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Despite the industry's best efforts to eliminate it, the scourge of counterfeit manufacturing plagues the electronic component industry. Design or component engineers and buyers require an edge to help eliminate the risk of encountering fakes in the supply chain.
A White Paper
The copyright owner shall not be liable for technical or editorial errors or omissions contained herein. mechanical. license or services agreement governing such products or service. the copyright holder claims no express or understood association with any person. recording. or otherwise. photocopying. or third party mentioned. All warranties for products and services are set forth in the applicable subscription.A makeshift component "recycling" operation in southern China. Front cover . This document is derived from a white paper presented at a major electronic components conference in the United Kingdom in 2011. without prior written permission. entity. Portions of this document have been significantly modified from the original to provide broader discussion on the topic of counterfeiting. The copyright holder does not buy or sell counterfeit products. Nothing herein should be construed as constituting an additional warranty. The information in this document is provided as is without warranty of any kind and is subject to change without notice. and aggressively discourages any activities that foster the manufacturing and exchange of illicit parts.A Market for Counterfeit Parts? Notices © 2011 All rights reserved. Unless where expressly stated. electronic. Page 2 © 2011 . No part of this document may be reproduced or transmitted in any form or by any means.
A Market ftr Counterfeit Parts? Contents Summary Introduction What is a Counterfeit? What Counterfeit Is Not Why is There a Counterfeit Market? How Large is the Counterfeit Industry? What is the Coot of Counterfeit Parts? Other Costs Best Practices to Avoid Counterfeit Products Reduce Risk with Intelligent Product Selection Technology References 4 5 7 8 9 12 13 14 15 17 18 Page 3 © 2011 .
Buyers of electronic parts face ever-escalating risks at the hands of counterfeiters. counterfeiting has been looked upon as an everpresent plague. In the early days of electronic components manufacturing. so does the level of effort that counterfeiters employ to fabricate and ply their wares. and should be aware of what they can do to reduce risk while remaining competitive in the market.A Market ftr Counterfeit Parts? Summary Counterfeiting has a long and ignoble history. as the variety and sophistication of electronic components grows. Page 4 © 2011 . However.
albeit unpleasant . several factors have made counterfeiting a lucrative endeavor for those willing to take up the dark mantle: • With a ubiquitous acceptance of technology into both commercial and consumer goods.or even exceed . Counterfeiting was virtually unheard of 15 years ago. • The laws of supply and demand will never be perfect. in the real world this is usually neither possible nor practical. the overall demand for electronic components rises. counterfeiting has been an ever-present . • The advent of microscale component manufacturing imposes no barriers to counterfeit organizations willing to invest in faking parts at the same level of detail. Page 5 © 2011 . • This opportunity sets the stage for counterfeit manufacturers to make profits that match . some buyers must turn to the gray market. In the absence of factory-direct and franchise purchasing. • The "cost" of sophisticated components (such as FPGAs)continues to rise and the functionality is so complex that the parts are difficult to test in other than a production environment. Manufacturers continue to experience difficulty in accurately forecasting their component bill of material (BOM). there are indeed many independent brokers that provide legitimate.those made by legitimate manufacturers by creating parts that can replace the originals at a fraction of the true manufacturing cost.A Market for Counterfeit Parts? Introduction Many vendors in the electronic components supply chain advise only to purchase from franchise distributors or manufacturers directly. Fake parts show up more frequently as sophisticated technologies with an uncannily close match to their genuine counterparts. However. While the "gray" moniker may invoke images of an unexplored territory to be tread upon with caution. This provides manufacturers with the ability to operate at a relatively healthy profit. reliable options as answers to buyers' needs. Since the earliest days of electronic component manufacturing.reality accompanying the gray market. However.
A Market ftr Counterfeit Parts? When it comes to the detection of counterfeits. Buyers of electronic parts should be aware of what they can do to reduce risk while remaining competitive in the market. Mere checking for discrepancies between the parts packing list (or spec sheets) and the information shown on packaging and labeling of the box no longer safeguard buyers from illicit parts. gone now are the days when simple inspection sufficed. Page 6 © 2011 .
an approved manufacturer facility may turn out fully functional. • • Blanks . but which may pass as the actual parts for which they are labeled. fake parts of this category show up more often as parts of less sophisticated technology. While there may be some overlap to these definitions. Below are some of the more common examples. However. Partially functional components made to look like the genuine item. These parts are © 2011 • • • Page 7 . Non-functional parts made to look like genuine components. this only serves as a testament to the nefarious nature of counterfeiting. some do not function at all. These components are introduced into the supply chain by several methods. these parts can easily be "third-shift" products .products made at an actual manufacturer-approved facility. After their unauthorized recovery from disposal. Other repurposing of these components may include labeling for parts of similar appearance and an entirely dissimilar function. a simple capacitor is more easily replicated than a chip designed and produced in microscale detail. They may be of inferior quality.not destruction. For example. but fail one or more standards and are earmarked for disposal.Empty bodies of components with no wiring or internal circuitry. Fully functional illicit parts made to look like real parts. after the factory officially closes. For example. Most commonly they are components produced against high specifications. These counterfeits have no functionality but look genuine superficially. These parts are made en masse. form and function replacement. Historically. Mislabeled parts that have inferior or unmatched function. While the instance of these parts coming from unauthorized production facilities is relatively rare. Parts such as these may be a variant of the mislabeled parts mentioned above. workers may return some hours later for an unofficial "third shift" to continue producing parts which are later sold off the company bill.A Market for Counterfeit Parts? What is a Counterfeit? There are many interpretations on what "counterfeit" actually means. Worse yet.even though they may be fit. and are usually not subject to the same production standards that legitimate day-shift parts see . fully authorized components during the first and second day shifts of the factory's regular schedule. these parts may be relabeled to match the specifications of parts whose quality standards they do meet.
the parts may appear damaged but work well. They frequently bear their original labeling.without relabeling. However. • Mislabeled parts that have an entirely different function. • Older parts relabeled as new parts. • Refurbished and recycled parts reconditioned to look new and relabeled as a different product. Page 8 © 2011 . may not work at all. With rougher handling they provide only partial or substandard functionality or.A Market ftr Counterfeit Parts? more difficult to detect because frequently they don't show any sign of external manipulation in labeling. depending on how sensitive the parts are and how they are handled during the process. What Counterfeit Is Not It is legal in some countries to recycle fully functional parts from IC boards and sell them as they are .
All components undergo the same stages of market maturity. they also contribute significantly to opportunities ftr counterfeit supply.Product Life Cycle Data Model © 2011 Page 9 .opportunities that counterfeiters seek out. While these methods have helped to promote efficiency in the supply chain. For those components which some buyers need to keep in continuous supply for long-term products . When this happens. Re-designs are out of the question due to support costs. but they all conclude with obsolescence. "Fab Shortages" .Some counterfeiters see opportunity in supplying illicit parts that mimic specialized or one-of-a-kind components that are either discontinued or have few to no alternatives available. opportunity arises for counterfeiting. • Obsolescent I Hard-to-Find Stock .A Market ftr Counterfeit Parts? Why is There a Counterfeit Market? Inefficiencies or weaknesses in the supply chain abound. and then the manufacturer becomes hard-pressed to match a sudden rise in demand. With such abundance come just as many opportunities . Ideal • • • 1 TIA/EIA Standard 724 . suppliers without genuine stock on-hand now force buyers to turn to the gray market. ECsupply chains have adopted and supported Lean Manufacturing and just-in-time (JIT) fulfilment. The customer need is high and so the normal "risk threshold" increases with the need. "Lean Mentality" . This increases the chances of coming across counterfeit products. By not keeping ample stock on-hand.such as military and aircraft systems .Manufacturers ("fabricators") use all manner of forecasting to determine how much product they turn out and when they produce it.Within recent decades. The electronic components industry detnes' these stages. Manufacturers may inadvertently create "fab shortages" when their production based on estimated demand falls short of real-world demand. Lack of Alternative or Upgrade Parts . Any unfu~illed market demand and accompanying lead times create the opportunity for counterfeit suppliers to fill in the gap.there is little recourse but to turn to the gray market. Whether their forecasting is accurate is sometimes out of their hands. Perhaps their product exceeds forecasted demand.
One such example of allocation arises from RoHS component lots earmarked for government applications. • • Allocations . lead times may lengthen as the manufacturer struggles to ramp up production to meet rising demand. "Back Door" Sales .Allocations are also cause for shortages of components otherwise available for general consumption. This longterm market opportunity allows counterfeiters time to acquire and reverse engineer genuine components.or were never produced at all . In the early phases of its introduction to market.shortages on the original component amplify the desperate component buyer's need. Yet another. this provides an opportunity for counterfeiters to "fill in the slack" with illicit components."Back door" selling of excess manufacturer stock to independent distributors. Allocations may occur at any time in a part's availability life cycle. these assemblies may remain in use well after OEMs and regular CMs manufacture them. component production is limited or sporadic. If no alternate manufacturer is available.may knock out a manufacturers' production capability.A Market ftr Counterfeit Parts? alternatives to parts like these would either be produced by OEMs or CMs tasked with short-runs. Military and high-investment / slow ROI industries (such as aircraft / aviation) are especially susceptible to long-term component counterfeit markets. This provides an ideal opportunity for counterfeit production. Authorized and unauthorized manufacturers may be willing to keep up with continuing demand. • Long Lead Times .best exemplified by the recent Japan earthquake . This may possibly allow indiscriminate access of real • Page 10 © 2011 . because these alternates are in scarce supply . and thus ramp up on their technology for creating convincing fakes. • Extreme Supply Chain Interruptions .For electronic assemblies that will be used for the long-term. alternative to an original part would be an upgrade component that provides similar or superior performance when compared to the original.While long lead times may occur at any time of a product's maturity. However. perhaps better. Long-term Component Demand / Life Cycle .Sudden catastrophes . The gap between orders and fulfilment may create an opportunity for counterfeiters to provide product to fill that gap. they usually take place in the early stages of a new product's introduction. Assuming the product is widely accepted and generates sudden demand.
When a component reaches a supply shortage. component buyers themselves can be a significant factor in illicit part manufacture. that they "heat up" the market. they inadvertently "heat up" the counterfeit supply market.. counterfeiters are able to produce high-quality fakes on short notice.A Market for Counterfeit Parts? parts to counterfeiters who in turn reverse engineer the product and turn out inferior or non-functional knock-offs.As time goes on. This makes the introduction of counterfeit parts into the supply chain relatively easy.Whether component products are either in plentiful or short supply. In so doing. • Electronic Waste . .. Phantom inventories "miraculously" become available.. Because they are not subject to numerous development hurdles that legitimate manufacturers face in the real world..) • Lack of Accountability ._L_ _ _ _. Some unwittingly put the signal out so fervently. • Buyers Exacerbate the Counterfeit Supply Market . thus exacerbating the counterfeit market supply. Page 11 © 2011 . and desperate buyers either purchase these bad parts. more and more electronic waste accumulates and provides the fodder from which the refurbishing trade arises. '-- Image 1. (See the previous sections discussion of "third shift" products. buyers often move from mainstream distributors to the spot market._~ . or place deposits down for parts that may not even exist. they often create a market for "hot" parts .p .Lack of accountability on the counterfeiters' part is a condition of the counterfeit industry.. If buyers work hard to put out the word that they are seeking hard-to-find components. • "Third Shift" Parts ."Third shift" production of parts.or even phantom parts.. In doing this they sometimes put the word out that they require hard-to-find components.
A Market ftr Counterfeit Parts? How Large is the Counterfeit Industry? The overall component market is estimated to be $320 billion". and 44 of these were independent distributors . Independent Sources Counterieitt??? Image 2. 2010. the risks and costs associated wiU7failing to detect them can be devastating.neither manufacturers nor franchisers" During a three year period. As reported through Carbone. 576 of these incidents involved unauthorized distributors. © 2011 Page 12 . 2011 . 2 3 Based on analysis of information provided by New Venture Research Corp. This means that anywhere from $3-16 billion worth of these products could be at higher risk as counterfeits. 613 incidents of fake parts were reported. A 2010 US Commerce study of 98 authorized and unauthorized distributors of electronic components determined that 54 reported counterfeit products. While the chance of encountering counterfeit components is small when compared to the overall market. 1-5% of the parts may need to be purchased from the broker market. Industry experts estimate that on any given BOM.
it is slightly more difficult to catch all occurrences of counterfeiting here. Manufacturers may need to recall products from multiple locations for rework and screening costs. The only expense here is the cost of screening and testing for. • Lowest cost at the supplier level . They may also need to pull back and screen more units to determine the extent of the issue. it is easiest to catch occurrences here. • Exorbitantly high cost if caught after delivery and installation to end-user. you still face substantial reworking and screening costs. Depending on the counterfeit type (for example. Page 13 © 2011 . • Moderate cost if caught at the manufacturing plant before entering production line.If the buyer seeks parts in the broker market. If caught before entering the end-user supply chain. the manufacturer could face product liability suits/damage claims. and replacing counterfeit parts. Rework charges are the main cost when counterfeits are detected at this stage. • High cost if not caught prior to manufacturing. in addition to substantial rework and screening costs. and may impact the ability to support ongoing product demand. Detecting fake parts at this stage may affect the production line. it is important to work with trusted brokers that screen components. Because components here might have already passed the bulk of quality inspections. Moderately difficult to catch all occurrences here. • Extremely high cost if caught after products have entered the end-user supply chain. At this part of the supply chain. but instead during QA screening. if it causes a product failure). Very difficult to intercept counterfeits at this phase.A Market for Counterfeit Parts? What is the Cost of Counterfeit Parts? Cost to the buyer depends where in the chain counterfeit components are caught.
and even death of. these costs are especially high-risk.A Market ftr Counterfeit Parts? Other Costs Other costs exacerbate the operational costs already incurred resulting from the failure to detect counterfeit components. Legal costs incurred in litigation arising from on-the-field failures of end products. or sell counterfeit electronic components. In the medical device industry. buy. Criminal costs and penalties. Judgments can be extremely harsh. subsequent recalls. • • • Page 14 © 2011 . closure of business. Among these more expensive additional costs are: • Contract losses . and expensive reworking.Some contracts stipulate dates by buyers may receive bonuses for on-time or before-schedule deliveries. as defective or substandard components may result in the misdiagnosis . both buyers and their suppliers (including brokers) run tremendous risks.a patient who otherwise may have benefited from the accurate readings a properly operating medical device. and even imprisonment may be rendered against buyers and suppliers based on judgments entered against them both by government authorities and the customers to whom buyers deliver their products. and cannot be taken lightly. Whether they knowingly or unknowingly use.Component buyers may suffer bad faith and loss of later business from their customers. Contract losses may arise from missed productivity goals and late delivery of component-dependent products due to late counterfeit detection. Bad faith and loss of later business . Stiff fines.
These add up to a system of best practices the buyer can use to greatly reduce the chance of encountering counterfeit products. A vendor vendor tracking system supports ranking of suppliers based on transaction history including dealings in counterfeits transactions. Ramp Up . Share these standards with brokers so as to level-set expectations..existing suppliers such as manufacturers and franchise distributors. then "test" rnrre.-- - Image 3. implement an interim plan whereby you continue buying from trusted sources . How long has the broker or distributor been in business? What is their QA process? Do they have certification credentials (such as ANSI/ISO)that indicate they use mature quality systems? Establish in-house quality standards.. fortunately there are many points of influence the buyer can leverage. Page 15 © 2011 . policies and procedures that cover the known gaps in your processes and those of the broker. What processes does your broker have in qualifying and disqualifying their suppliers? .A Market ftr Counterfeit Parts? Best Practices to Avoid Counterfeit Products While the majority of gaps in the supply chain are out of the buyer's control.In the absence of a short list of existing trusted suppliers.Establish a selection process for qualifying new brokers with which to start doing business. • • • Verify your broker's QA process. As the "risk" increases. • Implement an Interim Plan .
ask for photographs of the parts in the broker's supplier warehouse. packaging and the parts themselves. you are broadening the overall choice for the parts which you could use to complete your design. Page 16 © 2011 . As a further step. By having alternatives available. and "try-before you buy". and upgrades. Greater choice helps to reduce the counterfeit risk associated with using only one hard-to-find part. • Incorporate flexibility into designs that reduce risk . what's to stop a counterfeiter from producing traceability paperwork and reports for the parts they sell? Start with the basics.A Market for Counterfeit Parts? • Request parts traceability. If a broker is willing to arrange for it. Determining alternate suppliers and products requires access to listings available in Intelligent Product Selection Technology. Use caution with traceability: As there is no globally accepted standard for traceability. By asking "Where exactly are the parts now?" some interesting answers may arise. Keep a running history of each broker and evaluate them periodically for risk.Demand intimate knowledge of brokers. ask the broker to have random samples of parts shipped for in-house testing. verification. Contact the manufacturer for lot code identification. their operations and their suppliers. • Know thy broker . Pictures may prove that the vendor has the stock in-house. or at least has a relationship with the true owner of the stock. Always ask for pictures of labels.By producing designs that accommodate alternative parts. you are able to choose from a broader range of parts and suppliers whom you can evaluate and rank with the least risk. replacement parts. When in doubt just walk away.
Page 17 © 2011 .A Market ftr Counterfeit Parts? Reduce Risk with Intelligent Product Selection Technology Do you know whether your design uses components that may pose a high risk to counterfeiting? The copyright holder has identified four market factors most closely associated with counterfeit parts. • Low availability / high lead time * • High price * • High risk of obsolescence • Availability from only one or a few sources Use intelligent product selection technology to determine which components expose you to the risk of counterfeiting.
2011. (2010. 2011. Retrieved May 2. April 19). September). J.com/prod ucts-services/reports/ • Page 18 © 2011 . Counterfeit components problem worsens. New Venture Research Reports. Retrieved May 2. July.digikey. from New Venture Research: http://www. from Digi-Key Corporation .PurchasingPro: http://www. (2011.html New Venture Research Corp.A Market ftr Counterfeit Parts? References • Carbone.com/us/en/purchasingpro/articles/suppIychain/counterfeit-components-problem-worsens.newventureresearch.
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