Auto Spare Parts Counterfeiting and How Blockchain Can Help

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Auto Spare Parts Counterfeiting and How Blockchain Can Help

The automobile industry has come a long way from the manufacturing of Horseless carriage in the 1860’s to be one of the largest economic sectors of the world by revenue. Likewise, the automotive supply chain is one of the most complicated and distributed, second only to the electronic sector. The automotive supply chain not only involves the supply of components for manufacturing but also the sourcing and distribution of spare parts. These auto spare parts are used in after-sales service and constitute a major source of income for the automobile manufacturers and OEMs.

The Issue

The auto spare part supply chain is most affected by the introduction of counterfeit products. Despite efforts by automobile industry players and the government, the volume of fakes continues to rise. All major components including airbags, engine and drivetrain components, wheels, batteries, brake pads, windscreens, and electrical components, etc., are counterfeited. As per the European Office of Intellectual Property (EUIPO) estimate, 2.2 Billion Euros is lost due to counterfeit wheels alone (Peresson, 2019). This issue not just translates to monetary loss for the auto manufacturers and OEMs but has further fallouts in the form of reduced consumer safety and damage to brand value. Fake parts underperform and quite often are the reason for accidents leading to injury and even loss of life. In such cases, it becomes very difficult for the auto manufacturer to prove that the incident was caused by the counterfeit part installed in the vehicle. Manufacturers are also facing an ever-increasing number of claims for parts replacement under warranty which are later found out to be a fake one. Often manufacturer has to painstakingly trace the actual supplier of the failed part only to be informed that the part in question is a fake one.

The Cause

Easy money is the biggest motivator for counterfeiters. However, the lack of proper, end-to-end tracking of spare parts through the supply chain aids in the entry of these fake products. The figure below illustrates the parallel counterfeit supply chain and its intersection points with the actual one.

counterfeits supply chain

The numbers indicate the points where counterfeits can enter the supply chain.

  1. Supply of sub-standard raw materials (rare)
  2. Supply of counterfeits to the distributor
  3. Supply of counterfeits to dealer
  4. Supply of counterfeits to a repair facility or opting for fake aftermarket products

The challenge in finding a solution

The only way to check the flow of fake parts into the supply chain is to maintain the integrity of the supply chain. It’s rather easier said than done. A spare parts supply chain is a complex one with a large number of suppliers. A supplier can supply multiple parts or a single part can be supplied by multiple suppliers. A part can be a simple or compound. A compound part is made up of several other parts but is supplied to the manufacturer as a set (e.g seat assembly, gear assembly, etc.). In the case of a compound part, it is quite difficult to check if a fake subpart has been used. The subparts, in this case, may or may not carry a serial number and thus difficult to track.

The Solution

A blockchain technology-based network anchored by the manufacturer would be the best bet for anti-counterfeit. This network could be complemented with IoT devices for location data generation. To make it simpler, just RFID tags (for high-value components) or plain old barcodes for scanning at the time of transfer of custody. Although not everything can be barcoded or RFID enabled it could be done on a box level for low-value components. It would be difficult to achieve supply chain integrity with a traditional application (application using a centrally owned database) as all the stakeholders already have systems on which they work and making them switch to a new application would be a difficult task. Moreover, the suppliers will not be comfortable sharing their data over an application that is owned and handled by another entity. Being distributed in nature, the blockchain application, on the other hand, would be more apt. The blockchain-based application would run in parallel to the existing systems already in place and would be connected via APIs. Although the network would be anchored by the manufacturer, each stakeholder (supplier/3PL/distributor/dealer) would have their own copy of the same ledger and would access using their own node. The data shared over blockchain could be masked for others (competitors or irrelevant parties to the transaction), ensuring data security by making separate channels for each transaction type. The serial number of each part will be logged on the blockchain along with the current owner which would help in maintaining an immutable chain of custody and eventually help in creating a barrier against the entry of counterfeits.

The Benefits

The blockchain-based solution would benefit the supply chain stakeholders in the following ways:

  1. Easy tracing of supplier: A part could be easily traced back to its supplier. This would come in handy in case of warranty claims.
  2. Low probability of counterfeits entering the supply chain: Since each and every component’s chain of custody would be maintained on the blockchain, it would be difficult for fake spare parts to enter the supply chain.
  3. Easy adoption: As the proposed blockchain application would run in parallel to the existing systems, it would be easier for the stakeholders to adopt such a solution.
  4. Data security: As mentioned earlier the data could be masked from other irrelevant parties in a transaction by creating channels ensuring data security.
  5. Increased transparency: The blockchain-based solution would equip the relevant stakeholders in tracking the volume, exact location, and status of spare parts in the supply chain resulting in increased transparency. This would help the suppliers in planning their production schedules.
  6. Targeted recalls: When a manufacturer identifies that a particular batch of parts is faulty, it would be easier to do a targeted recall than a total recall as each part could be uniquely identified based on the chain of custody.

Conclusion

The automobile industry needs to act fast for sustenance by embracing new technology. The blockchain technology is in an early stage of adoption in parts tracking in airline and defense industry with many examples such as a) Honeywell’s initiative for airline spare parts tracking (Shah, 2019), b) Thales blockchain prototype for aircraft parts tracking, c) US Navy exploring blockchain for parts tracking, etc. The automobile industry has identified the potential and is involved in multiple PoCs related to supply chain tracking. One such example is BMW launching PartChain (for transparency and traceability of components). It’s the tipping point for the automobile industry to try out this anti-counterfeit technology for the creation of an integrated supply chain. Blockchain technology provides the needed decentralization, data security, and trust along with an immutable audit trail which seems to be a perfect fit for the problem at hand.

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