Gray Market Concerns Lead GE to Tighten Control of SPAs, OEM Agreements

The ravages of the ongoing recession have been creating unwanted incentives for distributors and original equipment manufacturer (OEM) customers of General Electric's lighting and industrial products businesses to deal more in the gray market. The often opaque nature of gray market transactions also increases opportunities for counterfeit products to enter the sales channel. In response, the company is taking steps to discourage its partners from buying from or selling to unauthorized sources.

In a letter to authorized distributors last month, the company announced changes to its OEM agreements and distributor special price agreements (SPAs) designed to ensure when customers buy from authorized distributors they can have confidence that the product was procured from the manufacturer.

The letter was sent by Gary Arnott, general manager for North America Industrial Sales for what was GE Consumer & Industrial, Louisville, Ky., (see story on page 1 regarding the reorganization of GE C&I into different units). In it, he outlined three new policies designed to raise the visibility and trackability of products in the channel:

“First, we are going to begin serializing breakers and creating databases that will allow us to track products we sell. This costly change greatly improves our ability to identify counterfeit products and trace any quality assurance concerns. Also, this change helps us ensure that GE products sold at special prices intended to meet a competitive situation for a specific project, segment, or end-user are used solely for that project, segment, or end-user.

“Second, we are updating language used on our special pricing authorizations to further confirm that such prices are good only for purchases that meet the special pricing authorization requirements. GE will seek reimbursement (i.e., list price less SPA price) for any other purchases that do not actually meet the SPA requirements.

“Third, we have developed a new OEM agreement that is more explicit in providing that direct-served OEM customers can only sell products as part of their OEM product or as replacement parts for OEM product they have sold, so they are expressly prohibited from distributing the products separate from their OEM products.”

Arnott told Electrical Marketing that GE has seen an increase in distributors taking advantage of SPAs, though the scope of the problem is not clear. “We're not sure how significant it has been, but we have seen it. We're just monitoring usage and asking questions,” Arnott said. “In these tough economies, more people are searching for ways to reduce their costs and find new revenues. On the OEM side, if a company's sales are down 30 percent, they have an incentive to look for other ways to drive revenue. That opens up the possibility that they can use that product in a resale nature. That's why we're tightening OEM and distributor agreements.”

The primary message of the letter was to let distributors know GE would be stepping up its enforcement of its agreements, Arnott said. “We've gone back to a couple of customers that we caught reselling products they purchased under special agreements. We reinvoiced them and they paid for the difference. We want to get to a point of zero tolerance. This letter was to let them know the policy and the ramifications.”

Arnott said he also wanted to raise the visibility of GE's efforts to combat counterfeiting, a problem it has been fighting in conjunction with national and local law enforcement for years. The letter reminded distributors that the only way to be sure they were selling their customers new, genuine GE products was to buy direct from GE.

The problems presented by gray-market sales have challenged every manufacturer. Surplus dealers, many of whom provide a source of obsolete and discontinued products for maintenance and repairs, often point to manufacturers' policies regarding returns as a major driver of the gray market. Arnott said GE has an authorized source for discontinued parts and products that maintains the integrity of the authorized channel.

“We have a flexible return policy today for both authorized distributors and OEMs,” Arnott said. “I don't think our return policy is a driver, but I'd like to understand if it is. We'll buy the products back for the price they paid for it. For access to discontinued MRO products, we do have an authorized channel. Our parts supercenter, www.partssupercenter.com, has parts going back 20-30 years. If they need parts, they can get it there. And really, if it's not there, the product is probably beyond its useful life.”