One From Column “A”

So my son Devin, who is a member of the NY Young Insurance Professionals and whom many of you know, tells me the other day that he is writing a paper for his junior year economics class at the University of Hartford, on counterfeit auto parts manufactured in China that find their way into our vehicles, and the ramifications that affect everything from insurance premiums to the job market.

Finding this to be a very interesting topic, I asked him if I could please read it. Well, a few lines into his paper, I realized that this is something that would be very interesting to the readers of my column, so I asked Devin if I could share it with you, and of course he was honored to do so (he had no choice or I would have cut off his laundry money at the dorm). The following is what Devin presented to his professor:

The Counterfeiting of Automobile Parts in China

By Devin Loguercio

When discussing the violation of intellectual property and counterfeit goods, many consumers consider only the falsification of Veblen commodities. In actuality, Veblen goods account for only thirteen percent of all counterfeit products (Government, 2013). The remaining eighty seven percent are counterfeited consumer goods. By definition, counterfeit consumer goods are tangible goods produced as a response to the consumers’ wants and needs and which thusly infringe upon the rights of trademarks and copyright laws (Britannica, 2013). These consumer supplies are anything from sneakers, to cigarettes, to pharmaceuticals. As the mid-2000s (2002 to 2006) came, there was a sudden surge of counterfeit auto parts emerging from the Far East; most notably the People’s Republic of China. Counterfeit auto parts can turn out to be some of most dangerous commodities to counterfeit. Aside from the economic impacts or harming legitimate companies, these parts are not tested or regulated properly. They can cause serious injury or even death due to failure or poor performance. Although the Chinese government has made attempts to shut down such counterfeiting operations, they continue to exist, causing more than just monetary tribulations worldwide.

China alone produced nearly eighty three percent of the counterfeit auto parts sold worldwide in 2011 (Bowman, 2011), making the current counterfeit situation in the Chinese market one of the worst in the world. The manufacturing of auto parts industry is a multibillion dollar market opportunity; one in which over 1,200 businesses compete in, with an annual revenue reaching fifty three billion dollars and a one percent annual growth rate (Auto Parts Manufacturing in the US: Market Research Report, 2013). The main purpose of counterfeiting a good is to turn a profit, so in a multibillion dollar industry there are obviously going to be counterfeit goods entering the market. When these counterfeit parts are sold in major markets, they are sold, on average, at twenty to thirty percent cheaper than the real auto part. Consumers are more inclined to go with this cheaper option, thus causing demand levels for auto parts to change. With the change in these demand levels for automobile parts many manufactures are working overtime to advance and increase their output into this extremely competitive market. Although these legitimate manufacturers attempt to sell at competing prices, the counterfeit parts will always be sold at a cheaper margin.

Legitimate auto part manufacturers must undergo a series of tests and use high grade material to ensure the public and their consumers that their part is safe to use, and also that it will work one hundred percent of the time. Conversely, the counterfeit industry does not. These counterfeit manufacturers will push out parts in bulk without the proper tests or even proper material. They will substitute cheap materials in place of higher grade metals, brand the part with a legitimate company’s logo, and sell the part under that company’s name. Therefore, when a consumer or third party repair shop goes to buy a certain part, they search for what brand they want and purchase a supposedly “legitimate” part at a great price. This act, whether the consumer knowingly purchased a fake brand name part or not, has caused a loss of a near $700 billion to legitimate auto manufacturers (George, 2011).

Even with this major loss in revenue, the prices of legitimate car parts are still higher than counterfeit ones, causing repair shops to look around and search for the best price. When the auto body repair shops seek to purchase a product at a particular price, they seek out a jobber, or wholesaler. These jobbers browse the market for the particular part at the right price. The issue presented here is that due to the large influx of counterfeit parts, all with the “proper” trademarks, the jobbers do not know which goods are forged or not. These jobbers purchase the cheaper parts and sell them to the auto body shops, not knowing the part is counterfeit. Seeing as it is extremely difficult to differentiate between the real and counterfeit parts, the auto shops as well as the consumers are unaware of the potential dangers that this one part possesses. Forged auto parts are not made with the same detail and precision as their original counterparts. They are not inspected nor tested to show if they work. Their only purpose is to turn a profit.

Therefore there is no possible way to tell if the part will work once installed. This can lead to a series of extremely dangerous events which could in turn end with not only affecting consumers in a monetary state, but with the loss of human life.

On October 10th, 2012, the United States Federal Government warned consumers about a sudden influx of faulty airbags. The National Highway Traffic Safety Administration released a statement saying that anyone who replaced their airbags within the past three years are in danger of having counterfeit airbags installed into their car. These airbags are the exact same dimensions and color as the originals and even display the correct manufacturers logo and markings. The United States government estimated that over 10,000 fake airbags have been installed into vehicles across the country (Press, 2012).

These fake airbags have been tested by the NHTSA and reported that those airbags do not deploy properly or at all and do not inflate properly. There have even been reports that on the rare occasion these airbags deploy at random with enough force to send shards of plastic and debris into the driver and passengers face and eyes. The NHTSA with the help of police forces made a move to begin confiscating fake airbags from consumers. In August of 2012, these moves lead to 1,600 counterfeit airbags being seized in a North Carolina body shop who knowingly sold counterfeit airbags purchased from a plant in China (Beconcini, 2013). In the first nine months of operation, United States Immigration and Customs Enforcement seized 3,000 counterfeit airbags.

These counterfeit airbags are extremely dangerous. When they fail to deploy or deploy prematurely those involved will not only be faced with a safety issue, but these consumers will be faced with an economic concern as well. Under the assumption the driver is in an accident and the air bags do not deploy, statistically, he will be harmed much greater than one whose air bags did deploy. The consumer will face a higher medical bill, which in turn will increase the cost of his insurance premium or even loss of their insurance completely.

This premium increases and part failures are not only affecting those consumers directly involved in the accident, these counterfeit parts affect everyone as a whole. When the insurance companies begin paying out multiple claims due to the fake auto parts failing in multiple cases, they will start requiring a higher premium from every client in order to meet their net profit value. Although those consumers who were in the accident will be paying a higher premium to make up the difference, it still affects the other consumers economically because the insurance companies have to ensure that their net present value remains even. While there is no way for these companies to predict whether or not someone will become involved in an automobile accident or which cars are equipped with counterfeit parts, the insurance companies have to look out for their bottom line; which includes a higher premium cost for car insurance for most, if not all, consumers.

These counterfeit parts are not affecting only the American and Chinese markets. The United Arab Emirates (UAE) have projected that the counterfeit auto parts make up an alarming rate of twenty-five percent of the total auto parts in the market and account for nearly sixty nine percent of all counterfeit goods within the United Arab Emirates (George, 2011). The UAE conducted a series of raids in an attempt to seize the counterfeit auto parts. Over ten days, the UAE raided twenty seven different auto body shops and seized over 30,000 pieces of counterfeit parts. Some of these parts were branded with major car companies, such as the Toyota Motor Company. Hatem Ghani, Director of IP Enforcement in Al Shaali and Co., Advocates and Legal Consultants has been conducting raids since 2008 in order to reduce the market for counterfeit goods.

Director Ghani gave a statement stating that; “The exact counterfeit market cannot be defined, as the authorities usually act upon requests from Car brands and not all brands are similarly active.” (George, 2011). These counterfeit parts, sold under a brand name, are the cause for more than fifty percent of all accidents in Saudi Arabia. Even with all the raids, it is near impossible to shut down these operations.

With the help of the United Arab Emirates and the European Union, the United States government has begun urging auto brands to confront the Chinese government about their intellectual property infringement. The Chinese, according to reports, lack the political force to overcome these violations. The central government in Beijing has gone forward to try and improve intellectual property rights and combat counterfeiting rings. Due to China’s large size however, it has become nearly impossible to regulate all provinces. The local police force, trademark enforcement officials and magistrates of each province are appointed by the local government, not the central government. These provinces each possess their own economic concerns which is some cases differ from the central governments’. Many counterfeiting rings, although involved in illegal and in many cases criminal activity, purchase and set up legal entities within their region of China. These businesses were started with the capital gained from the counterfeiting operations, but follow the law and regulations set down by the central government of China and the local government of the province.

This poses a major problem for the Trademark Enforcement officials due to the fact that these companies help out the citizens of the province and the local government. In many cases the local government has even invested in business where counterfeiting is the main operation, or was the source of the capital gained (Beconcini, 2013). Therefore, these local municipalities are very reluctant to shut down the counterfeit operations because they provide their own method of economic reform and in essence contribute more to their province than the central government does.

With all the attempts made by the central government of China, there is still a constant game of cat and mouse in the attempt to shut down these operations and catch those involved. According to Supplier Business, on March 12th, 2012, the Chinese government underwent one of the largest counterfeit raids in China. It resulted in two people, the counterfeit ring leaders, being sentenced to one year in prison, one year probation and a fine (Goldsberry, 2012). The issue here is that the punishment is not enough deterrent for these rings. With the amount of revenue these counterfeiters pull in, paying the fine is not a problem and the year in jail can easily be served or overturned due to bribery. This raid will have no effect on the counterfeiting operations in China. With the government attempts made to regulate export of counterfeit goods or raid known operations, these counterfeit rings remain one step ahead of the central government. These counterfeiting rings will close or will be shut down by the government, only to reopen directly after.

These rings own a series of factories and business, all with different names and in different locations. Thus when one operation is shut down they move to a different location with a different name and continue as if nothing happened. The lack of proper control and enforcement in China has begun to create a shadow of a doubt in many auto parts manufacturers. These companies are beginning to realize that there is no way to fully protect their intellectual property and trademarked parts, thus forcing them to retreat from the market. The pull out of the corporations causes a major economic back lash within the Chinese market. Not only does the Chinese market lose out on the economic benefits of particular companies, this constant counterfeiting issue and lack of enforcement has cause many countries and trade organizations to cast dispersions upon the Chinese market and government, forcing them to remain apart from the East Asian market.

The violation of intellectual property on auto parts is an issue that affects every consumer in society. With the sudden surge of counterfeit auto parts emerging from the People’s Republic of China, foreign governments have made numerous attempts in order to control the import of forged automobile parts. These counterfeit auto parts have turned out to be some of most dangerous commodities that can be counterfeited, and possess both economic issues and issues of safety to the general public. Although the Chinese government has made the attempt to shut down such operations, these counterfeiting rings remain steps ahead by reopening business directly after they are shut down. In an attempt to regulate the flow of these counterfeit goods, the United States Customs Enforcement and United Arab Emirates have launched a series of raids across the United States and Saudi Arabia, attempting to confiscate the forged goods and shut down the home front operations. Although these actions have proven successful, they still bring up the question of what impact will this have on the counterfeiters operating in China and if they will ever cease to exist. Due to the large monetary opportunity presented and lack of enforcement by the Chinese government, the counterfeiting of automobile parts will continue to be an issue while consumers worldwide face threats to of bodily harm and economic tribulations.

Bibliography

Auto Parts Manufacturing in the US: Market Research Report. (2013). Retrieved from IBIS World:

http://www.ibisworld.com/industry/default.aspx?indid=837

Beconcini, D. P. (2013, January 03). Auto Brands Must Confront Counterfeiting in China. Retrieved from Automotive World: http://www.automotiveworld.com/comment/auto-brands-must-confrontcounterfeiting-in-china/

Bowman, Z. (2011, February 16th). Report: Counterfeit parts overwhelm China; include fake airbags, oil seals. Retrieved from Autoblog:http://www.autoblog.com/2011/02/16/report-counterfeit-parts-overwhelmchina-include-fake-airbags/

Britannica, E. (2013, April 22). Consumer good. Retrieved from Encyclopedia: http://www.britannica.com/EBchecked/topic/134546/consumer-good

George, J. (2011, September 28). 25% auto parts counterfeit. Retrieved from Emirates247:

http://www.emirates247.com/business/economy-finance/25-auto-partsare-counterfeit-2011-09-28-1.421095

Goldsberry, C. (2012, March 23). Fake auto parts are big business for counterfeiters. Retrieved from Automotive/Mobility: http://www.plasticstoday.com/blogs/fake-auto-parts-arebig-business-counterfeiters

Government, U. (2013, April 22). U.S Customs and Border Protection. Retrieved from U.S Customs and Border Protection: http://www.cbp.gov/xp/cgov/home.xml

Press, A. (2012, October 10). Feds to warn of counterfeit replacement air bags: auto execs. Retrieved from CBSnews: http://www.cbsnews.com/ 8301-201_162-57529308/feds-to-warn-ofcounterfeit-replacement-air-bags-auto-execs/

Thank you, Devin, for allowing me to share this in my column…for every person who tells me that they enjoyed reading it, I’ll throw in an extra buck for laundry this month!

This past week The Insurance Club of Buffalo, which is celebrating their 60th anniversary this year, held their renowned Buffalo I Day Conference at the Buffalo Convention Center in Buffalo, NY. I Day attendees were greeted by a 1950’s theme, along with a bright red 1953 Cadillac Convertible in the registration area, and pretty girls in bobby socks and 50’s style dresses…just like Mom used to wear! There were over 1400 attendees, and 120 Exhibitors, representing companies, wholesalers, finance companies, and a wide array of insurance related services.

The morning CE session, “Compete, Counsel and Comply: Taking Care of Client’s needs while playing by the rules” was extremely well attended and many in attendance enthusiastically commented on the excellent presentation by Tim Dodge and Jamie Deapo of IIABNY (Jamie is also a friend of mine and a regular contributor to the Insurance Advocate, whose column I always read…right after reading mine!).

The luncheon keynote speaker was Rudy Giuliani, 107th Mayor of New York City. Those of you who have heard Rudy speak, know that his remarks are always poignant, right to the point, and presented in a confident and well thought out manner. As always he was charismatic, and I even detected what sounded to me like a test balloon for a possible run again in 2016…we shall see!

Overall, another total success by The Insurance Club of Buffalo! Congratulations to the “Presidential Triumvirate”: Dawn Caci of Travelers, Joe Floss of The Floss Agency, Dave Pietrowski of LoVullo & Associates, and the entire Board of Directors of the Insurance Club of Buffalo. But wait, there’s more! I would be remiss if I did not mention a friend to me and the entire insurance industry in NY, Tony Kubera of Russell Bond who was our Emcee for the event…great job Tony!

Well, that’s what’s happening around town, and until next time, “Ciao for now!”