The Fight Against Counterfeit Goods through Blockchain and IoT

The challenge of combating counterfeit goods has been a persistent issue for companies, with the risks of counterfeit and fake parts infiltrating the production system, and similar products being produced with the aim of stealing sales. These fraudulent activities can result in financial losses and damage to a company’s reputation, and until now, it has been difficult to trace and authenticate the authenticity of products due to a lack of comprehensive data and networks. However, the integration of blockchain and IoT provides a solution to this problem, offering improved visibility and tracking of provenance data throughout the entire product life cycle.

The Impact of Counterfeiting

Counterfeiting has a significant economic impact, resulting in billions of dollars lost in business revenue each year, and exposing individuals and companies to increased health, safety, and cybersecurity risks from fraudulent materials and defective parts. The pharmaceutical industry sees between $75 billion and $200 billion in counterfeit drugs sold annually, while the electronics sector loses approximately $100 billion per year to fake parts. In the European luxury goods market, 10% of all items for sale are counterfeits, resulting in approximately $28 billion in lost value.

Counterfeit products affect every stage of the product life cycle, from manufacturing to the point of sale, servicing, and beyond, leading to increased costs, reduced revenue, and damage to company reputations and brands. Companies must invest significant time and resources to ensure the authenticity of their products, track parts, validate provenance, and meet regulatory and compliance demands. These challenges occur across the three major stages of the product life cycle, procurement and production, sales, and after-sales and support.

By combining the unique identification capabilities of IoT with the tamper-proof information of blockchain, companies can create a shared ledger that records the origin, location, and ownership of raw materials and products at each stage of the value chain. This level of transparency and authentication provides a solution to the challenges faced by companies, by giving manufacturers, partners, and customers the confidence in the authenticity of products.

To combat counterfeiting, suppliers and manufacturers can join a single blockchain platform and use smart tags to track and confirm the provenance and location of products. The immutability of the blockchain ensures that the genealogy of products can be tracked and shared across multiple stakeholders, making it harder for counterfeiters to succeed.

Our research suggests that the integration of blockchain and IoT offers a significant financial and competitive advantage to companies, by providing a solution to the challenges of counterfeiting. The ability to trace and authenticate the provenance of products throughout the entire product life cycle offers improved visibility and transparency, reducing the risks of counterfeit goods and enhancing the reputation of companies.

Counterfeit goods and associated losses represent a persistent challenge for companies across various industries. In this report, we examine the potential benefits of incorporating blockchain technology and the Internet of Things (IoT) in the fight against counterfeiting. Our analysis delves into the three main stages of a typical product life cycle and assesses how improved tracing and authentication can reduce counterfeiting and its associated costs.

Improved Oversight of Raw Materials

The integration of blockchain and IoT provides a single, immutable source of provenance data, allowing companies to improve end-to-end oversight of raw materials and reduce product defects. By maintaining a tamper-proof chain of custody, companies can authenticate items, flag deviations from agreed-upon sourcing arrangements, and prevent defective and inferior components from entering the production system. The resulting improved visibility safeguards customers, protects the company from the risk of recalls, lawsuits, and reputational damage, and reduces operating costs.

Reduced Likelihood of Fraudulent Sales

By utilizing smart tags and blockchain, manufacturers, channel partners, third-party retailers, customers, and regulators can verify a product’s authenticity as goods move through the value chain, making it harder for counterfeit goods to escape detection. Real-time authentication ensures that the preponderance of sales and revenues goes to legitimate brands and manufacturers. Regulators can digitally trace the provenance and chain of custody of any product being sold.

Improved Support Center Efficiency

By linking front-end applications to the blockchain platform, support representatives can quickly and accurately verify the authenticity of a claim, even without seeing the product. This improved tracing capability allows support personnel to direct their time and resources to legitimate, high-value purposes, improving responsiveness, reducing waste, and increasing customer satisfaction.

Financial Benefits Range from 2% to 5% of Revenues

To study the potential impact of improved counterfeit detection on cost and revenue, we modeled a hypothetical example of a $1 billion electronics equipment company that manufactures its products in China and sells through channel partners and third-party retailers in the United States. Our analysis determined that the net financial benefits of improved counterfeit detection range from 2% to 5% of revenue. The greatest benefit comes from stemming sales losses, with the electronics manufacturer in this case expected to recoup an average of 3.85% in associated revenues. The average net impact for our $1 billion electronics company translates to $33 million.

The issue of counterfeiting affects businesses and industries differently, with the extent and impact being determined by a number of factors. To effectively calculate the return on investment of implementing a blockchain-IoT solution for counterfeiting, it is important for companies to assess the characteristics of their products, the composition of their supply chain, and the market risk they face.

Impact on High-Value Products

High-value products, particularly those that can be easily forged and sold at a premium, are most susceptible to counterfeiting. Protecting these products from such activities would help preserve the brand and contribute positively to the revenue. However, it is important to note that some products may also be voluntarily purchased as counterfeits, particularly in cases where price and prestige are high. As such, companies must consider buying behaviors and channel characteristics across key markets and segments to evaluate the overall cost-benefit of a blockchain solution.

Supply Base Considerations

The size and complexity of a company’s supply base also plays a role in determining the ROI of a blockchain-IoT solution. Companies with larger and diverse supplier networks are more likely to benefit from the provenance and chain-of-custody information provided by blockchain. On the other hand, companies with a more controlled supply chain may not see the same level of benefit.

Market Risk Assessment

In certain industries, such as medical equipment, pharmaceuticals, and food and beverage, there is a strong responsibility to ensure product safety and reliability. A blockchain-IoT solution has the potential to generate significant value in these industries by enabling rapid, continuous, and accurate authentication of parts and raw materials throughout the product lifecycle. However, in situations where counterfeit products and materials are easily identified by their performance, look, or feel, the benefits of a blockchain solution may be less clear.

Economic Value of Authenticity

While having a guaranteed authentic product can bring economic benefits, companies must carefully consider the tangible and intangible value that blockchain-enabled counterfeit prevention can deliver and compare it to the cost of implementation.

The Advantages of Blockchain and IoT

Blockchain platforms offer manufacturers a scalable and effective solution for mitigating the risks posed by counterfeit parts and goods. By combining blockchain with IoT, stakeholders across the value chain can determine the legitimacy of a component or product, as well as its origin, transportation, storage, and previous sales history.

A substantial adoption base within an industry or supply chain is crucial for success, and this can be facilitated by having a large player or industry leader leading the effort. As blockchain platforms and enterprise solutions become more mature, use cases and technologies will continue to evolve.

Our analysis suggests that the potential benefits for most companies will significantly outweigh the initial setup efforts. Implementing blockchain-enabled counterfeit solutions will provide manufacturers with a powerful tool to secure their customers, protect their revenue, and ensure long-term financial stability.