With Counterfeit Components, Buyer Beware

A 2012 study by market research firm IHS found that more than 12 million counterfeit electronics and semiconductor components have entered the distribution chain since 2007, with 57 percent of all counterfeit parts obsolete or end-of-life components.

Many of these parts make their way into mission-critical industries, such as defense and aerospace, where a malfunctioning counterfeit part can mean the difference between life and death. Additional research from IHS noted that suppliers labeled by the US government as "high risk" are increasing their sales to federal agencies -- their presence in the government's supply chain has soared by 63 percent over the past decade.

With the increase of counterfeit electronics in the distribution chain, it is clear that many of these high-risk suppliers are employing increasingly sophisticated techniques to pass off fake components, and many engineers and procurement professionals are unaware that they are being taken advantage of.

This article is the first in a series that examines the growing problem of counterfeit components in the electronics supply chain and how buyers can educate and protect themselves by recognizing fakes and dealing only with manufacturer-authorized distributors.

124 million gray-market units
The problem of counterfeit components is rampant throughout all industries, with everyone from design engineers to purchasing professionals and consumers negatively affected when products they purchase are advertised as new and authentic when in reality they could be used, refurbished, or, in fact, counterfeit.

In a recent internal study conducted by Components Direct for a leading semiconductor supplier of both analog and digital devices, over 124 million units of its product were found floating in the gray market across 6,500-plus part numbers. As seen in the attached diagram, although over 70 percent of the product was found in Asia, 20 percent also appeared in both North America and EMEA. The product age spanned many years with date codes of less than one year accounting for 22 percent of the gray market product. A further 5 percent had date codes more than 11 years old, demonstrating that whether you were an OEM looking for the newest product or a military sub-contractor looking for obsolete components, no end customer is immune to the presence of unauthorized product.

Gray area: A Components Direct study of leading semiconductor suppliers
found more than 124 million units on the gray market, 70 percent in Asia.

Impact on mission-critical industries
While provisions in the 2012 National Defense Authorization Act have enabled the government and trade groups to make some progress towards regulating the supply chain to ensure that components are only sourced directly from the manufacturers or their franchised distributors, the problem has not abated. The difficulty of combating counterfeits and gray market components may be best illustrated by looking at the defense industry, where counterfeit components finding their way into the military supply chain exacerbate costs and threaten lives.

For example, the US Navy SH-60B helicopter, which provides surveillance and targeting support, was outfitted with counterfeit parts sourced from Raytheon through an equipment subcontractor in Texas, through an additional four states and three countries, finally originating with a company in Shenzhen, China. This porous supply chain is not uncommon, with numerous potential points of entry, and therefore multiple opportunities for counterfeiters. While counterfeit components often display telltale signs an engineer can identify when inspecting a component, most counterfeit parts are not easily distinguishable from authentic components.

Long-term risks
Left unchallenged, counterfeits and the gray market pose significant risks and long-term impact on suppliers including:

• Revenue. Where products are diverted from intended geographies or sold to the unintended end customer -- allowing the end customer to receive a higher-than-normal discount -- a brand owner's revenue and profitability may be directly impacted.
• Cost. When gray market products require after-sales product support or warranty, it hits a supplier's revenue and profitability because applicable support fees have typically not been paid. There are also other costs to the supplier such as field service to repair or replace the damage done by counterfeits. An October 2012 report by the International Electronics Manufacturing Initiative found that the average field service cost to a supplier is more than $1,100 per incident.
• Brand reputation. When end users see differing price points for the same brand in the market, it causes confusion and may damage a brand's value. And if a counterfeit or gray market product is not supported by a supplier, then users may be financially and operationally affected, thus lowering user satisfaction with the supplier's brand and potentially tarnishing a company's reputation.
• Liability and risk. Buying from an unauthorized source increases the risk of counterfeit components due to the potential commingling that can occur in uncontrolled channels, resulting in risk to product quality, reliability, and liability. The only way to combat this risk is to buy from a factory-authorized source.

Fortunately, suppliers and buyers are not helpless against the rising tide of counterfeit components sold on the gray market. By better understanding how these components differ from authentic parts and by only doing business with factory-authorized sources, the financial and logistical impacts of counterfeit components can be mitigated.

Next month: Learn what to look for when evaluating electronics components and the tricks of the trade that counterfeiters use to exploit weaknesses in the components supply chain.

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