HP GETS TOUGH ON INK CARTRIDGE COUNTERFEITERS

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http://www.businessweek.com/magazine/content/09_23/b4134044747987.htm?chan=technology_technology+index+page_top+stories
HP Gets Tough on Ink Counterfeiters
With ink profits drying up, the tech giant is making anti-piracy efforts a top priority
Back
in 2007, the owner of a North Carolina company that resells
Hewlett-Packard (HPQ) printer supplies says her firm’s phones were
ringing non-stop. Customers were irate about defective HP ink
cartridges purchased from her firm. Several big corporate customers
told her they spent days cleaning up leaky ink. The buyer for one local
municipality was so furious about damage to the city’s printers that he
canceled his contract.

She began to worry: Perhaps the $40,000
in ink cartridges her company had purchased at a 10% discount from an
Internet supplier were fakes. When she called HP, the company advised
her to check security seals on the boxes containing the ink. They were
identical to other packaging in her warehouse. Then one of HP’s ink
detectives knocked on her door. Part of a little-known group that roves
the globe to track down counterfeits, the man confirmed her fears. “We
were duped,” says the woman, who asked not to be identified for fear of
losing other customers. “We found out the hard way that counterfeiters
are putting more into making the boxes than they are into the actual
product.”

Combating counterfeit ink has become a major priority
for HP CEO Mark V. Hurd. Analysts estimate the Palo Alto (Calif.)-based
company’s imaging and printing group lost more than $1 billion in
revenue to illegal counterfeits last year. And the company is concerned
that shoddy products will do even more damage to its reputation.
“Counterfeit cartridges hurt HP’s business,” says Hurd. “More
importantly, they hurt our customers, who are not getting what they
think they are paying for.”

The revenue drain comes as HP’s
printing business, once so lucrative it delivered nearly 60% of the
company’s operating profit, has fallen on hard times. Sales have
tumbled 21% this year, to $11.9 billion, while profits have slumped. At
the same time, HP is struggling with the recession in its other
businesses, and its stock is off 5% this year.

HP isn’t alone in
losing out to counterfeit ink. The entire industry missed out on an
estimated $3 billion in sales last year to counterfeits, according to
market researcher IDC. Counterfeit ink has become a growth business in
part because of printer makers’ business model. HP and other
manufacturers sell printers on the cheap and make virtually all their
profits on ink and other supplies. But many customers wince at the cost
of replacement ink, which can sell for the equivalent of $8,000 a
gallon. Some consciously take their chances on lower-cost counterfeits,
since quality can be decent. Others buy counterfeit ink without knowing
it.The Internet has made it easier for people around the world to buy
and sell illicit products of all types. The International Chamber of
Commerce estimates counterfeiting cost businesses about $600 billion in
2007, or roughly 6% of global trade. Some 10% of tech products sold
globally are counterfeit, according to a study by KPMG and the tech
trade group Alliance for Gray Market and Counterfeit Abatement.
“Counterfeiting is one of the most significant threats to the free
market,” wrote KPMG partner Richard Girgenti in the study.For years, HP
could afford to ignore the problem. The worldwide ink market grew from
$11 billion a decade ago to about $45 billion last year. And the profit
margins on replacement ink ran as high as 60%. Counterfeits were an
annoying problem, but HP spent more energy trying to thwart companies
that made legal, low-cost alternative inks that were compatible with
its printers. Counterfeit ink was so low a priority that earlier in the
decade HP dropped out of the Imaging Supplies Coalition, the industry
trade group that publicizes the issue and counts Canon , Xerox , and
Toshiba  as members.

CARTRIDGE SLEUTHS
Times have changed,
however, and HP rejoined the group in March. As financial firms go bust
and thousands of workers lose their jobs, people are printing fewer
pages—and using less ink. IDC predicts the number of printed pages will
decline for the first time this year, to 1.47 trillion pages, from 1.5
trillion in 2008. At the same time, counterfeiting has grown to the
point that one in 20 ink cartridges sitting on store shelves globally
is suspected of being fake. Now HP, Samsung, and others are hiring
teams of private investigators and setting up forensic labs around the
world to analyze suspect ink and packaging. They take their findings to
law enforcement to help nab big distributors of counterfeit ink
supplies. “Stemming the flow of counterfeits has become an absolute
priority,” says IDC analyst Jake Wang.

In the North Carolina
case, HP’s Anti-Counterfeiting Force swung into action. Peter Hunt, the
group’s Singapore-based director, dispatched one of his 12
investigators to examine pallets of ink in the reseller’s warehouse.
Then they worked with North Carolina authorities to set up a sting
operation. Within weeks, a local man was charged with selling
counterfeit HP, Samsung, and Canon toner and ink cartridges via his Web
site. Some $60,000 in fake goods was seized. HP traced the origin of
the ink to China, where it believes 80% of counterfeit ink originates.
“The marching orders from the highest levels are this: Protect our
brand and the enormous amount of R&D that has gone into creating
our products,” Hunt says.

HP scored its biggest antipiracy
success in May 2007 in Foshan City, China. After tracking illicit
supplies for more than six months, the company worked with Chinese
police to raid 14 warehouses, seizing $88 million in equipment,
supplies, and packaging materials from a variety of manufacturers. Two
men were convicted this year and sent to jail.Ink counterfeiters have
developed techniques to throw off investigators. One approach: They
sell supplies only slightly below the usual cost, unlike knockoffs of,
say, Rolex watches. The North Carolina reseller says that’s why she
wasn’t concerned. “Who would think they’d be selling ink for a 500%
markup?” she asks.

[Author]

June 2, 2009 at 12:15 PM