Counterfeits Jeopardize Lives & Cost Billions

Examining the electronics global supply chain landscape, the critical nature of the problem of counterfeits and obsolete products is sobering.

The public has heard rumors about the serious problem of electronics counterfeits for many years, but the magnitude and complexity of the challenges have only come into sharp focus over the last ten years, and in the last five years in particular. For aerospace, military, and other high tech industries, the discovery of counterfeits has ignited intense debate over how to lessen the alarming risks involved. Without a doubt, counterfeits or obsolete components can, sooner or later, fail to perform under critical circumstances. There are a number of factors which have contributed to the difficulty in under- standing what to do about obsolete and counterfeit electronics, not the least of which has been the lack of visibility of components as they travel through the supply chain.

Many experts insist that the high prevalence of electronic counterfeits has arisen as a bi-product of the gray market, which is the unauthorized sale of new, branded products diverted from mainstream distribution channels. Some estimates state that up to 8% of total market revenue for electronics components are diverted through the gray market. For the semiconductor industry alone, which earned almost $336 billion in 2014, the gray market could account for up to $26.8 billion.

The gray market has spawned a fraudulent and unreliable distribution system based on a marketplace clamoring for price discounts and high availability for more and more technology products. Counterfeits have crept into the gray distribution networks through rogue component design houses fronting as manufacturers, which then sell those products to independent distributors, who in turn ask the design firms to buy their products of choice from an authorized manufacturer. After distributors obtain these products illegally, components enter the gray market, are sold at sharp discounts over the Internet, and are often offered alongside counterfeit components, making it difficult to know which products are authentic and which are not.

The “underground” supply chain also handles obsolete parts found in e-waste and used in remanufacturing. These obsolete parts have made their way into the hands of buyers who believe they are getting brand new products.

In this way, counterfeit and obsolete electronics have been discovered in missile guidance systems and hundred-million-dollar aircraft, causing serious security problems for the U.S. Department of Defense and its contractors. Who made these counterfeits, and are they programmed with malicious software from terrorist organizations designed to divert flights, radars or missile controls? What about tampering with commercial aircraft electronic components?

What happens when an obsolete component fails? Certainly lives can be at risk.

There is understandably very little information about the sources of counterfeits. When investigative organizations divulge details of their findings, they are often obliged to protect their sources. Counterfeiters shut down and reopen regularly, mushrooming in multiple locations because they hear about sting operations through the media.

So it is easy for manufacturers and suppliers to become discouraged with the risky gray market and counterfeiting environment today. What can be done about it? The U.S. Department of Defense finalized a new ruling in May of 2014 to detect and avoid counterfeit electronics as an amendment to the 2012 National Defense Authorization Act, but many manufacturers are still not clear about who is responsible for which part of the ruling. The DOD has placed more of the responsibility on contractors to identify counterfeits, putting them in charge of the legitimacy of the supply chain to include their subcontractors and suppliers. How to meet that mandate, is the question.

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