The counterfeiters are not winning and they won't. The industry is awash in news and research reports about surging incidents of counterfeiting in components used in aviation, consumer goods, and military equipment, but that represents only one side of the story. As counterfeiters have increased their supply of fake parts, corrupting the supply chain, so have concerned manufacturers and regulators intensified efforts to combat the trend.
Component manufacturers, distributors, electronic manufacturing services (EMS) providers, and OEMs won't be able to completely scrub the supply chain of fake parts, but, quietly and intensely, they are developing and waging a fierce campaign against the counterfeiters, according to industry sources I've spoken with in the last few weeks.
Some of the efforts can be attributed to the decision by Congress and the US government to make manufacturers responsible for certifying components supplied to the Department of Defense, but companies are also beginning to be strident in calling for a concerted plan to reduce counterfeiting, because the entire market gets a black eye with each reported incident.
The anti-counterfeiting provision in the 2012 National Defense Authorization Act (NDAA) has certainly lit a fire under the industry. Attendees at a seminar on counterfeiting hosted at ES-Live (an annual conference linking up component manufacturers and purchasers) in London were warned by presenter Bob Willis to pay greater attention to their sourcing strategies, especially if they sell parts to the DoD. "You may end up in an orange suit and headed to prison," he warned.
Willis, a mechanical engineer, consultant, and specialist in the detection of counterfeit parts, wasn't exaggerating the threat. The NDAA puts the onus on the manufacturer and supplier to prove components sold to the DoD were genuine. Failure to ensure this could result in prosecution and imprisonment, as other news reports have highlighted.
Congress has been alarmed by a sharp rise in reported incidents of counterfeit parts supplied to the US government and has prescribed stiff penalties to combat the criminals responsible. However, as IHS noted in a recent report, suppliers who unwittingly introduce fake parts into the defense supply chain may also get prosecuted. Here are the steps defense contractors are expected to take, according to IHS's interpretation of the NDAA:
Contractors are now responsible for detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit parts
Contractors are also responsible for any rework or corrective action that may be required to remedy the use or inclusion of such parts
Defense contracts will no longer allow the cost of counterfeit electronic parts and suspect counterfeit electronic parts or the cost associated with rework or corrective action to resolve the use or inclusion of such parts
Qualification procedures and processes must be established to use trusted suppliers and procure electronics from authorized suppliers
If these onerous burdens have been shifted onto suppliers and defense contractors, how come I still believe the counterfeiters are not winning? The answer is simple. Over the years and at all levels of the supply chain, companies have been introducing actions that have continually placed them several steps ahead of the counterfeiters. Also, many more companies are today willing to publicly address the subject and even admit to the discovery of fake parts in their inventories. This was not the case two years ago, when even the mere mention of counterfeit components in the same sentence with a reputable distributor's or manufacturer's name was seen as the kiss of death.
Today, many companies not only admit that fake parts have been discovered in their inventories, but they'll also disclose how such components could have infiltrated the supply chain. Such public disclosures are working against the counterfeiters, who can no longer rely on the silence of victims to cloud industry visibility into the scale of the problem. In fact, the reason researchers like IHS now have more data on reported incidents is because manufacturers (OEMs, EMSs, and component suppliers) are more willing to submit information on these.
Finally, manufacturers are hosting training and other educational seminars for employees, suppliers, and customers to equip them with the knowledge and tools necessary for combating, detecting, and reporting counterfeits and counterfeiters. Out of these activities have arisen technological innovations that are now being shared across the industry to fight counterfeiting. EBN blogger Douglas Alexander wrote about one of these in a recent blog, and other EBN contributors have similarly addressed the subject in various postings.
In my next blog, I will focus on some of these anti-counterfeiting technological initiatives. EBN will also be hosting a series of online educational sessions on this. Stay tuned.
Bolaji: fantastic overview of the progress the industry has made. Of late, the focus on the trees (incidents of counterfeiting) has obscured the forest (the good guys are winning). Thanks for putting this all in perspective. I agree: in spite of the incidents and reports of counterfeits in the supply chain, in the grand scheme of things I believe that more parts have been ferreted out than actually get through. I just don't think we hear about "Today, no counterfiets were found in the supply chain." We only hear about it when things go wrong. More often than not, they go right. Thanks again for the perspective.
It is good to hear that the bad guys are not winning. Great news indeed. However the battle is not fully won yet and further actions might be required to fight those counterfeiters who are still resisting.
@Hospice_Houngbo, You're right, more is required to further combat hardcore criminally minded ones. It'll be impossible to completely eradicate counterfeit components. However, making this much progress and involving manufacturers to educate all involved is a step in the right direction.. Don't you think?
@Hospice_Houngbo, you're absolutely correct. The battle against counterfeiters is not over yet. However, as you mentioned, efforts thus far is indeed promising and worthy of praise.
I think the ultimate victory over counterfeiters would be when they are completely wiped out from the supply chain and seize to exist. A counterfeiter's aim would never be to take over the business of an OEM, but it would be to capture a substantial share of the market so that both the OEM and counterfeiter continue to run in parallel.
It is great to hear that the companies in the supply chain are a few steps ahead of the counterfeiters at the moment. Life looks difficult for the counterfeiters at the moment but they will keep on searching for new ways and the suppliers need to remain alert and make sure that their filtering and detection methods are always up to date. We should not forget that this is a continuous battle and expecting the counterfeiters to close shop anytime soon would be too naive.
This battle looks very similar to the battle between cryptographers and the attackers. New encryption techniques are always developed which temporarily makes us feel that our digital data is safe. However, the attackers are always hard at work looking for new methods of rendering the new encryption algorithms useless. Sometimes the cryptographers are ahead and sometimes the attackers. The only thing that remains unchanged in this battle is the motivations and the fact that the battle will continue.
As the more victims are reporting the incidents and the establishment of standards could easily help the manufacturers to tackle the problem of counterfeiting components. I do not think its any more an easy task to sell the crap.
It is not an easy task. Many suppliers have started implementing strong detection strategies and they are more willing to disclose any part they find in their inventories because of the pressure they get from the US government. My question is whether the same compelling actions are being taken in other countries. The battle should not be limited to just one country.
But if the cases of EU Aviation Carbon Taxes and the Current IMF confusion over how to tackle EU Debt Woes shows anything clearly its this-There is no clarity and uniformity of thought amongst Global Leaders and Nations.
The Best ways to put it is this-We Live in a Dog Eats Dog world where the Market is shrinking very rapidly(before our eyes).
In such a market countries are going to fight over and do whatever it takes to protect their Market shares in the short-term.
I was most fascinated by the EU Aviation Taxes case.
For those who don't know,the EU decided unilaterally that any Airline flying into and out of EU Airspace will have to pay A Carbon Tax (the equivalent increase in Passenger Fares will be between 4 Euros and 30 Euros,depending on length of the Flight).
The Carbon Tax was levied ostenibly to Fight Climate Change.However,the truth is that the Bankrupt EU needs the money to save itself from Debt Slavery so they are desperate to raise Revenue in any way possible.
The American,Canadian ,Chinese,Russian and Indian Airlines react very angrily to this New Tax but one by one fell in line-Except for the Chinese and the Indians.
According to the EU,8 Chinese Airlines and 2 Indian Airlines have refused to comply with the EU Directive and have been threathened with Massive Fines by the EU.
And now the Governments have gotten involved.Both Chinese and Indian Governments have explicitly banned their Airlines from Taking part in this programme.
And if the EU reacts negatively by fining their Carriers then they have threathened to retaliate by blocking access to their Lucrative & Growing Markets!!!
So Unilateralism (where it hurts State Interests) ,especially since both China and India have State owned Airlines is a Strict No-No.
Similarly,here with the Suppliers-Most Suppliers (and especially of the counterfeit variety) have huge plants in China which employ huge numbers of Chinese.
Any move to curb their employment will not be happening anytime soon .After all,its a question of the legitimacy of the Chinese Communist Party!!!
Ashish, You juxtaposed the size of China's legal economy and the counterfeit segment and you seem to find them of equal size, hence the statement "any move to curb their employment will not be happening anytime soon." I don't agree. The Chinese government cannot thumb its nose at the rest of the world. When fake parts compromise aviation and military systems, it becomes a collective concern and you can bet the largest military system in the world won't accept the status quo.
China is already taken steps to curb incidents of counterfeiting of Windows operating systems and other software products. It has to otherwise it will be shut out of global markets.
Nobody would be happier than me if this happens(Counterfeit companies in china are shut down);but Information that I am getting on the Ground tells me a completely Different story.
For Demonstration sake,I would like to share with you the cases of Dabur(One of India's largest Manufacturer of FMCG Products-just like P&G or Unilever).
Dabur exports a lot to Africa and the Middle East where there is a Big market for their products.
For the last Three Years they are having to spend more and more on Policing and Seizing of Fakes (especially in West Africa) than on Marketing their Products there!!!
I have friends inside the Company and they tell me that Top-Level Senior Execs(alongwith Indian Govt Officials) have gone so many Times to China and specifically Shown the Govt which factories are making the fakes.
Still No Action!!!
Another case is that of India's Generic Drug Companies which Sell very cheap drugs in Africa;even here So many Consignments of Fake Drugs coming out of China(all stamped with a (Made in India Label);that it boggles the mind and ths scale of most of these cases are clearly beyond the resources of most African Countries enforcement Divisions.
The Indian Companies complain back to the Indian Govt which takes it up with the Chinese Govt.But again,No Action.
Why is that?
The Major Reason is because Most of the Counterfeit companies are owned explicitly by the Communist Party Officials ;who not just want to make Money but also have a Social Responsibility(to provide Jobs) to their constituents.
I personally feel Counterfeit Drugs and Food products are more dangerous to Human Society than Fake Software.
@Ashish you always make your point with great flair! You're right about countrfeit drugs; I've heard of deaths resulting from inadequate substitutes. As for counterfeit foods, it depends on how they are presented and what's in them.
Just like You I feel Human Life is very valuable and Companies(& countries since its a State-wide Problem in China) should not play Games(like these cases) when Lives are at stake.
People take medicines in the Hope/confidence that it will make them better.Then we hear of incidents like this...
@Ashish, yes, it is scary. Unfortunately, even legit medicines sometimes bring on unforeseen side effects, as well. But we do hope that such risks are minimized by rigorous research.
Any moral responsibility on the part of the people who sell fake drugs or counterfeit components? Their actions can result directly in the death of thousands of people. What kind of punishment fits such a crime? How far should society go to put such people away and who should be involved in the efforts?
Ariella, I am for deterrence but of course this comes when justice is seen to be done. The implications of counterfeiting entering the electronic supply chain or other segments of the economy can be devastating to businesses and lives. The US government is trying to assure safety of the military supply chain by prescribing stiff penalties for counterfeiting.
As Ashish mentioned in a separate comment you still have to catch the counterfeiters. Justice is the effective, efficient and judicious execution of laws and regulations and it may deter potential offenders from walking down that road. It shouldn't be seen, however, as vengeance, which in my opinion can lead our society down a morally suspect line.
@Bolaji It is a problematic situation. I would imagine that even the stiff penalties can be circumvented by closing the business down, claiming that everything was sold off with nothing remaining, and then opening up under a new identity.
BTW today's news included a warning about counterfeit Adderall, which the FDA says, "should be considered as unsafe, ineffective and potentially harmful."
Ariella, I want to toss the question you asked back at you. What would you look for in this situation: justice or deterrence? If you are at the head of a government body charged with resolving this, what would you do? Would you hammer down on the businesses more or would you focus more on the counterfeiters?
@Bolaji, Happily, I am not in that situation. The key thing is really to prevent counterfeiting through whatever means may work -- short of shooting suspects on the spot and asking questions later, of course. However, in situations in which the counterfeit part is not merely a matter of fraud but a cause to bodily harm, those who legislate the laws may have to take the question of justice into consideratio, as well. Certainly, in American trials, the cost to victims in terms of suffering and loss is used to direct the jury's sympathy to them and away from the one accused.
The problem businesses and society at large must contend with as counterfeiting proliferates is that deadly danger might have already been done before the culprit is apprehended. We've chatted here about how to detect counterfeits and what kind of punishment to levy on those involved. There's a third layer and that centers on actually catching counterfeiters before their deadly goods are injected into the supply chain. Currently, this is not a part of the battle against counterfeiting. The actual process of producing counterfeits has to be disrupted but that will require pouring investments into locating plants where the counterfeiters operate. Who will finance this? The government, business?
@Bolaji You hit on another key question for many proposals to address problems. Who is to foot the bill? People are often quick to respond "the government," as if it is an entity with unlimited resources when, in reality, the government really means you and me and all the other millions of tax of payers.
I prefer the Firing Squad Approach for Proven repeat Offenders.
After One Offense you are let off with a Fine but if you Sin a Second time,its the Firing Squad with Blanket Media Coverage and Live streaming On Youtube for You.
That's the best way to set a Good Example to other misguided people who choose this path to Riches.
The trouble is since so many of the offenses committed are Cross-Border;Questions regarding Jurisdiction apply.
And I don't wanna drag everything to the ICJ in Hague and get stuck there for Ages...
Ashish, Sorry, I won't let you off that easy. You may be right that there are no easy answers but if you were appointed a Czar by the US government or industry to find a solution to this problem what would you do? You've identified the challenges but what are the solutions?
Bolaji: If I were appointed as a Czar to find a solution to the counterfeiting of electronic parts, I would first look at determining which country is producing these counterfeit parts – China, India, other Eastern countries – and then set it up so that their supply of used parts is cut off. If we stop sending scrap material to these countries, they will have fewer parts - reclaimed from discarded circuit boards - from which to make the counterfeit parts. This means that we need to do our own reclamation. We either crush them to destroy them, or first reclaim their metallic content – lead, silver, gold, tin, copper, etc. – and then crush the residual ceramics. Ultimately, we would still need to crush the ceramic residual of the parts and that would probably be a part of the reclamation process anyway, in order to get at the microcircuit metallization metals. This, then, leads us to determine the effects of putting this excess ceramic material into a land fill – its toxicity, if any, etc. Ultimately, we are putting off the disposal of the material to further down the chain, but at a point where the counterfeiters cannot use our waste product any more. While this might lead to a "cottage industry" of scrap reclamation, but, ultimately, the ROI on such an investment will determine if such a process would be viable. Maybe there will end up being a central crushing/disposal facility, but this would, once again, be determined by the ROI of such a facility, and the landfill problem would still exist.
Ashish, You need to have more faith in mankind; :) Yes, China is host to counterfeiters but don't blame these folks alone. How about the end receivers? The example you gave is a good one. Indian officials can get the Chinese government to close down some fake product manufacturers but these will only be reopened elsewhere. The best way to fight this is to kill demand for the fake products and combat it also at the consumers.
You know very well this has happened in the "Drug War" the U.S. has been waging for decades. Drug traffickers and producers just move from one company to another.
The Issue at hand is very complex and not something which can be resolved/Taken care of at one shot.
As Crypto has alluded to here,below this is an ongoing Fight that involves not just Manufacturers but also Suppliers and Govts.
The problem with Having Standards is this-They can always be subverted.
Also,we have another problem.Who exactly is designing those Standards?
I do a lot of extensive work in this area and believe me for often than not the most influential Manufacturers/Vendors get Standards scripted to their convenience and not according to what the market needs are.
Also,if you say you bring the Govt in here then the problem is that the Govt is totally infiltritated by the same Crony Capitalist Interests.
Case in Point-The Green Energy Scams propagated by the Obama Administration today.
"make manufacturers responsible for certifying components supplied to the Department of Defense," I want to ask you to comment the possibility to apply this to the whole supply chain of the electronic industry.
Well I don't agree with your term that they won't win at all since at the initial point they do win and that is where you figure out where the loop hole is. It also can be found if the hacker makes a mistake. If not goes the 3 rd level
Nemos, In the commercial space, contracts are enforced somewhat differently. It is assumed that a supplier should take all necessary steps to ensure fake parts do not enter a customer's supply chain. Failure to ensure this results in a loss of the business.
As for the US government, the dynamics are quite different. First, the military market is huge. The US government spends hundreds of billions on military procurement each year and even a tiny amount of this can be a boon to a supplier. Second, only the US government can come up with this kind of mandate that forces suppliers to certify their supplies are not fake. The government is also able to specify the penalties for failure to do this. No other commercial customer has the clout and the enforcement powers to implement such policies.
I think it is a positive sign that companies are disclosing the fact that they found counterfeits in their supply chain. This shows that they are taking responsibility and willing to work with others to try to reduce and ultimately stop counterfeits.
Counterfeiter are like noise. That is their modus operandi. They come suddeny for some time, make money and dissapear before getting caught. After brief hiatus they find new avenues and again repeat similar wrong work. They are very quick and very difficult to catch. US governmnet and defense department must evolve more innovative punishing strategy to discourage these counterfieter.
_hm, The counterfeiting business is akin to weed on your lawn. You simply can't take a break from weeding and using whatever other resources are available to combat it. Simply applying weed killer for a season won't stamp them out so vigilance and knowing its an unending battle would be key to keeping them at bay.
It's unlikely counterfeiting will be completely eliminated but the climate can be made so constraining that fewer people get into the business and many of the ones in it could be squeezed out.
Another interesting aspect is that more often than not, these counterfeiteer are non-technical people. And technical / intellectual people help them commit this crime, knowingly or unknowingly.
If we are talking about counterfeit products cutting across all areas, including drugs, then killing demand is going to be a century long battle.
The market for these counterfeit products centre around people who are just after money, nothing more and when you get to developing countries, you find a great deal of them there.
I know of Pharmaceutical companies that are evolving methods to find counterfeit drugs, by having each pack of their product signed with a code that can be verified on the spot before purchase via mobile. This method has been working, but for how long is the question.
Truely killing the deman is the best option, but how feasible is that in this present world?
Tioluwa, The idea of on-the-spot verification is one of the best I have read recently and if it works in the pharmaceutical industry I think it can be applied in electronics too. Of course, with electronic parts it may be more difficult to stamp a code on each tiny component but it can work with packets.
I like the thrust of making suppliers responsible for ensuring the integrity of supply and having onerous consequences otherwise. It is akin to supplying stolen goods. If you sell stolen goods to someone then you can be prosecuted for it...plain and simple. The problem still needs attacked on all fronts to be conquered properly though.
It's unlikely a single player (the government, for instance) can eliminate counterfeiting in the economy. The payoff is too big for the people involved. I guess the US government is shifting the responsibility to suppliers perhaps because the procurement folks at the Department of Defense lack the knowledge and the resources to protect their supply chain against counterfeiters.
This is an international problem, and international bodies with drastic international laws will be needed to significantly dent the counterfeiting ring.
It is a deep rooted problem.
for counterfeiting Drugs and other things critical to life, the penalty has to be harsh, and the system in place to limit counterfeiting has to be strong.
By moving to the core of the industry and offerings services that keep the system humming, a group within the electronics market has rendered irrelevant the question of ownership and control of the supply chain.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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