By Simon Duddy
Counterfeiting affects us in every walk of life but in the world of IT the problem is more prevalent than you would imagine. Andrew Picken investigates the extent of counterfeiting in the Middle East IT industry and looks at what is being done to resolve the situation
Big business|~|fake-8IR.jpg|~|This is a poster that Gigabyte, a Taiwanese motherboard manufacturer put into Middle East retail outlets at the end of 2003 to educate consumers on the difference between original and fake Gigabyte products. |~|Faking it is big business. It is estimated that 7% of all world trade is accounted for by counterfeit goods and the lucrative IT world is certainly no stranger to fake products, with the Middle East having more than its fair share. The reach of counterfeiting extends from faked printer cartridges to the 100 children killed in Nigeria in 1990 after taking counterfeit cough syrup that was actually antifreeze. Counterfeiting in the IT business does not tend to have such tragic consequences of course, but fake IT goods add to a worldwide market that exceeds $350 billion according to International Chamber of Commerce estimates.
One of the biggest problem areas for the IT industry is the production of counterfeit printing consumables. Printing supplies are a veritable cash cow for all of the major printing firms. For example, they accounted for 55% of Lexmark’s overall turnover in 2003. The cost of Original Equipment Manufacturers (OEM) consumables is high. Which? — a UK based consumer organisation — recently estimated that a colour HP ink cartridge can be seven times more expensive per millilitre than the cost of vintage champagne.
The margins on offer for the likes of HP, Canon and Epson are very lucrative, something that has not gone unnoticed by the counterfeiters. The American-based Imaging Supplies Industry trade association puts the damage to the worldwide consumables industry at over $1 billion annually though others claim it is almost impossible to gauge the scope of counterfeiting, particularly in the Middle East.
“We don’t know how big the problem is,” says the manager for HP’s EMEA anti-counterfeiting programme, who did not want to be identified. “The only thing we can measure is how many products we seize and how many complaints we are getting. We have seized around 8,000 products in the region since March 2002.” In the Middle East, the extent of the counterfeit consumables problem appears to vary from country to country. “There are no real hard facts about how bad the problem is,” says Jagdeep Gill, director of the Imaging Consumables Coalition of Europe Middle East and Africa (ICCE). “The estimations are that 20-25% of the UAE market is counterfeit, but when you start looking at places like Saudi Arabia and Egypt we could be talking as high as 70% of the market.”
“I am losing somewhere close to $300,000 each month purely to counterfeiting,” claims Abhijeet Sathaye, account manager for consumables distributor Despec MERA. “Our sales are in proportion to the OEM’s but we are losing about 20% of our sales to counterfeit goods.” HP claims that it found a small production set-up in Saudi Arabia last year but, on the whole, the source for counterfeit consumables is mainly the Far East. “It is sometimes difficult to know the source because they are really creative when it comes to counterfeiting,” adds Khalil El-Dalu, general manager, EPSON Middle East.
It is easy to understand the motivation behind buying cheaper printer consumables but the difference between counterfeits, third party and OEM original supplies is often misunderstood.
Third party suppliers offer generic substitutes for the branded printer supplies and these are commonly re-manufactured cartridges that the OEM’s naturally claim are not to the same standard as theirs. Counterfeit printing supplies are those branded as, for example, a Canon printer cartridge but actually housing non-Canon ink in copied Canon packaging. “The cost of the cartridge is in the ink because the chemical composition in a genuine [cartridge] is completely different to a counterfeit one,” explains Epson’s El-Dalu. “It is like buying detergent — consider the difference in quality between the cheapest and expensive brands.” El-Dalu claims that the counterfeit cartridges could never achieve the 16 million colours you can get with an original Epson cartridge because of their inferior quality. “When the customer calls us and says that once they started using the cartridge, the quality drops, we immediately know it is a counterfeit cartridge,” adds El-Dalu.
“In 95% of the cases, most of the shops that are selling counterfeit goods are well aware of it and return the customer’s goods with no questions in order not to raise suspicion.”
“In 99% of our counterfeit cases, it’s a refill cartridge which is put into a box which is a copy of our box, so the end user thinks they are buying an original but they end up with a refill,” explains the manager for HP’s EMEA anti-counterfeiting programme. “[This] results in a higher failure rate and lower print quality. Many of our complaints come from end users coming back to us because they think they have an original cartridge.”
Norbert Gex, marketing manager for Lexmark’s EMEA Export Division, claims that the role of unscrupulous cartridge brokers is also a problem in the counterfeiting industry, with many spent cartridges reaching the hands of counterfeiters via this route. Lexmark and HP have both recently launched recycling initiatives in Europe and the US in a bid to alleviate the environmental impact of the hundreds of thousands of cartridges that are binned each year. Corporate responsibility has been cited as the motivation behind this move but each cartridge sent back to the OEM is one less in the hands of the third party refilling companies or indeed the counterfeiters. ||**||Fighting back|~|hp-cartridge.jpg|~|HP began its anti-counterfeiting programme in 2002 and the firm claims that more than 70,000 counterfeit products have been stopped from entering the EMEA market since its inception.|~|Other types of counterfeiting
There are other areas of the hardware sector that remain equally lucrative for counterfeiters. “With almost any product in the market, people will duplicate if they can,” says Milad Jabbour, managing director of Genius Computer Technology, which has long suffered from its range of speakers and mice being copied. “Overall it is no more than 5% of our business but it depends on the country. As long as you can duplicate to a lower cost — which always means a lower quality — then people will duplicate,” he adds, citing computer speakers as a good example of counterfeited goods. “With the speaker you can make them of similar shape to expensive ones but with a lot cheaper components. This is especially true when you sell it to consumers [who are] not aware of the difference in quality.”
In October 2003, Gigabyte issued a warning to consumers about a number of counterfeit motherboards in the market that were being passed off as genuine Gigabyte products. The boards had been assembled using low quality components that meant they only had a lifespan of about two months. “We have been dealing with this problem for a long time,” says Max Chiu, sales supervisor for Gigabyte. “When the market is flooded with counterfeit goods it affects the business of Gigabyte’s resellers [and] consequently Gigabyte’s sales.”
“The counterfeiters use out of date chipsets and the compatibility of the products is not assured. The lifetime of the components or products should be very short due to the extreme low cost it bears and any updated features are missing because there is no software or bios update.” Chiu says there are a number of telltale signs that consumers can use to spot a fake Gigabyte product. These range from the model number and exterior packaging to the accessories that ship with the product.
Another form of deception used in the region’s IT market was uncovered in January when the American manufacturer of Multimedia Cards (MMC), SimpleTech was the victim of a scam. A counterfeiter operating in Kuwait was trying to sell 256MB MMC cards branded SimpleTech, but the 256MB specification is not one included in the current SimpleTech portfolio. SimpleTech sent out a warning to all of its channel partners about this fake product.
“I personally feel that this business is safer than the drugs business and the returns are almost equal,” says Despec’s Sathaye. “There should be much harsher punishments.” The big question facing the industry is what is being done to stop this trade in fake hardware and software? Overall, the signs are encouraging but many feel there is still a long way to go, particularly in terms of the response from the authorities. “There is a bit of red tape to get through, but generally they are trying,” says the ICCE’s Gill. “I’d like to see customs have a more pro-active approach and that is something that we have to empower them to do by giving them the correct information. In an ideal world where you have millions of containers coming through, customs should be able to look at a fixed percentage.”
“The other important thing is education. A lot of people out there still don’t understand the importance of intellectual property rights and the fact that if you sell counterfeit goods you really are committing a criminal act,” adds Gill. The importance of awareness and education is echoed by the majority of the printing OEM’s. “In 2001 we ran the first training programme with the Dubai Port Authority in order to train customs officers to identify suspect products,” says Lexmark’s Gex, who added that awareness is equally important at both re-seller and consumer levels.
Gill points to the anti-counterfeiting successes in the region over the last few years, claiming one member of the ICCE carried out 25 raids in Saudi Arabia in February 2004 alone. The HP anti-counterfeiting programme, launched in March 2002, has a hotline and e-mail address, which the firm claims now accounts for between 15-20% of its leads on counterfeiting in the Middle East. When Genius discovered one firm selling fake Genius products, they wrote to this firm’s channel partners and told them that the batch this firm was trying to sell was fake and if they were going to buy it then they should be purchasing it at a fraction of the price they had been quoted. This tactic worked, as none of the channel partners touched the goods when they realised they were fake.
“The OEMs have to play a bigger role in this, we can distribute the product but ultimately they are getting hit. They need to pull their socks up,” says Despec’s Sathaye. “Unless you hunt them down, actually catch the guys selling the goods [and] suspend their license, the problem will go on. What happens is that the guy makes so much money that if you just slap a fine he will pay it then get away with it again,” he says. “Most of our legal chasing is in the Far East,” says Epson’s El Dalu who adds that counterfeiters are now concentrating on making the packaging as close to the original as possible, leaving many consumers confused on the difference between fake and original products.
OEM’s are attempting to avoid any ambiguity on packaging with the introduction of increasingly sophisticated anti-counterfeiting technologies. “Holograms are fairly predominant and members tend to change them every year, which gives them three or four months head start before the counterfeiters catch up,” says Gill. “Some of the members have five layer security on their more expensive products: Maybe one is visible on the consumables but then you have other layers of security that are visible to their investigators.” Simpler steps have been taken by the likes of Lexmark, which has introduced a regional packaging system for its ink cartridges.
There are other technologies, such as Epson’s Color Shifting Label, which has a shimmering effect on the label surface, that have evolved from holograms but an even more futuristic concept is DNA embedded technology. Not yet deployed by any of the key players in the market, this technology provides the ability to embed or apply combinations of natural plant DNA to products and applications. The unique characteristics and numerous combinations of DNA sequences are used as a tool to differentiate and verify authenticity of products. Creating a fingerprint for products and software is a reasonably ‘out there’ concept but as the problem of counterfeiting shows no sign of abating then it may become a real possibility in the IT industry.||**||The battle to stop software piracy|~|bsa_jawad2.jpg|~|“We are going in the right direction,” says Jawad Al Redha, co-chair, Middle East, Business Software Alliance. |~|Any discussion about counterfeiting would not be complete without considering the impact of software piracy. The anti-piracy trade organisation, Business Software Alliance (BSA) estimates the cost of software piracy across the world to be approximately $12 billion a year and anyone interested in IT will have come across some form of software piracy in their lifetime.
Despite the best efforts of software developers, the software piracy market continues to flourish. The Middle East was traditionally a hotbed for illegal software but things are slowly beginning to change, mainly due to a shift in attitudes from governments and the efforts of organisations like the BSA.
“The future of IT depends on how we respect and implement the Intellectual Property Rights (IPR) laws,” says Jawad Al Redha, co-chair — Middle East, BSA. “It is not enough to have the law, it is more important to enforce that law and to make sure people respect that law.”
The BSA has been keen to publicise its role in halting the trade in pirated software and the organisation claims a 44% drop in software piracy in the Middle East between 1994 and 2002. “In some countries we have a rate of piracy that is way too high, but it is decreasing year by year, which is a good sign but not to the extent that we expect,” says Al Redha.
The BSA’s main role in the Middle East is one of education and awareness and being funded by software giants such as Microsoft means the organisation is not afraid to flex its muscle at times. “90% of our job is to educate the users of software and also those who sell, distribute and export it,” says Al Redha.
“We teach them why they should go for legal software and the benefits to their countries, their own business and customers. We have a lot of training and workshops for universities and schools in the Arab region and we do lots of round tables with developers, BSA partners and government officials.”||**||Call the AAA|~|ms-office.jpg|~|Pirated software, bought for less than $2.|~|Like things on the hardware side, the extent of software piracy varies from country to country, as do attitudes to resolving the problem. “Some are doing great, some are muddled. The best example is the UAE, I wish the other countries in the region would take the same steps as the UAE. We are really proud of the UAE in terms of its actions on software piracy,” adds Al Redha.
“The tremendous fall in piracy rates is well-documented by now,” adds Scott Butler, CEO of the Arabian Anti-piracy Alliance (AAA). “However, there are cases of individual resellers that cannot resist the temptation to make a fastbuck through the use of pirated software. “Users are also becoming increasingly aware of the advantages of using original licensed software. They are aware that counterfeit software is often of lower quality.”
Al Redha says that the upsurge in Arabic software should be a spur for a reduction in piracy. “We have local software developers in each [Arab] country [and] software in almost every single country in the world, this is the golden age of Arabic software.”
“We are dreaming to have zero piracy, but there is nowhere in the world that has no piracy. At least when you see a decrease in piracy year by year, it is a good sign, I think we are going in the right direction,” concludes Al Redha.||**||