Counterfeiting: The Ripple Effect

Barbara Jorgensen's story last week about counterfeit components and the NIMBY effect got me thinking about something I heard recently on the same topic: A small counterfeit operation, left unchecked, can wreak havoc on the supply chain for a long time.

Remember the scandal about VisionTech Components a few years back? Yes, the Florida company that ran a $16 million counterfeiting racket and sold phony semiconductor chips to more than 1,100 customers. The Feds got involved, dots were connected to another infamous California counterfeiting operator and Chinese businesses, people were indicted, guilty charges were handed down, people went to jail, and VisionTech owner, Shannon Wren, died pending trial.

It has all the makings of a Hollywood blockbuster as is, but the story gets even more epic. While I was reporting on the "Top 25 Global Distributors" feature, which will be published May 7 in EBN and in our sister publication, EE TImes, a few people mentioned the ongoing drama with this particular case. Mark Snider, president of ERAI Inc., told me some of the parts VisionTech hustled through the supply chain are still showing up in ERAI's sophisticated counterfeit-tracking database. Meaning, years after being shut down, many of the bad chips VisionTech sold to a number of companies are still out there and probably not totally accounted for.

With that story fresh in my head, I wasn't too surprised to see a related report from information and analytics provider IHS and its Haystack Gold service. Basically, the researcher says that the stringent new counterfeit-part regulations found in the 2012 US National Defense Authorization Act (NDAA) could have "broad international implications, impacting hundreds of overseas companies that have supplied billions of dollars’ worth of items to the American government."

Here's what it looks like if we run the numbers. IHS estimates that 362 non-US companies that supply the US government could be directly affected by the new regulations, and many more could be indirectly affected. Non-US-based suppliers accounted for more than $2 billion worth of the American government's procurement budget during the five-year period from 2007 to 2011, with European Union and Middle Eastern companies accounting for the bulk of that. Additionally, supply chain participants in 2011 reported 1,363 separate verified counterfeit-part incidents worldwide, a fourfold increase from 324 in 2009, the firm noted.

From the IHS press release:

“There’s a perception thatU.S.regulations such as 2012 NDAA,Section. 818. Detection and Avoidance of Counterfeit Electronic Parts,is only an issue for American companies, and that they don’t impact firms in Europe, the Mideast and elsewhere,” said Greg Jaknunas, senior product manager, supply chain solutions, at IHS. “However, the impact is beginning to be felt worldwide, as many international companies and global manufacturing facilities can directly participate in the defense supply chain and begin to see customer requests for counterfeit detection and avoidance measures that are flowed down through the supply chain.”

All of this is to say that counterfeiting will remain a global supply chain issue for the foreseeable future, and all segments of the supply chain will have to take responsibility for the parts going into machines and devices, whether that's under legal scrutiny or as a result of corporate ethics.

Warranted or not, brokers usually are the ones blamed for these bad trades and sinister deals. We all know that's just the superficial finger-pointing issue, and the sale and distribution of counterfeit parts runs much deeper and touches many suspecting and unsuspecting members of the electronics supply chain.

To their credit, and as a way to break the cycle of lumping all non-franchised parts-movers into the same mud-slinging category, many well known independent distributors have taken significant steps to assure quality of their parts and build strong relationships with purchasers. I've written more about these initiatives in the upcoming distributor feature, so I won't mention them here right now.

Similarly, several industry organizations and standards bodies are looking into this area, with fingers crossed that they can curb counterfeit shipments and siphon off credible sourcing partners from malicious ones. In the next couple of weeks, I'll be taking a closer look at new standards being developed by Independent Distributors of Electronics Association (IDEA) and SAE International that address exactly this issue.

In the meantime, what kind of counterfeiting stories have you heard? I'm sure they're juicy whoppers.