Counterfeit Cartridges: Opportunity or Civil War For The Aftermarket Industry

December 6th, 2012

Counterfeit Cartridges: Opportunity or Civil War For The Aftermarket Industry

Who we are…

Ian Elliott, President, Print-Rite N.A. Inc., • Extensive domestic and international industry experience • CEO at a reverse logistics & asset value preservation company • Executive level management for Business Development, Strategy, Business Planning, New Product Development and Sales Strategy

Print-Rite North America • Wide range of imaging products (over 2,500 SKUs) from a worldclass manufacturer • Technology innovations while focusing on intellectual property rights • 30 year history in the imaging industry with a strong capital structure • 2,000 patents issued or applied for globally within the printer consumables arena

BEFORE WE GET STARTED‌

We strongly recommend you attempt to broaden your intellectual property knowledge if you plan to continue operating in the aftermarket imaging Industry.

Counterfeit cartridges = civil war

Why should the current fervor over intellectual property, patents, International Trade Commission actions and counterfeit cartridges be a concern to you today?

You have two possible approaches:

Ignore

Ignoring the legal issues does not mitigate your responsibility to your company and your customers.

Become informed

The link between intellectual property and imaging supplies is becoming more important every day.

Flat economy

Declining printer consumables demand Weak business outlook Declining revenue and profits Core constraints and inconsistent supply

Salvation

Current market conditions

The temptation to adopt an “ignore” strategy Compatible cartridges No supply constraints

Blind drop-ship Low cost – restore revenue growth and

How did we get here?

• Flat sales of imaging supplies combined with a decrease in HP market share, has led HP/Canon to become increasingly protective of their “revenue pie” • Our industry has seen this previously with Epson on inkjet patents, Lexmark on cartridge chips and prebate programs, and now Canon (HP) on drum gears • When sales flatten or decrease, as they are with Canon (HP), the strategy changes from growing revenue to maximizing profits.

– Translation: HP didn’t care so much about the aftermarket when revenue was increasing. Today the aftermarket share is a primary focus.

What is the “civil war” we refer to?

• In our opinion – Canon’s two gear patents are the tip of the iceberg • It’s not just HP anymore: the aftermarket is now offering compatibles for Xerox, Brother, Dell, Samsung, OKI, etc.

• HP compatibles – why doesn’t Canon act?

– We know counterfeits are taking market share, but from whom: the OEM or the remanufacturer?

– Resale of counterfeits: the OEMs are watching our industry destroy itself

• New litigation is only a matter of time

CONCLUSION #1 • The aftermarket continues to face a relentless battle with the OEMs • There is an aftermarket segment that is adopting an “ignore” strategy through sale of counterfeit cartridges. This is directly weakening the aftermarket industry • The aftermarket is at war with itself

Toner decisions: the past • Traditionally, you’ve made your toner vendor decisions based upon the BIG 3:

Quality

Price

Availability

Toner decisions: new considerations • If you want consistency and continuity for your laser toner supplies, beyond the BIG 3, you must now consider:

Intellectual Property

Technical Manufacturing Process

Market Dynamics

Logistics

Toner decisions: the present • The BIG 3 considerations still ring true today, but your evaluation needs to be deeper with your toner vendor • New market factors and a changing legal landscape affect the aftermarket supplies strategy and game plan

It’s time for an aftermarket deep dive

Remanufactured Vs. Compatible & Intellectual Property 101

Remanufactured vs. compatible 101 • We refer to remanufactured products as compatible products to our customers, yet, in the industry, we know there is a difference

Remanufacturing: starts with an empty core

Compatibles: 100% new - built new from the ground up

Remanufactured vs. compatible • Why has our industry had such a low “compatible” adoption rate while other industries have wide adoption?

• The business case: Resellers need to embrace compatibles to increase revenue and profit • However, the reality (as some know full well) manufacturing a legitimate compatible is not easy – engineering and IP/patent issues – Capital expenditures – Research & Development

Remanufactured vs. Compatible

Why so much fuss about a little drum gear?

• The current battlefield of IP has surrounded “twisted gears” – 59 of 64 complaints since 2009 Canon has made for patent infringement have involved twisted gears – 40 of the 59 have been settled with admissions of guilt & validity • Why has Canon focused on these patents? You’d need to ask Canon, but…

– The patents are VERY strong; have survived USPO reexamination & litigation – Building cases for infringement is expensive for Canon to do • Stand out efforts have been made by a few aftermarket manufacturers to invent their own gear technology

CONCLUSION #2 • In the case of the twisted gear patents, partners that are “IP informed” will protect their customers from legal expenses and potential business disruptions.

Business issues that have resulted in IP related issues for our industry IP ISSUES

MPS

Larger manufacturers = better resources

HPs loss of market share

Core constraint

CONCLUSION #3 • OEMs defend against compatibles with IP. • When only remanufacturing (repair!) was a concern, OEMs used marketing and technological barriers as the primary defense.

Good news… and, bad news

The good news: • The aftermarket has expanded. You now have options beyond remanufactured HP products. In most cases your margin improves when you provide aftermarket in place of OEM.

The bad news: • Not all manufacturers providing aftermarket compatibles may be respecting third party IP. Those who may not be, may not know or may not be telling you they are cutting corners.

Now you know and (hopefully!) you care, what next? • The first and most important step is to become informed. I hope this material presented today is a significant step on that path

• The next step is to have a serious conversation about IP and potential legal issues with your current vendor

Questions for your vendor • Are you (or any of your third party suppliers) currently in any IP related litigation?

• Do you have a contract/provisions that indemnify us in the event of any IP lawsuit brought against you?

• Will you pay legal costs if a lawsuit should arise?

• What is your IP strategy?

• Do you have any patents?

– Have you applied for any patents?

• Do you have a documented and organized process to review current IP?

CONCLUSION #4 • If your current vendor cannot answer these questions directly, it is likely that their strategy is “ignore”.

• For all the reasons we have discussed today, this is dangerous for your business.

Print-Rite N.A. Inc., www.printritena.com ianelliott@printritena.com

@PrintRiteNA Like what you heard? Look for our blog: The Aftermarket Informant here: http://www.printritena.com/categories/theaftermarket-informant