The counterfeit industry has grown, turning brand protection into a big business
Consumer spending is on the rise in Africa, but the continent's counterfeiting business is growing in tandem. Africa - where borders are often porous, regulation and law enforcement weak, and customers often looking to pay lower prices - has become a hotbed for the world's fake goods.
It is hard to measure the size of Africa's counterfeiting industry, given that most estimates are based on seizures, but countries - increasingly aware of the problem they face - are still trying. Telecoms has been a hard hit sector. Of Kenya's 30 million mobile phone subscriptions, for example, up to 3 million users, or 10 percent, were thought until recently to own counterfeit phones.
Those products are potentially dangerous to consumers, given that they are not subject to quality control or tested for electrical safety standards. They are also a problem for mobile vendors, who lose revenue every time a consumer purchases a fake, as well as for network providers.
"These devices have a negative impact on the quality of network service, in terms of access failure - where attempted calls fail - and dropped calls - where calls are interrupted or disconnected from the network. That places a burden on operators who try to resolve network issues that are often related to handset deficiencies," says Abdulla Hasayen, Nokia's brand protection manager for India, the Middle East and Africa.
"Across Africa, the availability and use of counterfeit mobile phones is widespread and has reached the extent where a potential mobile phone buyer cannot immediately tell whether they're purchasing a genuine or imitation handset," he explains.
The story is similar in pharmaceuticals, where anything up to 30 percent of Africa's drugs have been said to be fakes - though organisations including Interpol and the World Health Organisation, to which that figure has been attributed, have backtracked, saying that the industry is impossible to measure.
While fake drug proliferation is often driven by supply constraints, the rise of nascent African manufacturers has caused an increase in output of low-quality pharmaceuticals, says Ashifi Gogo, CEO of Sproxil, a brand protection company. "This isn't just a problem of counterfeit medicines produced in the East and shipped over to Africa," he argues. "There's also the problem of sub-standard medication from new African manufacturers who are just learning how to make these drugs with routine high quality; and every now and again they have manufacturing errors that lead to casualties."
The stakes here are higher, and not only in terms of the immediate risks of taking fake drugs. "When you have a lack of effective treatment, the patient in the long-run will have a lack of trust in the national health system, and in health professionals," says Sabine Kopp, who heads the WHO's medicines quality assurance and anti-counterfeiting programmes.
For businesses, this is a multi-billion dollar headache. The World Economic Forum says that globally, counterfeiting accounts for between 7 and 10 percent of world trade. That is about $1.3tn annually - or about the size of Mexico's entire economy. The industry spans almost all sectors, right through to the likes of toothpaste, cosmetics and ink.
In 2009, the computer company Hewlett-Packard admitted that inkjet counterfeiting cost it about $1bn in revenues. As Steve Simske, a Fellow at HP, puts it: "Our traditional competitors are not the real competition anymore. The biggest competitors, in almost every part of our supply chain, are counterfeiters."
Most companies agree that reducing their product prices to compete with counterfeiters is not the most productive way forward. Price is not the limiting factor, they say, and most could not make the cuts needed to equal the cost of counterfeits even if they wanted to. Instead, many companies are using technology to fight fakes - and that has translated into a huge business opportunity.
"The spectrum of anti-counterfeiting in the world today is absolutely massive. It goes from ticketing in events and luxury goods, right up to pharmaceuticals and everything in between," says Chris Coughlan, senior manager at HP Galway, where authentication technologies are being developed.
HP began creating anti-counterfeiting technologies to protect its own value chain, but quickly realised it could "do that for our customers as well". In 2010 it partnered with social enterprise mPedigree Network to introduce a SMS-based drug authentication service in West Africa, which allows customers to text in a unique code to find out whether they are purchasing a real product.
Those technologies are now being rolled out in other industries, including industrial products such as auto and aircraft parts, and lubrication products, where faking is a big game. "First we adapted our technologies for drug authentication, and now it's taking on broader commercial applicability," says Mr Coughlan. "It's been a fusion of social impact and business."
This is a big business with companies keen to protect their brands. "Some of the clients we've worked with are very concerned not only about sales losses, but that the brand damage will be up to 10 times the actual loss of revenue. If you lose that reputation you lose future sales. You have to prevent the brand damage," Mr Simske says.
HP is not alone. In August, Sproxil partnered with telecoms giant Bharti Airtel to bring its mobile drug authentication service into Airtel's 17 African countries, free of charge to users. "Building relationships with individual telecom companies to get the short codes we need for the mobile product authentication service takes a long time," Sproxil's Mr Gogo says. "By having these agreements we speed up the process from up to a year down to a matter of weeks."
Like HP, Sproxil is growing its mobile authentication business across sectors, including cosmetics and agro-chemicals. "Any physical product sold in Africa where the consumer is concerned about fakes is a product that could be a target for our business," he says.
For brand owners, meanwhile, consumer education is paramount, Mr Gogo argues: "The first mistake that brand owners make is to deny that there is a faking problem, because there is apprehension that the stock price will take a hit. In ignorance, the problem keeps growing until it actually threatens the existence of the company. So don't deny that there's a problem. Tackle it. Nip it in the bud. Otherwise it just gets worse."
New technologies are proving useful for governments too. The Global Pharma Health Fund, financed by German pharmaceutical company Merck, has donated 500 mobile laboratories globally to help identify fake drugs. About half of those suitcase-sized 'minilabs' are being used in Africa, by governments as well as private pharmacies.
"Sometimes it's just a small hospital using these labs to test products. But in Tanzania and Zambia they are really used by the Drug and Food Administrations to test the tablets imported into the country at the airport or the port, and control them when the medicines enter the country," says Frank Gotthardt, Merck's head of public affairs.
Meanwhile, businesses like HP and Sproxil are aggregating data from their authentication services. Over time, they hope to develop analytics - or "forensics" - to shed light on counterfeiting trends and hotspots, and help enforcers crack down on the problem.
"The text messages that get sent to consumers don't grow legs, arrest offenders and put them in jail. They serve to give an indication to the authorities about where they should do their investigations," Sproxil's Mr Gogo argues. "Governments are starting to get a handle on counterfeiting, because the clarity of intelligence that is coming from brand owners has improved, meaning that they can make use of their limited budgets to get the most impact."
Technology is one cog in a bigger machine, and there is pressure on governments to further invest in enforcement. "There's definitely a need to look at this from the bottom: to strengthen the capacity in a country, to monitor what products are on the market, to make sure the regulatory authority is functioning, that the recognition is there legally, and that there is also enforcement to take action when necessary. A good framework is needed," says the WHO's Dr Kopp. "Some countries have been finding that these authentication systems can help them, in addition to other measures. It's one tool, but certainly not the only one."
At the end of September, Kenya cracked down hard on counterfeiters when it switched off fake mobile phones. The estimated 1.5 million Kenyans thought still to be using fake handsets after a public awareness campaign had their connections cut, and mobile networks are now forbidden from activating new counterfeit devices.
The government was another user of mobile authentication, letting users text unique codes to check the status of their phone against a database of real handsets before the deadline. The system can also be used in-store to prevent further purchase of fakes.
The switch-off is "expected to kill the market for counterfeit handsets in the country", says Francis Wangusi, director general of the Communications Commission of Kenya. The government also hopes it will curb political violence of the type seen after the country's last national elections.
Kenya's government has worked hard to crack down on the counterfeit phone industry, waiving a 16 percent tax duty on mobile devices - which increased the cost of real handsets over low-priced fakes - in 2009. "It is estimated the counterfeit market share dropped by almost 6 percent as a result of this bold move," Nokia's Mr Hasayen points out.
However, distributors have taken advantage of the East African Community's common market to move fakes across the region, and other member countries are still plagued by counterfeits. Neighbouring Uganda has already stated an intention to follow suit with a switch-off this November, but the regional enforcement required across sectors is huge. The same applies for economic communities across the continent.
"The region could be losing up to $200m to counterfeit products, threatening the spirit of the East African Community's economic growth as a trading bloc," Mr Hasayen says. "Kenya can be used as an example of how fake products can be considerably reduced. These efforts need to be replicated across Africa."