Counterfeit electronic components – are you worried...?

In this article Adam Fletcher, Chairman of the Electronic Components Supply Network (ecsn) outlines the current risks presented by counterfeit electronic components and provides his best advice on how to mitigate them.

Purchasing electronic components on the ‘Grey Market’ significantly increases the risk of ending up with sub-standard or even counterfeit devices in the end equipment, but it’s perhaps understandable that in the current market hard-pressed purchasing professionals are sometimes ignoring the sage advice “Just Say No!”. It’s fair to say whilst component manufacturers and their authorised distributors have managed to support their customers well over the last couple of years, they haven’t always won their accolade when it comes to 100% reliability of supply. Their failure is due in no small part to the ultra-poor oversight and control that component manufacturers have over the activities of their authorised distributors, sub-distributors, and OEM/EMS customers in Asia, particularly those based in China where their product apparently simply disappears.

The pressures on OEM and EMS buyers can be enormous and Grey Market brokers are often able to meet their needs when their usual sources cannot, albeit at hugely inflated prices. Sourcing electronic components ‘off-piste’ however doesn’t always suggest that buyers are not concerned about the risks of installing counterfeit or sub-standard components in their products, or that their strategy to mitigate these risks is faultless. It could be that they been instructed by their executive management/customers to purchase the products they need from these sources regardless.

Counterfeit Cottage Industry

For forty years or so customers in the UK, Europe and US have been plagued by electronic components produced by – primarily Chinese – ‘Counterfeit Cottage Industries’ that typically employ less than twenty people. These ‘Mom and Pop’ operations usually target military and aerospace customers who require highly specialist components in very small volumes. They determine what products are in demand via search websites and an international network of – sometimes? – unwitting component brokers. Once they determine the demand and/or have obtained a purchase order they rapidly produce product that purports to meet their customer’s specification. The major components of the devices – or something close – are frequently sourced from local operations that recycle electronic components from discarded systems, which they modify with the sole intention of deceiving the customer. Other organisations in the counterfeiters’ network produce authentic looking manufacturer transit packaging and documentation to accompany the counterfeit goods and enhance credibility by providing bogus traceability. Whilst the external appearance of their output has improved significantly in recent years the products produced by Cottage Industry Counterfeiters often do not work at all or, perhaps fortunately, fail distressingly early in the predicted lifetime of the end-equipment.

Professional Commercial Counterfeiters

Over 99% of the counterfeit electronic components available in the global market are predominantly produced and consumed in China by “Professional Commercial Counterfeiters”.  In contrast to ‘Cottage Industry’ operators Professional Commercial Counterfeiters are typically large organisations employing 100’s of highly trained personnel across many technology disciplines. In many cases these counterfeiters  were established by Western based technologists who simply wanted to establish a high volume manufacturing source in what was a lower cost area when compared to the EU or USA. Having invested heavily in the capital equipment necessary for advanced manufacturing and in IT systems to support it at some point these counterfeiters began to supply their output directly to end customers or onto the Grey/Broker market. Usually, this move could be put down to simple greed, but just as often it was a survival strategy due the loss of a production contract with a Western technologist.

Like their cottage-based counterparts Professional Commercial Counterfeiters are expert at making counterfeit components appear as if they came from the original manufacturer/Intellectual Property holder but in stark contrast their products can be remarkably good, passing demanding OEM test procedures and operating to data sheet specifications for the predicted lifetime of the end equipment.

When it goes wrong

The old Latin maxim ‘Caveat Emptor’ (Buyer Beware) still applies to the purchasers of electronic components today, just as it did to the Chariot buyers in the Roman Latin wars over 2,000 years ago.

The UK predominantly manufactures industrial products, (as does most of Europe and the US) which demand a long in-service lifetime. The cost of a poor purchasing decisions by companies in this sector can have financial impact out of all proportion to the cost of the components purchased, especially when customer goodwill or organisational reputation is damaged. Early failure of capital equipment will inevitably lead to customers complaining, voting with their order books, or suing, or possibly all three. All counterfeit operations are driven by demand and can be eliminated if that ‘demand pull’ is removed because they will have no market. The response of all responsible purchasing organisations in the electronic components supply network to an offer that sounds too good to be true from outside of their trusted supply network should be very simple: “Just Say No!”

Final thoughts

Counterfeit components impinge on the Intellectual Property rights of the organisations that designed them and can have a significant negative impact on their revenue stream, and therefore on their ability to re-invest. It can also cause the original components manufacturer reputational damage as the failure to stop counterfeiting is primarily their responsibility. Electronic component manufacturers need to address the reasons behind the counterfeit ‘plague’. One area they could start with easily is by improving their capability to manage their inventory on a global basis, particularly in Asia, and establish effective control over where and to whom their product is shipped. They also need be able to re-direct a shipment when necessary to meet ‘real’ rather than ‘phantom’ customer demand generated by organisations seeking to cynically exploit failures in the market.

I urge procurement professionals to exercise great care in the ongoing management of their organisation’s forward order books and continue to work closely with their trusted, long-term supply partners. Careful collaboration between customers, component manufacturers and their authorised distributors provides the best chance of achieving a ‘win-win’ result for all parties in the electronic components supply network and the wider economy.

Organisations who would like to learn more about counterfeit avoidance may wish to review the information held by the Anti-Counterfeiting Forum www.anticounterfeitingforum.org.uk or attend the SMTA – Counterfeit Electronics and Material Symposium at https://smta.org/events/EventDetails.aspx?id=1665471&group=