No Counterfeits, No Excuses

In a move that already is causing no small degree of consternation, President Obama last Saturday signed a new law that places the onus squarely on the Pentagon’s supply chain for ensuring all electronics components in all defense products are legitimate.

The bill, part of the 2012 National Defense Authorization Act, requires that the Department of Defense, the Department of Homeland Security and their contractors  “detect and avoid counterfeit parts in the military supply chain.”

Counterfeits have been a known problem for years. (CIRCUITS ASSEMBLY has been warning of the issue at least since I came aboard in 2005.) I was personally told by a QA manager at one prime contractor that no less than a fourth of all the parts in some of its systems were suspected to be faked or otherwise out of compliance. And workshop after workshop told the tale of rivers of parts being shipped as e-waste to China, primarily the Shenzhen area, where they were separated and stripped from circuit boards, cleaned (usually in polluted water), sanded and remarked, and then resold into the supply chain. In a keynote at SMTAI in 2010, Tom Sharpe of independent distributor SMT Corp. noted some 29,000 incidents of counterfeits were reported to the US Department of Commerce between 2005 and 2008.

But the turning point, according to some analysts, was a Nov. 8 Senate Armed Services Committee hearing at which Congress heard compelling testimony on the sheer volume of fakes in the US military supply chain, including the results of a Government Accounting Office sting operation targeting electronics parts counterfeiters.

The evidence spurred Committee Chairman Carl Levin (D-MI) and Sen. John McCain (R-AZ) to lead a bipartisan effort to act. The result: legislation that establishes a program of enhanced inspection of electronic parts imported from any country determined by the Secretary of Defense to be a “significant source of counterfeit parts” in the DoD supply chain. The bill further requires defense contractors to establish policies and procedures to eliminate counterfeit electronic parts from their supply chains, and for the DoD to adopt policies and procedures for detecting and avoiding counterfeit parts in its own direct purchases.

Most important, the new law states those contractors that fail to detect and avoid counterfeits, or fail to exercise adequate due diligence, can be debarred. Furthermore, contractors can no longer charge the DoD for rework or related costs to remove and replace counterfeit parts, and they are held liable for any remedies required, regardless of where the counterfeit entered the supply chain.  The law affects all contractors at all tiers and is not limited to direct acquisition of parts. In other words, an EMS firm would be responsible for the counterfeit solder mask (yes, that happens) on a PCB it sourced from a fabricator in Asia (yes, that happens too).

Counterfeiting runs the gamut from the mundane to the highly sophisticated. In some cases, the trickery is performed by crude remarking and easily caught by a diligent inspector with an eye loupe. But at the upper end, it has evolved into a wholly systemic problem; again, we have been reporting on the “fourth shift” at various semiconductor factories, where workers build parts using legitimate materials and lines, but those parts are not subject to rigorous inspection and are sold “out the back” to unscrupulous third parties. In one egregious episode, VisionTech Components administrator Stephanie McCloskey was sentenced to prison and her boss, Shannon Wren, died of a drug overdose after facing similar charges for duping the US government in a long-running scam.

There is no question the supply chain has found counterfeit detection and prevention an expensive and difficult undertaking. XRF, chemical or laser etching and DNA marking are three of the more sophisticated means, although each adds time and cost to traditional inspection methods.

But the problem is too pervasive, and the risks too great, to whine about the costs. Counterfeiting has gotten completely out of hand. For those reasons, we welcome the bill and its well-conceived structure that puts the onus not on the taxpayer (via pass-along costs) but on the supplier, where it belongs. If this means contractors will have to start relying more on known-good suppliers, well, that’s not a bad thing either. I’ve seen far too many instances of high-level buyers at OEMs and EMS companies searching for parts on LinkedIn to be confident that the auditing many claim to have in place is being taken seriously.

Fake Numbers

I’m all for putting the flood of fake parts under the microscope.

But I take umbrage at the phony figures of the cost of counterfeits being floated by certain trade groups.

NEDA, for instance, claims in a Business Week story this week that fake parts costs the electronics industry up to $100 billion a year. Well, many economists peg the entire value of the electronics industry at roughly $1.2 trillion, give or take a hundred billion. So by NEDA’s accounting, fake parts cost us about 8% or so of the entire annual net worth of the global market.

I ask you: Does that sound even remotely plausible? And if not, does such blatant hyperbole come across as crying “wolf,” undercutting our attempts to sound the alarm on the problem?

How Fake Parts Find Homes

There continue to be a slew of great discussions on LinkedIn pertaining to component sourcing and counterfeits, with good reason. For recently, for example, a person identifying themselves as a purchasing manager at Askoll SEI, an industrial heating appliance OEM, posted the following note:

I am in shortage with a capacitor:UUB1A101MCR1GS, Nichicon. I need 20K.
Is anyone that can help me with? By chance, do you have it on stock?

All I can say is, if the PM finds the missing part, it is unlikely she will do so through a company on Askoll’s AVL. And if that’s the case, isn’t this exactly what experts on keeping component supply chains “clean” rail against?

Main Man

Dear Tim Main,

Thank you for your willingness to leave, in your words, $50 million to $75 million in potential sales “on the table” during your November quarter.

We understand material shortages always are frustrating, and it’s ever-so-tempting to cut corners by poking in the dark nooks and crannies of the industry looking for spare parts.

For it is said parts that tend to be, how to say it nicely, “faked.” And bad parts tend to do bad things, like fail in the field. That’s exactly what gets manufacturing companies in trouble — and engineers and purchasing people fired.

That extra $50 million to $75 million in revenue will make your February quarter look that much better. And while your customers might not be pleased, your customers’ customers — aka me — will be.

Fake Parts Pressure

Today’s report on the value of seized counterfeit goods can be spun lots of ways. The good news is the value of what’s been nabbed is falling. What’s less certain is whether that means there are 1) fewer attempts by counterfeiters, 2) counterfeiters are getting better at sneaking product in, or 3) the recession forced down consumer demand for goods, which in turn lowered the incentive for traffickers to try to evade the border.

It’s true that faked goods, like oxygen, are coming from everywhere. (The link is to a blogged item on a recently broken up counterfeiting ring in Waxhaw, North Carolina. Waxhaw!) The SAE, which this year produced a series of standards on avoidance and detection of counterfeit electronic components, pegs the current value of illicit parts at between $1 billion and $10 billion annually.

However, my take is that such estimates are exaggerated, particularly on the high end, the byproduct of extrapolation upon extrapolation. But I do think there’s a problem here, and I like seeing Customs’ and others reporting on the issue because it keeps the pressure on to address it.

The Price of ‘Faking It’

Counterfeit electronics components supposedly are destroying the integrity of our hardware.

One estimate holds that “five to 20% of electronic components in distributors’ chains are probably counterfeit” at a cost to industry of some $100 billion a year.

In response, several organizations (not to mention a cottage industry of consultants) have jumped on the bandwagon, launching programs to warn of the hazards (death! destruction! locusts!).

Let’s put aside, for the moment, the obviously inflated numbers ($100 billion, after all, is more than the sum of all the semiconductor revenues of Intel, Samsung, Toshiba, TI, STMicroelectronics, Infineon and Renesas — in other words, the world’s top 7 semiconductor OEMs — in 2007.

The SIA, for example, now has an anti-counterfeiting task force, and is working in concert with SEMI to combat the problem. “Counterfeiting is a serious and growing problem in the worldwide electronics industry,” says SIA president George Scalise. “Counterfeit products pose a significant risk to consumers as well as to the manufacturers of semiconductors and electronic products.

In the UK, something called the Component Obsolescence Group published a list of best practices said to help minimize the risks associated with the growing supply of faked parts.

And of course, makers of traceability software, XRF and other gear have ramped up marketing efforts to pitch their solutions.

But…in all the hue and cry, one thing is missing: The guilty users. Over the past few companies, I’ve asked at least two dozen EMS companies if they’ve seen any counterfeit components. None would admit to it.

Now, we estimate that there are at least 1300 EMS sites in the US, so my sample is hardly representative. Still, is the problem overblown? Or are my contacts – gasp! – lying?

And if they are fibbing, in the end, who gets hurt? (Answer: The customer.) Is it worth it?