Counterfeiting: The Enemy Within

Reported incidents of electronic part counterfeiting climbed more than 67 percent from 2009 to 2011, a recent IHS report says. The data backs up suspicions that the problem is growing rapidly and could severely hurt high-tech manufacturers.

Almost 1,400 "verified counterfeit-part incidents" were reported worldwide in 2011 alone, versus 815 in 2010 and 324 in 2009, according to the report. The increase may be due to better reporting and information processing, or it could be a result of heightened industry awareness, but the implications for the industry are dire. The most worrying aspect for industry observers is the increased penetration of counterfeit parts into military hardware. That development has attracted increased scrutiny from the US government.

Last week, the House Committee on Foreign Affairs held a hearing on the issue and received comments and presentations from industry representatives. The IPC – Association Connecting Electronics Industries , which has been on the forefront of the fight against counterfeit products, sent Mikel Williams, president and CEO of DDi Corp. and chairman of the association's government relations committee. His charter was to advocate for the introduction of restrictive controls on printed circuit boards, especially for military applications.

"Reform of the current export control system is long overdue, and IPC supports reform and the opening of foreign markets to our manufacturing companies," he told the panel. "The current system is complex, bureaucratic, and does not adequately protect our national security nor facilitate the export opportunities we need to grow our economy."

Other industry bodies are similarly worried. As counterfeiting in general and reported incidents in the US military supply chain have increased, so has the realization that the industry must take action to curb the trend. Failure to do so could be expensive later as government agencies, OEMs, and other manufacturers force component suppliers to implement safeguards. I like the way IHS laid out the magnitude of the problem and the potential cost to the industry in a press release:

Counterfeit parts often are... cheap substitutes or salvaged waste components that fail to meet strict military and aerospace specifications, leading to potential failures. Even more concerning, these failures put lives at stake. Furthermore, there are fears that some counterfeit devices like integrated circuits have the potential to act as malicious Trojan horses that could be disabled remotely, compromising defense capability at critical times.
The expense to resolve a single counterfeit incident can be massive. For example, the government reported how the U.S. Missile Defense Agency learned that mission computers for Terminal High Altitude Area Defense (THAAD) missiles contained suspect counterfeit devices that could have led to an entire system failure. The cost of that fix was nearly $2.7 million.

The IHS report indicates that the problem is ballooning, especially for military and aviation applications. Though the affected parts were not necessarily meant for these two markets, their presence in OEM equipment for these critical industries is sparking fears and forcing the government to consider even more punitive laws.

Rory King, director of supply chain product marketing at IHS, said in the release:

The counterfeit issue is serious, it's growing and it's a major problem for electronics makers... The problem has grown increasingly hard to ignore, as reports of counterfeits have risen exponentially and most companies lack the awareness and capability to effectively detect and mitigate the growing problem. The reporting done by the industry can help other organizations pinpoint risky parts or suppliers. And now that United States legislation will hold defense suppliers accountable for counterfeit issues, access to these incident data becomes a critical decision-support capability for business systems.

Pointing the finger at faceless criminals isn't honest enough, though. The counterfeiters get their products into the electronics supply chain through supposedly reliable individuals and companies in the industry. Apprehending these individuals and entities might be easier than dealing with the second set of culpable players. These are the companies and executives not doing enough to protect their supplies or demanding the same of their own suppliers, despite their awareness of the dangers counterfeiting poses to the entire system.

Until everyone accepts collective responsibility for dealing with the two groups enabling the proliferation of counterfeiting through the electronics supply chain, the industry won't be able to stamp out or at least dramatically reduce the problem. The enemy we are looking for is not outside the camp. It's among us.