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With Counterfeit Components, Buyer Beware

A 2012 study by market research firm IHS found that more than 12 million counterfeit electronics and semiconductor components have entered the distribution chain since 2007, with 57 percent of all counterfeit parts obsolete or end-of-life components.

Many of these parts make their way into mission-critical industries, such as defense and aerospace, where a malfunctioning counterfeit part can mean the difference between life and death. Additional research from IHS noted that suppliers labeled by the US government as “high risk” are increasing their sales to federal agencies — their presence in the government's supply chain has soared by 63 percent over the past decade.

With the increase of counterfeit electronics in the distribution chain, it is clear that many of these high-risk suppliers are employing increasingly sophisticated techniques to pass off fake components, and many engineers and procurement professionals are unaware that they are being taken advantage of.

This article is the first in a series that examines the growing problem of counterfeit components in the electronics supply chain and how buyers can educate and protect themselves by recognizing fakes and dealing only with manufacturer-authorized distributors.

124 million gray-market units
The problem of counterfeit components is rampant throughout all industries, with everyone from design engineers to purchasing professionals and consumers negatively affected when products they purchase are advertised as new and authentic when in reality they could be used, refurbished, or, in fact, counterfeit.

In a recent internal study conducted by Components Direct for a leading semiconductor supplier of both analog and digital devices, over 124 million units of its product were found floating in the gray market across 6,500-plus part numbers. As seen in the attached diagram, although over 70 percent of the product was found in Asia, 20 percent also appeared in both North America and EMEA. The product age spanned many years with date codes of less than one year accounting for 22 percent of the gray market product. A further 5 percent had date codes more than 11 years old, demonstrating that whether you were an OEM looking for the newest product or a military sub-contractor looking for obsolete components, no end customer is immune to the presence of unauthorized product.

Gray area: A Components Direct study of leading semiconductor suppliers  found more than 124 million units on the gray market, 70 percent in Asia.

Gray area: A Components Direct study of leading semiconductor suppliers
found more than 124 million units on the gray market, 70 percent in Asia.

Impact on mission-critical industries
While provisions in the 2012 National Defense Authorization Act have enabled the government and trade groups to make some progress towards regulating the supply chain to ensure that components are only sourced directly from the manufacturers or their franchised distributors, the problem has not abated. The difficulty of combating counterfeits and gray market components may be best illustrated by looking at the defense industry, where counterfeit components finding their way into the military supply chain exacerbate costs and threaten lives.

For example, the US Navy SH-60B helicopter, which provides surveillance and targeting support, was outfitted with counterfeit parts sourced from Raytheon through an equipment subcontractor in Texas, through an additional four states and three countries, finally originating with a company in Shenzhen, China. This porous supply chain is not uncommon, with numerous potential points of entry, and therefore multiple opportunities for counterfeiters. While counterfeit components often display telltale signs an engineer can identify when inspecting a component, most counterfeit parts are not easily distinguishable from authentic components.

Long-term risks
Left unchallenged, counterfeits and the gray market pose significant risks and long-term impact on suppliers including:

  • Revenue. Where products are diverted from intended geographies or sold to the unintended end customer — allowing the end customer to receive a higher-than-normal discount — a brand owner's revenue and profitability may be directly impacted.
  • Cost. When gray market products require after-sales product support or warranty, it hits a supplier's revenue and profitability because applicable support fees have typically not been paid. There are also other costs to the supplier such as field service to repair or replace the damage done by counterfeits. An October 2012 report by the International Electronics Manufacturing Initiative found that the average field service cost to a supplier is more than $1,100 per incident.
  • Brand reputation. When end users see differing price points for the same brand in the market, it causes confusion and may damage a brand's value. And if a counterfeit or gray market product is not supported by a supplier, then users may be financially and operationally affected, thus lowering user satisfaction with the supplier's brand and potentially tarnishing a company's reputation.
  • Liability and risk. Buying from an unauthorized source increases the risk of counterfeit components due to the potential commingling that can occur in uncontrolled channels, resulting in risk to product quality, reliability, and liability. The only way to combat this risk is to buy from a factory-authorized source.

Fortunately, suppliers and buyers are not helpless against the rising tide of counterfeit components sold on the gray market. By better understanding how these components differ from authentic parts and by only doing business with factory-authorized sources, the financial and logistical impacts of counterfeit components can be mitigated.

Next month : Learn what to look for when evaluating electronics components and the tricks of the trade that counterfeiters use to exploit weaknesses in the components supply chain.

4 comments on “With Counterfeit Components, Buyer Beware

  1. _hm
    March 3, 2013

    Defence needs legacy sustainment support for their old failing systems. Most OEM are unable to offer this and they instead offer newer system solution, which cost few millions. Alternate is to repair exsisting system with other defence vendor.

    If you have read original specfications for each part from OEM, they are very very extensive. It does is impossible to get those parts as specified, unless custom remanufactured. Which will cost few hundered thousand dollars for each part. Alternate is to employ their commercial equivalent or some other substitute. Both defence procurement and service engineer does indirectly agree to this due to urgent requirement. That is how not so qualifed parts gets introduced to supply chain. I will not say it counterfeit. Mainly they are commercial equivalnet of QPL parts.

     

  2. Brian Fuller
    March 3, 2013

    @_hm, do you think this problem gets minimized over time as more defense systems have shorter lifecycles? I have to believe that the churn rate in military electronics will quicken over time. 

    But I may be wrong. 

    Thoughts?

  3. _hm
    March 3, 2013

    @Brian: This involves very expensive systems. e.g. radar system installed in Saudi Arabia, South Korea or Taiwan and each of them cost few millions. Also they have trained person for it and lot many other inestements. Now, If one of subsystem or part fails, they do not intend to replace them. They desperatly seeks to repair it as they are very critical requirement.

    When OEM can not repair it, they look for other vendors to substitute that part with closest available reverse engineered subassembly. In this process, they may have to employ some non qualifed parts. This is how commercial parts gets introduced to military systems.

    This is not correct, but in essence both parties agree to this to satisfy their urgent needs at reasonable price.

  4. SShammah
    March 8, 2013

    Area51 has been helping OEM's with obsolescence for more than 10 years now.

    A premium minority supplier to Northrop Grumman and many other prime contractors, Area51 prides itself it is End of Life program offerings as well as our ability to manage EOL devices over the life span of your product with cutting edge solutions.

    Through Area51's EOL management solutions and services, Area51 offers programs designed to fit with the lifespan of your products. A planned preventative approach which controls costs, guarantees product availability just in time, when you need it and only when you need it with no mishaps or surprises.

    Product is maintained, bonded, secured and stored in our corporate owned Irvine, California humidity controlled facility. All products are insured.

    With One (1) to Ten (10) year supply chain agreements Area51 introduces cost effective and proven methods to sustain the burden of massive inventorying costs and management of said products throughout the life cycle of the end product.

    We recognize the fact that OEM's should do what they do best, engineer and develop products to a changing world and let Area51 assume the supply chain responsibilities of their older still active products. All products have a life span, a warranty and a purpose, Area51 fills that void by adopting your program into a cost effective management system.

    Having programs such as these available to the end user and PRIME Contractors not only guarantees and mitigates the risk of counterfeit components from entering their supply chain, but also allows the end user to engage a minority entity with long term business opportunities thus supporting their minority spending goals at the same time. Its a win win for all parties and a small preventative step to assure quality. End of Life components gives birth to new buisness opportunites at Area51.

     

     

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