Risk and Consequence Fuel Counterfeit Supply

Only until recently most chip manufacturers turned a blind eye to any unauthorized supply issues. The explosion of counterfeit problems fell nicely in to the “I told you so” attitude and allowed chip manufacturers to blame non-authorized channels and customers for using non-authorized channels as procurement solutions.

As the problem escalated, customers had little information or any solution to the electronics supply chain issues at hand. Buyers of electronic components regularly used gray market channels to source product from known unauthorized sources. Component manufacturers despised it, but begrudgingly admit the gray market had its place to fill order book the factory could not.

The growth of counterfeit incidents is off the chart, a growth chart that most distribution outlets haven’t seen in years. Industry associations and agencies see counterfeit product as the number one concern in the electronics supply chain. The government is extending its involvement from gate keeping to the creation of anticounterfeit agencies and committees to implement prevention and enforcement guidelines. Many component manufacturers have been contacted by such government interests appealing for incident reports, cost estimates and policy information regarding how rejected material is handled at the factories.

The pressure is on, but who is the pressure on? Top 10 component manufacturers are doing their part, Texas Instruments and Maxim Semiconductor have introduced areas to their Web sites that assist companies in dealing with counterfeit situations. Industry organizations continue to try and bring awareness to the problem. NEDA is warning members that the risks are higher than ever and only buying from authorized sources can completely eliminate counterfeit risks. And the gray market is scrambling to ease quality concerns by adding equipment and increasing screening techniques.

Unfortunately, counterfeiters will always be a step ahead. Most agree that even the most vigilant of companies can’t completely safeguard against counterfeit supply, as it’s neither financially viable nor realistic to test every part. Sample testing techniques are easily countered with counterfeiters surrounding bad product with a few good ones in a tube/pack. Companies are regularly encountering counterfeit product, many of it is getting through but even more worryingly is much more of it goes unreported.

Presented with this problem, some gray market outlets have reverted to passing on the burden or responsibility. Admitting to their customers that they may not be able to guarantee quality and asking the end user to bear the burden. This is a shift that fuels the counterfeit problem further. The result of any such agreement serves little purpose to ensure quality. Adversely, it is a zero consequence, zero risk environment that provides the supplier with a free ticket to source cheaper product from less vigilant sources.

Additionally, the consequences to the end user are also reduced. There is no financial risk, no contingency risk and no legal consequence. The majority of counterfeit incidents go unreported and product is returned to the supplier until “working” product is supplied.

In these scenarios product is likely purchased via an escrow service, holding the suppliers funds until the end user confirms all is ok. Escrow or not, the open market rapidly issues refunds on receipt of the bad product being returned. Amazingly, the product is not scrapped, it is most likely remarketed to gray market sources, where it will be resold and offered with a 30 day warranty. These open market outlets do this for the possibility that the next time it is sold the problem isn’t identified and subsequently returned within the 30 days. Once the 30-day warranty expires and product isn’t returned, funds are unrecoverable.

Passing the burden isn’t a solution to the problem. More importantly, it rarely resolves the electronics supply chain problem for the end user; it only delays it. When presented with electronics supply chain problems and when authorized channels are unable to supply, end users must wise up. Stop accepting the counterfeit burden, it only fuels the problem. Push back the risk and consequence to the supplier and find an alternative sourcing solution.

Electronic News, a sister publication of EM Asia