Semiconductor manufacturers are the most directly affected by counterfeiters. Not only do they lose direct sales, their credibility and brand image can be compromised. In addition, they must incur additional expenses for maintaining the security of their intellectual property if they use subcontractors; for developing and implementing security policies and procedures; and for hiring and training personnel to carry them out. It is also expensive, but necessary, for companies to follow up on confirmed or suspected counterfeit incidents and report them to the proper industry and government agencies. Some companies are working on developing sophisticated identification technologies that can be included in the production of components, but these are also extremely costly.
Franchised and authorized distributors, who procure their entire product from the original manufacturer or their authorized sources, are the least affected by the counterfeiting issue. In addition to utilizing authorized sources, these distributors also control their warehousing and shipping security. Because of these practices, their entire inventory is traceable. As a further protection, many authorized distributors provide their staff with counterfeiting awareness training. Unauthorized distributors, however, purchase from many different sources. The inventory that is acquired this way is not traceable to the original manufacturer, and is oftentimes compromised, mishandled, or even counterfeit. Unfortunately, these faulty components are not set aside or properly disposed of, and make their way into the semiconductor supply chain.
Electronics equipment manufacturers must spend money on ongoing training programs for purchasing staff. They often have to conduct or outsource expensive testing. Counterfeits that somehow make their way to the production line can cost money in manufacturing downtime. If the counterfeits make their way into manufactured product and cause failure, losses stack up because of returns and replacements. Company reputation and brand image also suffer.
When products manufactured with counterfeit components fail when they are finally in the hands of the end user, whether private or commercial, more costs stack up.
But the negative impact of counterfeits is obviously not just about losing money. Many of the components sold in the recently prosecuted case were intended for systems that have a direct impact on human safety, the most obvious being systems used by the US military. Military failures also may threaten US national security.
The continuing escalation in the number of counterfeit parts making their way into the US supply chain – particularly the military supply chain – has prompted the US government to take a closer look. In March 2011, Sens. Carl Levin (D-Mich.) (chairman) and John McCain (R-Ariz.) announced a Senate Armed Services Committee investigation into counterfeit electronic parts in the Department of Defense’s supply chain. In November, the committee held a hearing on the investigation. In his testimony at the hearing, committee witness Brian Toohey, president of the US Semiconductor Industry Association, said, "A counterfeit semiconductor is a ticking time bomb." Among other suggestions, Senator Levin proposed changes to the Defense Department’s acquisition procedures that would put more responsibility for the costs of counterfeit parts on the contractors.