Editor's note: This is not a “how-to” guide
Marc Hermann recently got to view a marketplace for counterfeit electronics fist hand. (See: A Gray Market for Electronics.) Marc's post also raised some questions regarding a “black” market vs. a “gray” market. Without delving into legal definitions, my sense is that the word “gray” has been used in the electronics supply chain because a lot of what's happening is not outright illegal.
For example, there's no law against an OEM or EMS provider selling excess components to an interested buyer. Unless a distributor or supplier is willing to take excess inventory back, there's really no other recourse for manufacturers that simply ordered too much components.
Additionally, not all products in the electronics gray market are counterfeit. In fact, they probably are what sellers say they are. The issue is whether or not the component manufacturer will take responsibility for a problem with the part. In many cases, the answer is “no.”
The US International Trade Commission (ITC) recently published the first part of a study on IP infringement in China. Although China is used as the main example in the report, the methods of counterfeiting described are used everywhere. Here is how the ITC says bogus ICs enter the marketplace:
- There are a number of different ways trademarked products reportedly are infringed in China. A contract manufacturer may produce more than the original contract called for, or may continue to produce after the contract ends, and market the overproduction without the knowledge or consent of the IP owner.
Counterfeiting can also occur with an internal breach at a factory, whereby a current or former employee will take know-how gained there to another factory in which counterfeit goods are produced. Counterfeit goods may be produced from salvaged or recycled products that are re-marked and sold without the authorization of the trademark owner. Counterfeit goods also may be produced by individuals or enterprises unrelated to the owner of the branded product based solely on a visual examination or the deconstruction and copying of the original.
In the case of production continued past contracted amounts or deadlines, the product is identical to that of the trademark owner, but is produced without the trademark owner’s permission. This type of counterfeiting may be labeled a “ghost” or “third shift” operation. When produced in this way, the end product is generally indistinguishable from the original although quality control during such third shifts is reportedly lacking.
Similarly, counterfeiting may occur when current or former employees train others to produce the trademarked product. Employees of the brand owner may assist counterfeiters in setting up a production line, using the skills and trade secrets learned making legitimate goods. In the footwear industry, for example, sources commented on the production of “super fakes” made in this way; the counterfeit shoes are so similar to the original that they can only be distinguished by cutting them open.
An example of counterfeiting by recycling is seen in the counterfeiting of integrated circuits (ICs) from electronic waste (e-waste). China collects e-waste from around the world to salvage components from it. Some components are legitimately recycled, but others enter the counterfeit IC market when ICs are salvaged, remarked as new, and “recycled” back into the distribution stream.
Another source of IC counterfeits is called “second source,” where lower-performance ICs are re-marked as higher-grade ICs or where nonfunctional ICs are re-marked as new. Old chips can be placed in new packaging; this method of counterfeiting is extremely difficult to detect. Industry sources report that in some cases production has become more disaggregated, with false labeling added at the very end of the process in order to avoid detection and seizure.
See our previous blogs — (More on Anti-Counterfeiting: Defending Your Brand) and (In Search of Counterfeiting’s Silver Bullet) — for discussions and possible solutions to counterfeiting, and look for the discussion to continue next year.