In my recent blog post, "Office Products, New-Build Cartridges and Clone Hysteria!", I made the statement that, "instead of being a threat to the independent reseller and the aftermarket industry, legitimate new-builds are a threat to the established order and may, in fact, be the single biggest chance of survival for those that some elements of the media purport them to be the ruin of!"
I want to expand the thinking behind this statement because it's at odds with other industry veterans who, while I believe they passionately care about the future of the aftermarket and the remanufacturing industry, appear to single out new-build compatibles as a primary reason for the challenges the aftermarket segment faces.
So, who makes up the "established order" and how is it that legitimate new-build cartridges may threaten to bring it down?
The Established Order
- Original Equipment Manufacturers
- Big-Box Resellers (such as OfficeDepot and Staples)
- Tier-1 Remanufacturers (i.e. Clover Imaging Group)
You'd think it would be the OEM's who'd be making the most noise about supposed illegal "clones", not members of the aftermarket community! The new-build cartridges in question have been entering the United States and European markets for more than five years and, the fact that the OEM's are largely quiet, can only be the result of three or four possibilities:
- They are not illegal, infringing designs.
- They may be viewed as illegal but, they serve a purpose.
- They may be viewed as illegal, but the largest player (HP) is powerless to act.
- They may, or may not be viewed as illegal but, they're not viewed as a threat to market share.
If the cartridges don't infringe the OEM patents then the OEM's are powerless to use the legal process against them.
If they are viewed as illegal, then it's possible they're currently viewed as more damaging to the aftermarket than to the OEM's themselves. Instances of poor quality and low online pricing (i.e. on the Amazon and eBay marketplaces where many of them are sold), may be viewed as self-inflicted damage to the reputation the aftermarket, and to be simultaneously weakening the resellers financially. The OEM's may choose, at some time in the future, to act against them, but only once they have served their purpose.
The OEM's may be quite happy to see the sale of a $75.00 Clover cartridge replaced by the sale of a no-name brand in the Amazon Marketplace for $10.00. Litigating to prevent the sale of a $10.00 cartridge, that's more likely to fail than the $75.00 Clover cartridge, may not currently be determined to be in their best interests!
Hewlett Packard, with around 50% share of the market, may view the cartridges as illegal but, because Canon owns the intellectual property, is powerless to act. HP is buying the printer division of Samsung which comes along with 3,000 or more patents. So, while Canon may no longer be as motivated to pursue expensive legal measures to help protect HP's market share, you can be sure HP will be doing everything possible to enforce it's considerably expanded intellectual property portfolio in the future.
So long as the big-box resellers continue to dominate the distribution of ink and toner, then the OEM's are not seriously threatened by the emergence of new-build cartridges. They may create a lot of noise in the online segment, but (at least today) that's not where the vast majority of consumers purchase their cartridges from.
The big-box resellers are the least threatened by the emergence of new-build cartridges because they'll be the first to fall in terms of flipping their model from remanufactured to new-build. They'll get a lower cost from the Chinese and they'll lose some of the support they currently get from Clover that can't be provided by the Chinese. But, in the big scheme of things, their action (as they flip) won't substantially change the order. In effect, they'll just be switching from one supplier to another and the OEM ink and toner cartridge volume rebates will continue to control market shares.
Tier-1 Remanufacturers (Clover Imaging Group)
So, where does that leave us in terms of what may constitute the biggest threat to the established order?
Clover Imaging appears to be in a tight spot.
They don't have new-build technology in their portfolio and, because remanufactured cartridges have a higher cost than new-build, they now operate at a cost disadvantage. Ultimately, this cost disadvantage will open the door to the Chinese new-build competition in the big-box distribution channels that Clover has dominated for the last 8-10 years.
Clover has a lot at stake. They have a massive reverse logistics infrastructure in place. They have admirably positioned their business as an environmentally responsible brand, placing a high value on their strong, socially responsible corporate image. An image that's been built upon the foundation of recycling and remanufacturing.
Well, what if the era of remanufacturing is coming to an end? How on earth does Clover turn off their reverse logistics supply chain? These cartridges are going to continue coming in for years and years, even if there's no demand for them. Who, but Clover, will be paying all the inbound freight and disposal costs? What financial liability could this incoming stream of potentially unwanted cartridges represent?
Of course, Hewlett Packard recovers millions of cartridges as part of their "Partnering for the Planet, One Cartridge at a Time" program. These cartridges are responsibly recycled and turned into park benches and a whole variety of other products. Perhaps Clover will eventually be forced to adopt the same recycling model.
However, should this eventually turn out to be the case, it's difficult to see an effort on such a scale being a profit, as opposed to a cost, center. This may be particularly damaging for Clover when combined with the likely scenario for reduced revenue and profits that would be taking place as demand for remanufactured cartridges declined.
The Chinese are hungry for volume, they have excess capacity, and they're surely willing to pony up a better deal, for the likes of Staples and Depot, than they're currently getting from Clover. Now, for the Chinese to replicate the total package, in terms of support, is not easy and they don't currently have the infrastructure to provide the breadth of services that Clover does. However, regardless of the logistics and support capabilities of the Chinese, they are a serious competitive threat that will continue to squeeze Clover's margins as they [Clover] fight to keep Chinese new-build out of the big-box distribution channels.
If Clover eventually loses business at any of these major customers, then it will put a major dent in their demand for cores and they may be overwhelmed with an excess of core supply for which there will also be no demand in the open market. Demand for cores will evaporate as new-build takes over.
Clover probably genuinely cares about the environment and their remanufactured cartridge value proposition. However, while they may really care, unfortunately for them, it's unlikely their biggest customers really care. If Office Depot, Staples, Essendant, SP Richards, etc. sense an opportunity to improve their profitability then, so long as their OEM taskmasters give the nod, they will embrace the new-build Chinese cartridge technology and, the recycling story, always a difficult sell, will go out the window!
Of course, such a switch will only take place once their OEM taskmasters have endorsed it. But, of course, they'll endorse it. That is, so long as the big-box resellers agree to ensure overall market shares won't change - an outcome the OEM volume rebates effectively guarantee anyway!
It appears there's only going to be one big loser here and it's not the OEM and it's not the big-box resellers!
When I see front page Google headlines on my homepage attacking Tesla (man dies watching movie while on auto-pilot), attacking Uber (price gouging during peak demand), attacking
Of course, I then look at who stands to lose most as these organizations become more and more successful. Perhaps the oil and gas industry, the taxi cartels, and the hotel industry, just to highlight a few. Their entire business models depend on the failure of these new upstarts.
So, then I wonder if there's a link between who stands to lose and where the money comes from to get that story, discrediting the disrupter, onto the front page of the Google News Page.
Then, moving back to our industry, I wonder what may have motivated the recent outbursts we've seen running across the news wire with regards to every new-build out of China being an illegal clone. The cynical part of me questions if it was money provided by those most threatened by the technology or, was it simply (and independently) motivated through residual nostalgia for a remanufacturing business model that's rapidly becoming obsolete?
I don't know the answer and I don't think it really matters. Uber and
Now, this scenario seems pretty logical to me and my projected outcome pretty straightforward. However, things don't usually work in such a straightforward way. As we know, the Clover management is smart, really smart. They didn't build a billion dollar company without being smart, in-tune, and in-touch with everything that's going on. They must know they stand to be the losers here but, they're too smart to let that creep up on them without having developed a plan to deal with it. Right now we don't know what that plan is. However, the pace and pressure for changes, that could have a significant impact on their business, continue to develop with every day that passes so, it shouldn't be long before we start to see evidence of their reaction.
Headlines may raise temperatures, they may stimulate discussion, they may cause disagreement but, they aren't going to alter the final outcome of this ink and toner story.
However, although they may not ultimately affect the outcome, they may be effective in the short term by casting doubt on new-build cartridges from China and slowing down the process. So, now may be the time for the new-build cartridge manufacturers to demonstrate they're on top of their intellectual property game. Now may be the time to bring their own public relations campaign to the market, a campaign that clearly explains and supports their position that they are manufacturers of high quality, legitimate, aftermarket alternative ink and toner cartridges.
Until they do, they have to accept they will be fair game for all the headlines that cast doubt on their products and, that these doubts once sown, may slow down their business development objectives.
If you missed my eight-part series on the aftermarket tipping point, please check out my new eBook, it's just published, it's FREE, and it contains a thorough examination of the office supplies industry and a path to the $20 billion growth opportunity for independent resellers.