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Counterfeiting: The Worst Is Yet to Come

Incidents of counterfeit components in the electronics supply chain are maintaining a record pace so far this year, according to IHS. Year-to-date, 2012 has the potential to surpass 2011:

    Counterfeit incident reports from the beginning of the year through the end of August averaged 107.3 per month, up slightly from 107.1 in 2011… on a sequential 12-month basis, a total of 1,336 separate verified counterfeit-part incidents have been made for transactions involving a minimum of 834,079 purchased parts. These figures are considered conservative because purchased parts reflect only a subset of all reported incidents.

IHS also notes the data coincides with an important milestone in anti-counterfeiting efforts in the US:

    These new counterfeit report figures arrive at a time when the U.S. Department of Defense (DoD) is scheduled to update the Defense Federal Acquisition Regulation (DFAR) Supplement to the Federal Acquisition Regulation (FAR) on October 3, 2012. These updates are part of measures intended to regulate the detection and avoidance of counterfeit electronic parts as part of the National Defense Authorization Act (NDAA) of 2012.

I don’t think anyone in the industry needs additional verification that this is a problem. In fact, I did a casual search of the term “counterfeiting” on EBN’s home page, and the first mention was a mere four days after EBN re-launched as an online publication in October 2010. During this two-year span, we have published statistics, best-practices, blogs, news reports, court documents, and hosted what I’d conservatively call a “spirited debate” on the causes of counterfeits.

We’ve recently co-sponsored a Webinar on approaches to anti-counterfeiting and have done in-depth reporting on recent efforts by the US government to thwart counterfeits in the DoD supply chain.

Granted, it’s a fairly new effort, but I have to admit I’m concerned that one of the centerpieces of the NDAA is agreement on the definition of “counterfeit.” This is from IHS:

    To help combat the counterfeit problem, President Obama in December 2011, signed the fiscal year 2012 U.S. National Defense Authorization Act (NDAA), which added regulations for counterfeit part detection and avoidance. The pending October 3, 2012 updates to the DFAR supplement will implement portions of section 818 of NDAA that must add definitions specific to counterfeit parts, define contractors' responsibilities, and clarify the government's role.

One of the key points IHS makes in its latest release has to do with the reporting of counterfeits, which is why I think next year’s data will be even worse than 2012's. The IHS data includes numbers from the ERAI trade association and GIDEP, the Government-Industry Data Exchange Program.

In August, EBN contributing editor Tam Harbert reported that the Defense Logistics Agency (DLA), which accounts for the bulk of the government’s procurement of electronics parts, hasn’t kept up with its GIDEP reports. According to Harbert, a government committee that recently researched the problem of counterfeiting in the defense supply chain cited cases identified by the DLA in 2009 and 2010:

    According to the committee, of the 202 cases, only 15 were reported to GIDEP. And only four of those reports were filed by the DLA; the rest came from “private companies or another DoD element.” DLA has since changed its practices and says that it is now filing such reports.

So let’s assume the NDAA accomplishes part of its goal, which is to standardize the definition of counterfeits and improve reporting methods. IHS admits its 2012 data is conservative, because it only includes “reported” incidents. A year from now, I’d expect the number of reported incidents to skyrocket, with very little data to measure the effectiveness of the NDAA. But let’s say the NDAA does have an impact. Is it likely private industry will adopt similar practices?

I’d like to hear what you think. My guess is “no,” for reasons I’ll examine in upcoming posts.

24 comments on “Counterfeiting: The Worst Is Yet to Come

  1. ddeisz
    October 8, 2012

    As of today, there are still no GIDEP reports by DLA for all of 2012.

    Dan Deisz

    Rochester Electronics

  2. Barbara Jorgensen
    October 8, 2012

    Dan: Interesting. That could mean there were no counterfeits; or that there weren't any reports (to date). Maybe they just wait until the end of the year to tally them up?

  3. ddeisz
    October 8, 2012

    My only problem is that if DLA says they are reporting into GIDEP, where are they? It might be worth a follow-up to whoever said they are reporting into GIDEP because it isn't there. GIDEP reporting amounted to 3 suspect counterfeits reported for all of September. Somebody is making GIDEP out to be more than it is. While the IHS number doesn't come with any backup data that allows investigation, I would think the GIDEP number should be bigger.

    The IHS and/or ERAI numbers are being thrown around a lot. It makes for exciting press. Exactly how are those numbers derived? Has anyone really investigated the source of that data? Its' really easy to throw around the numbers, but who is looking at the data?

    Dan

     

  4. Barbara Jorgensen
    October 8, 2012

    Good points Dan. I'll admit that trying to backtrack through the numbers got confusing (so it must be a nightmare for real statisiticians.) First, I checked to see where IHS got the numbers.  Here's what it says:

    Among all reporting entities in IHS figures, sources include the Government-Industry Data Exchange Program (GIDEP) and ERAI.  Consistent with 2011, ERAI represents the significant majority of reports made – 88 percent of year-to-date 2012 totals.

    So then I looked back on Tam Harbet's GIDEP story and found that most GIDEP reports came from “industry” not from the DLA. (At least not in 2009 and 2010). Here's what Tam reported (in addition to the 202 incidents from DLA.)

    (Contractors weren't very good at reporting either — of the 1,800 cases of suspected counterfeits identified during the Senate investigation only 271 GIDEP reports were filed.)

    So most of the data comes from ERAI. I'm not certain how ERAI tabulates its data. But let's add the DLA's 202 incidents with the other 271. That's 473 incidents out of the 1,800 or so reported. I'm not sure what to make of that, but it seems pretty low for a problem that requires an Act to address its shortcomings.

  5. SP
    October 9, 2012

    I think its beneficial for the whole industry if the counterfeiting cases get reported well and get addressed well. Reaching the closure is equally important. We all have agreed that counterfeing happens and its a problem. Its something like piracy problem, its there many people make their living out of it but then it has to stop. I guess if all the consumers make a single voice against counterfeiting, do not accept the counterfeited product/components because as long as there is demand and people are buying, this business will continue.

  6. Adeniji Kayode
    October 9, 2012

    @SP,

    One of the factors that encourages the growth of counterfeited products is ignorant of most consumers, some don,t even know how to identify the original product.

    Moreover, counterfeits also come very cheap when compared to the original.

    These two factors may not allow for consumers to have one voice.

    In some cases and places, the so called ” counterfeits” tends to be available more than the original products and sometime seems to solve some immediate problem

    though there will always be consequences.

  7. ddeisz
    October 9, 2012

    In looking at just 2012 GIDEP data (where the totals should be more), there are no GIDEP entries for DLA and less than 100 suspect counterfeit reports TOTAL for non-passive semiconductors this year. When it gets reported that counterfeit is growing and the gut feel is that the numbers are getting larger, is everything based on ERAI data? That means we have reported growth in counterfeit with no specific and actionable data to back it up. We have what amounts to emails, feelings, and he-said-she-said data.

    When DLA reports that they are making GIDEP entries and yet there are none for 2012, I view this as a problem.

    The ERAI data needs to be more detailed and actionable in my opinion. Stating growing numbers reported in anonymity does nothing for the end customers.

    Dan Deisz

    Rochester Electronics

  8. Kristal Snider - ERAI
    October 9, 2012

    This discussion involved a summary reported in an IHS news release.  The purpose of such news releases is to briefly highlight key market trends.  These trends are drawn from very comprehensive commercial databases and tools.  For instance, IHS and ERAI have partnered on an offering which provides granular details about each counterfeit investigation, complaints made against a part, part numbers and descriptions, photos and documents of non-conformance, inventory information such as date code/lot code, and other detailed part property information.  In addition to the comprehensive data itself, both IHS and ERAI have integrated tools to help companies analyze, manage, and act upon part and supplier risk within critical business processes.  Together, these play a vital role in the counterfeit detection and  avoidance procedures implemented by many organizations serious about counterfeit risk mitigation.

    This news release highlighted the trend of an ongoing threat from counterfeits based on incidents reported in the marketplace.  While the majority of incidents summarized by IHS were attributed to ERAI, the figures included other entities in addition to ERAI.  As indicated in the news release, IHS combines data from several sources into a single repository in order to facilitate research, report industry insight, and provide analytical tools to be used for counterfeit detection and avoidance. 

    At ERAI, each counterfeit incident reported involves thorough investigation which consists of reviewing purchase orders, invoices, test reports, email communications, and other verifiable documentation.  A report has never been generated based on “feelings”, “assumptions”, or “he-said-she-said”.  No single incident is considered confirmed (nor supplied to IHS) that does not undergo this rigorous ERAI due diligence and validation.  Specifically, this eliminates subjectivity and erroneous claims.  These objective and stringent procedures are among the reasons why ERAI is widely-supported within industry as the news release conveyed statistically.

    I am happy to take anyone seeking a better understanding of the comprehensiveness and objectivity of ERAI's data, processes, and procedures on a virtual walkthrough of our capabilities.

  9. Barbara Jorgensen
    October 9, 2012

    Hi Kristal: Thanks so much for the breakdown. I think the industry appreciates how difficult it is to cull through word of mouth and get to reliable and meaningful data. (I don't envy any organization the task.) From my POV, I find it worrisome that we read–for whatever reason–about the dangers of counterfeits in mil/aerospace equipment and then see so little data from DLA and/or GIDEP. I'm sure there are a lot of reasons for that, including some of the ones we have noted, such as definitions and other unclear guidelines. That's certainly out of the control of ERAI or any organization (outside of the government, I mean). I hope, and other contributors have noted, that the new procurement guidelines should help.

    Do you think the data will change if the new guidelines are followed?

  10. Mr. Roques
    October 9, 2012

    Should the Government create certificates, based on audits and other systems? This would benefit firms that are very organized and can prove their products are not counterfeited. 

    Has anyone done anything in this regard?

  11. Ariella
    October 9, 2012

    @Barbara I would think so. But it will be necessary to raise awareness about the problem and how the guidelines would help.

  12. SP
    October 10, 2012

    Hi Adeniji,

    I totally agree with your statement. Many people are just not aware of this problem. I guess its time we create more and more awareness for this among electonics industry. People must write blog on this, write on social websites, visit companys, start a business only on this subject etc. I am in for this with my best support.

     

  13. SP
    October 10, 2012

    Mr. Roques,

    That's a good point. I think definitely it should happen in near future. But we must not ignore the fact that if a firm has to prove that their product is not counterfeited, they have to prove that all the components on the product are also not counterfeited. If they have to produce a certificate that their product is not counterfeited, they have to collect certificates of non counterfeit from all the component in their BOMs. SOmething like what we do for ROHS/WEEE compliance. Its not impossible but then its not very easy too. Strict guidelines have to be made and government has to make it mandatory.

  14. Daniel
    October 10, 2012

    Babrbara, one thing is its very difficult to stop counterfeiting, but I think we can minimize it through various methods like strong filtration and parametric tests. Most of the companies and defence labs have a good system in place to filter such counterfeit components, but most of the time negligence made them to pass the test.

  15. Adeniji Kayode
    October 10, 2012

    @Sp,

    You made a good point there.The effort really worth it.

  16. GraniteIC
    October 10, 2012

    Beware the cheeky cheater. They are all smiles and have a flashily marketing pitch. They will promise you everything. They will solve all your problems.  They are so nice and tell you funny jokes and can get you to smile with them. They will make you fee so good about yourself. They will make your job so very easy and supply you with all the parts you need and provide flashy test reports with lots of photos that states, inconclusive. 

    Beware the cheeky cheater is very charming when things go wrong they will convince you it's your fault because you signed a wavier and accepted the inconclusive test report.   You will not want to upset the cheeky cheater who is your friend and makes you feel so good, and after all you did sign that wavier an accepted the inconclusive test report.  You will apologies to the cheeky cheater and promise not to report them. 

    Beware the cheeky cheater will promise to report the P/N and keep you out of it. The cheeky cheater has solved another problem. The P/N gets reported and no one knows you sign that wavier an accepted the inconclusive test report. Beware the cheeky cheater who is solving all your problems when that undiscovered escape cause catastrophic damages the cheeky cheater will explain how you knew about the issues you did sign that wavier an accepted the inconclusive test report.

  17. SP
    October 11, 2012

    So true GraniteIc. Unless every individual and every organization stands against counterfeit components morally and business wise, nothing will change. The few years will be tough but afterwards it would be good for everyone. And government must also give some subsidy in taxes or any other form to the organizations or individuals who buy from genuine source and say no to counterfeit.

     

     

  18. Barbara Jorgensen
    October 11, 2012

    I have to admit I keep going in circles on this topic. It seems to be we should have made more headway than this–based on the statistics, at least. Maybe there are more counterfeits because more components are being shipped. But judging by earning reports, component sales have been declining. I think what really alarms me is the reported lack of data from GIDEP and DLA. If the problem is so bad that we need an act of Congress to combat it, where's the evidence? The NDAA hasn't even been implemented yet, but government isn't reporting any incidents of counterfeits in 2012. Does that mean there aren't any? Or that they are just not being reported?

  19. Adeniji Kayode
    October 11, 2012

    @Sp,

    I agree with you on that, the moment counterfeits have reach the lowest level possible, the price of the  original products may go up too.

  20. SP
    October 12, 2012

    @Barbara, Its difficult to believe that counterfeit doesnt happen at all. I think its not getting reported. I guess the people who are buying it are seeing a value in it may be they are cheaper or they are just available when its not longer available from the genuine source or the lead time is huge if to get from genuine source. Defintely the seller would not report it. So if  the buyer and seller both are happy how would it get reported. Unless there are detective agencies working on this to catch the parties involved I guess it would be difficult to get the data. But the question is “Is stopping counterfeit such an important task that government employ some detective agencies on this?” I would say yes it is.

  21. GraniteIC
    October 12, 2012

    Companies do not report counterfeits because they fear it makes them look bad.

    What happens is that the End User requires the Independent Distributor who supplied the counterfeit to report the incident. 

    This way the Government Contractor is unknown, and completely out of the reporting process. They are then able to show they have dramatically reduced the incidents of counterfeiting. 

    The Independent Distributor also wants to remain anonymous. They do not report to GIDEP. Instead they report to a private company who allows reporting of just the part details. 

    The original source of the counterfeit is allowed to learn how the counterfeit was detected. They use the information to sharpen their counterfeiting skills and continue on with their nefarious activities.   

    Everyone in this process including the End User is covering up for their supplier who shipped a counterfeit. 

    Until all customers military and commercial are required to report counterfeits the problem will continue to grow. Only with fair accurate reporting will we make progress. 

    When a “Suspect Counterfeit” is identified it should be reported immediately to the supplier of the product. If the supplier is unable or unwilling to supply tractability or other evidence of authentication then the end user must report the supplier and so on down the supply chain until the original source of the counterfeit is discovered. There is no other way. 

    The days of protecting your supplier with anonymous reporting must end.

  22. Kristal Snider - ERAI
    October 12, 2012

    Excellent discussion!  Barbara, in response to your question: “Do you think the data will change if the new guidelines are followed?” It's too early to tell what effect new NDAA regulations will have on the defense supply chain and broader global counterfeiting efforts.  Having said that, the U.S. government and their defense industry counterparts have already made tremendously positive strides to bring awareness to the risk that counterfeits present to armed services personnel, national security and the taxpayers.  Education, standardization, information sharing and addressing the “root” of the problem are all key pieces to solving this puzzle.  I would like to encourage your readers to follow closely the standards, (AS5553, AS6081 & AS6171), being developed by SAE Aerospace.  Participate in educational opportunities which may include free webinars, conferences, and trainings. For example, SAE will be holding a Counterfeit Parts Avoidance Symposium at the end of this month and SMTA|CALCE are hosting a Symposium in early December. These and others are commendable efforts and steps in the right direction. Readers here are also welcome to join ERAI's LinkedIn Group (ERAI: Counterfeit Part Avoidance, Detection, Disposition and Reporting), it's free and full of great information.

    I whole heartedly believe unity brings forth change.

  23. Adeniji Kayode
    October 13, 2012

    @SP,

    you right on that, the issue of counterfeit is a bit complex to the extend that your technician may even use one for you to draw more cash into his pocket. Now if you can,t identify counterfeits, he should.So who is suppose to make the report.

  24. Mr. Roques
    October 25, 2012

    Well, then you create a 1st level certificate (“we validate that this company's process is genuine”), 2nd level certificate, etc. Each one costing more than the next.

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