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Posted: November 2008

Opportunities and Challenges for OSM Researchers -  A Focus on Counterfeit Products in the Supply Chain

 

Mark Stevenson (Lancaster University)

 

1. Introduction

 

As the competitive landscape evolves, opportunities and challenges for Operations & Supply Management (OSM) researchers continue to emerge. One area where this is currently evident is counterfeit production. While counterfeiting has been commonly associated with currency and luxury items, with growth in outsourcing, increasingly global and complex supply chains, greater freedom of trade and labour movement, and new distribution channels, including the Internet, it is now a significant problem across a broad range of products in B2C and B2B contexts. Industries affected include pharmaceuticals, apparel, electronics, automotives, and aerospace, where there is high reliance on R&D and innovation. Using, e.g., reverse engineering, counterfeiters bypass years of investment, rapidly imitating products and profiting on the back of brand names and marketing campaigns. The Counterfeit Intelligence Bureau (CIB, 2008) estimated that counterfeiting accounts for 5-7% of all world trade, worth an estimated US$600 billion/year.

Counterfeiting is closely related to parallel importing (i.e., price diversion or the “grey market”, see Myers & Griffith, 1999; Maskus, 2000) where goods are produced legitimately but diverted from a lower-priced into a higher-priced market without the authorisation of the local Intellectual Property (IP) rights owner. This leaves behind unfulfilled demand, often satisfied by counterfeit products. Not only do counterfeits affect jobs, revenues, brand integrity, share price, etc, they are a disincentive to innovation and linked to the funding of organized crime and terrorism. Moreover, counterfeits may not have been made to the same standards as the products being imitated; in industries such as pharmaceuticals and automotives, poor quality counterfeits can be fatal. Many examples are provided by the International Chamber of Commerce (ICC, 2008), including cases of counterfeit components being found on military aircraft and space shuttles.

The phenomenon is now of high interest to supply chain (SC) practitioners - reflected by recent articles in industry-oriented publications (e.g., Whitehead, 2003; Wald & Holleran, 2007) - but has received little attention in leading academic journals. While the influential work of Chopra & Sodhi (2004) on SC risk raised concerns over the security of IP as a result of global outsourcing, of the nine SC risks the authors present, it is arguably the one which is least well understood.

Section 2 focuses on counterfeiting in the automotive sector – an industry in which OSM researchers have a longstanding history of conducting research - before OSM-related topics that can be expanded to consider such emerging phenomena and employed to further understand, explain and reduce counterfeit activity in the SC are outlined in Section 3, providing research opportunities to be exploited. In Section 4, challenges for researchers to overcome, such as how existing research methods can be adapted to explore emerging phenomena, are discussed. Concluding remarks are provided in Section 5.

 

 

2. Counterfeiting in the Automotive Industry

 

In recent times, much automotive manufacturing has been transferred from the West to low cost economies, e.g., in Eastern Europe and Asia. Taylor & Taylor (2008) referred to Donnelly et al. (2002) in stating that the automotive sector is “probably the most globalised industry in the world”. To manufacture in low cost economies, e.g., China, many large automotive companies have entered into joint ventures with local firms. Western companies have provided designs, state-of-the-art technology, and training to local companies, and, in doing so, introduced new SC risks. Jiang et al. (2007) stated that “as companies consider transferring processes and technologies … they need to consider China’s historically lax enforcement of laws protecting proprietary information and processes”.

It is perhaps no coincidence then that the most globalised industry in the world is also one of the most heavily counterfeited, both in terms of the infiltration of counterfeit automotive parts into the SC and aftermarket, and, the cloning of entire models. The following briefly explores counterfeit automotive parts before counterfeit car production is discussed.

 

2.1 Counterfeit Automotive Parts

A report by the Coalition Against Counterfeiting and Piracy (CACP, 2006) estimated that counterfeit automotive parts cost Ford Motor Company US$1 billion and the industry as a whole US$12 billion/year. Parts known to have been counterfeited include: wheels, engine hoods, spark plugs, windscreens, shock absorbers, and brake discs. The importance of this issue is also evident in one of BMW’s marketing campaigns for “genuine BMW parts” (BMW, 2008).

A supplier, producing automotive parts for an OEM, may seek to increase their revenue by using the OEM’s machines out-of-hours, producing extra batches, perhaps from a substandard material or by reworking scrapped parts, and selling them ‘through the back door’ to other customers with the trademark and/or packaging of the OEM (Minagawa et al., 2007). Counterfeit parts also enter the aftermarket, being bought by garages and fitted to cars when replacement parts are required. Haley (2003) explained that “Volkswagen sells only a third of the replacement parts for the 1.5 million Santanas driven in China … makers of bogus unauthorized parts claim the other two thirds”. There is also a lucrative grey market in automotive parts (Miano, 2004).

 

2.2 The Counterfeit Car

Many of the best-known automotive and motorcycle manufacturers in the world have been on the receiving end of alleged cloning from Chinese firms. For example, the (alleged) clones of: General Motors’ Chevy Spark by Chery Automobile, called the “Chery QQ”; Honda motorcycles by the Chongqing Lijan Industry Group, branded with a “Hongda” logo; Daimler Chrysler’s subsidiary Smart Fortwo by CMEC, called the “City Smart Car”; and, Toyota cars, and logo, by the Zhejiang Jili Group called the Geely Merrie. Some counterfeiters purchase former factories and/or old machines of genuine producers, use the same suppliers, and employ from the same labour pool; employees arrive with expertise and IP, even if not the rights to it. Modularity is prevalent in the automotive sector (Doran, 2003) and, arguably, this aids counterfeiters as genuine products can be more easily disassembled and reverse engineered. New technologies are also used to scan a genuine part or model, develop a 3D image, produce a rapid prototype, and then mass produce it.

 

 

 

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