Fake consumer durables a real worry for companies

Samsung admits it is

In June 2011, a consignment of about 4,000 AKAI television sets was confiscated at a Chinese port. The problem with the cathode ray tube (CRT) television sets scheduled to be shipped to India was that those were actually not manufactured by AKAI.

The counterfeit sets, in fact, were caught by the management of AKAI’s India operations based on a tip-off. “We took the necessary action,” says Pranay Dhabhai, managing director, AKAI India. “And, this was not repeated.” The electronics firm imports all its products for the Indian market from China.

In a slowing Indian market, where intense competition is already squeezing margins, this was evidence of another pressure that consumer electronics firms are dealing with, though few are willing to talk about it on the record. Queries sent to Korean electronics firm LG and white goods major Whirlpool were not answered.

There’s more. It’s not just counterfeits, i.e. exact replicas of existing products, but also a booming grey market — products smuggled and sold without paying taxes — that together constitute at least 15 per cent of India’s consumer electronics segment, analysts indicate. And, the numbers are growing steadily.

On top of this, companies such as Samsung admit they are “grappling” with controlling parallel imports of high-end television sets, brought into the country mainly from Southeast Asia, which could be 10-15 per cent of the flat panel TV market in India. Parallel imports are genuine trademarked goods purchased abroad and resold in the domestic market.

“China is not the only place where counterfeits come from,” says Krunal Mehta, vice-president, Angel Broking. “In the last 12 months, government authorities have conducted raids on dealers and godowns with fake consumer electronics in north India.”

The majority of fakes in the market today are TVs and fridges in which brand-new compressors are replaced with older or locally made ones. A number of counterfeit factories and godowns are present in the National Capital Region, say analysts, which continue to operate despite occasional police raids, and supply mostly to the north Indian market. Electronics firms, as a result, are now pressuring the government to not only increase vigilance domestically but also tighten customs to stop fake and grey market imports.

Customs are crucial because the parallel supply chain often works in collusion with government authorities at ports. Without this, analysts assert, products shipped from manufacturing centres like China’s south-eastern region cannot enter markets like India in large numbers.

“It’s not just about one or two TV sets,” explains Rohit Mahajan, partner and co-head of forensic services, KPMG, “There are huge containers (of grey market imports) that come through. Also, there is the possibility of under-invoiced duty-paid products with all required documents coming into the country which could be counterfeit.”

The Indian counterfeit and fakes market is worth about $16.84 billion, according to Havocscope, a provider of information about the illegal economy, which has been traditionally dominated by spurious FMCG, pharma products, automotive components, computer hardware and software, and low-value electronic products like mobile phones.

Yet, as the AKAI raid showed, there is a new and growing threat of accurately manufactured duplicates of consumer electronic products entering the Indian market and being pushed through dealers or sold directly to consumers in all-cash deals. These products are sold at almost half the price, or even at one third of the retail price when sold directly to rural consumers. But when pushed through dealers/retailers, these products are sold on a par with the retail prices of branded products.

“We are grappling with the issue of parallel imports in the case of flat panel TVs,” Samsung said in reply to detailed queries sent by Business Standard.

“The parallel imports of flat panel TVs (FPTVs) have gained momentum in recent times owing to the growing popularity of FPTVs in the Indian market,” the Korean electronics major explained. “We would estimate parallel imports of FPTVs would be accounting for anywhere between 10 and 15 per cent of the FPTV market in India. Informal industry estimates suggest parallel imports of FPTVs would be to the tune of around 800,000 units per annum.”

That is a significant number given that the FPTV market pegged at 3.7 million units last year is estimated to grow to around 5-5.2 million units this year.

Sources in Whirlpool and Panasonic confirmed electronics companies may be losing about 10-15 per cent volumes because of a network that buys original products in Thailand, Malaysia and Singapore at much cheaper rates and bring them at a lower-priced invoice to avoid customs duty.

Samsung says the matter “has been taken up with the CEAMA (Consumer Electronics and Appliance Manufacturers Association), which would take it up with the DGFT (Directorate General of Foreign Trade India).”