National security threat
The expansion of counterfeiting into the military and aerospace sectors is particularly worrisome. Many of the parts that contractors and government agencies buy are for electronic systems on aging planes, tanks and ships. Redesign is too expensive, so the only option is to purchase decades-old, obsolete parts in the aftermarket. It’s an accident waiting to happen.
Indeed, the obsolete-parts market is particularly appealing to counterfeiters because of the high margins on the hard-to-find components and the anonymity of the gray-market distribution channel.
The gray market comprises unauthorized brokers, traders and distributors that match up buyers and sellers around the world. Most of these middlemen are aboveboard; some are not. Gray-market parts are acquired from a variety of sources, and some market participants neglect to authenticate the parts they buy.
“It’s a national security issue,” said Leon Hamiter, president and founder of Components Technology Institute Inc. (CTI; Huntsville, Ala.). Hamiter’s company has been conducting training workshops for independent distributors, OEMs and EMS companies in the United States and the United Kingdom since 2006, and it provides tools and resources to help clients ferret out counterfeit parts. CTI also offers a certification program for independent distributors (see sidebar).
Numerous counterfeit versions of parts and equipment have already found their way into military and government systems. In a high-profile 2008 case, the Federal Bureau of Investigation reportedly seized $3.5 million of counterfeit Cisco routers and switches that were made in China, illegally shipped and then installed in U.S. government computer networks.
Earlier this year, two Southern California counterfeiters pleaded guilty in a federal case to an elaborate scheme to manufacture and sell counterfeit chips, including to the U.S. Navy. The Navy reportedly was issued a Certificate of Conformance for the chips it bought. Among other things, the indictment accused the counterfeiters of “harvesting” IC dice from scrap electronics and repackaging them to appear new, including adding fake OCM markings indicating the devices were new and authentic components.
According to industry sources, the operation ran for nine months in 2009 and produced 400,000 components, of which more than 200,000 are suspected of still being in the supply chain. The most popular part the pair counterfeited was the Intersil ICM7170 IPG, an obsolete microprocessor compatible real-time clock. They paid 2 cents apiece for the scrap ICs, repackaged them as ICM7170AIPG and resold them for around $38 apiece. The potential gross sales value was $15 million.
Of course, buyers of components—primarily OEMs and EMS companies, but the government as well—share some of the blame for the counterfeiting boom. Procurement staff are often under pressure to buy the lowest-priced components with the shortest lead times, and many companies don’t have adequate controls in place to guard against buying counterfeit parts.
Even component manufacturers and franchised distributors contribute to the problem. Some component makers don’t help customers authenticate obsolete parts purchased from independent distributors. And franchised distributors have been known to accept OEM returns without checking and validating the authenticity of the parts. As a result, franchised distributors unknowingly have sold counterfeit parts; indeed, 21 percent of respondents to last year’s Commerce Department study on military electronics listed franchised distributors as a source of counterfeit goods.
|Survey of 83 OCMs was conducted in 2009; results shown are for those that reported encountering incidents of counterfeiting.
Source:"Defense Industrial Base Assessment: Counterfeit Electronics,"
U.S. Department of Commerce, 2010
While it may not be foolproof, authorized distribution is still the safest bet for minimizing the risk of buying counterfeits. Two organizations provide resources to identify authorized distributors and certified original parts. The Electronic Components Industry Association (ECIA) launched a Web site earlier this year that provides inventory availability from authorized distributors (www.eciaauthorized.com).
And a collaboration between the Semiconductor Industry Association and distributor Rochester Electronics Inc. offers the Authorized Directory (www.authorizeddirectory.com), which lists franchised distributors for more than 230 original semiconductor manufacturers and guarantees the traceability of their products.