterfeit products enter the market place, they compete with legitimate product and could result in a competitive drain on authorized distribution partners. Furthermore, those who choose to purchase from unauthorized sources could unknowingly resell counterfeit products, which would
result in negative customer experiences and question of the manufacturer's integrity by their resellers and end customers.
By sharing information about counterfeiting issues, CFB can increase customer confidence in branded product and protect valued channel partners.
What is the overall impact of the Gray Market and counterfeit products on Manufacturers?
First, there are the multiple customer satisfaction issues resulting from counterfeit products and gray marketing. Anytime products are purchased outside the authorized distribution channel, there is risk that the customer is buying counterfeit or substandard products, including products that may have been altered in some way, or used products represented as new. Further, gray market products can be mishandled or damaged during multiple shipments all around the world, which would cause additional customer satisfaction issues. Manufacturers cannot protect against mishandling when the product leaves the authorized channel.
Second, gray market and counterfeit products entering the market place result in shadow inventory that is not visible to manufacturers, thus making it difficult to forecast accurately.
Third, the existence of counterfeit products can cause a decrease in the demand for your genuine product as customers and the channel are unsure of ways to guarantee they are purchasing quality authentic goods.
Fourth, when products move through multiple tiers there can be a drain on overall revenues for the manufacturers and their channel partners.
Fifth, in certain instances, this may also void the manufacturer’s warranty, thus disappointing consumers and hurting the manufacturer's reputation.
What can the Fire Fighting Bureau decision makers do to protect themselves against counterfeit and gray market products?
The ultimate responsibility lies with the purchasing decision maker. It may add a level of complexity that has never been part of the specification process in the past, but doing so will help to ensure that the XFD purchases only genuine products and can expect the future benefits of manufacturer support and service if, and when, it becomes necessary in the future.
Perhaps most important, however, is the safety considerations of the users, the firefighters. Counterfeit or gray market fire fighting equipment is almost always sold by agents competing on price alone. This aggressive pricing discount, compared to other known genuine brands, should be ruthlessly analyzed. Manufacturing costs of similar products, no matter where goods are made in the world, are typically very similar, +/- 10% maximum. If a differential exceeding this is seen in competing products, this should immediately sound alarms of potential manufacturing defects, bad engineering, poor quality materials used, and overall unsafe and unsound for firefighter use.
1. During tender qualification process, demand presentation of documents (and verify their genuine origin and effective dates!!! Call the manufacturer if necessary. This could save a firefighters life.):
Manufacturer-authorized China distributor
Distributor-authorized regional sub-dealer, if applicable.
Any further layers of distribution mean you are probably overpaying for these goods.
2. Specify manufacturing quality in your tender specs:
Manufacturer's ISO9001:2008 certificate, or similar. (Continuous ISO certification, not one-time. Both exist, but only continuous certification review will ensure product quality.)
Other applicable product-specific certifications from third-party testing laboratories. (UL, AMCA, ATEX, IEcEx, NFPA, MED, DN, etc.)
CE is not a certification, it is a self-declaration of compliance not requiring independent testing, and should not be considered as a defining product quality standard.
3. Get detailed with specifications. Form a committee to write specs (don't do it alone), including educated frontline users and manufacturers, to form a sort of specification negotiation between what is desired on the frontline and what is possible considering manufacturing capabilities and market availability.
This requires an educated decision maker. Incomplete (lazy) or uneducated specifications will lead to purchasing of underperforming equipment that does not meet the real needs of the frontline fire fighters and will, most likely, not be supported by the manufacturer.
4. Require a warranty, or some sort of service capability agreement from the reseller. Specifying this is not enough. Enforce it with follow through! If a reseller cannot deliver service per the contract terms, or is reluctant to provide a delivery period warranty and training, than they are most likely either an uncommitted or unauthorized reseller. Do not blame the brand's manufacturer. Restrict that particular reseller from future sales at your department. Let natural market forces take care of the rest. After taking these actions, the manufacturer will surely do better quality control of their resellers in the future which will lead to win-win-win scenarios for all parties involved: Fire department gets quality equipment, a committed and capable reseller gets rewarded for his investments and efforts, and the manufacturer gets to continue selling to your department.
■ Author / Zachary E. Allen