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Sizing Up the Damage

Up to 10 percent of all high-tech products sold worldwide are phony, according to the Alliance for Gray Market and Counterfeit Abatement (AGMA), a trade association composed of high-tech firms. Printers, laptops, cell phones, and components such as memory chips and integrated circuits are the types of hardware most frequently counterfeited. Such knockoffs cost manufacturers $100 billion annually in lost sales, according to the AGMA.

A look at recent U.S. Customs and Border Protection seizures gives some idea of the problem's scope in the United States: Three of the top ten items that Customs agents seized in 2004 were consumer electronics, batteries, and computer hardware, according to U.S. Customs statistics. Although some of those seizures resulted from import law violations, the majority involve counterfeit goods, according to Customs agents.

U.S. Customs' Randazzo says the value of seized tech goods more than doubled between 2004 and 2005. The fakes ranged from PC components (such as hard drives and keyboards) to entire systems. Also on the rise: seizures of networking hardware.

In fiscal year 2004, at the port of Anchorage, items that violated intellectual-property rights accounted for 80 percent of all goods seized, says Lance Robinson, assistant area port director of trade operation; high-tech gear made up 20 percent of that contraband. That figure puts counterfeit gear on a par with the volume of illicit drugs Anchorage Customs hauled in during the same period.

In certain parts of the world--including some Asian nations--finding real brand-name goods is harder than locating bogus ones, says Jorge Barahona, a private investigator hired by U.S. tech firms to protect their brands outside the United States.

Phony Labels

In many cases the counterfeiters don't make the phony hardware themselves. Instead, they take a legitimate but inexpensive hard drive or memory module from an undistinguished maker, slap on the label of a better-known firm, and charge a premium rate. Woody Taylor, who uncovers counterfeits for Seagate, says hard drives made by little-known companies and rebranded as Seagate models make up the bulk of the hundreds of phony Seagate drives he sees each year.

According to numerous experts, counterfeits may also come from manufacturers that have a legitimate contract with a brand-name company but make products containing unauthorized or substandard parts. For example, Kyocera Wireless asserts that it had this problem with Texas-based Hecmma, a company Kyocera hired to make some of its cell phone batteries. Kyocera subsequently filed suit against Hecmma in the U.S. District Court of the Southern District of California, claiming that batteries made by Hecmma were defective and prone to overheating, and that Hecmma sold excess substandard batteries bearing the Kyocera name to distributors after Kyocera stopped its order.

In its own court filing, Hecmma strongly denies these charges, arguing that it is the assembler--not the manufacturer--of the batteries, and that problems with components are thus beyond its control.

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