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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.

13 comments on “Counterfeiting: The Ripple Effect

  1. Barbara Jorgensen
    May 2, 2012

    Hey Jenn–first, thanks for mentioning me in your lead! 🙂 Second, I have a collection of what I like to call “stupid counterfeiter tricks.” The first was a counterfeiter that spelled “Malaysia” wrong on the “Made In” label.

    Whoops.

    I covered a story in which a single individual set up several bogus accounts at major banks. That person then orderd a bunch of components from distributors. After they checked his credit, they shipped the products. The checks bounced and the distributors finally began investigating, but by then, the individual was gone. He was finally caught as part of an FBI investigation that uncovered many such operations in the Silicon Valley area.

    Back in the days before the Internet (not THAT long ago) I know of two distributors were actually held up at gunpoint for trays of microprocessors. I believe the warehouses were based in the LA/Orange County area. They had to change the entire warehouse operation afterward.

  2. FLYINGSCOT
    May 3, 2012

    How long do you reckon before we see a James Bond movie based on this subject? 

  3. Barbara Jorgensen
    May 3, 2012

    Movie fans–I'd point to the film The Departed in which computer chips that had been stolen from the now-declining 128 Tech Corridor were in play. Jack Nicholson was buying them from an Asian gang in a classic scene outlining the practices of commerce in the United States:

    “No tickee, no laundry.”

    Politically incorrect on so many levels, but so was the character Frank Costello.

  4. Jennifer Baljko
    May 3, 2012

    Barbara- LOVE the stupid counterfeiters! Least they could do is get the spelling right. But, being held up at gunpoint, well, that's not fun, to say the least.

  5. Jennifer Baljko
    May 3, 2012

    Barbara – Will add it to my list of “Movies I missed and I wish I didn't.” Thanks for listing it.

  6. Barbara Jorgensen
    May 3, 2012

    Great opportunity for an informal contest. James Bond Gadgets that Defeat Counterfeits.

    I'm envisioning something with x-ray glasses and laser beams.

  7. garyk
    May 3, 2012

    Sounds like a CHINA, Chinese problem. Any Distributors or Company's that have this type of connections are suspect.

    It easy to say buy only from QPL Suppliers and QPL Distrubutors, or buy from large US QPL Distributors. But the US is using large CM'S that are owned by CHINA and they might be operating in the US. The best solution is when the couterfeiting is found get the FED'S envolved, contact NBC, CBS, ABC. The only counterfeiting I hear about is in EBN and Military & Aerospce Electronic News. Maybe the public needs to hear about the counterfeiting of electronic components.

  8. Daniel
    May 4, 2012

    Jennifer, counterfeit is a major issue with most of the component supply chain. Sometimes back I read an article that some suppliers have supplied counterfeit components to NASA and US defence production centre. We know that for defence and space application, very high grade components are required, where selection and filtrations are too high. But the supplier made his components pass through such filtration systems by different mechanisms. What I meant is counterfeiting components are creating headaches even for space and defence sectors too.

  9. Daniel
    May 4, 2012

    Jennifer, I think as long as there is a big margin between the actual costs and selling cost, there may be chances for counterfeiting. If the margin is less, nobody tries for that. The major motivation behind counterfeiting any product is, making maximum profit with less effort.

  10. prabhakar_deosthali
    May 4, 2012

    There is a small suburb named Ulhasnagar near the Metro city of Bombay ( now called Mumbai)  This whole town has flourished on counterfeiting business-not just the electronic parts but almost anything that is produced. These people are clever enough to even put a label on their counterfeit product saying that the product is ” Made by USA”  instead of “Made in USA”  ( And here USA  actually stands for U lhasnagar S indhi A ssociation  and not United States of America )

    The smart way of taking people for a ride . Isn't it!

  11. garyk
    May 8, 2012

    If the US knows all this, what are we doing about this. Are still letting imports in the US????????? Know wonder our economy sucks 

  12. prabhakar_deosthali
    May 9, 2012

    Oh No!  These goods are not imported in USA.  These goods are made in India and sold in India. The counterfeiters make the gullible buyers believe that these goods are imported from US in India.

    So no threat to US. It is just the local trade trick.

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