The true cost of counterfeit

January 26, 2008

The problem of component counterfeiting is an increasingly serious and complex  issue, and one which affects virtually every manufacturer or assembler of electronic equipment.

The commercial pressures of international competition and increasingly tough legislative environments have created a fertile environment for the unscrupulous to profit at the expense of legitimate business. Far from being a “victimless crime”, the cost  – both human and commercial – of counterfeiting can be devastating. With so many companies now sourcing on the international market, counterfeiting is an issue that nobody can ignore. Companies need to be aware of the problem and the steps that can be taken to avoid falling victim.

Worldwide, it is estimated that counterfeit goods account for between 5% and 7% of all world trade, worth a colossal $450-$500 billion a year. While fake clothing, consumer durables and automotive components account for a large part of that, counterfeit electronic components are a significant and growing proportion of the total.  An estimated 10% of all technology products sold worldwide now contain fake components. That equates to a staggering $100 billion annually. The cost to industry in terms of product failures, loss of reputation or litigation is potentially much more.

The origins of the majority of these forged and counterfeit components lie in South Asia and the Far East. The EU imports €10.6 billion of goods every year from China alone – mainly computers, electronic components, mobile phones & cameras. While the vast majority of trade is entirely legitimate, with such volumes even a few percent of counterfeiting represents a significant quantity of substandard components arriving into the EEA every year.

In contrast to fake designer clothing or consumer goods, counterfeit components used in electronic sub-assemblies are often very difficult to spot. Today’s counterfeiters have become very adept at producing convincing forgeries and have developed sophisticated techniques for introducing them into the legitimate supply chain. Given the difficulties of enforcing contracts and international intellectual property rights legislation in China and India, the unscrupulous agent or manufacturer has very little to lose from being caught, and everything to gain. The complex ways in which components and sub-assemblies are traded and sourced can work to the advantage of forgers, enabling them to hide their tracks behind a complex series of transactions. The international outsourcing of procurement means that components can often pass through the hands of several procurement agents before delivery; agents that in some cases actually “own” the components for a matter of minutes before selling them on.

The problem is compounded by the number of ways that components can be faked and the sophisticated ways in which unscrupulous suppliers introduce them into the market. Deliberate forgeries are perhaps the most obvious way in which companies can fall victim to the counterfeiters. Bearing a recognised makers name and trademark, an encapsulated component may look – superficially – very convincing. Often, the forged component may even perform to specification, at least initially. Internally, of course, it is a very different matter: Sub-standard materials and production techniques, and lax quality control mean components that can fail suddenly with potentially disastrous consequences.

The remarking of components is more difficult to spot. In this case, genuine components will have their markings modified to denote a component of a higher specification from the same manufacturer. For example, a faster processor or greater memory capacity. In the post RoHS world, remarking can also be one way that non-compliant components can be passed off as legitimate. The unexpected discovery of non-compliant components could easily spell disaster for an equipment manufacturer or sub-contractor, even if no actual failures occur in service. Even without re-marking, non-compliance at component level is very difficult to spot without costly and thorough analysis by specialist companies.

The passing-off of recycled components as new is also a growing trend. Low labour costs coupled with the legislative requirements for the disposal of hazardous waste means that the shipping of obsolete equipment to China and India for disposal and recycling is an increasingly profitable enterprise. In a few cases, parts salvaged in this way can sometimes find their way back into the market as new parts. Although genuine, components are stressed during the salvage process and are often at the end of their useful lives anyway resulting in short-lived and unpredictable performance.

Sourcing only from reputable suppliers is an obvious way in which companies can protect themselves from forged components. But in an increasingly competitive world, the temptation to look to the so-called grey-market for components may well prove an overwhelming one for hard-pressed businesses. But in doing so, companies expose themselves to risk.

Some manufacturers operate a scrap allowance scheme, by which they pay distributors to scrap overstocked inventory. However as this scrapping process is itself often outsourced, these components may well find their way back onto the grey market rather than being destroyed. Although genuine, as far as the manufacturer is concerned they do not exist and so will not be covered by any guarantee.

Even by dealing only with authorised suppliers does not necessarily ensure fake-free components. If an authorised supplier operates a returns policy, this may provide the means for fake components to enter the legitimate supply chain. For example, if a company sources components through both authorised and grey market sources, it is entirely possible that “fakes” from the grey market sources can end up getting mixed in, either deliberately or unwittingly, with genuine returned components. Once a batch of genuine components is contaminated in this way, the fakes become almost impossible to spot.

In combating the menace of component counterfeiting, the best defence that businesses have is to arm themselves with knowledge. For the first time, the subject of component counterfeiting will be addressed at Southern Electronics 2008 (February 6th-7th, Farnborough) as part of the free seminar programme. Hosted by Bob Willis of the SMART group, the presentation on February 6th will take a detailed look at the problem of forged and counterfeit components together with the practical measures businesses can take to ensure they do not fall victim to this pernicious trade.  

 


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