Genuine solutions to the counterfeit problem
21 July 2008
Looking at the stats from last week’s newsletter it came as no surprise that the top story was about counterfeit components – an issue that has rapidly become a major concern for electronics manufacturers.
The story ‘Fake parts, real threat’ , dealt with an initiative from the UK electronics industry to counter the issue within its own shores – but the problem is global and therefore the solution must be. Last week I went to speak to some of the members of the UK Electronics Alliance who have co-ordinated the programme in the UK to try and find out more about the problem and what can be done about it.
By its very nature a counterfeit component is not always easy to spot and therefore it is no surprise that the exact size of the problem is difficult to ascertain. In 2006 the US-based Alliance for Grey Market and Counterfeit Abatement (AGMA) estimated that 10% of all technology goods sold worldwide was counterfeit, representing revenues of around US$100bn. An OECD (Organisation for Co-operation and Economic Development) report in 2007 stated that counterfeit trade in 2005 could be in the region of $200bn, although this included all goods, not just those in electronics. What is clear is that for all nobody is really sure of the size of the problem it is certainly a big problem. If you drive over a cliff you don’t need to now how big the drop is to know that you are in trouble!
Estimating the size of the problem in the UK as being in the region of £1bn (US$2bn) is not just the cost of the actual components, which is in the region of £450m (about 9% of the total UK spend on electronic components), but also the cost of rework, recalls, breakdowns in the field and so on.
So why has the problem come about and why is it suddenly such a concern?
According to the panel of experts I was talking to, the reasons are numerous. Adam Fletcher claimed one of the major factors comes from the Far East: "The counterfeit problem has been like a toothache, its been around for a long time in the background. What we are seeing now is that the Chinese have upskilled and got very much more sophisticated manufacturing. What we are seeing now is a wave of counterfeit products. What has been going along at a steady rate for 10 or 12 years is now beginning to ‘hockey stick’ up dramatically and what we are likely to see in the next two to five years is a significant amount of counterfeit products entering the chain. And that is our concern."
Mike Trenchard was more concerned about the effects of obsolescence in such a fast moving industry, an issue that was exacerbated by the RoHS legislation. And all on the panel agreed that the lead times from many component makers was driving manufacturers into the unscrupulous world of the grey market. A market, claimed Fletcher, that was 98% honest – the 2% providing the route to market for the counterfeiters. Price, incidentally, was far less of an issue and sometimes, because of scarcity of the genuine component, the fake parts actually came at a premium.
Another key driver was the increased use of the internet as the market place of choice for most purchasing. Even as recently as five years ago the grey market suppliers were still trying to create long term relationships and would make as sure as they could that counterfeit components were not included. Now that this trading is done on the internet it is done at arms length and people do not know, if they are being honest, who they are doing business with. You can buy from a company, pay for the goods and by the time you find out it those goods are faulty the website has closed down and the company disappeared.
The panel also believed that a further boost for the counterfeiter was the tendency for industry to adopt lean manufacturing techniques. Gone are the days when all incoming goods were inspected. More typical is the situation when parts go straight to the manufacturing line. While we are relatively lucky in the electronics industry that we usually employ some sort of inline test, ATE or functional, so that faults are picked up quite quickly, even faults found at this stage result in lines being stopped, components and boards being scrapped and so on.
Some counterfeit components will not be spotted at this stage as they can be fairly good, resulting in failure at a later stage in the manufacture of the end product or worse, out in the field. The panel gave a collective shudder at such components worming their way into safety critical applications.
So those are some of the main reasons why counterfeit components have become such a big problem in a relatively short space of time. To resolve this problem there are a number of steps that can be taken – some on a corporate level and others on an industry or even governmental level.
According to the panel, education is the key. Again this works at all levels, from the purchasing and goods inwards within a manufacturing company, to distributors and component manufacturers, and ultimately to customs officials who are patrolling the borders. Identification of the counterfeit parts is the most obvious educational step, as it allows early identification of a problem and the earlier it is identified the easier the trace back to source and rectify.
There are several other measures that would help. Distributors could supply components in smaller batches, thus preventing unwanted components to re-enter the supply chain as this is where traceability starts to become difficult. Manufacturers should source components direct from the component manufacturer where possible, or at least from an authorised distributor. The deeper into the grey market the buyer goes the greater the risk of being landed with faulty components. Anyone who handles faulty or scrap components – from the component manufacturer to the distributor to the OEM or EMS using those components – must reliably dispose of those scrap components.
On a grander scale the problem could be better tackled by both legislation and co-operation across governmental and non-governmental bodies which is one of the recommendations that the UK Electronics Alliance’s report makes clear it would be keen to support (the STOP initiative in the US is already going down this path).
My own opinion is that wherever money is being made there will always be a parasite to try and feed off it. The UKEA implication that this is in part the fault of the Far East seems to me to be a bit convenient as it pins the blame on the region that stands accused of draining the electronics industry away from the west. It builds on the paranoia we saw last year when it became clear that an American toy design was at fault for problems attributed to Chinese manufacture. None the less I have no doubt that this is still a contributory factor. While there are higher end memory and processor chips in the counterfeiter’s repertoire, there are also some of the most basic passive components and these can only be profitable if they are made, even on a counterfeit level, in very large numbers at a very cheap price – and we know who the global masters of that discipline now are.
Counterfeiting is theft – whether it is someone’s IP, or their business, or their market, it is theft. And that theft undermines all the good honest hard work that people do in this industry, but I wonder if time might prove that this sort of crime is just not worth it.
First the issue of safety critical applications. This is always the easy emotive label to give anything that needs to be resolved – the ‘sort this problem out or the plane you are in will fall out of the sky’ type of argument. I would have thought that the consequences are so dire if you work in aerospace, automotive, or medical industries that you cannot afford to make a mistake. If you cannot afford to make a mistake then you do everything possible to remove chance – and chance includes buying components on the grey market. Safety critical applications are not usually time sensitive. Long lead times can be catered for simply by managing a project well. In these applications the grey market must not be entered. Buy from component manufacturers or authorised distributors who have all the paperwork in place. If everyone is doing their job for RoHS-type legislation or military or automotive approvals, then these sorts of systems will already be in place. Safety critical applications should not really be affected by counterfeit components.
As for everyone else, it is a case of risk management. If a manufacturer wants to play in the grey market, which let us not forget is perfectly legitimate, then there is the risk involved. There is always going to be different shades of grey as well. A company that you have dealt with for many years with good sound documentation procedures are not that much further down the hierarchy than an approved distributor. On the other hand if you order from an unknown company off the internet you may be lucky to see any components at all. Let alone genuine ones!.
But maybe this is worth the risk. The last computer I bought was made by a company called e-machines. The motherboard exploded after only a year (and two weeks – just out of warranty) and I lost everything on it. I won’t buy from that company again. However, the reason I did buy in the first place was because the spec seemed good for an astonishingly low price, and there will always be a market for that type of product. In essence I did a risk assessment on sacrificing quality and reliability for low price and that, unless I was just unlucky and am doing e-machines an injustice, is probably what the manufacturer of that computer did. Maybe it was a counterfeit component that caused my computer’s untimely end.
If enough of these computers blew up then nobody would buy them. If nobody bought them then the purchasing model that they followed would become unfashionable or even unsustainable. And so the market will find its own level. If we don’t like it, as I don’t, because it means criminals are prospering while honest manufacturers (both of components and assembled PCBs) are suffering, then we have a choice. Don’t buy them.
This is easier said than done in the short term partly because of lead-time and obsolescence issues and partly because the counterfeits are so good that they are virtually impossible to spot. But by focusing on the supply chain and weeding out bad suppliers from the good, and taking a responsible attitude to what we feed back into the supply chain by ‘keeping it clean’, the counterfeiters will effectively lose their route to market.
Most of the knowledge and facts in the first half of this article came from the panel that comprised Adam Fletcher (Chairman of the Association of Franchised Distributors of Electronic Components), Mike Trenchard (Chief Executive of the Component Obsolescence Group), Roger Rogowski (Alliance Executive of the UK Electronics Alliance), Henry Parker (Programme Manager at Intellect), and Peter Marston (Consultant to Rochester Electronics). The opinions in the second half of the article, while in some cases inspired by the gentlemen above, are my own – so please do not think that they are responsible for them!
If you would like more information about this subject the following is a link for the UK Electronics Alliance, which contains links to all the organisations represented in the panel mentioned above as well as more information about the anti-counterfeiting campaign.
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