Counter the Counterfeiters as Chip Shortages & Supply Chain Woes Continue

For the past year or two at least, supply chain woes have abounded—and compounded: trade restrictions, unprecedented natural events, a global pandemic, and all its associated side effects. As a result, demand for electronic components will far outstrip supply for the foreseeable future, and fab capacity takes years to build. OEMs in every sector are scrambling to get the components they need. This nightmare for manufacturers is a compelling opportunity for fraudsters who make their livelihood hawking fake parts, but countermeasures are available.

The downside of counterfeit products is obvious at the surface level in that organizations aren’t getting what they pay for. The component makers lose revenues that they would have otherwise received, and product failure and poor performance can degrade the brand of both the manufacturer and its suppliers. Going deeper, costs associated with product replacements, lawsuits, and mass recalls add up quickly, and security systems are compromised. In worst-case scenarios, product failures can seriously injure or be fatal to end-users. Consider that electronic components are the brains of critical systems in nearly every mode of transportation, healthcare system, power grid, and military system.

Although large OEMs that have a direct line to component makers are probably well-insulated from the challenges, low-volume manufacturers with less leverage on their supply chains will likely suffer. Also at risk are those playing in sectors that are critical but hard hit with shortages: defense, healthcare, and automotive come to mind first. Although current research is sparse, there’s little to suggest the problem has been substantially improved. Technology and online commerce have given bad actors the ability to move quickly and take advantage of opportunities more quickly than in the past.

For these customers, strong relationships with distributors will be a key strategy for success in safeguarding supply and ensuring the quality of the products they buy (Figure 1).

Figure 1: Almost one-quarter of the industry's semiconductors are handled through the distribution channel, including buyers worldwide and smaller organizations. All of whom need to ensure strong relationships with their distributors. (Image source: McKinsey)

Falling for fakes

In the coming months, with stretching lead times, many organizations and their sourcing specialists will be tempted to take shortcuts and risk buying from “alternative” sources, hoping they’re not getting counterfeit components. They will be rushing to verify and onboard suppliers and shifting policies in terms of what is considered a reasonable risk. Rather than sticking to franchised distributors or known independents, organizations are likely to consider new avenues for getting the products they need. Consider that, a decade ago, the Committee on Armed Services of the U.S. Senate determined that as much as 15% of the electronic components purchased by the Pentagon were counterfeit.^[1] Attention was drawn to the issue when Boeing discovered that an ice detection module in its flight line had failed.

The risk of counterfeit components is considerable. For example, the Semiconductor Industry Association (SIA) has gone on the record with estimates that the semiconductor industry loses about $7.5 billion each year because of counterfeit parts.^[2] Further, the cost of replacing a counterfeit or failed component in a system after it has been built goes well beyond the cost of the component. Taking a broader look, estimates suggest that counterfeit electronic components may cost businesses around $250 billion a year. Note that although a number of organizations, such as ERAI Inc. and the Government-Industry Data Exchange Program (GIDEP), track counterfeit parts complaints privacy concerns mean that detailed information on this has not been made public.

This summer, the ERAI pointed to dozens of websites that have popped up online hoping to lure unsuspecting buyers searching for parts on Google.^[3] The industry watchdog gives some tips on spotting bad actors. Red flags include:

• A demand for up-front payment via wire transfer. They refuse alternate payment methods such as credit cards and PayPal.
• Using Google ads to advertise specific part numbers.
• False claims of alliances with industry members such as a major semiconductor brand or the Electronic Components Industry Association (ECIA). You’ll find a list of true affiliates on their websites.
• Language and design that is mirrored across multiple sites.
• A promise of an obsolete or hard-to-find part in stock and sold at below-market prices. If it seems too good to be true, it probably is!

Best practices include standards & screening

Counterfeiters, who deliver products that look like the real thing but are inferior, are harder to spot. These swindlers generally take one of two approaches to create fake products:

• Cloning: Parts are made from scratch to look like a specific product but may not meet the promised performance specifications.
• Recycling: Components are harvested from electronic waste and cleaned and remarked to appear new.

Fortunately, manufactures can put a variety of approaches in place to reduce risk. First and foremost, it’s desirable to work with known and tested suppliers, especially those franchised by the component maker. Check that the distributor has certifications such as SAE AS6081 Counterfeit Electronic Parts: Avoidance, Detection, Mitigation and Disposition for Distributors or adheres to industry-specific standards such as AS6081 which provides requirements, practices, methods, and guidance to mitigate the risk of purchasing and supplying suspect counterfeit and counterfeit parts in the aerospace industry.

OEMs need to look at their entire business strategy to minimize the potential for the introduction of counterfeit components. In the design phase, organizations should think carefully before designing sole or single-source products because having alternatives makes taking chances less compelling. At an operational level, OEMs should consider taking the strongest inventory stance possible and work with distributor partners to manage the pipeline. At the supply chain level, close collaboration with suppliers, partners, and customers will create trust and shared understanding.

Finally, once products are in hand, particularly if a source is new or independent, testing and inspection can help spot potential problems. Components should be measured to look for a variance in manufacturers’ specs. To spot blacktopping (commonly used by counterfeiters to falsely mark components), testers apply an acetone wash to remove any false printing. Also, X-ray inspection and electric testing allow for poor quality or reduced performance to be spotted. Finally, some organizations decapsulate some chips when the authenticity of a batch is in question.

Shortages aren’t going away any time soon. Counterfeit components have always been a problem, but that challenge is likely to grow. Vigilance and care will be the watchwords for electronic procurement pros for the foreseeable future. Good business practices—combined with a healthy skepticism—are the path forward to mitigate the risk of fake parts.

References

1. https://www.govinfo.gov/content/pkg/CHRG-112shrg72702/html/CHRG-112shrg72702.htm
2. https://www.semiconductors.org/wp-content/uploads/2018/06/ACTF-Whitepaper-Counterfeit-One-Pager-Final.pdf
3. https://www.erai.com/erai_blog/3160/hundreds_of_component_buyers_scammed_by_fraudulent__websites