Countering counterfeits

THE ELECTRONICS industrybreathed a sigh of relief at the end of 2011. It had weathered two natural disasters which threatened the supply chain, and as the new year opened, the wider macro-economic issues in Europe and the US were easing. Demand was returning, excess inventories were being used up.

But savvy analysts say this is a peak in the so-called silicon cycle, and the extended lead times and price rises for components are creating a fertile environment for counterfeit components.

Trends over the last ten years have resulted in fragmented supply chains, with less end-to-end visibility, as operations were outsourced to Electronics Manufacturing Services (EMS) providers, distributors and logistics providers. As a result, counterfeiters now have more vectors through which they can introduce counterfeits into the supply chain.

Towards the end of 2011, the electronics supply chain made world news when reports from the US indicated counterfeit electronic components had made their way into critical equipment used by the US military.

A Senate Armed Services Committee hearing saw testimonies from defence supply chain stakeholders claiming 1 million suspected counterfeit electronic parts were detected being sold to the Pentagon, of which 70 percent were traced to Chinese firms.

Statistics from the Semiconductor Industry Association found counterfeiting costs US-based semiconductor companies more than $7.5 billion a year, while information broker IHS claims up to 10 percent of all worldwide technology products are counterfeit.

According to a US Department of Commerce Bureau of Industry and Security study titled “Defense Industrial Base Assessment: Counterfeit Electronics”, incidents of counterfeit electronics grew 142 percent from 2005 through 2008.

The findings by the committee were partly responsible for strict new anti-counterfeit regulations released with the 2012 US National Defence Authorisation Act (NDAA). Section 818 of the act specifies responsibilities for counterfeit detection and avoidance measures to be undertaken by contractors, and these measures are naturally trickling down to suppliers and manufacturers.

If counterfeits are affecting one of the world’s most powerful military forces, what can companies in Australia do to safeguard themselves from the problem?

At stake
Vendors agree that counterfeits pose a real threat to companies, large or small. The most immediate victims of counterfeit electronic components are the original makers of the parts, who lose revenue from royalties, and cannot take full commercial advantage of their intellectual property.

But the problem also extends through the supply chain to firms who wittingly or unwittingly put the components in their products and then to their end-users. The US Defence Department was concerned about the possibility of the counterfeit components causing failures in larger systems.

According to element14 Australia and New Zealand regional director Peter Davis, such a risk is not limited to military hardware.

“The consequences of system down-time or even critical system failure where counterfeit components are used in safety-critical applications, such as public transport, infrastructure, mining, domestic appliances, automotive, medical, can be potentially catastrophic,” Davis told Electronics News.

These failures could lead to wider consequences, ranging from product recalls to injuries and deaths. Of course, brand and reputation losses, loss of revenue and law suits would follow.

Even if such a catastrophic failure does not eventuate, the discovery of the use of counterfeit components could lead to legal action, and damage business relationships within the supply chain.

The use of counterfeit components may also violate international laws, regulations and standards, including Restriction of Hazardous Substances (RoHS) directives.

“Component users may have unwittingly used non-RoHS compliant devices in a RoHS process,” Davis said. “More critically, safety-critical RoHS exempt applications such as avionics may have unwittingly used RoHS compliant devices in a non-RoHS process in contravention of EC legislation.”

Tracing the origins
Not all counterfeit components are created equal; they fall into a number of general classes according to their source.

The first type of counterfeits are reverse-engineered parts. These inferior copycat parts include batteries, electrical safety parts such as breakers, as well as lower-tech, easily manufactured components like resistors, capacitors and electromechanical devices.

While there are low profit margins on such items, market shortages on any of these components will see savvy counterfeiters quickly flooding the market with their second-rate products.

Unscrupulous electronics manufacturing practises contribute to the second type of counterfeits. These are genuine but defective parts, scraps from legitimate operations which were taken out due to problems with the components during screening.

These deficient parts may be detected early in the production cycle if they fail quickly, but where the flaws are less serious, the problems may only manifest themselves when the product is already in the hands of customers or in use, resulting in reputation loss and warranty claims. If such parts make it into critical applications, the eventual failure could be even more catastrophic.

Associated with this sort of counterfeiting but posing less risk of failure are bonus lots, which are genuine parts manufactured by the factory in excess of the amount required by the contract. It is standard procedure to manufacture more components than required in order to cover lost or damaged parts, but some makers may retain these excess parts, or intentionally manufacture more of them to sell under the table.

Another common counterfeiting practise involves re-marking or re-branding legitimate parts. This involves taking lower cost parts (with lower performance, RoHS-non-compliant, non-lead-free, or by a different manufacturer), eliminating the original markings, and re-marking them and selling them for a higher price.

In the case of lead-carrying parts being marked as lead-free, the damage to the production process can be immense due to lead contamination going down the line. Parts with unexpected performance can also have negative impacts on the final product.

Lim Cheng Mong, RS Components head of electronics marketing for Asia Pacific, says counterfeit components usually comes from countries with a big installed base of outsourced factories from brand name electronic components or where there are big electronic waste processing capabilities. China is an obvious example.

“However for simple re-marking of devices from one manufacturer to another or from a lower specification to a better part, the technology to do this is easily available and can happen anywhere,” Lim explained.

Suppliers play their part
Electronic component suppliers like element14 and RS Components say the best way to avoid counterfeits is to buy from reputable vendors.

While these distributors can also be affected by the extended supply chain where suppliers have their own secondary suppliers, they have checks and measures in place to reduce the risk of counterfeits, and there is a clear path of recourse should problems arise.

Element14, for example, is part of the Electronic Components Industry Association (ECIA), and supports a search site which lists only genuine and authorised inventory. It also has close ties with its suppliers, with documented processes and quality assurance guarantees.

All packaging is subject to visual inspection for mis-spellings on the manufacturer’s labels and date codes, logos and checked against purchase order information.

The process may also include measurement of physical dimensions as well as an inspection for evidence of physical alteration. Components’ electrical function may be tested to ensure they match the product data sheets supplied with parts known to be authentic.

RS Components says it maintains traceability from manufacturers and suppliers via purchase order and delivery records which are retained in accordance with published ISO 9001 certificated procedures. It has a rigorous selection process in place to ensure its suppliers are trustworthy.\

Due to the number of parts it supplies, the company does not test incoming products to determine if they are genuine, but if it suspects a counterfeit product, it will withdraw the part from sale, then conduct in-house testing, including X-ray fluorescence (XRF) screening. Depending on the results, it may issue a recall for affected customers.

What purchasers can do
In the case of companies which source their own components and have their own supply chain, it is important for procurement officers to be vigilant and disciplined.

The market is returning to growth, and that means extending lead times, possible shortages and price adjustments. Counterfeiters are also growing more sophisticated in their operations, and they keep a close watch on market shortages, in order to exploit opportunities to supply desperate or clueless buyers with counterfeits.

While procurement staff may face pressure to ensure the continuity of supply in the midst of such conditions, they still need to undertake aggressive counterfeit component prevention measures, says Rick Stanton, director of US-based ProSkill Consulting and Training Group.

Stanton has previously spoken at the Surface Mount and Circuit Board Association (SMCBA) conference on counterfeits, and his company runs a certification course PRO-STD-001 on the detection/prevention and risk mitigation of counterfeit electronic piece parts. He is in negotiations with Electronex to bring the course down to Sydney for the 2012 expo.

“Start by strengthening controls on internal purchasing procedures and supplier approval requirements, including a tightened supplier flow down process. All processes related to suspect counterfeit material must be governed by a solid standard/guide such as the SAE AS5552,” Stanton said.

Other recommendations include adhering to concrete procedures, leveraging updated and thorough counterfeit component check point inspection systems, and, if possible, having a certified and trained counterfeit component inspector on hand as an “absolute countermeasure in the prevention of counterfeit material”.

When considering distributors, purchasers should check if they are members of relevant industry associations such as the Independent Distributors of Electronics Association (IDEA) and ERAI.

AS9120 and ISO9001:2000 certifications, ESD S20.20 compliance and IDEA-3000 certified inspectors, in addition to supplier controls and flow-down clauses for counterfeit mitigation are also good indications of a quality supplier.

Having an updated continuity of supply plan will also help alert purchasing staff to possible weak spots where counterfeits may enter the market. Such plans would consider the products being procured, the bill of materials, the overall market conditions and supply chain information flow.

By constantly watching the market, and being aware of fluctuation of prices, availability, part lifecycle and maturations, companies can navigate a difficult market, ensure the continuity of their supply, and avoid potential counterfeit pitfalls.