As counterfeit electronic components continue to plague the industry’s supply chain, trade associations, manufacturers, and distributors are rolling out new, more aggressive plans to deal with the problem. It’s a major industry concern, and it seems to be getting worse.
A study by the International Chamber of Commerce puts the total counterfeit market at $350 billion, or about 7% of world trade. Of course, that covers a variety of products. But semiconductors and other electronic components, computer hardware and software, and consumer electronics are high on the list.
The U.S. Department of Commerce’s Bureau of Industry and Security Office of Technology Evaluation, at the request of the Naval Air Systems Command (NAVAIR), conducted its own survey to provide “statistics on the extent of the infiltration of counterfeit electronic parts into U.S. defense and industrial supply chains, provide an understanding of industry and government practices that contribute to the problem, and to identify best practices and recommendations for handling and preventing counterfeit electronics.” The survey shows original component manufacturers (OCMs) reporting an increase in counterfeit electronic incidents doubling from 3369 in 2005 to 8644 in 2008 (Fig. 1).
U.S. Commerce estimates that 39% of companies in the U.S. Department of Defense supply chain encountered counterfeit electronics during the four-year period of 2004-2008. The agency also recorded more than 9000 reported occurrences of counterfeit electronic parts in 2009.
“But we can assume that the actual number was much greater,” says Gregory Zawitoski, director of business development for government contracts at National Semiconductor’s Trusted Solutions Business Unit (Fig. 2).
According to U.S. Customs and Border Protection, the quantity of computer hardware seized as counterfeit increased fivefold from fiscal year 2009 to fiscal year 2010. (U.S. Customs and Border Protection is a unified border agency within the Department of Homeland Security charged with the management, control, and protection of the nation’s borders at and between the official ports of entry.) This increase included a $2.3 million seizure, which included counterfeit military-grade semiconductors. Also, the quantity of optical media discs seized over the same period of time increased threefold.
The U.S. seems to be an easy target for counterfeiters of microelectronics. Counterfeiters simply buy bulk junk electronics from the U.S. Parts of printed circuit boards (PCBs) are stripped off, remarked, and sold back into the so-called grey market.
“Once authorized distributor supply is gone, the grey market is mobilized,” says Zawitoski.
Another source of counterfeiting comes from recycling ICs from electronic waste or scrap.
A report published by the U.S. International Trade Commission (ITC) at the end of 2010 on intellectual property (IP) infringement flatly states that China collects e-waste from around the world to salvage components from it.
“Some components are legitimately recycled, but others enter the counterfeit IC market when ICs are salvaged, remarked as new, and ‘recycled’ back into the distribution system,” the report states.
Second sourcing, where low-performance ICs are remarked as higher-grade ICs or where nonfunctional ICs are remarked as new, is another issue. This works out to be particularly profitable for counterfeit ICs sold into the military supply chain. As the ITC points out, so-called “mil-spec” parts require more stringent testing and quality control, which raises costs and makes them more expensive than non-mil-spec chips. A consumer-grade IC that sells for $1 can be sold for $50 if it bears a military grade marking.
The 2010 U.S. Department of Commerce study, “Defense Industry Base Assessment: Counterfeit Electronics,” specifically identifies passive and active components, as well as PCBs, as key candidates for counterfeit parts.
“The counterfeiters are so good that they know what we’re using to determine if the parts are counterfeit,” says Zawitoski. It comes down to this: “If a distributor has purchased significant open market volume in electronic components, then they have likely purchased counterfeit parts. So we have to get smarter and be prepared for what’s coming in the future.”
Zawitoski also points out that most counterfeit parts are not in the cheaper range of products, but often have a higher resale value of up to $500.
“We have also found that most of these parts had been used, but had been remarked to a higher grade,” Zawitoski says.
Where do the phony parts come from? The Commerce Department study says the most dominant type of counterfeiting activity encountered by “microcircuit manufacturers” was “used product remarked as higher grade new product.” These types of counterfeit parts may work, but they will not operate at the same level as the higher-grade part and may fail under stress that would be expected under normal conditions.
The next most common types were “fake non-working product” and “new product remarked as higher-grade product.” Like remarked used products, remarked new products will work, but not at the desired level of functionality.
Another major finding of the study is that most counterfeited parts aren’t found until after they have been installed in a system. In most cases, says Zawitoski, they were returned as defective or were discovered to be defective parts from their performance.
In response, the Electronic Components Industry Association (ECIA) has developed and launched an industry-owned and managed inventory search Web site. The ECIA says the site provides authorized inventory only, giving ECIA distributor members the opportunity to list their inventory on www.eciaauthorized.com at no charge through July 30, 2011.
Robin B. Gray Jr., president and CEO of ECIA, says the search results are random based on search match and availability and aren’t influenced by advertising or sponsorships (Fig. 3).
The ECIA is also working with the Semiconductor industry Association (SIA) to solve redaction issues created by the U.S. Treasury Department for the verification of legitimate electronic components passing through U.S. Customs.
The IPC Surface Mount Equipment Manufacturers Association (SMEMA) Council Steering Committee, representing the electronics assembly capital equipment manufacturers, is working on its own counterfeit parts program.
“The IPC is taking this very seriously. We’re developing a counterfeit parts policy that we’re going to distribute to all equipment manufacturer customers. Obviously, there’s an education aspect to this and we want to make sure the parts come from the equipment manufacturer. It \\[the policy\\] will be sent to all EMS \\[electronics manufacturing services\\] and OEMs globally,” says Tony Hilvers, IPC vice president of industry programs (Fig. 4).
“Counterfeit parts concern EMS companies,” adds Hilvers. “But they say they buy from franchised distributors who get their parts from component manufacturers, so it’s not a big issue with them.”
Counterfeit parts are a big issue with the military, especially for its legacy systems. They’re also critical to capital equipment manufacturers, and they can cause significant damage to pick and place equipment, whose vendors are strongly represented in the IPC.
“The spare parts business for equipment manufacturers is larger in North America than in Asia,” notes Hilvers. “If it’s bigger in North America than in Asia, and there’s a huge installed base in Asia, what does that mean? It’s a problem and it’s a growing problem.”
Hilvers also says counterfeit parts destroy equipment, stop productivity, and can harm operators. The IPC is developing a toolkit for equipment manufacturers that will likely include a list of known counterfeit parts suppliers and a list of Web sites that sell counterfeit parts.
“We could go to the Web site and ask them to take off these counterfeit parts manufacturers,” says Hilvers. “There are cease and desist orders we can send to the Web sites. We can also work with U.S. Custom and Border Protection to seize parts coming into the country. We operate in a technical advisory capacity by assisting agencies in identifying goods. We could coordinate with American embassies in coordinating raids. These are things we’re looking at now.”
Hilvers says that much of what the IPC is doing will be facilitated by the Web.
“You get on a global Internet where you can see spare parts and not really know that it doesn’t come from the manufacturers,” he says.
The IPC has also developed a standards document that covers the preservation of IP for PC manufacturers. It covers the security of their plants and the IP of their customers. It’s not counterfeit-specific in its coverage, but it deals with issues like scrap—for example, should you drill a hole so no one can use the part, or do you actually ground it up so you can’t reverse engineer the PC? And how do you protect your data?
The SAE has published a standard, “AS55553 – Counterfeit Electronic Parts: Avoidance, Detection, Mitigation, and Disposition,” that the U.S. Department of Defense already has adopted. It covers the requirements, practices, and methods for parts and supplier management, procurement, inspection, test/evaluation, and response strategies.
“We have almost wrapped up our work on the counterfeit policy and we’re starting to work on the toolkit now,” says Hilvers.
The Aerospace Industries Association (AIA), which formed the Counterfeit Integrated Project Team in 2007, has indicated it’s staying on top of the problem when it published a report, “Counterfeit Parts: Increasing Awareness and Developing Countermeasures,” in March.
Interestingly, while counterfeit parts post a significant risk to aerospace and defense programs, the AIA says the aerospace/defense sector accounts for less than 1% of the global semiconductor market. But it uses the same supply chain for electronic parts as consumer electronics and other industry sectors. Still, the report suggests the aerospace industry encounters more than its share of non-electronic counterfeit parts and materials, including fasteners, composites, and metals.
Virtually all major chip manufacturers and authorized distributors have developed a program to monitor and respond to any counterfeit parts. STMicroelectronics and Atmel have announced a series of techniques that employs cryptography to help detect unauthorized parts before they end up in end products.
Rochester Electronics and the Semiconductor Industry Association (SIA) partnered last year to develop a worldwide directory of companies that are authorized by OCMs to distribute their products. (The directory can be accessed through www.authorizeddirectory.com.) Trace Laboratories, a testing and analysis company, says it has expanded its counterfeit component detection capabilities through component authenticity verification, cross checks of bills of materials (BOMs), and consulting services.
Another concern among distributors has been the potential for an increase in counterfeited parts flooding the market as a result of a supply-chain disruption from the earthquake in Japan. “\\[Customers\\] need to make sure they’re partnering with folds that have that type of technology and knowledge of what’s going on,” Paul Romano, chief operating officer at Fusion Trade, said recently (Fig. 5) (see “Distributors Respond To The Earthquake In Japan,” May 5, p. 74). “The counterfeiters are looking for an opportunity, and here’s an opportunity.”
The IPC – Association Connecting Electronics Industries, which represents more than 2900 industry member companies, is also concerned about where some products are being made. A market analysis prepared by the IPC for the U.S. Air Force estimates that one-third of all PCBs used in U.S. defense or military systems are produced outside North America.
In April, a small defense contractor based in New Jersey pleaded guilty to selling military replacement parts that were not made in the U.S. and did not comply with manufacturing specifications required by the government. The parts were to be used in a Navy helicopter.
Based on data from IPC’s market research as well as from N.T. Information and other electronics industry consultants, IPC’s analysis concluded that the value of the U.S. military market for PCBs is between $1.05 billion and $1.23 billion. Depending on the market size estimate used, between 27% and 39% of all PCBs in products sold to the U.S. military are manufactured outside North America.
Who’s To Blame?
Whose fault is it, anyway? It’s a global problem, but China continues to be the number one source country for counterfeit and pirated goods seized, according to U.S. Customs and Border Protection. This includes everything from apparel to jewelry, but consumer electronics, computers and hardware, and optical media are mentioned in the agency’s top 10 list of categories of IP rights-infringed products. Asia, in general, is the most predominant regional source. OCMs also identified Russia and India as suspected sources in the U.S. Commerce Department study.
Nokia also says China is the major culprit, resulting in one out of every five cell phones sold in the world being an illegal or an unlicensed copy, especially in emerging markets. The market research firm Gartner estimates the grey market share for cell phones has increased to more than 20%, but some market forecasters believe that figure is high.
Curiously, most OCMs do not believe counterfeit parts have negatively affected their reputations. Only 8% of discrete component manufacturers reported that their company’s reputation and standing in the marketplace have been hurt by counterfeit versions of their products. A larger percentage of microcircuit OCMs (25%) said their reputations were damaged by counterfeit versions of their products in the U.S. supply chain.
How can the industry better combat counterfeit electronic parts? One obvious suggestion is to use only “trusted” suppliers for manufacturing components for critical systems.
“There’s definitely a need to develop a single DoD procurement policy that requires all DoD agencies and other organizations procure microelectronics under the same guidelines,” says Zawitoski. At the moment, though, “The DoD is doing one thing, the Army is doing another, the Navy is doing something else. There’s no one set of guidelines. It makes it difficult for the general contractor to put a system together.”