China's growing presence as a center for electronics manufacturing is likely to yield an increase in the circulation of counterfeit parts, industry observers say.
EMS revenue from production in China is expected to reach $66.8 billion by 2006, up from $19.7 billion this year, according to iSuppli Corp., El Segundo, Calif. Some observers fear the increased pressure on distributors to fulfill EMS demand will spur a surge in scrap theft as well as in re-marked and bogus parts.
"The entrepreneurial spirit is widespread, and I expect as economic activity intensifies you probably will see an increase in counterfeit production," said Tim Bennett, senior vice president of international affairs at the American Electronics Association, a Washington industry trade group.
Bennett said the Chinese government has begun to integrate international business rules, but its power is limited, particularly if counterfeiting occurs with the knowledge of local government authorities.
The potential for illegal activity could be heightened next year when market conditions are expected to improve and component shortages begin. The problem has prompted independent distributors like Advanced MP Electronics, America II Electronics, and Smith & Associates to stop procuring parts, at least for now, from brokers in China.
"Our policy is, we don't purchase product directly from China unless we have developed a relationship with the company, but the problem is, how do you develop a relationship with these companies," said Chuck Magee, executive vice president of sales and marketing at America II Electronics Inc., St. Petersburg, Fla. "Next year, when the market goes short, [counterfeiting] will raise its ugly head and become a major issue."
Problem already exists
By some accounts, it already has. One passives supplier, speaking on condition of anonymity, said it has been asked by several OEMs in the past month to run failure analyses on capacitors branded with the manufacturer's seal. In each case, tests confirmed the components were counterfeit. At least one of the OEMs had procured the parts in China from an unauthorized distributor.
More recently, Advanced MP Technology received word from an un- identified tier-one EMS provider that it had bought PMC-Sierra parts in China with lot numbers scheduled to be scrapped after failing yield requirements.
"The components are packaged as PMC-Sierra parts, but the EMS provider said they're not functional," said Homey Shorooghi, president of Advanced MP Technology, San Clemente, Calif. "This leads me to believe they need to keep a better eye on whom-ever scraps or crushes the components," he said.
PMC-Sierra Inc., Burnaby, British Columbia, declined to comment on what it characterized as a rumor.
EMS companies unfazed
EMS providers expressed little concern about the issue, even though their relationships with Tier 1 independent distributors have come under scrutiny by suppliers and franchise distributors. All those contacted for this story said they would source products from brokers, with OEM approval, only if the parts were unavailable through authorized channels. Many said the same strict quality control measures apply in China as in any other country or region.
"We're fully committed to the China market," said Lawrence Conrad, vice president of distribution and worldwide supply base management at Solectron Corp. in Milpitas, Calif. Conrad declined to say whether the EMS company has encountered counterfeit parts in recent months.
"Solectron doesn't view the possibility of counterfeit parts as an impediment to manufacturing in the region, and we plan to continue the movement of production to Asia," he said.
Meanwhile, distributors seem to run into fake parts more and more. Advanced MP three months ago procured 40,000 bogus Dallas Semiconductor parts from an independent distributor in China for $1.50 each, according to Shorooghi.
"We kept calling the Dallas Semi factory to get the board we needed to test these parts, but there was no cooperation," he said. "Last year it was $300,000 in Kemet capacitors. The boxes were perfect, but the chips were blank."
Mike Hamper, senior vice president and general manager of distribution at Philips Semiconductors in Sunnyvale, Calif., said he had heard in recent months of several instances of brokers re-marking old components with new date codes.
However, Len Jelinek, an analyst at iSuppli Corp., believes newer devices are less prone to counterfeiting because Chinese companies generally lack leading-edge manufacturing capability.
"At certain process nodes, the increased production will stir more counterfeiting, but they don't have the manufacturing ability to copy the leading-edge chips at this time," Jelinek said. "The newer high-tech gadgets require a chip that is 0.15- or 0.13-micron, not the [previous]-generation chips that contain 0.25-micron and above."
A bigger concern, he said, lies with wafer manufacturers that sell substandard chips to assembly providers. Often the assembly house will go back to the supplier to request a scrap allowance before sending defective parts to be destroyed. But some instead find their way into the secondary distribution channel.
"Components that don't meet manufacturers' specifications should never leave the plant," said Patricia H. Moorman, vice president of worldwide distributor sales at components supplier Bourns Inc., Riverside, Calif. "It's the obligation of the manufacturer to rework or destroy those suspect products. If a company buys components from nonauthorized sources and then finds out they are suspect, the liability is on the purchaser, not the manufacturer. A manufacturer's liability is for product sold through authorized channels," Moorman said.
High-tech companies concerned about counterfeiting in China will implement tougher quality controls, according to Rosanna Herrera, vice president of corporate security at Smith & Associates Inc., Houston.
"We're in the process of developing a program that would certify the companies we conduct business with, including waste management companies that scrap or smelter material," Herrera said. "Even companies in China must make sure they get a certificate of destruction when they scrap parts. The counterfeit problem in China isn't going to disappear. Companies need to protect themselves."