Business monthly August 07   EDITOR'S NOTE COVER STORY EXECUTIVE LIFE VIEWPOINT IN PERSON SUBSCRIPTION FORM IN BRIEF MARKET WATCH ADVERTISING RATES IN DEPTH CORPORATE CLINIC THE CHAMBER Search Business Monthly | Back Issues

COVER STORY

MARKET OF DECEPTION

BY GEOFFREY CRAIG

The war on counterfeiting, once fought on the sidewalks against unlicensed vendors hawking imitation luxury goods and consumer electronics, has come indoors. Today, store shelves are brimming with hard-to-distinguish knockoffs of everyday items such as cosmetics, pharmaceutical drugs, food products, electrical switches and even toothpaste. Empowered by new legislation, consumer groups and afflicted companies are fighting back to foil counterfeiters and educate consumers of the role they play in preventing fraud.

The sight of counterfeit goods being hawked by street peddlers barely raises an eyebrow from most passersby, whether in Cairo or any city. It may be a crime, but the consumer usually purchases the knockoff with full knowledge of its counterfeit nature. Inevitably, the product – a fake Rolex, DVD or pair of sunglasses, for example – breaks in a matter of days or weeks, or never works in the first place.

But the situation is entirely different for buyers who only learn of the counterfeit nature of their purchase later when they are injured or become ill. The product – often food, medicine or a household item – is virtually indistinguishable from the trusted brand it imitates. But inside its meticulously imitated package the counterfeiter has substituted the genuine product’s components with cheaper and often dangerous alternatives.

The consequences of this deceit tend to be realized in poor countries. Last year, at least 100 people were killed in Panama after a toxic chemical found its way into cough medicine. Investigators discovered that a Chinese supplier had substituted diethylene glycol (antifreeze) for more expensive pharmaceutical-grade glycerin, and a local drug-maker had inadvertently used the falsely labeled ingredient to produce 260,000 bottles of deadly cough syrup. Similar incidents have been reported in India, Bangladesh, Haiti, Argentina and Nigeria.

Developed countries have also seen their share of health scares from counterfeit products. Most recently, Chinese-made toothpaste sweetened with diethylene glycol and falsely packaged as a leading brand of toothpaste was found in discount stores in the southwestern United States. And earlier this year, over 60 million packages of pet food were recalled after wheat gluten used to thicken the gravy was found to be adulterated with melamine, a chemical used in plastics production. The toxic ingredient, blamed for the deaths of dogs and cats in North America was imported from factories in China, US Food & Drug Administration (FDA) officials said.

The ensuing media attention and US government inquires have caused shock waves in China, where the majority of these dangerous goods originate. The Beijing government is now scrambling to demonstrate that it is taking the issue seriously. Authorities have shut down hundreds of counterfeiting operations. In an even more extreme response, China’s former chief food and drug regulator was executed last month after a court found him guilty of taking bribes to approve fake medicine.

But critics suggest that true reform involves creating an effective and transparent regulatory system. Importing countries might start to block Chinese imports it suspects are unsafe. But this measure could simply create a vacuum filled by other low-cost suppliers.

To curb the flow of counterfeit goods effectively requires curtailing the demand for such goods. But that is very difficult, says Abdel Fattah El Gibali, an economist at Al-Ahram Center for Political & Strategic Studies. He believes that a deeply rooted cause behind counterfeiting exists, which is that many poor people consider price first and quality second. “If you don’t solve the problem of people’s incomes, then you don’t solve the problem of counterfeits,” he says. “If I need this product, and it has half the quality, then I’ll still buy it.”

Profit at any cost

Counterfeiting is a growing worldwide problem due to low production costs, high demand and ever-widening international trade. Because of the nature of the crime, it is difficult to fully estimate its scale, but the International Chamber of Commerce believes counterfeits account for $650 billion, or 7 percent of the global trading volume. About $50 billion of these goods are believed to end up in the Middle East.

In Egypt, a transshipment hub where fake and pirated goods are both produced locally and imported from Asian suppliers, the counterfeit industry is valued at LE 21 billion per year, and robs the government of LE 2.9 billion in annual tax revenue, according to a study recently commissioned by the Brand Protection Group (BPG), a local anti-counterfeit NGO. The study noted that counterfeit food, pharmaceuticals and personal care products tend to be made in Egypt, while fake electrical components, garments and tobacco products are made abroad, primarily Asia, and smuggled into Egypt.

The profits in these illegal operations are enormous. Counterfeiters minimize their operating costs by using cheap components, operating with minimal staff and overhead, evading taxation and piggy-backing on the multimillion dollar marketing campaigns of the brands they imitate. One industry insider estimated that counterfeit consumer products such as shampoo, for instance, can generate profits of up to 80 percent.

While some products are sold by street vendors at bargain prices as obvious fakes, others appear on store shelves at prices close to those of the authentic goods they imitate. “What the counterfeiters are doing is either matching the price or going slightly below [it],” explains Khaled Hegazy, external relations manager at Proctor & Gamble. The counterfeiters aspire to keep their imitation products cheap enough to attract consumers, but not so cheap as to raise alarm bells.

Part of the problem, Hegazy admits, is that consumers are often prepared to buy a product regardless of whether it is being sold legally or not. Many Egyptians seeking to buy goods for the lowest possible price have no qualms about knowingly purchasing smuggled goods. Their willingness to buy these illegal items creates an opportunity for the vendors to sell fake goods. “If you can smuggle the original, then you can smuggle the counterfeit,” he notes.

Counterfeiters and their distributors have become increasingly cheeky in recent years. Tarek Massoud, a legal counselor at Unilever, says the consumer goods giant has seen its share of dirty tricks by people selling fakes of the company’s products. “Some people knock on doors with phony badges identifying themselves as Unilever representatives, saying that they have a promotion. And in the summer, some people go to Alexandria and sell the [counterfeit consumer goods] on public beaches to people directly,” he says.

Deadly knockoffs

For many years, the extent of damage from counterfeiting was measured in economic losses. The music, film and software industries took an enormous hit, but few people ever considered counterfeiting a serious threat to public health. Until recently.

A June report by the Organization for Economic Cooperation & Development (OECD) noted that the global growth of counterfeiting has been accompanied by a marked shift from high-value luxury items such as executive watches, designer clothing and expensive perfumes to common goods such as food and beverage products, personal care items, toys and automotive parts. With this trend comes higher risk to personal health and safety.

Rafik Nasralla, deputy chairman of Elios Egypt, an electrical component manufacturer, says the cheap counterfeits from China that undercut his business pose a serious safety concern. He figures that between 25 and 30 percent of the electrical wiring devices and accessories, such as switches, plugs, lamp holders, sockets and ballasts, sold on the market in Egypt are imitations. It is possible, but unlikely, that these counterfeits are made according to the required standards, he says, but “the people who [make these imitation products] are very greedy... and the temptation of making a lot of money on a faulty product is humongous.”

As counterfeiters are taking a risk to engage in an illicit trade, “they don’t want to take that risk for a modest return,” he explains. “They will not go and [make] an okay product. Some do, but a good 70 or 80 percent of these [knockoffs] are faulty products.”

The easiest way to lower their costs and maximize profits is by using the cheapest inputs they feel they can get away with to create their imitation product, Nasralla explains. For example, a manufacturer might use a cheap yet brittle grade of plastics, or substitute copper for steel. “[Counterfeiters] do some kind of chemical treatment so that you wouldn’t be able to tell that it’s not steel,” he says. “There are so many technical ways to use inputs at a fraction of the cost.”

The counterfeits can also be made to look like authentic goods, mimicking a brand’s packaging, price and origin, while others are correctly identified as “made in China,” but contain false information about quality standards. The deceived customer may lose a few pounds when a counterfeit light switch stops working. But when the counterfeit item is a faulty circuit breaker, it could lead to a far more dangerous outcome.

“It’s not the matter of a switch you use a few times, turn on the lights and now it’s not working anymore, or a socket that doesn’t want to properly hold the plug. No, you’re talking about a circuit breaker that doesn’t cut the current when it’s supposed to in order to protect your flat or your office. And this causes a fire.”

Counterfeiters in Egypt have also targeted a wide range of cosmetics, such as soap, hair depilatory creams and complexion whitening creams. The harsh chemicals in these untested products can cause allergies, dermatitis, skin ulcers and even skin cancer, medical experts have said.

One of the most popular techniques employed by local gangs is to collect empty shampoo bottles from trash bins. The bottles are washed and filled with liquid dishwashing detergent, which costs about a tenth of the price of shampoo. The plastic bottles are then shrink wrapped and sold in small retail shops and by street vendors for the same price as the shampoo product they mimic. Unilever’s Massoud says that when his company tested one of the hijacked bottles, it found the detergent inside caused a burning sensation upon contact with skin.

The irony is that victims of this fraud contact Unilever to complain. “We receive many complaints from consumers,” says Massoud. “They say that they have bought a Unilever bottle [of shampoo], which has caused them health issues.”

Counterfeit food products have also appeared on the radar. Last year, the intellectual property rights (IPR) unit in the Ministry of Trade & Industry, which investigates trademark infringements, conducted 47 raids on illegal factories producing food items disguised as popular brands. A total of 210,000 food items were seized in these raids, including falsely labeled potato chips, juices and confectionery. Many of these products were reported to contain dangerous levels of bacteria, or chemical compounds that may contribute to serious diseases such as colon cancer, lung disease and kidney failure.

More insidious still are counterfeit pharmaceutical products, estimated by the Ministry of Health to account for at least 10 percent of all medicine on pharmacy shelves, though some suspect the figure to be much higher. No single drug has attracted more attention than Viagra. Pfizer’s little blue anti-impotence pill, which retails for about LE 27 per 50 milligram pill, is constantly assailed by imitators, some of whom manufacture knockoffs under the most unsanitary conditions for mere fractions of a piastre. One local outfit used cement mixers to dye the pills, which were made of whatever cheap materials they could find. Other counterfeits were traced to producers in China and India and smuggled into Egypt on a vast scale.

Quantifying the extent of injuries and deaths related to counterfeiting is not easy because many incidents go unreported. Fathi El Hawawy, secretary-general of the Egyptian Association for Alimentary Supervision & Consumer Protection, draws a distinction between how cases might be treated in Egypt versus elsewhere. “Serious food poisoning outbreaks in Europe are well known and analyzed,” he says. “But here if someone suffers from this condition and treats himself at home, and goes to the pharmacy and gets an antibiotic, [his case is] not recognized.”

Hide-and-seek

Despite the prevalence of counterfeit goods, linking the product to its original source can be very difficult because counterfeiters engage in elaborate conspiracies to disguise their activities. Many establish fictitious businesses and front companies, and forge shipping documents to prevent investigators from unraveling the supply chain.

When the product is made abroad, the process can become even murkier. Sometimes foreign authorities can prevent a counterfeit shipment before it is made, such as one raid on a Chinese auto parts factory that turned up 7,000 sets of counterfeit brake pads destined for Egypt, each stamped with a convincing replica of Ford’s logo. But most times, it is up to Egyptian customs officials to intercept the counterfeit goods when they appear in shipments at ports and border crossings.

Who is responsible for bringing these fake goods to Egypt in the first place? Nasralla of Elios Egypt blames importers, not suppliers. He says that in most cases of smuggled or counterfeit goods, a local importer has established a contact abroad and worked out a plan to smuggle the product into Egypt. “Definitely the importer is aware of what’s going on, as he designs the whole operation,” he notes. Once inside Egypt, an importer might sell the product to a wholesaler, who then resells the product to a retailer.

Fake products made inside the country, or that have slipped past customs, fall under a number of different jurisdictions. The Ministry of Interior’s Supply Police and the Ministry of Trade & Industry’s Internal Market Authority carry out investigations inside Egypt, except those involving medical products, which fall under the jurisdiction of the Ministry of Health. Dozens of smaller agencies and NGOs assist in keeping counterfeit goods off the street.

The products of some industries, such as pharmaceuticals, face multiple inspections. “We have three levels of quality control to ensure the quality of our products,” explains Bassem Sadek, marketing manager of German-based pharmaceutical company Merck. “The first level is [testing] in the factory or by the manufacturer; the second level is our inspection, where we take random samples from pharmacies in the market and send them to our [lab] in Germany to be analyzed and make sure that these products are identical to what is being produced in Germany; the third level of control is through the Ministry of Health’s examination or quality control.”

But ultimately, Sadek believes, it is the responsibility of the pharmacists to ensure the quality of the products on their shelves. There is no excuse for a pharmacist to be deceived, he argues, because there are legitimate distributors who sell only authentic products. “The pharmacist knows his distributor and knows who to deal with, and takes the official document from the distributor with the price and quantity and expiry date,” he explains. “It is impossible to be deceived. There is a normal channel, and the pharmacist who is [buying counterfeit drugs] knows they are [committing] an illegal act.”

Fighting back

Six months ago, French drug-maker Sanofi-Aventis discovered that counterfeiters were imitating one of its leading products, Plavix, a medicine commonly prescribed for patients at risk of stroke or heart attack. Alaadin El Samman, head of communications at Sanofi-Aventis Egypt, noted that the fake Plavix sold in Egypt, which he believes was manufactured abroad, succeeded in deceiving many consumers because it appeared virtually indistinguishable from the real item. “The color of the outer package was a little bit shinier, the inner leaflet was a little different, and the color of the pill was [not quite] the same,” he says, “but the [average] patient can’t differentiate that.”

In response, El Samman says that the company will soon begin printing a hologram to appear on all packages of Plavix in an effort to alert consumers to the authentic item. “We believe it will be more difficult for the counterfeiters to [replicate] the hologram,” he says. Other companies have added safety seals, embossed their logo on the product and used special “non-scannable” inks on the packaging.

But Massoud of Unilever points out that the availability of high-quality printers and scanners has given even small-time counterfeiters the ability to faithfully mimic the packaging of well-known brands to a degree that deceives many consumers. In fact, he says, one reason Unilever has chosen not to use holograms or other special technologies on its packaging is “because these new technologies are already being utilized by counterfeiters in China.”

Unilever weighed the added production costs of adding holograms to the packaging of its household products and came to the conclusion that it was not expedient. Nor would it necessarily protect their products from counterfeiting. For every move the trademark holder makes, the counterfeiter manages to keep pace, Massoud explains.

After years of waging their own private campaigns against bootleggers and pirates, some companies – even long-time rivals – have begun forming alliances to face the growing piracy of trademark brands. In 2005, four multinationals operating in Egypt – Procter & Gamble, Unilever, British American Tobacco and Nestlé – pooled their resources to form the Brand Protection Group. The group has since grown to include 24 companies, both multinationals and Egyptian firms.

The group’s main weapon is media, and its members have collectively organized television and radio campaigns to increase consumer awareness and alert Egyptians to the dangers of counterfeit products. Announcements inform consumers of their right to receive a receipt, have information on the product clearly labeled, and return damaged or defective goods. “Each company can fight its own battle against counterfeit goods in its own way. Some companies make holograms, or awareness campaigns, or tamper-proof seals,” explains P&G’s Hegazy. “But what we are doing as a group of companies is trying to make the overall market in Egypt less conducive to this phenomenon.”

The group’s members believe that if a consumer holds a store accountable for selling a faulty product, then the store owner will lose the financial incentive to partake in illicit trade. “If the consumers are aware of their rights, and demand their rights, they will be less likely to be deceived,” states Hegazy. “The simplest right is the invoice. If you demand an invoice from a shop you are buying stuff from, then [the store’s employees] cannot sell you something that is not tied to the shop.”

Protecting and prosecuting

The importance of demanding a receipt cannot be understated, says Amr Fahim, executive director of the Consumer Protection Agency (CPA), the government’s consumer watchdog. The long-awaited Consumer Protection Law, which came into effect in August 2006, obliges suppliers to accept returns and exchanges within 14 days with a receipt, and stipulates fines from LE 5,000 to LE 100,000 for shops that refuse to accept returned goods or are found to knowingly sell faulty goods.

From its headquarters in the Smart Village, the CPA monitors compliance with this legislation. Its main activity is a new hotline to receive, and attempt to resolve, complaints from consumers in Greater Cairo. Most of the 600 calls fielded so far have been complaints about faulty household goods and durable items, such as refrigerators and ovens, mobile phones, cars and car parts, and air conditioners. More than 360 of these complaints have been resolved, says Fahim.

The agency has distributed 100,000 complaint forms to 3,500 post offices and has published its hotline number in local newspapers. When a complaint is filed along with a receipt of the purchase, a CPA investigator tries to resolve the matter for the consumer by speaking to the store owner. Usually that is all it takes. “[Store owners] want to resolve [the dispute], because nobody wants to go through the hassle of going to court,” explains Fahim, who says that so far, all cases have been resolved without involving the courts.

Companies whose trademarked goods have been counterfeited can also take legal action against manufacturers, importers and retailers of these fake goods. Egypt’s IPR legislation, Law 82/2002, imposes a fine between LE 5,000 and LE 20,000 and a prison sentence of at least two months for counterfeiting or trademark infringement. For repeat offenders, the fine is raised to between LE 10,000 and LE 50,000.

In all cases, the court will order the seizure of the counterfeit products, the equipment used to create the goods and any revenue generated by them. The court can also shut down the company for six months on a first offence, then permanently in the case of a repeat offense.

Efforts are being made to train inspectors and judges who specialize in trademark infringement cases. Mustafa Abu El-Enien, who served as deputy chief of the USAID-funded Intellectual Property Rights Assistance (IPRA) program from 2004 to 2006, says his project trained about 120 inspectors and 300 judges over a two-year period. Inspector training included “how to discover trademark infringement, whether or not to seize items... [and how] to get a solid case to be presented in front of the judge,” he explains. Judges, meanwhile, were trained on how to handle cases involving IPR violations.

El-Enien, now head of the commercial registration department at the Ministry of Trade & Industry, acknowledges that a major problem is discovering the source of the counterfeits, but he believes that the newly trained inspectors will help in this task. The inspectors have the power to raid factories suspected of manufacturing counterfeit goods, not just the retailers. “The sellers are the last step of this chain of illegal acts and most of them are small criminals; they are not the big fish,” he explains.

But catching the big fish is proving to be even more difficult – especially as many of these big fish in fact operate out of small, unlicensed factories and even homes. Counterfeiters are highly mobile operations, constantly evolving to evade capture and capable of shutting down and moving somewhere else at a moment’s notice. “When you talk about illegal actions, you have all colors, all kinds of tricks,” says Nasralla. “Every few months you have new practices because these people [use a technique], and then when they are caught, they think of a new [technique].”

While no one method will completely stop counterfeiters, the aim, says P&G’s Hegazy, is to make the environment more difficult to operate, thereby lowering the incentive. This could mean that the “person who is counterfeiting won’t find any shop owners who want to buy from him, or [the counterfeiters] find that the market is being well controlled and it’s too much of a hassle for [them] to try to counterfeit or sell the counterfeited [product],” he explains. “He might do something else, but we hope it’s something less harmful.”

Submit your comment

Top