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Anti-Counterfeit Measures Miss the Mark

The US government's most recent defense-related anti-counterfeiting measures are well intended, but they are targeting the wrong links in the supply chain. This merely confirms what many in the electronics supply chain suspect: There is a big gap between the folks who are having a problem and the legislators who try to fix it.

According to a press release from IHS, incidents of counterfeiting have exploded in the past few years. Because many of those parts were destined for defense and other mission-critical equipment, the government is stepping in to curb the problem. (See: Counterfeiting: The Enemy Within.)

The action is long overdue. Counterfeiting has been around as long as the electronics industry has. Here's what IHS says the 2012 US National Defense Authorization Act (NDAA) requires:

  • 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

See a pattern here? Contractors — not component manufacturers or distributors — are responsible for avoiding and detecting counterfeit parts. Here's why this is a well-intended but burdensome process that isn't likely to succeed.

  • The sources of counterfeit parts: Where do these bogus parts even come from? They come from component manufacturers. Chip makers frequently produce batches of chips that don't work or are substandard. Those devices are supposed to be scrapped. Because of waste and recycling regulations, most chip makers outsource the destruction and/or reclamation of these chips. But rarely do these factories follow through to make sure the chips do get destroyed. Truckloads of chips get diverted and eventually enter the supply chain.
  • The channels of counterfeit parts: Customers (or contractors, in DoD terms) can get products in a number of ways. They can purchase directly from the component manufacturer, through a distributor, in the open market, or on a subassembly. Buying direct reduces the risk of getting a counterfeit part to nearly zero. However, few contractors buy direct. The days of manufacturing parts exclusively for a defense customer are over. It's no longer that profitable. Many defense contractors, in an effort to cut costs, are using commercial products. Therefore, they are more likely to buy parts through a secondary channel. Since distributors take parts back from customers under certain circumstances, counterfeits have shown up even in authorized distribution. These distributors usually catch these parts, because they conduct stringent inspection and testing.
  • The buyers of counterfeit parts: Thanks to outsourcing, even defense contractors do very little of their own subassembling. By the time components reach a contractor, it's likely they've been soldered to a board. If counterfeits are discovered at this point, tearing up or scrapping entire boards is prohibitively costly and time consuming. Incoming inspection and testing at this point is redundant and adds cost to the process.

Remember that these chips should have been tested at the factory, at the distributor, and at the subassembler.

IHS concludes:

Companies in the military/aerospace electronics industry must obtain systems and data to analyze, assess, and act on counterfeit and suspect counterfeit electronic parts… By making use of available tools and ongoing reports for counterfeit, substandard and high-risk parts, electronics makers can cut costs, avoid risk, and expedite NDAA compliance.

This method will no doubt weed out counterfeits, but there is an easier and less expensive way to accomplish this: requiring chip factories to verify substandard or outdated parts are disposed of properly. It won't eliminate all incidents of counterfeiting — some bogus chips are actually built from the ground up in fabs — but it will eliminate remarked, retopped, rebranded, and redisguised components. And since disposal companies are already paid to junk these parts, it shouldn't add cost. Just make sure they do what they say they are going to do.

You don't even need a new law for that.

15 comments on “Anti-Counterfeit Measures Miss the Mark

  1. mfbertozzi
    February 16, 2012

    Well Barbara, in effect, report from IHS about reported incidents, has shown a ramp, but if we consider actions in place thanks to ACTA agreement, possible mistakes could come from number of signatories countries which is increasing a lot. Right now it involves about 31 countries and maybe it is not so easy to adopt processes for resolving issues matching rules and producers requirements, all over. Of course, it is only my opinion.

  2. ITempire
    February 16, 2012

    Barb, I agree with you that care on the part of manufacturers by monitoring disposal process is an easy way out and something which would be sigh of relief for contractors. Introduction of stricter regulations on manufacturers for disposing of waste/scrap or rather ensuring the actual implementation of the laws levied on disposing off scrap process is a measure that can wipe out counterfeiting from its origin. Also its in the benefit of the manufacturer to introduce tighter supervision for tackling this problem as the person/distributor taking advantage of this lapse is causing copyright violations hence adversely affecting the revenue generation of the manufacturer. Moreover the user of the electronics who is not aware of the counterfeiting going on and uses that product, is likely to blame the manufacturer when low performance issue arises.  

  3. Barbara Jorgensen
    February 16, 2012

    @mfb: Yours is an informed opinion, and I agree. Getting numerous countries aligned with the same processes–whether they are environmental or anti-counterfeiting–is unbelievably complex. Globalization in the electronics industry continues to be a double-edged sword, with benefits and challenges every step of the way.

  4. Barbara Jorgensen
    February 16, 2012

    @Waqas: I definitely think it is in the supplier's best interest to protect its brand, and most suppliers do so. When products are purchased through authorized channels, suppliers will warranty their products. That assumes the supplier's factory manufactured the chips, and those chips were sent directly to the distributor (or to the end-customer).

    The problems arise when a supplier outsources its manufacturing to a fab–it is up to the fab to dispose of scrap and that may or may not be in the brand owner's control. I'm not sure whether there is any data to suggest the problem is any worse when fabrication is outsourced–it is just one more step in a process that removes the brand owner from the actual product.

     

  5. elctrnx_lyf
    February 16, 2012

    As we see more and more companies are actually provided with defense equipment development contract there would be more chances of counterfeit components. I think the military should stick to a list of OEM's and make sure they are consistently able to develop products without any conunterfeit components.

  6. rohscompliant
    February 16, 2012

    I read today the FED ruling on sentencing for the owner of MVP Micro; a convicted chip counterfeiter. He was sentenced to ONLY 30 months. If his partner (who committed suicide as a result of being arrested for the same offense) had only known that he would get such a slap on the wrist, he would probably still be alive today. No doubt the MVP owner stashed a good portion of his $$$ away before getting caught and will come out 'all set' when he gets outta da big house……30 months incarceration is a joke for such an offense………what if it was traced back that 'mil spec' components he sold ended up in a system that malfunctioned and killed our brave soliders???? The man (using the term 'man' loosely) should go away for a lot longer………..the penalties for being caught should be much greater……..it may not stem the tide of counterfeiting but it may keep some from entering into the 'dark side'!

  7. Barbara Jorgensen
    February 17, 2012

    RoHS–that was a big case, and yet you are correct–the penalty was absurd. Once again, by the time it gets to the point of prosecuting people who traffic in the goods it is too late. I believe those components were discovered at the contractor level. That contractor no doubt had to find alternative parts and start from scratch.

    I strongly believe limiting access to discarded components will help cut down this problem. The reason most bogus parts  go undetected for so long is they probably perform 99 percent of the time. If a counterfeiter makes a chip rom scratch, there is usually a problem that can be caught earlier in the supply chain. My favorite story is about a counterfeiter that misspelled Malaysia on the surface of the device.

  8. rohscompliant
    February 17, 2012

    Barbara,

    Is it possible that the incident rate increase of reported conterfeiting is due to the fact that more people/company's are more aware of the problem and are on the lookout for it?…….and are reporting it? I know  that in the independent supplier market place, we are more alert, and on the lookout for suspesct suppliers and suspect parts upon incoming inspection. Also services we pay for eg; ERAI etc are reporting fradulent parts on an almost daily basis……..so maybe the increase in the reported rate may be due to some of these steps taken to prevent?????

  9. Barbara Jorgensen
    February 17, 2012

    @rohs–that could be a contributor, although I would look farther back than 2009 to see if there is a trend. The IDEA site has been available for at least a decade, although it has changed venues, I think. Your point about incoming inspection, though, is right on the money. Independents  became really aggressive, and public,  about incoming inspection within the last 2-3 years. (I know this becuase I received the press releases.) If those distributors reported counterfeiting incidents, that could certainly account for the spike between 2009 and 2011.

     

  10. Eldredge
    February 21, 2012

    Given the seriousness of the problem, one would think that the manufacturers would be motivated to destroy the defective product on-site, then let their subcontractors dispose of the waste, and not allow this product to compete in their own market.

  11. Eldredge
    February 21, 2012

    In the military sector, the amount of time required to qualify hardware, and hence the components that go into that hardware, combined with the life of the program for bbioding the hardware, almost inevitably create an obsolescence issue with some components. This tends to cause supply issues that conterfeiters have taken advantage of in the past.

  12. Redding McLemore
    February 27, 2012

    30 months might not seem like a lot but being in a prison for any time is a deterrent.  I think  the bigger issue is that the counterfeiting process is largely done offshore – away from the reach of US law.  We need better IP protection and enforcement in the countries where it occurs.  That is up to the state department and our administration.  Is it any coincidence that counterfeits come from current or former communist countries where the people who knew how to make money were also the ones who knew how to “get around the system”. 

  13. Clairvoyant
    February 27, 2012

    Eldredge, are you meaning manufacturers using components that turn out to be counterfeit? The issue is, who covers the cost of replacing the counterfeit component? The manufacturer will have to do deal with the cost in the end, even though they rightly shouldn't need to.

  14. Eldredge
    February 28, 2012

    Mostly I was trying to emphasize the obsolescense issue that often occurs in the defense industry due to the long design and produciton cycles, and how counterfeit components just adds to the headaches. Defense contractors are very serious about detecting and avoiding counterfeit parts. And you are correct – no one wants to deal with the cost repercussions from having used them.

    As the contractor, if you are 'lucky' (or more accurately, diligent), you or your supplier detect and eliminate counterfeits from teh supply chain befre they are used. But the result is that the contratcor may be scambling to find a source of legitimate parts, or, is forced to design in another component, redesign a board to match the footprint, or whatever else is involved with the remaining options.

  15. Clairvoyant
    February 28, 2012

    Exactly, Eldredge. There are indeed many (too many) headaches caused by counterfeit components.

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