Over the past year, Boston Consulting Group and Cisco Systems have explored the promise and impact of blockchain and the Internet of Things (IoT). The result is a three-part series that studies the practical applications and economic benefits of using blockchain with distributed IoT networks. Our first piece examined the set of blockchain-with-IoT use cases that businesses are actively exploring. (See Are Blockchain and the Internet of Things Made for Each Other? BCG Focus, July 2018.) Our second piece looked at how better tracking and visibility can help companies improve supply chain performance. (See Pairing Blockchain with IoT to Cut Supply Chain Costs, BCG Focus, December 2018.) In this final piece, we examine how blockchain with IoT can help manufacturers reduce the impact of counterfeiting.
Companies have been battling counterfeiters for years, investing significant time and resources to guard against the risk of defective and fake parts entering the production system and to prevent clever look-alikes and reverse-engineered goods from stealing sales. For much of that time, companies have been forced to operate partly in the dark, because fragmented data, networks, and sourcing arrangements make it difficult to trace and authenticate. Two technologies now give manufacturers and stakeholders the ability to shine a light on fraudulent activity. Advances in blockchain-with-IoT counterfeit detection provide at-a-glance visibility, tracing, and recording of provenance data from source to sale and beyond. The scale of the benefits will vary across businesses, but our research suggests that blockchain with IoT could be a source of significant financial and competitive advantage for many.
Counterfeiting is a massive economic problem that results in billions of dollars in lost business revenues each year, and it exposes individuals and corporations to heightened health, safety, and even cybersecurity risks from fraudulent materials and defective parts. Within the global pharmaceuticals space, between $75 billion and $200 billion in counterfeit drugs are sold each year. In the electronics industry, fake parts cost component manufacturers about $100 billion annually. And in the European luxury goods market, about 10% of all items for sale are counterfeited, representing approximately $28 billion in lost value.1 Notes: 1 “The Economic Cost of IPR Infringement in the Clothing, Footwear and Accessories Sector,” EU’s Office for Harmonization in the Internal Market, 2015; “2016 Top Markets Report, Pharmaceuticals,” International Trade Administration; “Counterfeit Electronic Components,” Oneida Research Services.
What makes the impact of counterfeiting so pernicious is its reach: fraudulent parts and goods affect every stage of the product life cycle—from the manufacturing floor to the point of sale, to the servicing function and beyond—driving up costs, eroding revenues, and damaging company reputations and brands.
Companies invest significant time and money tracking parts, validating provenance, communicating with partners, and filling out copious documentation to ensure the authenticity of their products, protect customers, and satisfy regulatory and compliance demands. The challenges—and the areas in which blockchain and IoT can help—extend across the three major stages of the product life cycle. (See Exhibit 1.)
IoT provides unique identification and traceability, and blockchain provides a tamperproof chain of custody information. Pairing them can create a shared, distributed ledger capable of recording the origin, location, and ownership of raw materials and products at each stage of the value chain—giving manufacturers, partners, and customers the transparency and authentication they need. Blockchain with IoT, because of its ability to immutably track and share genealogy across multiple stakeholders, can inhibit counterfeiting in ways that traditional technologies cannot.
To thwart counterfeiting, suppliers and manufacturers join a single blockchain platform and use “smart tags” (unique cryptographic identifiers) to track and confirm the provenance and location of each item. The tags can take a variety of forms, including security labels with unique QR codes, RFID, and digital tags that contain an individualized software component. Subtle, deliberate physical imperfections on metallic or ceramic surfaces create distinctive signatures and can serve the same purpose. Smart tags and related marks can be applied to a single item or to a batch. To manage authenticity, only genuine, verified tags and products should be entered onto the blockchain. Entering them early in the manufacturing process allows each tagged item or batch to be tracked at every stage along the manufacturing, shipping, distribution, and sales journey. Relevant data is logged at each step.
Although no solution can be fully foolproof, smart tags capture the complete genealogy of a product and are hard to replicate. Counterfeit tags won’t show up on the blockchain, for instance, and if a smart tag is somehow duplicated, a quick scan of the blockchain will indicate when and where the genuine item was manufactured and sold, thus revealing the duplicate item as a fake. In addition, when a product comes in for repair, support teams can use the smart tag to confirm legitimacy (and even ownership if that data is recorded). Front-end applications built on top of the platform allow stakeholders, including regulators, to digitally trace the entire chain and confirm the authenticity and origin of each part or good.
Looking again at the three main stages of the typical product life cycle, we explored how improved tracing and authentication combined with a tamperproof chain of custody could reduce counterfeiting and associated losses. Our analyses determined that blockchain with IoT can improve operational and financial performance in the following ways. (See Exhibit 2.)
To study the potential cost and revenue impact of improved counterfeit detection, we looked at the same hypothetical example we studied in our supply chain article: 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 modeling assessed two scenarios: an aggressive one in which the company reaped significant returns from blockchain-enabled improvements and a conservative one that delivered a more modest impact. We then averaged the results.
Our analyses determined that preventing fraudulent materials from entering the manufacturing cycle would help the company reduce failure rates and the cost of replacing defective parts and improve support center efficiency. The cost savings would result in an average net benefit of 0.08% of revenue. Far and away the greatest benefit from blockchain-enabled authentication, however, would come from stemming sales losses. Our research found that electronics and technology companies lose between 4% and 7% of revenue annually to counterfeit transactions. By using blockchain with IoT, businesses could reduce the number of fraudulent sales by 60% to 80%, allowing the electronics manufacturer in this case to recoup an average of 3.85% in associated revenues, with the total net benefit ranging from 2% to 5% of revenue. (See Exhibit 3.) The average net impact for our $1 billion electronics company translates to $33 million. The impact could be even greater for businesses whose products face greater counterfeiting exposure, such as pharmaceuticals and luxury goods. Beyond the quantitative benefits, improved counterfeiting detection would also help the company generate significant intangible value through improving regulatory compliance, safeguarding the customer experience, and protecting the brand.
Not all businesses or industries face the same exposure to counterfeiting; the severity and magnitude of the impact depends on a number of factors. To determine the return on investment from a blockchain-with-IoT counterfeiting solution, companies first need to look at their product characteristics, supply chain composition, and market risk.
High-value products, especially those that can be forged relatively quickly and sold at a premium (for example, designer bags), are most vulnerable to counterfeiting. Stemming that activity would help protect the brand and the top line. But companies also need to consider that some products have a higher likelihood of voluntary counterfeit purchases. Where price and prestige are high, such as with a popular handbag or sneaker, some customers may choose to buy knockoff versions, reducing the value of tools that help establish provenance. To evaluate the overall cost-benefit of a blockchain solution, companies must look across key markets and segments and examine buying behaviors and channel characteristics.
The size and complexity of the supply base is another consideration in weighing the ROI of blockchain with IoT. Companies that have large and diverse supplier networks are more likely to benefit from provenance and chain-of-custody information than are companies whose products and raw materials are tightly controlled internally.
Market risk is a third factor. Some businesses, such as medical-equipment makers, pharmaceutical companies, and food and beverage entities, have a strong fiduciary responsibility to ensure product safety and reliability (consider, for example, Chipotle’s food safety issues, which started in 2015 and wiped out almost 65% of the company value). The ability to rapidly, continuously, and accurately authenticate parts and raw materials across the product life cycle carries profound implications—helping safeguard the public and the brand. Here, a blockchain-with-IoT solution has the potential to generate significant value. However, in situations where counterfeit products and materials are easily identified by their performance, look, or feel, the benefits of a blockchain solution are less clear.
In many cases, knowing that you have the “real deal” in terms of product authenticity will be a real deal in economic terms, but businesses need to run the numbers on the tangible and intangible value that blockchain-enabled counterfeit prevention can deliver and compare that to the cost of implementation.
Blockchain platforms give manufacturers something they have long sought: an effective, scalable means of combatting the risks posed by counterfeit parts and goods. By pairing blockchain with IoT, stakeholders across the value chain can ascertain whether a component or a product is legitimate, where it was sourced, how it was transported and stored, and if it was previously sold. Success requires building a substantial adoption base within a given industry or supply chain, an effort that can benefit from having a large player or industry leader at the helm. Use cases and technologies are evolving as blockchain platforms become more mature and enterprise solutions become more readily available. Our analysis suggests that the potential benefits for most companies will far outweigh the early-stage setup efforts. Manufacturers that embrace blockchain-enabled counterfeit solutions will have a powerful tool to safeguard their customers, protect their revenues, and ensure stronger bottom-line returns for years to come.