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Counterfeit Components Problem Worsens

While the problem of counterfeit electronic components is not new, many in the electronics supply chain say the problem is getting worse as counterfeiters are becoming more sophisticated in their methods.

The problem is also worsening because of the breadth of parts being counterfeited. Everything from capacitors and connectors to microprocessors and memory are at risk of being counterfeited, depending on supply conditions of the parts. The rule of thumb is that if a part is in short supply, it will be counterfeited.

That's why many in the electronics supply chain are concerned that the devastating earthquake and tsunami in Japan will result in even more counterfeiting. The quake has disrupted the electronics supply chain, shutting down production of silicon wafers, some semiconductors, and other components. Shortages have already occurred and if shortages worsen in the third quarter—as some industry analysts predict—counterfeiters will take advantage.

In electronics, "counterfeit" is a catch-all word. It includes bogus parts made to look like genuine parts. It also includes substandard, mislabeled parts that have some functionality, but don't meet the specifications of the part number listed on the label. In some cases, counterfeits are scrapped parts, components that don't meet spec and were supposed to be destroyed by the parts manufacturer, but instead found their way into the supply chain.

Some counterfeiters have their own package-labeling facility. They will take older products and re-label them as new products. A counterfeiter may also re-label a genuine part with a higher speed or overall higher functionality.

"Buyers should look at the total cost and the total risk of buying from unauthorized sources," said Robin Gray, executive vice president of the Electronic Components Industry Association (ECIA).

Parts get ripped

In some cases, components are ripped off old printed circuit boards, cleaned up, and sold as new parts. "That is a relatively simple, unsophisticated form of counterfeiting that occurs," said Robin Gray, executive vice president of the Electronic Components Industry Association (ECIA), based in Alpharetta, Ga. "But it is happening more because of the growth of recycling of electronic equipment."

It is legal to recycle components and sell them, so long as the parts are labeled as used and they are not misrepresented as other parts. But counterfeiters take the parts off old boards, label them as higher performing parts or new parts, and re-sell them.

In some cases, counterfeiters will actually make parts look like genuine parts from the name-brand manufacturer. The fake part could just be an empty shell, or it could actually have some functionality.

"Counterfeiters have become sophisticated and can copy the technology of a part and make bogus parts that are difficult to identify as fake," said Gray.

Gray added that in some cases the "most blatant counterfeits" can be spotted by visual inspection. But the more sophisticated ones, particularly RoHS compliant parts, are impossible to detect without destructive testing of the component.

"The products look identical to real parts and may have the same SKU (stock keeping unit) numbers," Gray noted.

Nothing's easy

Gray said there is no easy answer to thwarting counterfeiters. The best way is for buyers at OEMs and electronics manufacturing services (EMS) providers to buy directly from component manufacturers or from authorized distributors. The bulk of counterfeit parts enter the supply chain because of some unscrupulous component brokers and independent distributors and brokers who sell fake parts to customers.

"With some of the counterfeit parts we have seen, it's unbelievable how good the counterfeiters are at what they do," said Dave Doherty, Vice President of Global Supplier and Product Operations for Hotenda.
The Independent Distributors of Electronics Association (IDEA), a trade group, agrees there are some brokers and independents that sell bogus parts. However, there are also many reputable independent distributors that unknowingly sell counterfeit components, said Debra Eggeman, general manager of IDEA, based in Buena Vista, Calif. She said many IDEA members have robust screening and testing procedures and have invested in test equipment to weed out counterfeit and substandard parts.

However, authorized distributors say there is no practical screening and testing procedure that can guarantee parts are not counterfeit.

"The only way you can guarantee that parts are authentic is a destructive test," said Dave Doherty, vice president, semiconductors for Hotenda, based in the Thief River Falls, Minn. "To use a 100 percent destructive test to prove that the parts that were just destroyed are real is not productive."

Screening for counterfeit parts is difficult because some counterfeiters have become much more sophisticated in how they produce bogus parts. "With some of the counterfeit parts we have seen, it's unbelievable how good the counterfeiters are at what they do," said Doherty.

"While some of them just scrape the names off the parts and re-label them, others reverse engineer the parts and produce ones that even have some of the same bugs that the original parts had," Doherty said.

Jeff Newell, director, Americas Business Ops at Texas Instruments, based in Dallas, said some counterfeiters "have access to an assembly/packaging facility" or may own one. The counterfeiters may take off the markings of the part and re-label it, "which is the most common thing we see. These guys are getting pretty clever," said Newell.

How sophisticated?

Jeffery K. Thomson, vice president, global channel sales for ON Semiconductor in Phoenix, said in some cases the actual counterfeit parts are fairly sophisticated. "Maybe the wire bonds on the parts should have eight wire bonds and they only have seven. It may take engineers several hours to look at lead frame layouts and the die configuration just to determine if parts are not real."

Thomson noted that perhaps 5-10 years ago "we could look at a label on a box of parts, check the lot code or other data, and immediately tell that the parts were fake." Today counterfeiters are not only sophisticated about producing fake parts, but also the packaging and even the boxes in which the counterfeit components are shipped.

Thomson added that counterfeiters are knocking off more high-technology parts instead of simple discrete chips.

"Today much higher analog products and integrated circuits are counterfeited instead of discrete," Thomson said.

It's also not just semiconductors that are counterfeited. Even passives such as tantalum capacitors and connectors are counterfeited. Distributors say that if a part is in short supply, it will be counterfeited.

"Much higher analog products and integrated circuits are counterfeited, not just of discrete," said Jeffrey Thomson, vice president, global channel sales for ON Semiconductor in Phoenix.
To avoid purchasing counterfeit parts, authorized distributors and component manufacturers agree with the ECIA: buyers should only purchase parts directly from manufacturers or from authorized sources.

They point to a 2010 U.S. Commerce Department study, concerning counterfeit parts in the defense industry, which said independent distributors were more likely to encounter counterfeit parts than authorized distributors.

The survey said…

The Commerce Department surveyed 98 authorized and unauthorized distributors about the number of times distributors encountered counterfeit parts in their business. Fifty-four of the 98 reported they encountered counterfeit parts. Of the 54 distributors that reported counterfeit components, 44 of them were independent distributors.

In addition, the report, which covered the years 2005—2008 , estimated that there were 613 incidents of counterfeit parts among distributors in 2008 and the vast majority—576—involved independent distributors.

Because most incidents of counterfeit parts involve independents, some semiconductor manufacturers and other component makers say one way to minimize the problem is to choke off component supply to independent distributors.

They say part manufacturers need to sell parts either directly to customers or authorized distributors. Some component manufacturers "back door sell" to independent distributors when the manufacturer has excess inventory. That practice should stop, according to Newell of Texas Instruments.

Newell notes that "TI has a very strict set of processes and guidelines about what we do with our product that is built for consumption, as well as parts we end up scrapping. On the consumption side, TI sells directly to OEMs and EMS providers and authorized distributors."

"On the manufacturing side, we take steps to ensure that product that is not going to get to market" gets destroyed. "We have strict guidelines about what happens to that material," Newell said.

A U.S. Commerce Department study found that unauthorized distributors accounted for 576 of 613 counterfeit part incidents occurring at distributors in 2008.
Scrap product—components that don't meet specification—sometimes get into the electronics supply chain because the products were not destroyed. The parts are often sold through brokers as fully functioning parts.

Despite the finding in the Commerce Department study that most incidents of counterfeit parts occur with unauthorized distributors, the report did not recommend that buyers stop doing business with independent distributors.

Trace those parts

The Commerce Department report recommended that buyers purchase parts from component manufacturers and/or authorized distributors when possible, or "require part traceability when purchasing from independent distributors and brokers."

The study also recommended that buyers "establish a list of trusted suppliers, which can include component manufacturers, authorized suppliers (distributors), independent distributors, and brokers."

In fact, most buyers at OEMs and electronics manufacturing services (EMS) providers prefer not to purchase from unauthorized sources, and it's not just because of the risk of purchasing counterfeit or substandard parts. Buyers often purchase from independent distributors and brokers during times of shortage, and often end up paying much more for the part than they would if they bought it from an authorized distributor.

However, sometimes during periods of oversupply, some buyers will buy from independent distributors because they can get a better price for a part.

Gray said that is a dangerous practice. "Buyers should look at the total cost and the total risk of buying from unauthorized sources," said Gray. If a counterfeit part causes a line shutdown or a piece of electronics equipment to break down, it can be very costly to an OEM.

OEMS and EMS providers need to educate their buyers that there is a greater risk when they buy from on unauthorized source, said Gray.

Gray added that manufacturers and governments also need to take steps to thwart counterfeiters. Greater efforts must be taken to protect the intellectual property of companies.

Gray said governments "around the world" need to recognize and protect intellectual property. Component manufacturers also need to make a greater effort to protect their own intellectual property.

"They need to make sure that in their quest for lower labor costs or entrée to markets, that they're not surrendering their intellectual property and creating a competitor."