Though bound by the privileges of World Trade Organization (WTO) membership to police its industries, China's efforts to stamp out IP theft and trafficking in counterfeit electronic components appear to be gaining little ground, according to industry observers.
The continued arrival of defective parts through trade routes that trace their origin to the Chinese mainland is causing concern for all sectors along the electronics industry's supply chain--particularly the independent distribution channel, which is often the option of last resort for companies in need of hard-to-find components.
According to the Electronics Resellers Association Inc. (ERAI), an independent distribution industry watchdog, about 70% of the nearly 200 complaints it receives each month involve counterfeit or substandard parts from China.
"The advice I give is to continue to buy from independent distributors," said ERAI president Kristal Snider. "But know your sourcing partners and know your rights. Customers must know from whom they are buying product. Anyone can sell a counterfeit, re-marked, or failing part."
What's most troubling to many industry veterans is the fact that the market for counterfeit parts shows no signs of slackening, despite the fact that global demand has been relatively weak for several years.
"Intellectual property theft and counterfeiting has become an industrywide and global concern," said Robin Gray Jr., executive vice president of the National Electronic Distributors Association (NEDA), a nonprofit trade organization in Alpharetta, Ga., that advocates purchasing from supplier-authorized electronics distributors. "We have seen a huge influx of knock-offs and counterfeit and generic products that borrow or steal intellectual property."
Agilent Technologies Inc., Palo Alto, Calif., met with its first instance of counterfeiting earlier this year after a customer returned an optocoupler for failure analysis. The parts, which were bought through an unauthorized distributor, came under suspicion after the unidentified customer recognized "Singapore" was spelled incorrectly.
In June, member companies of the ERAI discovered two other lots of counterfeit Agilent parts, one of which purported to be an RF integrated circuit (INA32063-TR1); the other a monolithic gallium aconite amplifier (MGA8356301).
"I know independent distributors list counterfeit parts on their Websites, trying to police the industry, but part of the reason there is an authorized channel is to guarantee the parts are genuine from silicon to packaged goods," said Frank Robertazzi, vice president of worldwide distribution for Agilent.
"These counterfeit Agilent devices are products procured via independent channels or parts brokers," Robertazzi said. "Customers who wish to avoid these issues should avoid the independent channel and broker."
In an effort to help customers distinguish reputable independent distributors from thieves and opportunists, the ERAI, a nine-year-old Plymouth, Mass., company that investigates incidents of high-tech fraud and counterfeiting, set up offices last month in Seoul, Korea, and Shenzhen, China. The new sites are designed to combat the increasing problem of counterfeit and substandard parts coming from Asia in addition to helping manage financial transactions for U.S. companies buying components overseas.
Is China trying?
Gloria Kamph, chief executive of Interliance LLC, Costa Mesa, Calif., said the problem stems not so much from a lack of will on the part of China to curb illegal trafficking in electronic components and IP, but rather from an inability to effectively police its industry.
"China has established courts in all provinces and major cities to handle IP rights," said Kamph, whose global management consulting and investment advisory firm specializes in Chinese government policies.
"With the help of the U.S. government and U.S. businesses, judicial training on IP is occurring at Beijing University, Qinqhua University, The People's University, and others."
Still, some question if the Chinese government is moving fast enough given the high-profile nature of some of the cases. Earlier this year, Cisco Systems Inc. filed suit in Texas charging Chinese network equipment manufacturer Huawei Technologies Co. Ltd. and its subsidiaries with the theft of IP used to design routers, technical documents, and IOS software, including source code. The suit is pending.
More Asian manufacturers are reverse-engineering brand-name products and either selling them under their own label or re-labeling them to look like the name brand, according to NEDA's Gray.
Europe is also beginning to take a harder line on the issue. The European Union on July 22 adopted a proposal pertaining to IP rights and counterfeit material in an attempt to stem the flow of bad parts.
The European Union said the new ruling, which becomes effective July 1, 2004, elaborates on the Council Regulation (EC) No. 3295/94 by granting customs authorities the power to seize goods entering member countries if they are suspected of being counterfeit or pirated.
Other sources of counterfeiting
China is not the only source of counterfeit and substandard products. In fact, some companies claim that California is sprouting a cottage industry of counterfeit parts.
SND Electronics Inc., a hybrid independent/authorized distributor that is based in Greenwich, Conn., has developed what it says is an "extensive black list" of brokers and independent distributors that it forbids its procurement specialists from doing business with.
Even so, the company recently bought Vishay Intertechnology Inc. resistors from a California broker that was not on its list, only to find that the color-coding was off on most of the shipment, according to Christopher DeNisco, SND's president and chief executive.
"The shipment arrived in April with an original label on one box. The other box labels in the shipment were photocopied," DeNisco said. "The color banding on the resistors inside the box was slightly different, which prompted our quality assurance manager to contact Vishay."
The Vishay part number engraved on the resistors, which DeNisco declined to disclose, does not exist. SND is working with the FBI in the hope of resolving the issue.
EMS provider Sparton Electronics, Jackson, Mich., said that it received faulty engineering samples in May and bought bogus components for a production run in January. The company said it has since reduced the amount of product it procures from the independent channel.
"We were desperate to find these parts to build the legacy system for our customer, but when we got the parts there was no die inside," said Stephanie Martin, vice president of corporate material acquisition and logistics. "The Linear Technology part number is LT1040DSW. We bought 100 pieces in January and paid $8.96 for what should have been in the high-$2 range for a new part."