Caveat Emptor – Challenge Of Grey Imports In The Australian Security Market

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Everyone has heard the term caveat emptor, a Latin term that means ‘let the buyer beware’. Similar to the phrase ‘sold as is’, caveat emptor means that the buyer assumes the risk that a product may fail to meet expectations or have defects. In other words, the principle of caveat emptor serves as a warning that buyers have no recourse with the seller if the product does not meet their expectations. What many people fail to realise is that the term is actually part of a longer statement: caveat emptor, quia ignorare non debuit quod jus alienum emit (let a purchaser beware, for he ought not to be ignorant of the nature of the property which he is buying from another party.) The assumption is that buyers will inspect and otherwise ensure that they are confident with the integrity of the product before completing a transaction. Yet surprisingly, few people ever do. This lack of due diligence could be attributed to yet another familiar proverb claiming it is a bad idea to look a gift horse in the mouth because if people look too closely at their ‘bargain’, they might actually realise that the thing you are about to buy, which seems like a really great deal because it is cheaper from this person than anywhere else, is actually cheap for a reason – it is a pile of rubbish or fails to meet certain legal requirements!

It is astounding in this day and age that an industry like security can still be locked into this seemingly perpetual race to the bottom where everyone wants the cheapest price, regardless of the consequences. And yet, we see endless examples every day of margins being eroded to the point of non-existence. End-users and consumers of security services and equipment continually insist on cheaper and cheaper prices until it reaches a point where local businesses can no longer meet demand at the prices expected. “But I can buy it cheaper on the internet,” cries the customer. Welcome to the world of grey imports.

The Australian Competition and Consumer Commission (ACCC) defines parallel importing, also known as grey or direct importing, as the act of a business selling products directly to consumers or businesses in Australia outside of the formal manufacturer distribution channels. That is, when a business decides to buy genuine products to import and sell in Australia without authorisation from the manufacturer.

According to the ACCC, a business is probably engaged in the importation and sale of grey imports if:

  • it has been purchased from a supplier other than the manufacturer or its authorised distributor
  • the particular model/range is not made for the Australian market
  • the product is not otherwise available in the Australian market
  • the price it intends to sell it for is cheaper than a consumer would ordinarily expect to pay for the product in Australia

While it is hard to put a dollar figure on the impact of grey imports to the Australian market, anecdotal evidence suggests that it is a significant problem. Rob Rosa of QSS states that he believes their business misses out on approximately $4–6 million in sales per year due to grey market opportunities. If this is what is happening in one business, what might the impact look like across the entire sector?

What is the big deal one might ask? What is wrong with someone getting a great bargain if he is not breaking the law? While on the surface this might seem like an entirely reasonable position to take, the reality is that grey imports, aside from their destabilising effect on the local market, come with some significant risks to both buyers and sellers.

According to Rob Rosa, one of the biggest issues around grey imports is one of quality. “People think just because it comes out of the same factory, it is the same quality. And while this is partially correct, you need to understand that different countries have very different standards and also some have specific government requirements. For example, Australia has very strict controls around which radio frequencies can be used for wireless transmission.”

According to the Australian Media and Communications Authority (ACMA), breaching those requirements can not only cause a product to operate incorrectly, it can also interfere with other equipment in the area and it attracts significant penalties. “If the device supplied is non-standard, for example if it transmits on frequencies which cause interference, an individual supplier may be subject to a penalty of 120 penalty units, with each penalty unit carrying a fine of $180. Other entities may be subject to a penalty of 1,500 penalty units ($270,000). If the device actually causes interference, both suppliers and end-users may be subject to a penalty of one year imprisonment and/or a fine.”

Rob goes on to explain, “We have seen products that were brought in for repair that did not meet C-Tick approval nor were they produced for the Australian market. Even the electrical cords were installed incorrectly. The products were equipped with power supplies designed for different power requirements.”

According to ACMA, if a person imports an electronic device into Australia and then supplies the product in Australia, the person will be responsible for the compliance of the device. This includes ensuring the device complies with the applicable technical standard(s) and labelling the device with the regulatory compliance mark (RCM). The following requirements and penalties are found in the Radiocommunications Act 1992.

ACMA regulatory arrangements require a supplier to:

  • register as a supplier;
  • maintain compliance documentation in their files which establishes that a device satisfies all mandated standards before supplying the device; and
  • apply a compliance label to a device before the device is supplied to the Australian.

In most cases, a supplier is a person who manufactures or imports devices into Australia for supply.

ACMA states that suppliers are required to register on the national database as a responsible supplier. More information about supplier registration can be found at: acma.gov.au/Industry/Suppliers/Product-supply-and-compliance/Steps-to-compliance/supplier-registration

For all ACMA regulatory arrangements, the compliance label is the RCM. The RCM replaces the A-Tick and C-Tick compliance marks used under previous regulatory arrangements. A supplier who fails to label a device may be subject to a penalty of 100 penalty units. The current value of a commonwealth penalty unit is $180.

A person who fails to maintain required compliance documentation (typically a declaration of conformity, some level of test report and a description of the device) may be subject to a penalty of 20 penalty units ($3,600). A person who applies an RCM before satisfying the relevant record-keeping requirements may be subject to a penalty of 100 penalty units ($18,000). Additional information for suppliers can be found at: www.acma.gov.au/Industry/Suppliers/Product-supply-and-compliance/Supplier-resources/supplier-beware

Rob believes product support is also a major issue that end-users need to be aware of, especially when purchasing grey imports from what he refers to as ‘backyard’ operators. Another major issue arises when the imported product is not C-Tick/RCM approved and use of the product results in damage to property or, in a worst case scenario, injury or death caused by faulty or non-compliant products. In this type of situation, Rob explains that the installer or non-authorised importer could be held personally liable, citing the example of a recent incident in April of this year when a hoverboard burst into flames, setting a Bankstown home on fire.

Cliff Simons of HIK Vision echoes Rob’s warning around support issues, stating that people purchasing grey imports leave themselves open to a range of issues, such as products running a different (and often less advanced) firmware to that which was developed for the Australian market. According to Cliff, this makes it much harder, if not impossible, to expand the system at a later date using locally supplied products. Cliff explains, “A lot of the customers ring our tech support and complain about the grey import wholesalers and their installers. These guys are prepared to put their reputations on the line because they saved some money, but it is a short-term strategy. It is also the case that warranty arrangements (if there are any) are much shorter on grey import items.” These installations involve tens if not hundreds of thousands of dollars worth of equipment, but these short-term savings on the purchase cost often end up making the project much more expensive, as the equipment often has to be removed and replaced.

If there is so little to gain, aside from the initial cost saving, from the importation, installation and sale of grey imports, then one has to ask, who would want to expose their business to such risks?

According to Rob Rosa, it is a combination of people, including IT suppliers outside of the security industry, some installers just looking to save a buck and even a small number of distributors in the Australian security market. “We know that there are installers purchasing through grey channels from competing installers and companies. If that is not stupidity in itself it makes you truly wonder. Why you would support a competitor’s business is just beyond me, not to mention that you are also opening yourself up to those businesses going direct and/or poaching your client/s.”

Cliff Simons explains that he sees a significant amount of the grey import trade coming into Australia via wholesalers overseas. However, Cliff points out an equally significant problem is the importation of ‘black market products’; products that are a copy of the original product but being sold as the original product. “These products often run firmware that has been hacked by the seller, using product designed for other regions and trying to make them look like they are for legitimate export to Australia. Often, these devices are unable to be upgraded over the life of the product. When you try and do an update on the camera or recorder, it instantly ‘dies’ and is then rendered useless and ready for the rubbish heap. There is also a ‘fake’ market that comes with its own pitfalls and people in Australia have also been duped into buying sub-standard product.”

Given the size and scale of the problem, one cannot help but wonder how it might be controlled? Whose responsibility is it to monitor and manage the sale of grey imports? Grey imports (as opposed to black imports) at the time of writing are something of a ‘grey’ area under Australian law. They are not considered illegal, so long as they meet all safety standards and other local requirements. However, it would seem that many grey imports fail this test. If the government is unable to or unwilling to police that issue, then should the manufacturers be acting to stop it, if for no other reason than to protect their own product and reputation?

According to Cliff Simons, it is extremely hard for manufacturers to police and monitor grey imports as, technically, the importers are not breaking the law. “Black market imports are a different matter,” states Cliff. “Those people we do seek out and prosecute to the best of our ability”.

Rob Rosa believes there are some manufacturers who not only choose not to police grey imports, they actually rely on them as a source of revenue. “I believe the end-user needs to play a much greater role in stopping the importation of grey imports. If people understand the risks and dangers associated with using these products, as well as the potential long-term cost, then they might be more inclined to ask a few more question before going with the cheapest quote. The cheapest is not always actually as cheap as it seems.”

Steve Charles of Sony explains that Sony have gone a long way to quashing grey import issues through pursuing a strategy of price parody so that, regardless where a product is purchased, the price will be the same, thereby removing the motivation to buy grey imports.

In the end, it appears that grey imports are an extremely costly and complex issue that will not be easily resolved. However, from an end-user point of view, it appears that there are significantly more long-term risks associated with buying and installing grey imports than there are benefits – potential fines, equipment failing or not working as advertised, lack of warranty or technical support and potentially hefty fines and penalties for products that fail to meet Australia requirements. Is it really worth it? Would you actually buy the cheapest parachute?

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