Why IP pirates are a serious threat to our supply chains – and prosperity

Empire of Blue Water is a great book about the true pirates of the Caribbean and what they did to Spain. Easily forgotten in the hazy glamour of Captain Morgan’s cool-looking life of rum and revelry, however, is the fact that pirates essentially destroyed the profits of Spain’s early foray into global supply chains. Pirates, then as now, wrought absolute havoc on the system of materials movement that underlay Spanish imperial power.

Today’s pirates may be less likely to cut your head off (Somalia notwithstanding), but there are far more of them and the damage they are doing is no less real. In our Chief Supply Chain Officer study last year the second highest rated supply chain risk overall was counterfeit products. Seizures of these items by the US Customs and Border Patrol have risen tenfold since 2001, with the biggest offender nation being China by a mile.

From fashion to pharmaceuticals

The first type of counterfeit product we tend to think of is knock-off fashion, which unless you are LVMH or Ralph Lauren, seems like no big deal. But 9% of the total last year was pharmaceutical products. India, a far smaller villain overall, is the biggest problem here with 76% of its seizures last year being drugs. Fake Viagra is at minimum a downer, but might be a lot worse if the ingredients are toxic – not only to those who take it but also to Pfizer’s brand value. The same could be said of counterfeit spare parts for big machines such as those made by Caterpillar, which dedicates a portion of its online community to spotting fakes.

Modern-day pirates also steal software and undercut the true costs of running their operations. Late last month the California Attorney General sued two apparel manufacturers – one Chinese, one Indian – for unfair competitive practices on the grounds that their use of pirated software from Microsoft, Adobe and others held costs artificially low, thus hurting California-based apparel firms. The same thing happened recently in Massachusetts when a Thai seafood supplier got hit with a law suit on similar grounds. In both cases, downstream customers (maybe you?) got a bit of a price break, but the supply chain was broken and trust destroyed.

Manufacturing’s Chinese Walls

Perhaps most dangerous of all from a supply chain perspective, however, is the leakage of engineering intellectual property across production lines run by the big contract manufacturers. Since so many brand owners in consumer electronics rely heavily on third-party manufacturing, the risk is real that proprietary design and/or technical information used in production finds its way into the hands of rivals whose products may be running on an adjacent line. Add in the increasingly outsourced, fragmented and globalised product engineering process and the risk goes up. Apple’s notorious secrecy may add some marketing value, but it certainly limits the risk of IP theft.

People talk about ethics in business as though respect for someone else’s IP is a noble thing. Nonsense! IP security in global supply chains matters not because it is fair or honourable, but because it facilitates trade. Drug companies won’t invest in R&D at the margin if fakes cut into their markets. Branded consumer products won’t sell in countries that brazenly hijack their hard-won credibility or cachet. New technologies will take longer and cost more to get to market if inventors need to spend lots of time looking over their shoulders.

Weighing opportunity and risk

Lack of trust in some countries’ IP laws is already reshaping the global supply chain footprint, with China in particular under the microscope. Software, media and entertainment industries are losing billions of dollars every year and asking themselves: what’s the point? Looking forward, there is too much opportunity in fast-growing markets like China and India for most to sit on the sidelines, but without a better system for securing IP from piracy the whole enterprise could shudder and stop just as it did for Spain.

One suggestion for those looking to systematically protect IP in their supply chains is CREATe (create.org), a new non-profit that has a comprehensive measurement and compliance system specifically designed to eliminate counterfeits, IP theft and other types of trade secret abuse. The CEO of CREATe, Pamela Passman, recorded a webinar for the SCM World community just last month. In it she describes how the compliance system works. Those of you worried about IP in your supply chain should have a listen.

It’s a lawless world out there for IP in supply chain. Pirates are everywhere and it won’t be the lawyers alone who stop them.

Kevin O’Marah
Chief Content Officer
SCM World

Please contact me directly with any comments, questions or suggestions. I welcome your feedback.