Cisco Warns Supply Chain Issues Causing Spike In Gray Market, Counterfeit IT Gear

‘The only conclusion we can come to is that it has to be a gray market product. We’ve seen that pretty regularly, especially in the last couple of years and especially because of the supply chain in the last year,’ one Cisco partner tells CRN on recently lost deals.

Supply chain challenges and material shortages aren’t only slowing manufacturing and shipping. The global issue is also causing a rise in gray market activity, as well as something more nefarious: a surge in counterfeit IT products, according to Al Palladin, Cisco’s legal director of Global Brand protection.

The gray market, or products sold legally outside of the brand’s permission by unauthorized dealers, has always been a challenge for IT vendors. The disruption of global supply chains that have resulted from the COVID-19 pandemic has made lead times for procuring technology hardware substantially longer. Some customers -- and even channel partners -- are looking outside of Cisco’s authorized channels to get their hands on new products faster, resulting in a spike of counterfeit activity, Palladin said.

“Admittedly, the problem has increased because of increased time to market. Customers are impatient and sometimes, they don’t follow the guidance that our team provides,” he told CRN.

[Related: New Cisco Environmental Sustainability Specialization, Incentives Are For ‘All Partners’]

Products sourced outside of Cisco’s authorized channels won’t come with a valid warranty or license from Cisco. This gear also runs the risk of being tampered with in a way to make it more vulnerable to security breaches. Not only could this cause damage to Cisco’s brand, it also could leave businesses open to attack or early failure of the product, Palladin said.

Palladin and his 50-person team of analysts, engineers, and forensic experts, are part of Cisco’s legal organization. The Global Brand Protection group that has a presence in 15 countries was established to investigate leads on fake Cisco IT gear or gray market activity. The group is focused on product diversion crimes and counterfeiting, or illegally using cisco’s trademark on fake or tampered-with products, a growing problem in recent years affecting Cisco’s switches and access points.

The problem isn’t only with customers buying counterfeit or gray market gear. Cisco is also grappling with partners making the same decision to purchase hardware from outside of the Cisco supply chain, which in turn, can take legitimate revenue away from other solution providers, Palladin said.

Cisco and its colleagues in the Alliance for Gray Market and Counterfeit Abatement (AGMA), which includes the likes of HPE, Juniper Networks, and Microsoft, have estimated the economic loss to channel partners exceeds $100 billion a year. From a Cisco perspective alone, the company estimates $1.2 billion a year in losses to Cisco partners that are displaced by other partners winning deals with counterfeit, or low-quality gray market gear or customers purchasing outside of the Cisco supply chain.

“We’ve noticed we’re missing or losing deals,” confirms Michael J. Fay, president and CEO at Syracuse, N.Y.-based ComSource Inc., a Cisco partner. Fay said that based on pricing of some of these lost deals, the winning solution provider can’t be providing new Cisco gear. “The only conclusion we can come to is that it has to be a gray market product. We’ve seen that pretty regularly, especially in the last couple of years and especially because of the supply chain in the last year.”

Solution provider ComSource got its start as a reseller of used and refurbished IT gear and also sold gray market products. In 2013, the firm pivoted under the leadership of Fay and went through Cisco’s partner conversion program to exclusively focus on delivering new Cisco products and services. “It was a tough hurdle to get into the partner program because of our past. We had a lot of promising to do that we weren’t going to [sell used or gray market gear] anymore,” Fray said. “It was a chore, but we changed our whole our whole makeup.”

Now, an established Cisco partner, ComSource’s sales have grown 140-170 percent in the last two years. “We don’t even talk gray market or used equipment anymore. We don’t want anything to do with it. Our focus is just selling new as much as we possibly can and we’re very good at it,” Fay said.

Cisco Channel Chief Oliver Tuszik is a “champion” of the work that Palladin and his team are doing to crack down on channel partners -- both those aware and unaware -- that are committing fraud, Palladin said.

Tuszik has introduced a consequences framework for partners procuring products outside of the Cisco supply chain. “We have a yellow card and red card type of an approach, where if you’re caught once, depending on the extent of the crime committed and the losses to Cisco, there are severe penalties and they are made to replace all of the illegitimate gear, especially the counterfeit or stolen goods, with customers that they cheated in the process,” Palladin said. “If caught twice, it’s a red card and [the partner] will never be welcomed back into our program.”

Cisco partners that may have encountered potentially counterfeit or questionable products can report this activity via a short intake form that is then addressed by the Cisco Brand Protection team. Palladin said the team receives about 100 new cases a week from around the globe.

“Our hearts always go out to those [partners] who are legitimate. We’re trying to educate and provide the best quality service, and these [partners] are being undercut by the bad guys who couldn’t care less,” Palladin said. “Partners are also the good guys. They’re a tremendous source of information and when they see others undercutting them or they suspect something, they work with us on cleaning up things.”

Palladin urges customers to purchase Cisco products through authorized partners only and for Cisco partners to be aware and careful during these challenging times.

“Temptation is out there,” he said. “There are many fraudsters out there that are trying to cheat you out of legitimate business, and if it’s too good to be true, it probably is. Don’t put your reputation at risk.”

Pictured: A recent bust conducted in collaboration with Cisco Brand Protection and Chinese law enforcement authorities.