Subject: [NEXTEL-1] Telecom Gear Counterfeiting Big Business

From: [email-masked]
Date: Mon, 07 Jul 2003 17:11:47 -0400

Telecom Gear Counterfeiting Big Business

Telecommunications equipment manufacturers are loosing billions of dollars to
hardware counterfeiting, from chips and network equipment to cellular phones.
While most wireless gear makers won't go on record to admit there is a problem,
they are hiring private investigators to track down and eliminate the production
of counterfeited hardware. Investigators say that China is the biggest
counterfeiting battleground, where labor is inexpensive and it is easy to keep R&D
costs down when you steal another company's technology.

===================================================================================

Telecom Equipment Cos On The Lookout
For Counterfeits

By TOM BECKER

Of DOW JONES NEWSWIRES
(This article was originally published Thursday.)
NEW YORK -- Jack Clode is a gumshoe, a snoop, a shamus.
He doesn't have the fedora, the whiskey bottle in his bottom desk drawer, or the
clients of Mike Hammer, but he's a private investigator nonetheless. Rather than
tailing cheating husbands, he tracks counterfeiters of everything from computer
chips to soda pop.

Clode is just one of a legion of private investigators employed by
telecommunications-equipment makers to search for and recover counterfeit routers
and switches that look and feel like, say, a Cisco Systems Inc. (CSCO) product,
but are actually low-budget knockoffs.  The telecom-equipment industry is hoping
to cut into what some experts say is a problem that costs it millions of dollars a
year. It's hard to tell who's winning.

Counterfeiters of everything from compact discs to fashion apparel produce an
estimated $35 billion worth of merchandise a year.  Statistics on counterfeit
telecom products aren't kept, but industry sources said it has gotten worse in
recent years.
"It's a problem we don't like to talk about for fear of making it worse," said an
executive at a West Coast maker of cell phone technology. "It's a fight, and right
now it's probably a draw."

More than a half dozen other telecom-equipment makers refused to comment on the
problem of counterfeiting.
Stopping counterfeiting is a huge task, considering it is a global business, but
the telecom-equipment makers are trying. Several investigators said they have been
hired by telecom-equipment firms in the past year. In June, the South China
Morning Post reported Cisco instigated large-scale raids on pirate manufacturers
there. A Cisco spokeswoman declined to comment on the report but said it is part
of Cisco's normal operations to "eliminate some limited production of
counterfeited hardware."
There are other cases.

"We had a case where a company came to us and said their competitor is selling
phones for 25% less and they are basically the same phone," said Vander Giordano,
associate managing director in the Rio de Janeiro office of Kroll Inc. (KROL), a
company specializing in security and risk assessment. "The company estimated they
lost $5 million over just a few days."
Turns out the phones were actually counterfeits of the competitor's product. So
both the company that hired Kroll and its competitor lost money as the
counterfeiter undercut their prices.

Investigators like Giordano and Clode see these kinds of cases everyday, which is
why the telecom-equipment firms have stepped up their fight. The largest
battlefield is in China, where criminals manufacture the counterfeits in their own
factories at half the cost by using cheaper materials and circumventing the costs
of developing their own product. R&D costs are low when you rip off someone else's
technology.

"The problem is steadily getting worse - especially in China," said Clode,
associate managing director with Kroll's Hong Kong office.

China Is Global Base For Many Counterfeiters

China is a good barometer for the state of global counterfeiting. Clode estimates
roughly $16 billion in counterfeit products are produced in China every year, far
more than in any other country.

There are several reasons why China is an attractive base for counterfeiters and
why the problem has gotten worse there, Clode said. First is the relatively recent
move of many of the world's manufacturers to make products in China. Much like
Mexico, it's cheaper to manufacture products in China where labor costs are lower.

This move has exposed China to more trademarked and copyrighted technology -
essential materials in a counterfeiting program. The move also means there are
more factories and machinery available to make counterfeits. Counterfeiters can
purchase the machines from legitimate manufacturers that have a surplus or might
be upgrading their factories.
A second reason is a lack of one central law enforcement agency charged with
stopping counterfeiters.  Clode said there is a disconnect between local law
enforcement and federal authorities that results in a lot of counterfeiters going
unprosecuted, if not unnoticed.

The counterfeiters start by getting their hands on a real product, say a cell
phone, then reverse engineer the phone to find out how it was made. Once that's
done, they figure out how to make it cheaper while still looking like the real
phone on the outside. The design is then taken to a factory, most of which happen
to be in southern China in the province of Guangdong. These factories can produce
thousands of products a day. Most of the counterfeit products are then shipped by
sea out of the country, with a portion remaining inside for sale. Organized crime
in China has been known to finance the shipments of the products, Giordano said.

The shipment is usually brought to South America through the port of Iquique in
Chile or the port Paranagua in Brazil. "The goal is to get the products somewhere
where they can be distributed worldwide rather easily, without close scrutiny,"
said Giordano.
That's where Ciudad del Este comes in. Giordano describes the city in Paraguay as
a strange place known for its criminal activity and infamous residents. For years
it has been believed members of Germany's Nazi party found a haven there after
World War II. Nowadays, Giordano said the city has become a second home to
terrorists from across the globe, including members of Al Qaeda, and South
American drug-runners.

"It is one of the world's foremost places of criminal activity," Giordano said.
"Counterfeiting is a big part."
From the city the products are shipped to all points, including the U.S. Officials
with the Chinese and Paraguayan governments didn't return calls and e-mails
soliciting comment.

Locating Counterfeits A Difficult Task

It's hard for law enforcement officials to prevent the entry of these products
into a country because it's so hard to determine if they're counterfeit. A
shipload of thousands of counterfeit Motorola Inc. (MOT) phones, for example,
looks like a shipload of thousands of Motorola phones. Counterfeiters often carry
documents that appear to be legitimate, meaning the only way law enforcement
officials can bust a shipment of the knockoffs would be to open up each phone and
compare its technology with the real thing. While that's unlikely, counterfeiters
have been known to include some genuine products in a shipment to throw off any
preliminary investigation.

"It's very difficult to catch them in the act," Giordano said. "It's much easier
to get them where they are making the counterfeit products."

One of the most effective ways for private investigation firms like Kroll to catch
the counterfeiters is to pretend they want to buy some of the products. Kroll and
other firms have several shell companies in place for this purpose. "Usually the
fake company has been established for quite some time," said Michael Kessler,
chief executive of Kessler International, an investigation firm. "You don't do it
at the drop of a hat. The bad guys will check you out and you have to make sure
the company passes the test."
Kessler said his fake companies have all the documentation of a real company,
including Dun & Bradstreet reports.

Once a fake company buys the knockoffs, the technology can be compared to the real
product. When it is clear the products have been counterfeited, the evidence is
presented to local law enforcement, Kessler said. As more
telecommunications-equipment makers are working with investigation firms to crack
down on the counterfeiters, the Chinese authorities have taken a very active role
in investigating and then prosecuting the offenders, Clode said.

"Once they have the evidence the factories get shut down rather quickly, usually
within 48 hours," he said.
There has also been increased scrutiny of international shipments, particularly in
Europe and the U.S., since the terrorist attacks of Sept. 11, 2001, said a
spokesman with the U.S. Bureau of Customs and Border protection.

"We're more concerned with finding weapons of mass destruction and security
threats than counterfeit products," the spokesman said. "But we are looking more
closely at shipments from foreign ports."

The U.S. has officials in several foreign ports that look over shipments destined
for U.S. ports. In China, for instance, the U.S. has officials in the ports of
Hong Kong, Shanghai, and Shenzhen, the spokesman said. Kessler said the increased
international scrutiny should help the telecom-equipment makers' effort to curb
counterfeiting.

"They should always keep a watchful eye," he said. "If not, they can lose a lot of
money very quickly."

http://online.wsj.com/article_email/0,,BT_CO_20030707_001587,00.html?

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