Pitfalls of Counterfeit-Part Epidemic Exposed at ERAI/IHS Event
May 22, 2012
This is an IHS iSuppli News Flash from information and analytics provider IHS (NYSE: IHS) covering events at the 2012 ERAI Executive Conference.
Companies attempting to manage the growing challenge of counterfeit electronic components face a range of government- and industry-related pitfalls that make it
virtually impossible to eliminate all risk associated with the plague of fake parts, according to experts speaking at the 2012 ERAI Executive Conference held here on Thursday. The event is being co-hosted by IHS.
Speaking to a sold-out crowd of more than 300 industry participants, presenters from information providers, standards organizations, defense contractors and distributors detailed the challenges associated with the rising tide of counterfeit and fraudulent devices. While much of the discussion focused on the impact of fake parts on the military/aerospace sector amid new defense department regulations, the presentations also examined the effect of counterfeits on the broader commercial electronic markets.
Garbage Out, Counterfeits in
The scale of the counterfeit problem has growth dramatically in recent years, with reports of counterfeit parts quadrupling from 2009 to 2011. Supply chain participants in 2011 reported 1,363 separate verified counterfeit-part incidents worldwide, a fourfold increase from 324 in 2009, as presented in the figure below.
Much of the counterfeit-parts problem can be traced back to the enormous amount of electronic waste (e-waste) generated each year, according to Bob Braasch, senior director, supply chain, for IHS.
"People don't hold onto their old electronic devices," Braasch told the event attendees. "A three-year-old cellphone is ancient, so people are constantly upgrading to the latest device. As the world economy improves and as technology continues to develop, people increasingly will be looking for the latest technology. All of this electronics consumerism translates into e-waste."
Braasch noted that 58 percent of e-waste generated by the United States is shipped to developing countries. All too often, electronic components such as semiconductors are culled from this waste and then returned to the U.S. and other developed countries in the form of counterfeit parts.
As the number of counterfeit parts has grown, government regulations covering fake parts have grown more stringent. The U.S. National Defense Authorization Act (NDAA), which was signed into law on Dec. 31, imposes strict regulations and severe criminal penalties on counterfeits supplied for government military and aerospace programs. While this phenomenon is impacting all electronics market, including consumer, communications and computing devices, much of the attention has been focused on defense, due to the NDAA.
The Devil's in the Details
One major problem companies face when attempting to comply with the new regulations is the vague language and difficult-to-comply-with requirements contained in the NDAA, noted Kirsten M. Koepsel, director of legal affairs and tax at the Aerospace Industries Association (AIA).
For example, section 818 of the NDAA calls for the Department of Defense (DoD) to "establish a process for analyzing, assessing, and acting on reports of counterfeit electronic parts and suspect counterfeit electronic parts…"
The NDAA also mandates that DoD contractors and subcontractors must obtain parts "from the original manufacturers of the parts or their authorized dealers, or from trusted suppliers who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers."
However, the definitions of "suspect counterfeit part" and "trusted supplier" are unclear, Koepsel noted. Despite such ambiguities, the burden appears to fall on DoD contractors and subcontractors to report any cases of suspect counterfeit parts to the Government Industry Data Exchange Program (GIDEP).
The NDAA also places the onus for detecting counterfeit parts upon importers of devices, calling upon them to arrange for examination and release of the goods.
Nevertheless, it can be very difficult to detect imported counterfeits. Koepsel highlighted a recent case where criminals in New Jersey conspired to conceal the import of counterfeit goods, using various means including generic outer lids on boxes and generic labels on products to hide the counterfeit brand-name labels beneath. The criminals also falsified paperwork and used fraudulent personal identification documents, such as Social Security cards, to carry out the scheme.
"All someone needs to do is make the boxes of counterfeit parts look like there are shoes inside - and you will never know that fake parts are coming in," Koepsel said.
Counterfeiters Get Smart
Companies that purchase electronic components also face a threat from increasingly sophisticated counterfeiters working to overcome even the most diligent methods to test for fake parts.
"Counterfeiters are escalating - they know what we are looking for and move on to the next step," said Tom Sharpe, vice president at SMT Corp., an independent distributor of electronic components to the defense and aerospace industry.
Always a Risk
This issue underscores a more fundamental problem: regardless of what steps companies take, the danger of counterfeit parts will continue.
"No matter how much testing there is, there will never be zero risk," said Mark Northrup, vice president at contract manufacturer IEC Electronics Corp. "Even the most accurate testing measures can only give a range - and not a single result."
For More Information
IHS provides content, software and expert analysis about worldwide electronics for component selection, sourcing, and logistics as well as integrated obsolescence management, BOM management, environmental compliance, and counterfeit risk mitigation. IHS offers 100 percent of the verified counterfeit-incident report information, of which more than 90 percent is availed only though the exclusive IHS and ERAI partnership.
To learn more, please visit: http://www.ihs.com/info/sc/a/combating-counterfeits/index.aspx
ERAI is a privately held global information services organization that monitors, investigates and reports issues that are affecting the global supply chain of electronics. Since 1995, ERAI has been the industry's primary reporting and investigation service, providing information and risk mitigation solutions to electronics professionals worldwide. ERAI is comprised of Original Component Manufacturers (OCMs), Original Equipment Manufacturers (OEMs), Distributors (franchised and independent), Contract Manufacturers (CMs), government agencies and associations serving the industry. For more information, please visit: http://www.erai.com/