Companies are likely facing billions of dollars in losses from warranty fraud due to the costs and lost revenues from servicing invalid claims. Yet many companies remain in denial about the scale of the problem, fearing the reputational damage and consumer backlash that could result from more widespread public reporting.
“The biggest competitor you didn’t know you had.” (PwC 2018)
Warranty abuse takes many forms, often involving counterfeit exchange where counterfeit goods, or products containing fake components, are returned to unsuspecting suppliers or manufacturers.
Estimates from the US suggest that up to 10 per cent of warranty claims could be fraudulent but underreporting may mask the true figure.
Counterfeit electronics have been found in computers and telecommunication products, as well as automobiles, avionics and even military electronics. Whenever a product or component can be made cheaper than the original, an opportunity for counterfeiting can arise, and the complexity of supply chains involved in the production of electronic goods increases the risk.
Spotting supply chain risks
Recognition of the problem is a critical first step towards identifying possible solutions. A study on the electronics industry, published in the Open Journal of Social Sciences, exposes three main areas of supply chain vulnerability that companies need to pay special attention to:
- Relabelling – lower priced or lower grade items are relabelled to appear as costlier or higher grade items. This type of counterfeiting largely occurs when new version products are introduced into the market. Counterfeiters buy a different version of the parts at a lower price, relabel them, and then resell them at a higher price.
- Illegal manufacturing – complete parts are manufactured and labelled to appear to come from an original manufacturer. These parts are then sold as being manufactured by the legitimate manufacturer.
- Scrap salvaging – defective or outdated items meant for scrap are salvaged and then re-circulated into the supply chain. Electronic parts that are scrapped but not destroyed are cleaned, reworked and returned to the supply chain.
Eyes wide open to preventive measures
In the face of such pressure, what can companies do? The study highlights a range of deterrents including overt and covert authentication techniques that make counterfeiting more complex and expensive, such as visible technologies that the public can use to authenticate products and other hidden features enabling company inspectors or enforcement authorities to easily spot counterfeits.
With the expansion of e-commerce and new technologies, counterfeiting is increasingly sophisticated and widespread. It’s time for companies to open their eyes to the harmful links between counterfeiting and warranty fraud and the need to take protective action.