Putting the Brakes on Gray Market and Counterfeit Goods

Collaboration with outside organizations doesn’t strike most people as the best way to protect intellectual property. But Ram Manchi’s goal is to convince you otherwise.

Manchi, director of global business controls at Cisco, is president of the Alliance for Gray Market and Counterfeit Abatement (AGMA), whose founding members include Cisco, 3Com, HP, Microsoft and Nortel. In this new role, which he assumed in November 2007, he is charged with increasing awareness of gray market and counterfeit goods, boosting membership in the organization and fostering collaboration among members.

Manchi recently spoke with CSO’s Katherine Walsh about his vision for AGMA, some successful investigations its members have launched, and what companies in all industries can do to combat the problem.

CSO: What’s a bigger concern–counterfeiting or gray market goods?

Manchi: Gray marketing is generally defined as products (very likely genuine) that are transacted through unauthorized channels and/or markets. Counterfeit refers to a non-genuine product traded with breach of brand and trademarks; it’s a deliberate attempt to deceive consumers by copying and marketing goods. Sometimes, the whole product is illegally manufactured, and sometimes, a part of the original product is contaminated with non-genuine components.

Both are significantly detrimental to the high-tech industry as well as to its channels and its customers. Gray marketing impacts the financial health of manufacturers and distribution channels through price destabilization, and it could also eventually impact the ability of manufacturers to make investments in future technologies. Counterfeiting, in addition to impacting manufacturers and channels, also impacts customers and their infrastructure with illegally produced and possibly inferior products.

Both of these issues have broader implications to society. Most of the time this money is not officially on the books and could fund undesired and unlawful activities. It could also contribute to money laundering, national security and other evils.

CSO: Do you combat gray market and counterfeit differently? Does addressing one tend to make the other become either less or more of a problem?

Manchi: Both gray marketing and counterfeiting are many times found to be blended. As individuals and entities that are engaging in gray marketing find easy ways to make money, it could tempt them to explore selling counterfeit to gain more easy money, and so on.

CSO: Can you give a couple examples that illustrate how AGMA enables companies to share information and best practices with each other?

Manchi: AGMA provides a forum for information sharing. This is enabled through best practice sharing at our meetings and through our website. AGMA also ensures that member companies do not violate any legal stipulations on sharing specific company/channel/individuals names.

As companies are being impacted by gray market and counterfeit goods, some companies have successfully detected and litigated the suspects. Some of these cases are discussed as case studies at AGMA meetings and conferences, providing the rest of the members’ insights into the process of detection, investigation, evidence, engagement of law enforcement and litigation.

AGMA conferences are also actively attended by law enforcement agencies such as the FBI, U.S. Secret Service and U.S. Postal Inspector General’s office. Such engagement further helps member companies to learn more on processes, available government agencies and how the legal system can help.

CSO: Can you give an example of what’s happened when members have shared best practices? How have they benefited?

Manchi: In one AGMA member company’s case, the company monitored abnormalities in volumes of product shipments, which helped identify a huge gray market fraud. The volumes of product being purchased were unusually high compared to the potential demand for the product to a specific country that has special discounts. Upon monitoring over a period of time and investigating the buyer and ship-to address of the buyer, it was found that both were fictitious, and the shipments were being forwarded to a more profitable market. The magnitude of margins lost in this case was in the multi-millions for the manufacturer. Upon sharing this case study with AGMA members, some of the member companies implemented additional tracking of shipment volumes by the market segment and by geography, and in fact, found interesting scenarios to pursue.

In another case, significant quantities of product was purchased for a market segment that had special discounts. Upon investigation, it was found that the named end-user’s budget was a fraction of the purchases made, and also interestingly, they had no product installed at their site. Unfortunately, these transactions not only impact the financial health of the manufacturers but also destabilize the channels, since the deeply discounted product competes in the same market with a good price point. This case alerted AGMA member companies to also review the authenticity of the purchasing entities when large volumes and special discounts are involved.

CSO: Why is AGMA geared toward the high-tech industry?

Manchi: Those companies have commonalities in terms of outsourcing, product development, their business models and the management of their IP. Having those common factors makes it a little easier to discuss some of the issues we’re trying to tackle, which are slightly different from the issues experienced by the pharma or automotive industries. AGMA has also reached out to some of the other trade associations to understand more about their efforts, and some of the best practices of each association are applicable across industries.

CSO: What are some best practices that any company can do? What are the first three things you’d recommend?

Manchi: While gray market and counterfeit products could possibly be an issue that can never be eliminated entirely, companies and the industry can significantly contain the magnitude through constant risk mitigation efforts. Although these efforts may require some investment and cost, ignoring or underestimating the issue could certainly compound and expand the problem, eventually making it unmanageable.

Companies could start off with an initial assessment of how the problem is impacting them, and if so, how and to what extent. To achieve this, it significantly helps to have an understanding of their “product and market” profile. This includes market potential for the product, competition, specific geographic needs, distribution models and serviceability. Analyze any abnormalities (spikes in demand, sales, discounts, service claims, product failure rates) to find any questionable trends. Also ensure that the terms and conditions on channel sales contracts are well defined, and if necessary, enhance the contractual language. Monitor broker and product trading websites to monitor price inconsistencies as well.

CSO: What is the biggest challenge?

Manchi: Education. There is a lack of awareness, and sometimes that means companies see the problem as smaller than it actually is. Most companies operate in a trust model and believe their channels and customers value their product and operate ethically. Convincing management of the criticality of the issue and how to invest in addressing the issue is one of the biggest challenges for our members.

Associate Staff Writer Katherine Walsh can be reached at kwalsh@cxo.com.