Counterfeit Components Remains a Huge Electronics Supply Chain Problem

Look around your house or office. There's a good chance one or more of the electronic products you use daily contain some counterfeit parts.

While it's impossible to know for sure, industry experts estimate counterfeiting cost at between $100 billion to $200 billion annually, or at nearly 10 percent of all electronic equipment sold worldwide. Most industry experts claim the problem is escalating and note that while the federal government and several industry associations have taken measures to limit counterfeiting, it continues to plague the components industry.

The flood of counterfeit parts is particularly high in Asia. “In some areas of China, as much as 30% of the components are counterfeit,” said Tom Sharpe, VP at SMT Corp, an independent components distributor in Sandy Hook, Conn. “A lot of the counterfeit parts have brand names, and the parts get marketed through the Internet into the US as new parts.”

While the worldwide slowdown in demand for components forced by the economic downturn may give the illusion that there is less counterfeiting, the problem still growing by most accounts. “I believe it is continuing to be as much of a problem as it ever has been – it’s probably increasing,” said Debra Eggeman, general manager of the Independent Distributors of Electronics Association (IDEA) in Buena Park, Calif. “There is definitely more counterfeiting out there, and the counterfeiters are getting savvy.”

One component trader believes counterfeiting has grown significantly in just the past few years. “With the slowing of the market, the problem may be slowing, as well,” said Richard Tapping, general manager at SemiCentral Inc, a company in Commack, NY, that facilities component trading among OEMs and contract manufacturers. “But overall, the number of counterfeit instances over the last five years has doubled. I don’t believe that new laws have slowed it.”

One recent legal tool to fight counterfeiting is the Prioritizing Resources and Organization for Intellectual Property Act of 2007 (PRO-IP Act). The law created a new executive branch office for the enforcement of intellectual property (IP) and included new provisions allowing the Department of Justice to conduct civil suits on behalf of IP owners. In addition, customs officials have become better educated about spotting counterfeit shipments from overseas. “The laws are certainly having some affect. And custom officials are becoming more educated,” said SMT’s Sharpe. “But it’s still a growing problem. The gateway out of China for counterfeit parts has continued to grow.”

Counterfeiting is being done in a number of ways. A considerable amount comes from e-waste that is shipped to the far reaches of the world as recycling initiatives are adopted in Europe and the United States. “When I was in Hong Kong I took a trip to where the counterfeiting was going on and I was blown away,” said Sharpe. “People were plucking components from circuit boards and washing them in rivers. Then they leave them on the sidewalk to dry with no ESD [electrostatic discharge] protection.” He noted that the lack of ESD protection alone will lead to widespread component malfunctions. “They will end up with a high failure rate. It’s like Russian roulette with five bullets in the gun.”

In some cases legitimate fabs continue to run product after they fill their orders. They take the overage and sell on the black market. “You can have counterfeit parts that are as good as legitimate parts,” said Steve Schultz, director of strategic planning and communication at Avnet Logistics, a Phoenix, Ariz-based division of distributor Avnet Inc. “There are a bunch of different streams that flow into the counterfeit river.”

Where are counterfeit parts coming from? What’s getting counterfeited?
There are many suspected sources of counterfeiting, from state-sponsored programs to a counterfeit mob. “According to the FBI, counterfeiting is largely being done by organized crime and terrorists. There is also state-sponsored counterfeiting,” said Robin Gray, executive VP of the National Electronic Distributors Association (NEDA), an industry group of franchised distributors in Alpharetta, Ga. “Mostly it’s in Asia, particularly in China where everything is being counterfeited.”

China is overwhelmingly depicted as the major source for counterfeit parts. “Counterfeiting can be anywhere there are very low labor costs,” said Avnet’s Schultz. “In China, there are a number of authorities that look the other way. In some countries, it’s almost a bona fide way of doing business. China is still a leader in that area.”

Even low-cost passive components have become targeted by counterfeiters. “Everything is getting counterfeited," NEDA’s Gray said. "It’s not just the high-value items like semiconductors. It can be connectors, resistors, anything that can turn a good profit, anything that’s on allocation, anything that’s in high demand.”

Why the demand for counterfeit parts?
In the past couple years, counterfeiters have found a new market in parts that have been discontinued by component manufacturers. “The greatest area of opportunity for counterfeiting is in hard-to-get parts and obsolete parts,” said Gray. “A lot of manufacturers have stopped making some of their products.”
One major market for obsolete parts includes the industries exempt from ROHS laws. Those industries still seek leaded parts that have been discontinued by manufacturers. According to SMT’s Sharpe, the military, aerospace, and medical industries are still using leaded product, much of which is obsolete and is no longer supported by the chip manufacturers. “So these parts are targeted by counterfeiters," he said. "These industries still have to buy the old product, and since it’s obsolete, it rises in value as it becomes scarce.”

Military purchasers in particular are turning to the open market to find non-ROHS parts. “A lot of counterfeiting comes from the fact that military customers cannot buy through the channels they are comfortable buying through,” said Avnet’s Schultz. “If I have 10 military customers, at least half of them will raise the question of counterfeiting.”

How do you avoid counterfeit parts?
As for solving the counterfeiting problem, there are a number of new tools to help. Law enforcement is one. “The FBI arrested two brokers in the Dallas area in 2008,” said Gray. “They were selling counterfeited Cisco routers in Cisco packages.”

The brokers were able to sneak it into this country in unpackaged pieces. “It was assembled here, so it got around customs,” he said. “They were selling the counterfeit goods to government agencies.”

The new emphasis from the government comes from the recognition that the problem is growing. “Because it’s such a huge problem in lost sales and lost jobs, congress and state governments are getting more sensitive to protecting US interests and public safety,” said Gray. “The Pro-IP Act stiffens the civil and criminal penalties and gives the government more resources to go after counterfeiting.”

Another tool for limiting the damage from counterfeiting is improvements in buying practices. “If you’re buying from authorized distributors and directly from manufacturers, you limit your exposure to counterfeiting,” said SemiCentral’s Tapping. “Also, if somebody quotes you $2 for a $20 part, you might get suspicious. You can see in the price that it has been counterfeited.”

NEDA's Gray agrees that pricing can be a dead giveaway. “If the supplier doesn’t price things at a market price, it’s a red flag,” he said. “But sometimes they price it close enough to the market price so you think you’re getting a deal but it still seems reasonable.”

One of the surest ways to dodge counterfeit parts is to know your suppliers and test your inventory. “Developing good supplier screening procedures are the best way to begin,” said SMT’s Sharpe. “Not sourcing product from China or from individuals who source from China is also good. You also have to have robust test and authentication procedures if you’re buying on the open market.”

Counterfeit inspection standard
IDEA has developed a standard to guide in the visual identification of counterfeit parts. As explained by SMT’s Sharpe, the standard was written to help people avoid counterfeiting and is used by purchasing to mitigate counterfeit materials from entering the defense industries.”

Access to the IDEA-STD-1010-A standard, which comes with documentation and 100 photos showing examples of counterfeit parts, costs $300. The standard was published in October 2006 and took about 13 months to develop by IDEA's members. IDEA’s Eggeman noted that the standard helps verify parts that are not in their original packaging. “When parts are still in factory packaging, that’s the Holy Grail,” she said. “But that’s not always possible. A real of parts may be open because production ended when half the parts were consumed and you have beautiful parts on the reel.”

The standard aims to help determine whether those parts on the reel are authentic and of good quality. “It comes down to inspection, looking at them through a microscope," said Eggeman. “There are telltale signs of counterfeit parts and the standard goes into this detail.”

IDEA also offers a buyer training program to teach those in purchasing how to avoid counterfeit parts. Eggeman believes that by using the standard and developing purchasing strategies to determine authentic parts, companies can ensure they are getting good parts.

“Number one, companies have to have a formal counterfeit parts mitigation program,” Eggeman said. “That has to be mandated by the uppermost level of the company. They have to make sure their inspection personnel are up to speed on the standard and educated to identify counterfeiting.”

Electronic Business, a sister publication of EM Asia