How the After-Market & Counterfeiting Are Linked

At first glance, it may seem that back-end services such as collection, recycling, and disposal have little to do with front-end concerns such as counterfeit components. In fact, they have everything to do with one another, and a strong partnership in the after-market can actually help prevent counterfeiting.

The primary source for counterfeit components is factory-made parts that for one reason or another are rejected for sale. “Counterfeit parts often are cheap substitutes or salvaged waste components that fail to meet quality requirements, leading to potential failures,” according to IHS iSuppli in a recent release.

Since these components contain materials (such as silicon) that can be recycled, or elements that are hazardous (such as cobalt or lead), component makers outsource the collection and disposal of these parts to third parties that specialize in recycling and reclamation. These companies deal with all kinds of industries, not exclusively electronics. Therefore, the risk associated with a dysfunctional semiconductor is not well understood. So in some cases, parts destined for scrap are sold to another party that remarks or manipulates a failed part to look brand new.

The second source of counterfeit parts is printed circuit boards that are also destined for the scrap heap. The boards are diverted and the components are picked off of them, often by hand. They are remarked, refurbished, and sold as new.

The electronics industry spends millions of dollars in detection and inspection equipment trying to spot these parts as they enter the supply chain. (See: US Sends Mixed Signals on Counterfeit Fight and Why Is Counterfeiting Getting Worse?.) If the parts were disposed of as originally intended, a lot of this effort would be unnecessary. (See: Anti-Counterfeit Measures Miss the Mark.)

When a distribution company, such as {complink 453|Arrow Electronics Inc.} or {complink 577|Avnet Inc.} enters the after-market, they know a thing or two about counterfeits. (See: Avnet Launches After-Market Services Business.)

First, every counterfeit part sold is money out of their pockets or their suppliers' pockets. Counterfeits taint the entire supply chain, so distributors have to inspect parts before they enter the warehouse, as they leave the warehouse, and when they are returned to the warehouse. These very same efforts — incoming and outgoing inspection — are also conducted by suppliers and most OEM customers.

The redundancy of these efforts costs the channel time and money, and still counterfeit components get through. According to IHS iSuppli:

    Supply chain participants in 2011 reported 1,363 separate verified counterfeit-part incidents worldwide, a fourfold increase from 324 in 2009. This marked the first time the reported number of incidents in a single year exceeded 1,000, a total that could encompass millions of purchased parts.

Distributors are increasingly getting involved in the after-market. In addition to providing an extension of their core front-end services (procurement, logistics, and fulfillment) they are moving toward the back-end as well. They take back used goods, repair them if they can, and dispose of them if they can't. These back-end services require many of the same things front-end services do: warehouses, logistics, and an expertise in electronics. Since Arrow and Avnet (in particular) also sell computer equipment and systems, they deal with everything from microprocessors to plastic and steel enclosures. They also “work” for their suppliers (Intel, AVX, and IBM, to name a few). Misrepresenting those brands — selling old components or systems as new — is professional suicide for a distributor. It is in their best interest to avoid this at all costs.

Many people think counterfeiters are clever individuals sitting in a factory somewhere turning out fake parts. While there are no doubt numerous examples of this, manufacturing and programming an analog IC (the most commonly counterfeited components, according to IHS) isn't that easy. (See: The 5 Most Counterfeited Electronic Parts.) Most counterfeiters take the path of least resistance, by using something that has already been made. There are a lot of uncertainties in the current market, but when a distributor gets into the after-market business, there is one thing you can be sure of: If they say something is going to be scrapped, it will be destroyed. As disposal and recycling become more than just a good idea in the electronics industry, selecting the right after-market partner will be critical.

How does your company current dispose of inventory? Let us know.

5 comments on “How the After-Market & Counterfeiting Are Linked

  1. bolaji ojo
    April 6, 2012

    Barbara, You laid out the case for the connection between counterfeiting and the after-market very well. The question that follows in my mind is this: who will police this entire system? All of the parties involved, the manufacturers of original parts, distributors, after-market parts recovery and redistributors and the counterfeiters are all in “business.” To what extent can the industry police itself and who leads?

  2. Barbara Jorgensen
    April 6, 2012

    Good question! I think it is in the best interest of the company that is contracting the service–chip/component makers–to audit their collection/disposal partner to make sure the components are destroyed/recycled. On the board side, that is going to be difficult. Any number of organizations collect old electronics (a local church does it here) and no one has any idea where the stuff goes. I think ultimately, if brand owners are going to declare themselves green or compliant, they will need to track both the sales and disposal of their products. Theoretically, a serial number of ID tag should accomplish this. In reality, those thigns are probably pretty easy to take off or fake.

    It seems to me that distributors–which handle components and now, products–from cradle to grave would be a good choice to oversee this process. They do it anyway–distributors track where the parts go. I think there is still a lot to be figured out, but since it is in their best interest to do the job correctly, they'd be the logical choice.


  3. bolaji ojo
    April 7, 2012

    I agree distributors may be the obvious choice but this topic is like the many layers of an onion. As I nodded in agreement to your answer I had another question in my mind. Who will compensate distributors for this task? They are in business also to make a profit and in years past OEMs and even suppliers have been reluctant to pay them for value-added services.

    Although my questions may be wrapped up in other questions, this is such an important subject for the industry that I believe the more we poke around this topic of counterfeiting, the clearer it becomes that no single party can take this burden upon itself. The government is concerned but its usual strategy is legislative but the real solution lies within the industry itself if they can speak with one voice. To do this, however, they have to see this as a common problem. I don't believe they do.

  4. Barbara Jorgensen
    April 9, 2012

    I agree there are many aspects to this that bear some deeper examination. I can answer one of the questions: who pays? If a brand owner wants you to repair, collect, dispose of something, they pay you (in this case, the distributor) to do so. I am told, BTW, that the margins on this business are better than typical distribution margins. Why? In this case, the distributor does not own any of this equipment. In components, distributors have to buy inventory and resell it. In the after-market, they don't. Granted, collecting, refurbishing and extending credit require people, facilities and transactions, but compared with inventory, the cost is lower.

    As to who is minding the store…again, the brand owner should, but then you have the government mandates as well. Maybe the EPA at some point will get involved…


  5. Ariella
    April 23, 2012

    Here's a visual representation of the range of Chinese counterfeiting

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