Declaring war on the clones

The term ‘piracy’ used to be associated exclusively with packaged software. The only pirated hardware available was fake printer cartridges. Now that’s all changing. Duplicate products are available across categories, from memory components to floppy drives to semiconductor chips. Unless hardware players find a way to curb this menace, the attack of the clones could shake the foundations of the Indian IT industry, warns SRIKANTH RP

According to K R NAIK, most of the fake products are not manufactured in India, but are imported from countries such as China, Taiwan, Indonesia, Philippines and Malaysia

THE marketing folk at Analog Devices India were puzzled. Sales of the company’s flagship product—a chip widely used in electronic metering systems—had declined by around 50 percent over a six-month period. Investigations ruled out any shortcomings in the product. Nor was there any significant competition in the Indian market. The enigma was solved when it came to light that bogus semiconductor chips from China had entered the Indian market and were being passed off as substitutes for Analog’s. While the company promptly filed a suit and obtained an interim injunction from the Delhi High Court to restrict the Chinese vendor from distributing its products in India, the case highlighted a disturbing trend—fake IT products are flooding the Indian hardware market.

Today, the list of counterfeit products spans categories, from keyboards and mice to printer cartridges, RAM, floppy drives, printed circuit boards and even microprocessors. According to one estimate, counterfeit products account for more than 12 percent of the Indian hardware market of Rs 21,325 crore. (MAIT, 2003-04)

Phoney consumables

The biggest impact is felt by printer companies who face a loss in revenue ranging from 5 percent to as much as 50 percent. Says B R Muralidhar, business manager, consumables, Epson India, “Epson generates Rs 3 crore a month in revenue from overall consumables. Ink cartridges account for 95-97 percent of the total revenue. We estimate the loss in the overall ink cartridge market to be around 5 percent because of the presence of counterfeit products.”

HP, which has a dominant market share in the printer segment, also faces an uphill task as it tries to curb the menace. Neel Pillai, business development manager, HP, estimates the fakes in the consumables business to be about 8-10 percent.

Similarly, Canon India, a company that has been on the upsurge, claims losses in revenue to the tune of 50 percent. Says Alok

B R MURALIDHAR says that customers can verify the genuineness of an Epson product by tilting the hologram at an angle of 90 degrees to find a concealed animated Epson image

Bharadwaj, director and general manager at the company, “Counterfeits eat into almost 50 percent of Canon’s consumables market share. To take action against counterfeiters, we initiated around 27 raids in India in 2003.”

While it is a common misconception that counterfeit cartridges are the same as refurbished or refilled cartridges, most vendors say that the sale of refilled cartridges is a legitimate industry. A refilled or remanufactured product does not become counterfeit until it is packaged or sold in a way that attempts to mimic the original product. A common modus operandi is to make an exact copy of the packaging and place a refilled cartridge in it.

Says K R Naik, President, MAIT, “Most of these fakes are not manufactured in India, but imported from countries such as China, Taiwan, Indonesia, Philippines and Malaysia. In India the packaging is copied. The fake products are then pushed in the market through resellers.” Most vendors claim that the fake menace starts mostly at the dealer level.

Total recall

Fake memory constitutes another big cottage industry. Popular brands such as Hynix, Samsung, Kingston and Transcend have been suffering from the problem of fakes floating in the market. It is estimated that around 70 percent of the memory market in India is accounted for by look-alikes. While a common strategy is to affix stickers of renowned brands, counterfeiters also pick up memory modules that have been rejected by the manufacturers and sell them through local resellers.

Unlike in the case of other PC components, the few memory vendors who do have distributors focus only on the OEM market, so Indian OEMs who purchase directly from an authorised distribution network are unaffected. This leaves the assembler segment (which dominates the PC market) vulnerable to fake memory modules since most assemblers buy memory components from resellers. This in turn affects the original distributor as it not only affects the price of the product but also damages its brand name.

A case in point is Mediaman Infotech, a Mumbai-based distributor for Transcend memory products. Mediaman, which used to sell around 2,000 Transcend modules a month, realised there were fake products in the market when it started losing major deals to distributors who were offering Transcend products at rock-bottom prices. IIM-Ahmedabad even cancelled an order when it was offered Transcend modules at a discount of Rs 200 per module. In an industry where margins are in single digits, spurious products could well put a company out of business.

Peripheral peril

While counterfeiting is most rampant in the memory and printer consumables space, there are categories like sound cards and even floppy drives that have fake counterparts floating in the market in small numbers.

Says Hemvardhan Shah, product manager, Rashi Peripherals, “We have seen a number of cases where fake Sony floppy disk drives have been detected in the country. We have already initiated action by asking channel partners or users to contact our branches or authorised Sony partners to help them identify the right products.” Rashi is also the distributor for Logitech, and faces a similar problem in weeding out fake Logitech mice which come primarily from markets like China or Taiwan, and retail for around half the price of the real thing.

Yet another common trick is to overclock a CPU. Channel players say that it is not unusual to come across processors that have had processor speeds re-marked to mislead buyers into thinking they are buying higher-end products.

Vendors retaliate

To beat the counterfeiters at their own game, MAIT has formed the IT Anti-Counterfeit Consortium of India. Vendors are fighting back with a three-pronged approach—educating channel partners, conducting raids and adopting innovative packaging. For example, printer major Epson reacted swiftly when it came across fakes in the printer cartridge market, and launched a special red pack for Epson’s ink cartridges exclusively for India. Earlier, its cartridges used to come in blue packs. The company has also introduced an Epson India hologram. Says Muralidhar, “A customer can verify the genuineness of the product by tilting the hologram at an angle of 90 degrees to find a concealed animated Epson image.”

Similarly, HP has a security seal on its toners which changes colour when viewed from different angles. To date, this feature has not been copied in India. Meanwhile, Canon includes gifts such as pens and calculators with its cartridges to distinguish genuine products from fakes. The company also gives certificates to authorised dealers so that customers can identify a genuine dealer easily. Processor giant Intel is also introducing India-specific packaging to forestall counterfeiters.

While fake products in the memory market are the most difficult to pinpoint, vendors such as Mediaman have been aggressive in educating channel partners and customers in an attempt to prevent novice buyers from falling into the counterfeiters’ trap. Says Dushyant Mehta, CEO of Mediaman, “The most common giveaways in fake memory modules are cheap, dull stickers; holographic stickers on originals are clear and bright.” The company has also released a list of resellers who it suspects are involved in distributing counterfeit products.

Weakest link?

India, being a signatory to the TRIPs (Trade-Related Intellectual Property Rights) agreement, has to comply with its obligations by 2005. Hence there is growing consciousness about IP protection, as can be seen from the numerous vendors who have filed and won cases against counterfeit product makers. However, while India does have all the laws on paper, the slowness of the Indian legal system effectively nullifies this advantage.

Comments C M Menon, national sales manager, Analog, “The process of filing for IP is too slow, and the punishment for infringement is not severe enough. We would like to see more severe penalties for violating IP laws, and faster filing processes to register IP rights.”

Naik agrees. “It has been identified that the weakest link in India’s intellectual property protection system is the judicial system. Due to delays in the judicial process caused by the heavy backlog of pending cases, the judicial system has come under criticism.”

A small beginning has truly been made, but India Inc clearly needs a more concerted effort to successfully quell the attack of the clones.

srikanth@expresscomputeronline.com