Electronics is no stranger to the perils of counterfeit components and end-products in our supply chains. The questions are: where are the most vulnerable points along the chain today, what have we been doing to curtail this serious problem, what is working, and how do we best ensure ourselves from counterfeits?
A major ongoing concern in the global marketplace, regardless of industry or product, is the continued rise and sophistication of counterfeiting and Intellectual Property (IP) infringement. These are serious problems for all, whether one is dealing in sneakers, designer hand-bags, mobile phones, ICs, restrictive components for RoHS exempt industries, or very low volume and highly customized parts for military, medical or aerospace. The U.S. Department of Commerce (DOC) recently reported an increase of 240% of counterfeit incidents from 2005-2008 (Defense Industrial Base Assessment: Counterfeit Electronics, U.S. Department of Commerce, January 2010, pi-ii).
Electronics is no stranger to the perils of counterfeit components and end-products in our supply chains. The questions are, where are the most vulnerable points along the chain today, what have we been doing to curtail this serious problem, what is working, and how do we best ensure ourselves from counterfeits?
The world of counterfeiting is broad and includes copied or fake goods and the actual use or reuse of original branded materials, components or goods repurposed or represented as being of original, new quality. The DOC Report (ibid, p.3) offers a precise and encompassing definition that will be adopted for purposes of this article:
"[A] counterfeit is an electronic part that is not genuine because it:
- is an unauthorized copy;
- does not conform to original OCM [original component manufacturer] design, model, and/or performance standards;
- is not produced by the OCM or is produced by unauthorized contractors;
- is an off-specification, defective, or used OCM product sold as "new" or working; or
- has incorrect or false markings and/or documentation."
The problem: Profit and availability
After carefully surveying reports and articles on counterfeiting in the electronics industry along with Smith & Associate's 25 years of experience in strict quality assurance measures, the discussion really comes down to profit and availability. Focusing on electronics, and expanding these two points, we come to understand the market situations that have lead to the proliferation of counterfeiting in electronics.
Profit is always an obvious motive. While there are a host of reasons not to counterfeit products -- illegality, harm to end-users, financial losses to other companies, decreased product valuations, and detrimental market conditions – the draw of high profits is too much to resist for some. Profit as a reason for counterfeiting is something we are unlikely to eliminate. However, of concern is the rise of counterfeiting incidents because it has actually become less risky and more profitable for some to manufacture and trade in counterfeit electronics than to manufacture and trade in illicit drugs; furthermore, there are those who use electronics counterfeiting as a means to launder money from the illegal drug trade. The reasons for these reduced barriers to counterfeiting are obvious if we take an honest view of the supply chain. In turn, there is much that we in the industry can do to curtail this economic opportunity, as will be discussed in the following sections.
Availability is the partner in crime to profitability. The availability of components that can be repurposed and used in counterfeiting is also on the rise. The sources are manifold, involve all points along the supply chain, and include:
- reclaiming of scrapped inventory;
- unapproved/additional runs by component contract manufacturers (CCM);
- lack of or lax testing and screening of all parts received, particularly returns;
- insufficient quality control within organizations throughout the supply chain;
- lack of industry-wide cooperation and recognition of the situation.
Counterfeiters succeed because they identify and take advantage of the weaknesses and problems in our supply chain and particularly our cooperative and reporting failures. Addressing the opportunities for counterfeiting is critical to reducing the amount of counterfeiting that is happening. There are very simple but effective steps that can be taken. Some of the steps that address the above problems and restrict counterfeiting include:
- close monitoring and documenting of scrapping processes – both at the consumer and at the industrial level – the entire electronics supply chain needs to improve the scrapping processes to ensure that these pieces do not RETURN to the supply chain;
- perform due diligence on component contract manufacturers (CCM) to ensure that there are no excess runs that can be sold to counterfeiters;
- improved quality process controls for returns by original equipment manufacturers (OEM) and contract manufacturers (CM) where many counterfeit parts are "returned" having been switched for the legitimate parts by counterfeiters;
- internal quality control and responsible personnel must be dedicated to monitor, test, validate, report, properly alert authorities, and properly dispose of counterfeit parts;
- expunge availability of parts to counterfeiters, monitor and guard illegal paths into and out of the supply chain to reduce counterfeit opportunities.
The various supply chain participants today all hold valid and necessary roles; counterfeiting is not the result of any particular parties engaged in the supply chain. Rather, what needs to change is that the entire supply chain engage in the standardized screening of all business partners. Furthermore, strict quality measures need to be adopted and enacted by ALL in the industry; it is no longer responsible to assume that anyone in the supply chain is immune to being the victim of counterfeiting – there are no safe sectors in the semiconductor and electronics supply chains, nor is counterfeiting the problem of the open market alone. (See the below sections for a more detailed discussion of the processes and solutions available).
The counterfeiting problem is not a simple one of franchised versus independent distributors – that over-simplification only feeds into the hands of the savvy counterfeiters allowing increased 'availability' and opportunity for inserting counterfeit product into the electronics' supply chain. Rather, the counterfeiting problem lies with those industry participants who do not engage in strict quality control themselves and assume that counterfeiting is something that only happens at some other points in the supply chain. Crime affects everyone and can happen to anyone at anytime. Counterfeiting is a semiconductor and electronics industry-wide crime, as has been well documented by the US Department of Commerce (DOC) and the US Customs and Border Protection (CBP) as well as numerous well respected industry and international groups (cf. the references list at the end of the article for names and links to the agencies and task forces).
Improving discourse, cooperation and standardization of quality control metrics is paramount to the industry. Beyond these steps, understanding the economic patterns that underlie counterfeiting trends is critical to help us be on guard for market periods and sectors that become prone to increases in counterfeiting activity.
Presently, the macro-economic conditions from which we are emerging, namely demand-sparse conditions, was a period of reduced orders and inventories. These reductions in inventories lead manufacturers to reduce component production and draw down utilization levels of their lines. Now with the steady increase in consumption patterns across markets, we are and will continue to experience shortages. It is precisely these component shortages, resulting from very normal and well-informed market and economic practices, that provide great opportunity for counterfeiting because of the profitability increase available on the short parts.
Another important issue is rare, obsolescing, or end of life (EOL) components. Again these present an economic profit margin precisely as in the above shortage condition – namely low supply coupled with steady demand leads to a higher priced commodity, a typical target for counterfeiting.
Importantly, supply-demand economics is not an exclusive rule to blindly follow; rather it is a market condition that is coupled with a trend of increased counterfeiting. Therefore, we ought to recognize such a trend and use it as a guideline for increasing quality control diligence during those periods. For example, in today's global market, there are increasing incidents of quite common, lower valued components being counterfeited. These previously less common counterfeit parts are on the rise because their higher volume presents availability opportunities. These high volume components are susceptible to counterfeiting not because of their profit margins alone, but rather because of the availability of valid parts that can be purchased by a counterfeiter, substituted for counterfeits and returned to the CM or OEM or distributor (whether franchised or independent), leaving the valid and/or counterfeit parts to be re-sold or for the valid parts to be mixed with counterfeit parts in order to increase the chance of passing looser inspections or less rigorous sampling and testing protocols. Profitability is realized as a result of volume and gaps in the supply chain's quality measures rather than as a result of high ASPs.
Accountability, testing and traceability are significant issues in the electronics supply chain that create vulnerable entry points at which counterfeiting can occur. Perhaps more than any other issue, these three are ones that we, in the industry, have the greatest ability to control and remedy. Simply by increasing our discourse on the topic of counterfeiting, increasing the exchange of information about counterfeit goods, sources, records, and collective informing of counterfeit events to the proper organizations within the industry AND to government policing bodies, we can directly and effectively put an end to a significant percentage of opportunistic counterfeiting. It is unfortunate that we continue to find a significant lack of quality assurance protocols being implemented rigorously and consistently by all businesses in our industry. Our shortcomings in ensuring the highest quality products and components in all of our inventories open the doors to counterfeiters and creates problems throughout the entire supply chain.
The prevention and solution
While counterfeiting is becoming increasingly sophisticated and penetrating more types of components and products, viable and effective solutions that will greatly dissuade and remove significant amounts of counterfeiting events are relatively simple. The complexity in these simple solutions lies in the ability to collaborate and work together across the entire supply chain to ensure that only quality vendors and components are part of the marketplace.
Some of the available preventative measures to ensure against introducing counterfeit parts into your inventory, and thereby into the industry's supply chain, include, but are not limited to, the following:
- Standardized and rigorous processes for:
- employee counterfeit training programs
- vendor screening and performance tracking
- parts research
- order tracking and tracing
- physical inspection by trained personnel
- product/component testing for tampering (e.g., remarking, resurfacing, etc.)
- product/component functional testing (as appropriate for part type)
- verification (of parts and parts' material content)
- comparison of parts/component with manufacturer specifications
- XRF analysis
- Adoption and implementation of a subset of the following:
- Recordkeeping on and reporting of counterfeits to proper authorities
- Improved awareness and enforcement of proper "legal requirements and liabilities related to the management, distribution, storage, and disposal of counterfeit parts." (DOC Report, p.7)
- Recognition of the DOC and others' finding that "no type of company or organization has been untouched by counterfeit electronic parts. Even the most reliable of parts sources have discovered counterfeit parts within their inventories." (ibid, p.7)
- "A key element to any counterfeit prevention policy is communication." This extends from within an organization between employees to across organizations to share information with "the overall industry and supply chain (i.e., suppliers, customers, and competitors), including details about counterfeit parts, methods of counterfeiting, and sources for entry into procurement chains." (ibid, p.195)