Electronics industry sees rising problem of counterfeit components

The survey was commissioned by the US Naval Air Systems Commands, which was worried that counterfeit components could compromise the US Navy's ability to maintain platforms with extended life cycles and to maintain weapon systems in combat arenas. The survey was undertaken by the US Office of Technology Evaluation (OTE), which questioned companies from five segments in the supply chain: component manufacturers; distributors; pcb assemblers and contractors; and defence agencies. OTE data revealed that 39% of companies and organisations surveyed had experienced counterfeit electronics during the period from 2005 to 2008. Moreover, the data highlighted an increasing number of counterfeit incidents, rising from 3868 incidents in 2005 to 9356 incidents in 2008. The report also found a lack of systems in place to deal with the problem. 'The rise of counterfeit parts in the supply chain is exacerbated by demonstrated weaknesses in inventory management, procurement procedures, recordkeeping, reporting practices, inspection and testing protocols, and communication within and across all industry and government organisations', it claimed. John Macmichael is managing director of Solid State Supplies (SSS), a specialist distributor for whom the defence sector currently represents 55% of its revenue. He sees the problem of counterfeit components being one of the biggest issues for distribution over the next decade. "It's an issue for SSS, but it's also an issue for the industry," he said. "We first saw evidence of the problem in 2002, but it was ignored by the industry as a whole. However, there has been a much larger impact over the last two or three years." In his opinion, the move to low cost offshore production has 'opened the flood gates'. "Counterfeit components are an unintended consequence of this move offshore," he asserted. "It has provided an opportunity for them to enter the supply chain. While this has largely been through non franchised distributors, those with franchises can't be ruled out." One of the ways that counterfeit components can get into the supply chain is through companies buying back surplus stock. SSS has hard evidence of the problem. "In October 2010, a Chinese company approached us, purporting to be an OEM for Pulse. It offered to sell us surplus Pulse components," said Macmichael. "But Solid State is a franchised Pulse distributor, so we won't buy from anyone but Pulse. We reported the approach to Pulse, which had to take action in China to deal with the problem." Adam Fletcher, chairman of the Electronic Components Supply Network (ECSN), said the problem had come to the forefront recently. "The US military is worried about counterfeit chips coming in by the 'back door', but it has been caught out by companies in the US who are blatantly trying to sell counterfeit products for profit. In the UK, there are instances of small companies trying to do the same thing, but they are easy to catch because they are easy to identify quickly." Fletcher says fake military components are generally easy to spot. "These products are often built in batches, so when a quality assurance department looks at them, they will often see something obviously wrong. Apart from needing the right paperwork, military components are tested in system and counterfeits are quickly found because the system doesn't work as expected." For Macmichael, the threat of counterfeit components is a major business issue. "It's additional cost," he pointed out. "We can only offer service and our technical ability, so we've had to institute new procedures, invest in staff training and awareness, and have incurred consultancy costs through being certified to additional standards. It's a series of overheads which companies like us have to adopt if we want to maintain the confidence which our customers have in us." There is also investment in new capital equipment. "For example," he continued, "we are now comparing known good product with suspect parts. If we are to continue being a high service distributor, we have to say to customers that it's OK to return surplus stock – and that's the point at which counterfeits can enter the supply chain. We're having to tighten up all of these things because of a problem that the industry has created for itself. Now, we only accept goods back in the original packaging. None of this is adding value." Macmichael gave another example of the problems of counterfeit components. "We recently had a batch of components returned because our customer's incoming inspection procedure said the parts didn't have the right markings. That comes back to us, even though we can trace the parts back to the manufacturer. We can't then resell them, they have to go back." SSS is also using known good markings from its principals to identify components and photographing devices when they leave the facility and then again if they return. One of the new procedures at SSS is the generation of random barcodes. "We keep one on file," said Macmichael, "the other one goes with the shipment. If the products are returned, we know they were supplied by us." Macmichael noted the size of today's chips means marking is now a serious problem. "Most products don't have enough room for any markings of substance. It's not an easy issue to solve, but it's critical." Asked about the cost of dealing with counterfeiting, Macmichael said the new procedures were probably adding another 2% to overheads. "Our capital expenditure will rise by 30% over the next year," he added. "It's a significant and ongoing cost." Fletcher said one significant way of protecting against counterfeiting is to buy only from franchised distributors. "They have to buy from the manufacturer," he noted. But he also perceives what he termed 'macho procurement'. "If a manufacturer says a part is on backlog, but the buyer needs them now, they will often go to the 'grey' market. There, products might appear to be 'sourced from the US', but they may well be from China. If products are available, they are likely to be a problem." He says even well respected brokers are buying parts that have changed hands five or six times. "They are losing traceability," he claimed. Macmichael isn't so sure about the franchise argument. "Companies hide behind the fact they 'only buy from franchised sources'. It's not good enough now." ECSN is suggesting a push back on project management. "If the lead time for a product is 18 weeks, don't start building until 20 weeks. Spending more money to buy the wrong components is 'macho procurement'." Fletcher rightly pointed out that counterfeiting is a bigger problem in the wider market. "The worrying thing is these products are often so good, they pass electrical test; even the manufacturer will struggle to identify counterfeits." Concluding, Macmichael said: "While the consequences of counterfeit components in the industrial market are potentially not as catastrophic, we can't allow counterfeits into any sector."