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Intellectual property crime is on the rise right now as companies around the global scramble to fill the gaps left by an ongoing semiconductor chip shortage. Taking advantage of a situation that’s left many of these organizations managing order lead times of up to 52 weeks or more, counterfeiters are currently flooding the market with dangerous knock-off options that procurement professionals should avoid at all costs.
The allure of these knock-offs—which, of course, aren’t identified as such—can be strong in a marketplace where demand for chips is extremely high and supply is at all-time lows. A recent U.S. Department of Commerce report found that demand for chips was up to 17% higher in 2021 versus 2019, and that the median inventory of semiconductor products fell from 40 days in 2019 to less than 5 days in 2021 (these inventories are even smaller in certain industries).
The primary bottleneck across the board appears to be wafer production capacity, which the Department says requires a longer-term solution. “Prior to 2020, there were already difficulties in obtaining inputs for production, including semiconductor manufacturing equipment used to make older varieties of chips, and components used in electronic assembly such as diodes, capacitors, and substrates,” it says. “The pandemic exacerbated these trends by dramatically increasing demand for products that require semiconductors of all types.”
Counterfeiters quickly caught onto this supply-demand imbalance and took advantage of it. According to the European Union Intellectual Property Office’s Intellectual Property Crime Threat Assessment 2022 report, IP crime continues to constitute a substantial threat to the health and safety of consumers. And while most counterfeit goods distributed in the EU are produced outside the political union, EUIPO says that the production of counterfeit and substandard goods increasingly takes place within the EU.
“The frequent seizure of counterfeit packaging materials and semi-finished products on
entry to the EU clearly points to the presence of manufacturing facilities in the EU,” EUIPO points out, “some for partial assembly and others running full production cycles.”
Electronic Devices are a Prime Target
A key category of counterfeit products, electronic and electrical devices are most often made in China (including Hong Kong), according to the EUIPO. In addition, it says mobile phones, their accessories and components remain among the commodities most affected by IP infringements, especially those involving designs and trademarks. Other key findings from the EUIPO report include:
- Counterfeiters are exploiting the global supply shortage in semiconductor chips. “Mobile phones, their accessories and components are among the most affected commodities targeted by IP design and trademark infringements,” the EUIPO states.
- The global pandemic has presented new business opportunities for the distribution of counterfeit and substandard goods. “Criminal networks involved in IP crime have been highly adaptable in adjusting their business model by shifting product focus and marketing,” it says.
- Counterfeiting now relies heavily on the digital domain to source components and distribute their products (both tangible and non-tangible) to consumers via online platforms, social media and instant messaging services. The EUIPO says COVID-19 further entrenched this development.
- Counterfeiters launder their criminal proceeds by using both traditional and more sophisticated schemes that make use of technology, trade-based money laundering and offshore jurisdictions.
- ·EU-based criminal networks distribute imported counterfeit goods and, in some cases, operate facilities that assemble semi-finished products.
Measuring the Impacts
IP crime causes reputational damage to legal producers, while damaging fair production and distorting market competition. Furthermore, certain IP crimes, such as pharma crime, reduce the funds available for research and public innovation. Counterfeiters operating in the counterfeit and fake medicine; food and beverage; cosmetics; electrical household goods; and toy sectors currently account for more than 15% of the total amount of articles seized at the EU’s external border.
“The distribution of counterfeit and substandard goods has been one of the key criminal activities during the pandemic,” says EUIPO, which adds that throughout the crisis, criminal networks involved in IP crime have been highly adaptable in adjusting their business models. “[They’ve] shifted product focus and marketing, based on the developments of the pandemic and the changing needs of individuals, and public and private sector organizations.”
