The Interview—Getting Real with Paul Fox
With continued Supply Chain outsourcing to low cost producers, piracy and counterfeiting loom large. So large it seems that there are billions of counterfeit goods that come to the US each year, what to say of lost revenue in these counterfeiting market places. RFID (and other process and technology solutions) hold promise to combat this problem.
Paul Fox is the Chairman of the Coalition Against Counterfeiting and Piracy http://www.thecacp.com, as well as a senior Vice President at Gillette. Paul speaks very eloquently on the issues surrounding counterfeiting and piracy. Who better to have my mind opened and shocked than Paul, by the risks for companies and consumers in these illicit supply chains?
Ann: Firstly can you talk a bit about the CACP?
Paul: We focus on education and lobbying in Washington. We really needed to raise the awareness of the administration on the issues of counterfeiting and piracy and the impact it is having on the US domestic economy as well as our Global Trade. So, as a result of our activity the administration launched STOP http://www.stopfakes.gov/,
This is the first multi agency task force since 9-11. That gives you an indication of the gravity the administration places on this issue.
Along with that we formed the CACP. This is the US business voice to help the administration to deal with this issue. This is a partnership approach which the administration welcomed. CACP now has in excess of a 160 enterprise members as well as various trade groups who are involved in working within their individual organizations, within the Chamber of Commerce and the National Association of Manufacturers. The various tasks forces are working on, firstly, ensuring we understand the dimensions of the problem and then educating the public, businesses and government.
Ann: How did you personally decide to become involved in this?
Paul: I have a passion for it. As far as I am concerned counterfeits pose a danger to consumers. And also my work at Gillette was involved with brand protection. Gillette has some of the most popular consumer brands. Not only are they popular with consumers, they are popular with counterfeiters, and therefore they are very prone to the activities of the illicit markets. And the potential damage it does to our brand equity is immense.
Not just Gillette, but if you look at most companies, they have substantial risk due to counterfeiting and piracy.
What is the value of a company? The tangible assets or the intangible assets? You will find that the fixed assets are the smallest part of that value and the intangibles are the real value of the business—the people, the intellectual property created by those people, and the brand equity.
So, it is in the company’s best interest to protect that brand equity, because without it, you really lose your momentum in the market. And that has become a passion for me to protect the brand equity of Gillette. Gillette’s brand name goes back more than a hundred years. And now today, with P&G, we have 22 brands to protect which is even a greater challenge!
Ann: So how big is this problem?
Paul: Just in the US about $200B and 7-9% of worldwide GNP. And if you think about it, that represents around 700,000 US jobs. And the loss of tax revenues of around $12B. That is a lot of hospitals and schools.
Ann: I admire your verve to go after this problem! This should give firms a financial justification to get involved as well as seek and implement solutions that mitigate counterfeiting and secure their supply chains!
But, It is interesting to me that with the pursuit of low cost country sourcing most firms don’t put that calculation in their financial plan—the valuation, the risk of counterfeiting and loss of sales or brand equity when they use these markets...
Paul: You know I think the whole issue is starting to get more traction in the minds of supply chain. I don’t think it is solely the quest for low cost sourcing. When you look at the issue of counterfeiting, it is highly complex. The first thing you have to realize is that there is no silver bullet—there is not a single thing firms can do to erase the problem. There has to be a combination of things often involving desperate parties from investigative in the country of origin; the support of the legal systems in that country—both customs from the point of origin as well as customs receiving the goods; then the wholesalers and distributors, who provide visibility of those goods as they move through the supply chain.
It requires a matrix of activities—and not just at one point. But it is true that in pursuit of low cost producers, companies have opened themselves up to 4th shift operation. These plants produce genuine goods and then keep the machines running—with the brand owner having no knowledge of this, the 4th shift! They pirate these products and then sell then as genuine.
Another problem in this quest for low cost, buyers are looking to less traditional ways to source products, particularly trade boards and business to business boards—you will find hundreds of sites selling that product, most of which are counterfeit!
The danger is that the retail buyer innocently accepting counterfeit drugs is now supporting the illicit supply chain. But, you tend not to find these operators unless the consumer complains.
Ann: ….and somebody gets sick
Paul: The product does not perform, they get sick, it does not work properly and they take it back to the store, it is replaced—increasing the cost to serve the customer; and then finally back to manufacturer. Only then it is uncovered that this is counterfeit, very late in the process to track the counterfeiter.
This is a message the consumers don’t want to hear—they bought a product in good faith and now it is discovered that it is counterfeit.
Ann: So that leads to the point, obviously, we don’t want our children to be sick, but aren’t we all –manufacturing and consumers—getting what we deserve? Many times people know they are buying fakes. We want cheap Gucci watches!
Paul: Consumers do go into the market seeking a bargain, it’s true. But if a price is too good to be true, it usually is. A study came out that stated that most consumers innocently bought—they had no idea they were buying counterfeit goods—which does open up the door for consumer education. We need to do a lot more to educate consumers that there is a risk associated with counterfeits and that these are creating and supporting illicit trade activities and groups.
Most consumers think that counterfeiting is a victimless crime. In their minds, they think counterfeit is, say, money, designer bags, fake luxury watches. What harm do they do? The point is that the counterfeiting world copies anything that they think they can make a return on, from fake automotive parts, fake aviation parts, pharmaceuticals, to fake insecticides and pesticides. And many of these things can be harmful.
Ann: Now, that is a frightening list! I don’t like the concept of flying in a plane with counterfeit parts!
Paul: That is the real danger. There should be some signal, some bells should go off when you are buying something from an illicit source. If you are looking for a special consignment of aircraft parts—the source you are buying from—you should ask, can you chain back through the supply chain to the original manufacturer and see them looking back at you from the other end? If you cannot, then a purchase should not be considered, regardless of the price. The risks are too high.
And that brings me to something that the CACP has been working on this year, to develop a set of Supply Chain Security Principles. In essence, there is a duty on behalf of that purchaser to look down that supply chain and to be able to authenticate that at each point that goods are moved they can see the activities all the way to the original source. If they can’t, then they should not be buying these goods.
Ann: I guess this means the purchaser now owns some of the liability, not just the brand company—who in many ways may not even have been part of, or even know about the transaction. But also the supply chains are so complex and the distribution channels the manufacturers set up creating those chains are byzantine—especially the Pharmaceutical firms!
Paul: Yes, the Pharmaceutical industry ultimately has a double responsibility—both to their shareholder but also their customers. They have to make sure only genuine pharmaceuticals reach their customers and their customers are protected—absolute purity—no illicit drugs can penetrate that supply chain! Many counterfeit drugs have been distributed and the effects—at best have been injury—what to say of death.
But the counterfeiters—they don’t care about the consumer, whether babies die. All they see is there is a product they can trade on.
Ann: So, let’s talk about the investment it will take to improve this picture. Technology, process changes, etc. will cost. We talk to many companies and although they are aware of the porous chain, they see a huge investment ahead. How do you see companies—large and small—being able to address this.
Paul: When companies equate the investment to the value of the brand equity then the investment looks like a relatively small investment, not discounting that what you are talking about is an investment of millions of dollars. But at the end of the day, what you are talking about is the reputation of the business and the safety of the consumer. In the mind of the customer, nothing is more precious than that. You won’t have a business if you lose that reputation. So the investment is worth every penny.
But it is more than that; it is about the supply chain process and working with your partners. Many firms think they cannot control their supply chains—due to the amount of third parties who operate within. But it’s also their reputation (the 3rd parties) and their reputation is also at stake. The brand companies will use other 3rd parties if they cannot rely on these partners to secure their supply chain.
It takes a partnership—collaboration. We all have a role to play!
Ann: So let’s talk about governments and legal issues.
Paul: The US government, by passing into law H.R. 32, the Stop Counterfeiting in Manufactured Goods Act, is closing a loop-hole in counterfeiting—from a legal perspective this is an important achievement.
But of course many nations around the world do not even have Intellectual Property laws. And many times you are depending on the hospitality of the host country to cooperate in your efforts. When you tackle this issue on a global basis, there are so many avenues—you can go after the manufacturer, but you are working in different legal jurisdictions. You many close a counterfeiter today, but they will open somewhere else that same week. That is not to say you won't pursue them with a vengeance and that those counterfeit goods won’t be removed from the market.
You know a sad fact is that many consumer goods counterfeiting provide the same or greater rewards—with less risk—that more illicit trade such as drugs. But making the effort to shut them down makes it harder for these illicit organizations to operate.
Ann: Yes, and I understand that sometimes they are using the same supply chains they set up for drugs and human traffic!
And now to RFID and other technologies. What role do you see them playing in the war on counterfeiting.
Paul: Well, the question has to be asked, do you know where all the back doors of your supply chain are? Can you guarantee the purity and quality of your product? Can you track the process and see up the chain to your customers and look down the chain and see your OEM looking back at you? RFID can help with this.
One final note, Ann. Things are changing in China. At the highest level there is more awareness. In fact, in China’s preparation for the Olympics, for example, there has been no pirating of the Olympic logo or symbol. And top ministers are getting involved.
Ann: Paul, you certainly are the genuine article! Thank you!
Readers: There is so much to be learned on this topic. I suggest you go to the CACP web site to learn more!
Paul’s testimony at Congress:http://judiciary.house.gov/OversightTestimony.aspx?ID=321
The Coalition Against Counterfeiting and Piracy (http://www.thecacp.com/portal/counterfeiting/default)
The business community recognizes the need to work together to address the growing threat of counterfeiting and piracy that impacts virtually every industry and business in our nation. With the recent increased government attention through the STOP initiative and the DOJ Task Force report and the growing threat of counterfeiting and piracy to the economy, jobs, and consumer health and safety, it is important that the business community organize itself quickly and efficiently to leverage the power of our collective resources. We propose the most effective means of achieving this objective is through a broad-based business coalition.
The Coalition Against Counterfeiting and Piracy (CACP) is committed to increasing the understanding of the negative impact of counterfeiting and piracy by working with Congress and the administration to drive greater government-wide efforts to address this threat.
- Organize a voluntary, business-led effort to Stop Trade in Fakes by identifying and encouraging the adoption of supply chain best practices
- Work with all relevant government agencies to ensure greater detection, enforcement, and prosecution of IP crimes
- Develop and adopt broad-based legislation that will advance the collective needs of the business community
- Encourage and coordinate greater research, data gathering, and communications efforts about the impact of counterfeiting and piracy
- Work with U.S. government to obtain increased international anti-counterfeiting and anti-piracy initiatives
- Provide information on state-of-the-art authentication, tracking, and monitoring technologies and their applications to anti-counterfeiting and anti-piracy efforts