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Counterfeit Components & the NIMBY* Effect

Sometimes it's easy to forget just how simple it is to set up a business that can traffic in counterfeit components. An article in a Boston-area newspaper provides a great lesson in how a small operation has the potential to do big damage.

Yesterday, in Methuen, Mass., local and federal agents raided a private residence and carried out boxes of material to a police van, according to the Eagle-Tribune. The residence was also the headquarters of Epic International Electronics Inc., an independent distributor of electronics components. According the the Eagle-Tribune, the principals of Epic are Peter Picone, who serves as president and director; and Lisa Picone, who serves as treasurer and secretary. There is no mention of any charges or arrests that have been made in conjunction with the search. Officials said the raid was part of an ongoing investigation.

It's significant to note that both the US Department of Defense Criminal Investigative Service (DCIS) and the Naval Criminal Investigative Service (NCIS) took part in the raid. The sale of counterfeit components to the US military has received a lot of attention lately and has spurred a recent mandate called Combating Military Counterfeits Act of 2011.

The fact that the US government is so involved in the effort indicates the magnitude of the problem. Yet, component suppliers, authorized distributors, and even buyers point out that many of the firms that traffic in suspect components are small operations that spring up and disappear within days. According to the Eagle-Tribune, the Picones formed Epic International Electronics in August 2009 and previously had served as directors of a company called Tytronix Inc., which was founded in 2005.

US distributors that are doing business in Asia say that small trading companies are among the most populous form of resellers in the region. The main difference between the trader model and authorized distribution is the issue of franchises, which authorize distributors to represent component brands. Most component makers will not guarantee the performance or authenticity of their products unless they are sold by an authorized distributor.

But the fact is, it takes very little capital to set up a distribution operation. For example, catalogue orders are frequently so small that purchases can be made by credit card. In such a case, the fraudulent buyer orders and receives components; swaps bad parts (either counterfeits or devices pulled from scrapped circuit boards) out for good; and sends the bogus parts back to the distributor as a return. By the time the distributor inspects the returned order for authenticity, the buyer could be gone. That buyer, in turn, can resell the good parts at a huge profit.

Traders aren't a problem that's unique to Asia. The Epic situation is a very real reminder that counterfeiters can literally exist right in our own backyard.

26 comments on “Counterfeit Components & the NIMBY* Effect

  1. _hm
    April 25, 2012

    This is very good action. Military procurement people do have good idea about this and they should ban all these type of resellers. Do US government suspect involvement of foreign power in this?

     

  2. Smartd Data Works
    April 26, 2012

    Counterfeit semiconductors are entering the worldwide supply chain in unprecedented numbers, and those numbers are increasing at an exponential rate. Also entering the world supply chain are substandard components that were originally viable but have been damaged through improper handling, storage, and shipping methods employed by unauthorized distributors. All of these components are causing production and maintenance failures that range all the way from inconvenient to deadly. Added to the already overwhelming mix of components that just don't perform properly – or at all – are components armed with malicious “extras” that can destroy systems, cause malfunctions, or covertly gather proprietary information.

    The Cost Effective Strategy against counterfeit components is to buy only from the original manufacturer or their authorized distributors.

    For full details visit: http://www.dististock.com

     

     

     

  3. Barbara Jorgensen
    April 26, 2012

    @hm: The US government can't ban businesses from opening, but they can discourage certain practices in defense procurement. The 2011 mandate outlines some of those practices. As for foreign government involvement, I don't think that the counterfeiting is some kind of conspiracy, I think it is plain old human greed.

  4. rohscompliant
    April 26, 2012

    could you please stop using this blog area to advertise ur product? seriously? ur service is a copy cat of many others and it is sub par at best.

  5. Barbara Jorgensen
    April 26, 2012

    While we encourage readers to point to tools, companies and services that can help our community, we try to exercise judgment. A reference and a URL will suffice, and I've edited down comments accordingly.

  6. Smartd Data Works
    April 26, 2012

    Dear rohscompliant,

    As you are a broker it is hardly surprising that you are angry with suggestions that encourage electronic components supply-chain professionals to buy only from Authorized sources.

    It is unfortunate that you did not bother to download the free trial of the application from http://www.dististock.com before denigrating it.

    I would love to read your comments once you have downloaded and had tried it for locating Authorized inventory for your customers.

    Good luck!

  7. rohscompliant
    April 26, 2012

    YES as a matter of fact my purchasing team has tried your service in the past and found it to be of little to no difference (and lacking) to other “for free” franchised compolation web site svcs…….ergo the reason for my comments. And yes we use franchised distributors on a global basis……daily! We have Net 30 terms w/ Avnet, Arrow, Future, Digi-Key, Newark, Telmil/Avnet Israel, Mouser, TTI………I could go on but I do not want to bore other viewers of these posts. I stand behind my critique of your svc and offer no apologies………again please do not use this site to advertise your wares…..for free…….perhaps you could purchase an add and have it posted on this highly respected site.

  8. Smartd Data Works
    April 26, 2012

     

    Dear rohscompliant,

    Your self aggrandizing comments not withstanding it is obvious that you and/or your so called “purchasing team” (most likely consisting of you, yourself and you) have not bothered to try this magnificent productivity tool. I am concerned that even if you would bother yourself, your manifest lack of objectivity would limit your ability to comprehend the extent of its immense usefulness to components purchasing professionals.

    With kind regards,

    http://www.dististock.com

     

  9. Barbara Jorgensen
    April 26, 2012

    There are a number of tools available to the industry from companies in all segments of the supply chain. Pointing them out to readers is a service we'd like to provide. We ask that the critique of these tools and the companies that provide them be constructive, ple

  10. cameron
    April 26, 2012

    Barbara,

               That is a great article that you wrote. Peter Picone has been around for a while and has had a few companies that I have seen over the years. Allegedly he has been know for shipping refurbished or counterfeit parts to customers and other brokers for years.

    Being an independant distributor myself (for the last 19 years) I have stayed away from buying parts from him for this reason. If you mess with the U.S. military and try to do what other brokers have done (not saying that he is) like a Vision Tech Electronics you are going to get in trouble for it.

    Testing and die verification as well as decapulization before shipping parts to a customer is key in making sure the product is good.

    On a side note we all know that independant distributors or “brokers” play a very unique role in keeping the supply chain running and also keep buyers out of hot water when franchise or the MFG decides to push product out and cause severe leadtimes for customers.

    Franchise sales people don't want to hear that the buyer placed the order with a “broker” instead of with them because the lead time from the franchise was so long. This is just the cat and mouse game that is the electronic component industry.

    Over the years I have worked for some very large “brokers” and the key to it all is good customer service and shipping quality parts everytime. Things will happen from time to time but it's how you fix issues that keeps the customer happy.

    As far as Epic Int'l and Peter Picone goes, if you have a rumor that has been around for years that you sell bad parts, well do I need to say anymore?

     

  11. prabhakar_deosthali
    April 27, 2012

    One of the measures against the counterfeiters making quick buck and later disappearing could be to have some kind of bank guarantee  valid for say three months after delivery. If the component is found fake then the bank guaranatee should be invoked to claim the damages.

    This ofcourse requires some kind discipline by the purchasing party to make sure the bought parts get tested during this time span. If the purchase r is just buying in panic and stocking the item for future use then by the time the part actually gets used the bank gurantee will have become void and the distributor also may have vanished.

  12. Barbara Jorgensen
    April 27, 2012

    @cameron: Thanks for your feedback. I just want to note for all that there have been no charges brought in the case of Epic. I think it will be up to the authorities to determine whether or not the company or its principals did anything wrong (and to the buyers who purchase from the company). I've been covering the industry for 20 years, and there are many independent distributors in the market that do the best job they can for their customers and go the extra mile to avoid suspect components. If they didn't, we would not have businesses such as America II, Smith and many smaller companies that have been around for decades and continue to grow. One of the points I'd like to emphsize is that the issue of counterfeiting is not an Asia problem. It's unfortunate, but no matter where you buy components from, you have to do your diligence first.

  13. Barbara Jorgensen
    April 27, 2012

    @cameron: Thanks for your feedback. I just want to note for all that there have been no charges brought in the case of Epic. I think it will be up to the authorities to determine whether or not the company or its principals did anything wrong (and to the buyers who purchase from the company). I've been covering the industry for 20 years, and there are many independent distributors in the market that do the best job they can for their customers and go the extra mile to avoid suspect components. If they didn't, we would not have businesses such as America II, Smith and many smaller companies that have been around for decades and continue to grow. One of the points I'd like to emphsize is that the issue of counterfeiting is not an Asia problem. It's unfortunate, but no matter where you buy components from, you have to do your diligence first.

  14. cameron
    April 27, 2012

    Barbara,

              I completely agree with you, it is just not a China problem anymore, it is from all over the world. Our supplier base gets smaller every year since we are so picky on who we add to it.

    Yes, I know America II very well (I worked there for ten years) and Smith & Ass. does a great job with working with their customers as well.

    I do believe that the MFG's should do more in helping franchise/independants fight counterfeit components. Did you know there has been more cases of counterfeiting hitting the franchise market as well? These are parts that are suppose to be coming straight from the factories.

    I believe the MFG's should do more with working with suppliers to combat this issue instead of just telling everyone it's not their problem.

  15. Himanshugupta
    April 27, 2012

    With the popularity of e-commerce, the online traders usually make sure that the seller and buyers get some kind of gurantee of service. This, maybe, can be used in electronic parts. The only problem is that finding out the fake parts from genuine parts can take a longer time.

  16. dalexander
    April 27, 2012

    Barbara, The Gray Market, also known as “brokers” can have a huge web presence and be a one man operation. One can go to their websites and see hundreds of thousands of part numbers listed in simple text format, ( first clue), no links, ( second clue) and “Call for pricing”' (third clue). Call them for inventory status and the response is, “the parts are in our X-coast warehouse.” or, “How much do you want to pay?” Now, if you want to buy from these sources, they say, “Give me a day and I will get back to you.” And as soon as you hang up the phone, they are calling their overseas contacts who are getting the parts from a little place in Asia, called “Whoknowswhere Province” and if you purchase from this “distributor”, be prepared to pay C.O.D because that is the only way he will do business, just before he changes his name, his office, and his phone number. The Gray Market isn't always this bad, but be advised, some Gray marketeers are darker than other Gray marketeers. It's enough to give some poor purchasing guy grey hair! Did I mention my hair was grey at 30?

  17. dalexander
    April 27, 2012

    Prabhakar, In my experience, the part's cost part of the top level product cost is not that significant. Think of the added labor for board level assembly, test, handling, sub-assembly build and test, final build, burn-in, test, packaging, and shipping. All of these cost are easily accrued within a three month time period, however, even if you get reimbursed for the part cost that caused the whole product to go afoul, how much real money cannot be recovered for all of the other good components that cannot be shipped until the boards are troubleshot, more labor, and now slightly less reliable because of hand resolder…if possible, and other additional problems to other components causing a cascading or systemic failure? I don't think the cost of one part could ever one close to the cost of all the other problems that could arise as a result of a counterfeit slipping into the high-speed, high-volume production operation. I guess your suggestion is better than nothing, but I believe a pre-assembly authentication program wold be much more beneficial to all concerned. The technologies being introduced now, will greatly lower the cost for countering the counterfeiters and hit the where it counts….in their accounting.

  18. dalexander
    April 27, 2012

    Cameron, America II is a great company. I hope they never get caught in the counterfeit crossfire. I did get some Xilinx serial PROMs from them where half of them were non functional, but they did not hesitate to give a full refund as soon as I sent the parts back to them. In general, the more ubiquitous the packaging, like an 8-SOIC, the more likely it is to slip anti-counterfeit detection. When their packaged 3000 to a reel, the first and last 100 may be the genuine parts, but the inner 2800 parts could be blacktopped or even reused originals. Nasty stuff for sure.

  19. elctrnx_lyf
    April 29, 2012

    The best way to solve this issue could be to order components through authorised distributor only. But many a times people in urgent actually try to get these components from small n not much known distributors where the actual counterfeit starts.

  20. prabhakar_deosthali
    April 29, 2012

    Douglas – Yes I totally agree that the indirect cost of counterfeit part causing board failure, malfunction, cost of additional inspection and testing is much more that the actual component cost.

     

    So in my opinion, we should hold the supplier responsible for all those damages and such act of supplying counterfeit parts should be treated as criminal offence by the law. Then only there will be some check on these counterfeiters.

    The traceability of each component used in a product is very much essential to have a some control on counterfeiting.

  21. Taimoor Zubar
    April 30, 2012

    “But the fact is, it takes very little capital to set up a distribution operation.”

    I think ecommerce is greatly helping the counterfeiters setup their distribution operations. With the help of an online website and electronic payment system, counterfeiters can set up their online stores and publish catalogs. They can book order for fake products, get them manufactured and supplied to the customers. They don't even need a physical office for all this.

  22. FLYINGSCOT
    April 30, 2012

    It is shocking how easy it is to set up these bogus operations.  More needs to be done by the OEMs by offering a validation service when only accredited distis are allowed to sell their products.  The consumer of the products also has a responsibility to validate their supply chain.

  23. Adeniji Kayode
    April 30, 2012

    @elctrnx,

    I agree with you on that, I am still of the opinion that that is little the government can do about even though that effort might go a long way but the best solution is to order from a reputable manufacturers that are traceable and can be held responsible in the case of malfunction.

  24. Barbara Jorgensen
    April 30, 2012

    The Internet and e-commerce has made a bad situation worse. But there have always been counterfeit problems in the industry.

  25. Barbara Jorgensen
    April 30, 2012

    Douglas: What's a little gray amongst colleagues? I first was introduced to the independent distributor model about 20 years ago and it has been a rollercoaster ever since. One of the things that always used to come up when I was talking to an independent was “let me talk to a customer.” That still hasn't happened. OEMs deal with brokers all the time but don't want to admit it. Until everybody–suppliers, OEMs, distributors, brokers–come out from behind the curtian, there will be problems.

  26. ppicone
    May 7, 2012

    Hello Everyone…. This is Peter Picone from Epic International Electronics. I usually don't respond to forums but this one is one of the more respected ones. I just want to clarify something's on who I am and what my Companies were.

    First, I have not owned a bunch of Companies. I had/have ownership in only 2 Companies. Tytronix and Epic. A little history, (I will try to be brief and short) Tytronix was around for 4 years. In the last year or so we ran into severe financial issues. We had a bunch of our normally good customers on NET 30 accounts, falling way behind or closing. We were not that big of a Company to overcome something like that. Combine that with we had a bunch of our suppliers that were normally trustworthy and shipped great product, started selling us a lot of bad parts. Unfortunately we were not equipped to overcome that. We spent our money paying for testing costs of these bad parts, shipping and refunds.

    So, after Tytronix closed I vowed to come back but with a lot of changes. Epic started in 2009 and we basically cut 90% of the suppliers I had used at Tytronix. I only used 2-3 trusted ones over the 10-12 we used at Tytronix. Again, though smaller, things were going great again. We had also bought some test equipment in late 2010 or early 2011. In late 2011 we started getting more requests for returns again. It turned out at the time, I thought my supplier was getting desperate and selling bad parts. I cut them off. Epic was hurting. Come to find out on a few orders, even though we were testing them (Function and Acetone) parts were again coming back as possible refurbs/counterfeit.

    Seems I was not aware until too late that these crooks had found a way around Acetone testing. I truly believe my good supplier was taken in this as well. So, here we go again. Now, I have made drastic changes here to match what a lot of other suppliers are doing as well. We will only ship parts that are either factory sealed with complete trace or if it is outside the US border, whether it is Europe or Asia, NOTHING ships in to us without a complete de-cap and x-ray test report. This will slow down shipping and increase costs but it is a small price to pay to absolutely ensure no bad parts get through us.

    I do blame myself of course for not being as up to date on a lot of the changing aspects of our business as far as parts go. I have seemed to be behind the 8-ball and that is my fault. That will never happen again. Thank you all and sorry for the long post.

     

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