Over the past few weeks I have been undertaking some research into the aftermarket parts market and it was interesting to uncover how counterfeit parts have infiltrated many automotive supply chains around the world. 

The global market for counterfeit parts has grown exponentially over the past five years and is now worth around $16bn a year worldwide, of which $3bn worth of counterfeit parts are traded in North America alone.  The worldwide hub for counterfeit part production is China, followed by a number of other emerging markets such as India.  Today’s counterfeiting operations are very complex and many counterfeit parts manufactured in China have been made by companies with excellent reverse engineering skills.  ie they can take a product such as an alternator, strip it down, measure each component part and then produce drawings from these measurements to manufacture the counterfeit parts.  An example of a counterfeit alternator is shown below, the fake part is shown on the left, but on first glance it is very difficult to tell them apart.

As you would expect, many of these parts are very inferior to the original parts and in many cases they are potentially dangerous if fitted to a car.  For example there was a story of brake pads being made from compressed grass cuttings which when put under pressure against brake discs led to the brake pads catching fire, so these pads were about as much use as a chocolate fire guard.  Manufacturing parts is one thing, manufacturing cars cloned on western designs is another. It shows the level that some Chinese automotive companies will go to in order to develop a car as quickly as possible , for example taking styling cues from successful western car designs. 

The image below shows a Chinese ‘version’ of BMW’s successful X5 SUV.  The car on the right is manufactured by Shuanghuan and needless to say BMW were very quick to prevent the car from being imported into their key markets around the world.  The Chinese government does not condone the manufacture of these counterfeit cars and parts, they see it as a way to develop the economy and ‘acquire’ the know how to compete against western companies.

With the increase in car ownership in emerging markets and a relatively uneducated car buyer in many of these regions, ie how to maintain a car properly and how to ensure their cars are fitted with genuine parts, the trade in counterfeit parts is going to continue to grow.  The counterfeit operations are highly organised, with many criminal gangs helping to fund the manufacture of these parts in China.  In fact a 2006 report by Interpol said that many organised crime and terrorist groups are shifting in dealing in weapons and drugs which have profit margins of around 200% into counterfeiting as the margins are as high as 900%.  

When the parts are manufactured they are simply put into a shipping container, a bill of loading is provided for the parts, this bill of loading is then sold to a third party and the container is re-directed to a waypoint, frequently a free trade zone.  One such free trade zone is Dubai and over the past few years this has become a key hub in the global counterfeiting operations.  Dubai has one of the world’s largest container ports, processing nearly 11m containers each year and Dubai customs will only search between 3-5% of all containers entering its port. 

When the containers reach this so called ‘free trade zone’ the parts are unloaded, re-packaged and then all the associated shipping documentation is created before everything is placed back into the container and sent on to its final destination.  So inefficient paper documentation checks, limited visibility of the shipment of the containers across Ocean container routes and limited efforts by the original parts manufacturers to try and minimise the trade in counterfeit parts have all contributed to fuelling the growth in the counterfeit goods trade. From Dubai’s point of view, the increased trade in counterfeit goods has contributed to the growth of the region, as depicted by the picture of Dubai port below with the bustling skyline in the distance.

Now with the Olympics looming on the horizon the trade or rather flow of counterfeit goods out of China could be affected however I would bet that the organisations running this trade will have come up with a way to minimise disruption to their very lucrative and profitable operations.  When you think about it, it is amazing that these unofficial ‘parallel’ supply chains are in place serving the same dealerships and car repair centres as the official parts suppliers such as Bosch, Valeo and others.  The counterfeit parts supply chain is not as sophisticated as the orginal parts supply chain, there is more use of paper based documentation, parts are easily distributed to small back street repair shops who may not care so much about where the parts originated from. 

So the problem has been identified, the counterfeit parts trade is eating a $16bn hole in the profits of the original car and parts manufacturers worldwide on an annual basis which is ironic given the turmoil that exists in some automotive markets at the moment. Numerous research projects being led by leading industry associations such as the Automotive Industry Action Group and American Aftermarket Industry Association and others have identified the problems in shipping counterfeit goods around the world and yet relatively little progress has been made to try and dampen down the trade in counterfeit goods.  So why is this?, especially when some technologies, both part identification and B2B solution based, are available on the market. How are other industries getting around this problem, indeed will we be ever able to remove this problem entirely? 

So what can be done to counter the trade in counterfeit parts and more importantly how can B2B solutions help to address some of these issues? How could improved visibility into the movement of aftermarket parts, better use of secure electronic documentation and better ways of labelling parts help to reduce the movement of counterfeit parts around the world?  

Well that will be the topic of my next blog entry…..

Over the past few years India has grown into one of the leading offshoring/outsourcing regions, with banks, telecommunication providers and IT companies establishing a presence in the region to take advantage of the highly skilled and relatively low cost workforce that resides in the region.  Many British banks for example have established their call centres in the region, IT companies have established their help desks in order to provide their customers with 24/7 support and many software companies have established their R&D facilities in the region as well.

During the last decade there has been a huge shift in the manufacturing footprint of the global automotive industry with regions such as China, Eastern Europe and Russia enticing the global automotive companies and their respective supply chains to establish a presence in their respective regions.  However over the past couple of years India has been positioning itself for further growth by encouraging automotive OEMs to establish new manufacturing plants in the region.  Manufacturers have rushed in to take advantage of the low cost and relatively highly skilled workforce and manufacture cars for both the domestic market and for export, well thats what they expected to do. The map below shows the current OEM landscape across India with four major regions being established.

However as the graph shows below, the adoption of four wheel vehicles is still relatively low and most of the population prefers two wheeled bikes etc.

This preference for two wheel rather than four wheel vehicles is for a number of reasons namely:-

· Most of the population doesn’t actually need a car

· They are uncertain about the cost of running  a car

· The road infrastructure is not good enough

· The roads are heavily congested with two and three wheeled bikes

· Parking space is not sufficient

· They do not know how to drive

· They are unsure whether some manufacturers will last as long as the vehicle thus creating a ‘trust’ gap 

So what about manufacturing cars for export, well there are a number of factors which, for the moment will limit the export of cars from India:-

· The geographical position of India, effectively being land locked to the North of the country by the Himalayan mountain range makes exports by road, (the most popular method of moving freight in India at the moment) relatively difficult

· Many of the country’s coastal ports are unable to handle vehicle exports due to infrastructure issues

· The quality of the road infrastructure is relatively poor meaning that supply networks, especially via road freight are not as efficient as those in other western countries

· As with China there is the western ‘perception’ that Indian made vehicles may not be as high quality as western made cars

Now many of these issues are currently being addressed, the Indian government is financing improvements to the country’s road and port infrastructure and many joint venture manufacturing projects have been announced partnering western manufacturers with domestic car manufacturers in India.  In addition, it was announced by TATA in June that they had taken over Jaguar and Land Rover and so immediately the quality perception issues surrounding some India car manufacturers such as TATA have been addressed as they will now be able to learn from Jaguar and Land Rover about how to improve the quality, safety and design of their own vehicles.  Indeed at the same time as announcing the acquisition of Jaguar and Land Rover, TATA announced their own new vehicle, called the Nano, which they reckon will sell for $2500, and they also announced an engine project that runs on air.  So within the space of two months TATA in particular has made a strong impact on the global automotive industry, quite timely given the current economic climate in regions such as North America. 

For the moment at least the one area where India will excel at is the provision of components and spare parts for the automotive sector.  Manufacturing castings for gearboxes and engines can be a lengthy and labour intensive process and the Indian companies are highly skilled in this area.  The graph below highlights the proportion of car parts being manufactured in India at the moment.

But many western automotive companies are use to their Tier1 suppliers manufacturing complete sub-systems for their vehicles rather than individual piece parts.  So the supply chain in India will have to be improved and take onboard the best practices employed by the likes of Bosch and Valeo in order to provide the correct parts and sub-system supply infrastructure that many western car manufacturers have become use to.  India has been able to entice a number of car manufacturers to setup their global parts distribution centres in India, Volvo and Renault are the latest to establish such logistics hubs in the region. 

So what about B2B infrastructures?, well EDIFACT is the preferred electronic document standard that has been adopted by many companies in India and this at least allows them to exchange EDI related information outside of the country.  But as with China five or so years ago, many of the smaller Indian companies have limited access to IT technology or indeed infrastructure. As with the improvements to the road and port infrastructures the telecommunications infrastructure will have to be significantly improved to get many of the Indian parts suppliers ‘e-enabled’ before they can become true players in the global automotive manufacturing market.  The Indian port authorities, given their requirement to link with global logistics providers are probably the most advanced users of EDI at the moment.  I will be taking a closer look at the current EDI and B2B adoption levels in India over the next week or so and will post my findings in my next blog entry