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.

Our research suggests that blockchain with IoT could be a source of significant financial and competitive advantage.

Counterfeiting Exacts a Heavy Toll

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.)