Counterfeiting: The Worst Is Yet to Come

Barbara Jorgensen, EBN Community Editor
Incidents of counterfeit components in the electronics supply chain are maintaining a record pace so far this year, according to IHS. Year-to-date, 2012 has the potential to surpass 2011:

Counterfeit incident reports from the beginning of the year through the end of August averaged 107.3 per month, up slightly from 107.1 in 2011… on a sequential 12-month basis, a total of 1,336 separate verified counterfeit-part incidents have been made for transactions involving a minimum of 834,079 purchased parts. These figures are considered conservative because purchased parts reflect only a subset of all reported incidents.
IHS also notes the data coincides with an important milestone in anti-counterfeiting efforts in the US:

These new counterfeit report figures arrive at a time when the U.S. Department of Defense (DoD) is scheduled to update the Defense Federal Acquisition Regulation (DFAR) Supplement to the Federal Acquisition Regulation (FAR) on October 3, 2012. These updates are part of measures intended to regulate the detection and avoidance of counterfeit electronic parts as part of the National Defense Authorization Act (NDAA) of 2012.
I don’t think anyone in the industry needs additional verification that this is a problem. In fact, I did a casual search of the term “counterfeiting” on EBN’s home page, and the first mention was a mere four days after EBN re-launched as an online publication in October 2010. During this two-year span, we have published statistics, best-practices, blogs, news reports, court documents, and hosted what I’d conservatively call a “spirited debate” on the causes of counterfeits.

We’ve recently co-sponsored a Webinar on approaches to anti-counterfeiting and have done in-depth reporting on recent efforts by the US government to thwart counterfeits in the DoD supply chain.

Granted, it’s a fairly new effort, but I have to admit I’m concerned that one of the centerpieces of the NDAA is agreement on the definition of “counterfeit.” This is from IHS:

To help combat the counterfeit problem, President Obama in December 2011, signed the fiscal year 2012 U.S. National Defense Authorization Act (NDAA), which added regulations for counterfeit part detection and avoidance. The pending October 3, 2012 updates to the DFAR supplement will implement portions of section 818 of NDAA that must add definitions specific to counterfeit parts, define contractors’ responsibilities, and clarify the government’s role.
One of the key points IHS makes in its latest release has to do with the reporting of counterfeits, which is why I think next year’s data will be even worse than 2012’s. The IHS data includes numbers from the ERAI trade association and GIDEP, the Government-Industry Data Exchange Program.

In August, EBN contributing editor Tam Harbert reported that the Defense Logistics Agency (DLA), which accounts for the bulk of the government’s procurement of electronics parts, hasn’t kept up with its GIDEP reports. According to Harbert, a government committee that recently researched the problem of counterfeiting in the defense supply chain cited cases identified by the DLA in 2009 and 2010:

According to the committee, of the 202 cases, only 15 were reported to GIDEP. And only four of those reports were filed by the DLA; the rest came from “private companies or another DoD element.” DLA has since changed its practices and says that it is now filing such reports.
So let’s assume the NDAA accomplishes part of its goal, which is to standardize the definition of counterfeits and improve reporting methods. IHS admits its 2012 data is conservative, because it only includes “reported” incidents. A year from now, I’d expect the number of reported incidents to skyrocket, with very little data to measure the effectiveness of the NDAA. But let’s say the NDAA does have an impact. Is it likely private industry will adopt similar practices?