Happy new year … or is it? For some it may not be such a happy one, with single digit projections, increasing problems with counterfeit products, and less product that is hard to find, allocated, or doesn’t already have an obsolescence solution leading to a precarious 2008 for many grey market channels.

Grey market channels may not have time to find their identity in 2008. We have already seen some smaller businesses shut down in 2007. In the past it would be common to see at least 2 to 4 independent or grey market channels on an approved vendor list (AVL), but through vendor reduction programs and extra vigilance in the form of site visit evaluations, the number of independents/brokers is likely to reduce rapidly in 2008.

Much of the business managed through the grey market comes from franchise distribution outlets. Pick anyone of the major franchise distribution outlets and they will source 10% to 30% of their total business from non-franchised distributors and brokers. Likewise, many of the major independents in the grey market rely heavily on franchise distribution for business. Franchised outlets not only get first crack at the opportunities, but they then purchase from grey market on the behalf of their customers. They do this to protect their business from other franchise outlets swooping in and using a “line down need” to leverage additional business away. Having the franchise source the grey market is good business practice and it satisfies the end customer because then they don’t have to purchase outside of their AVL.

However, it’s not all good news. Apart from being inefficient, it’s also the main reason why counterfeit product is coming from franchised outlets. The problem isn’t the franchise outlet, or even their vendor, it’s up the chain and is the vendor before that or the vendor before that. It is frightening to think of how many counterfeit incidents go unreported versus those that are. Many grey market channels only have basic testing techniques to expose substandard products. These techniques have proven to have had mixed results in the past. Yet a problem lies ahead as counterfeiters become more creative and techniques become less effective.

Grey market outlets that ignore the need for investment or change are likely to see fewer opportunities and a decrease in revenue. How the industry reacts to the counterfeit problem will determine the future of everyone else. The electronic component industry is the only industry where counterfeit offerings exist without a demand. Counterfeit Calvin Klein jeans certainly have a demand for example, as do other cheap knock offs, but they have to do the same job as the genuine articles. A demand for cheap electronic components is driven by a grey market forced to shop for competitive alternatives to franchise, and for this reason it is wholly responsible for fueling the supply of counterfeit product.

Opportunities do lie ahead for grey market outlets that can invest in counterfeit prevention and logistics. Some companies will target a product area as a niche and partner with aftermarket manufacturers. Others will continue to be a conduit for product from non-approved outlets. Focusing on what they can do by taking advantage of an approved vender status and sourcing out-of-region product, or perhaps less exposed product. Another more obvious target is the business procured by franchise outlets from the grey market.

2008 is likely to get worse before it gets better concerning counterfeit issues. End users need to take as zero tolerance approach with those that supply counterfeit product. By not taking action against the perpetrators and allowing them to replace the product without penalty the end user is actually encouraging the perpetrators to continue to take the risk. It may even be the reason why we still have a counterfeit problem in the first place. End users need to remove vendors from their AVL’s for even one offense.

Ultimately the future of the grey market lies in the hands of OEM’s and contract electronic manufacturers’ themselves. The grey market channels are relatively small with the 10th largest supplier generating approx $30 million in revenues. In comparison, the 10th largest franchised seller generates more like $300 million in revenues. The need for larger investments and better logistics means that many of the small-to-medium businesses may find it increasingly difficult to turn the same numbers this year. Without acquisitions or regional expansions, larger outlets may also see numbers dwindle as franchise takes back business that was once serviced by them.

Overall, the future for the grey market looks bleak. Whatever the future holds, the key to reducing counterfeit supply is to stem the demand. As opportunities dry up, and vigilance prevails, counterfeit suppliers ought to feel the effect.