Fakes: Can You Tell The Difference?

Aqua Systems is caught in a noose. Whether employees with the Roslyn, N.Y.-based VAR tied the rope themselves by knowingly selling counterfeit goods is up to a New York circuit court to decide. QLogic says yes, and hopes to prove that the sale of fake host bus adapters by Aqua Systems was both intentional and damaging to the manufacturer's reputation, channel sales and bottom line. Aqua Systems claims it was duped right along with its customers, and accuses its own suppliers of being the real guilty parties.

Aqua's tale is not unusual. Counterfeit goods, both hardware and software, have infiltrated the channel, and solution providers that aren't careful could—knowingly or not—get burned.

Peddling goods on the black market is big business. According to a report published by KPMG and the Alliance for Gray Market and Counterfeit Abatement (AGMA), the IT industry loses an estimated $100 billion annually to counterfeit products.

Also, according to the Department of Homeland Security (DHS), computer hardware accounted for 9 percent of all types of counterfeit goods seized by U.S. Customs and Border Protection in fiscal year 2006. The total amount was worth approximately $14.3 million—an increase of 198 percent compared with the year prior. On the software side, the fourth annual Software Piracy Study conducted by the Business Software Alliance and IDC found that 22 percent of total software installations in North America last year were pirated, a loss of more than $8.1 billion for the region.

"We have seen counterfeit product from day one and we continue to see it on a daily basis," said Josh McCarter, president and COO of independent distributor Arbitech. "In certain product lines, there's so much counterfeit and, in some instances, so little information available to distinguish real from fake product, that companies will unknowingly buy or sell the fake product."

Typically, the most counterfeited goods are those that are made in large quantity, such as Gigabit interface converters, WAN interface cards, memory, printer cartridges, network modules, or standard desktop applications from mainstream, marketable vendors, such as Cisco Systems and Microsoft.

China remains the hotbed of counterfeit goods. Coding of software programs is cracked and copied, and hardware products are reverse-engineered and re-created. In the case of the latter, many point to vendors' use of original design manufacturers, or ODMs, that can make their products for much less overseas. With fewer controls in these locations, exposure of processes inevitably occurs. Identical products without the brand name are created and sold for discounts of up to 90 percent, often bought by unscrupulous players that add a fake label and packaging and sell them as genuine products, McCarter said. Because these are often (but not always) commodity-type products, they're easily counterfeited.

"Manufacturers don't make their products—they rely on others for that," said Frank Kobuszewski, vice president of the Technology Solutions Group at CXtec. The Syracuse, N.Y.-based VAR offers both new and refurbished technology equipment. "And with the increasing emphasis on offshoring, people don't know what's happening at the facility. This is a very fragmented market because of people that want to make a buck, and mom-and-pop shops looking for discounts."

Next: Tracing the Source