Component Sense Blog

EBN live chat - Current Counterfeit Situation

EBN live chat - Current Counterfeit Situation

Component Sense CEO Kenny McGee took part in the EBN live chat yesterday (15 August 2013), which was hosted by Steve Martin (executive vice president of sales from Components Direct) and Hailey Lynne McKeefry (Editor in Chief at Datacenter Acceleration).

This post has been created to abridge the discussion, remove unanswered or topics that weren’t discussed, in an effort to provide a more clear understanding. Slight grammatical changes have been made in order to create a sense of flow, as this was originally written in real time. If you wish to see the original chat dialogue, please visit: http://www.ebnonline.com/dialogue.asp?doc_id=266481

The discussion started off with a question put to Steve Martin about the current counterfeit situation, with special mention to SIA's (Semiconductor Industrial Association) plan to issue their Standard with special requirements to manufacturers of components for counterfeit prevention:

“The problem is continuing to increase. According to the 2012 IHS report over 12 million counterfeit components were in the supply chain, 57% of these components are obsolete or EOL"

The problem of counterfeit components is a huge one, not only for the electronics industry, but for the economy as a whole, it has been estimated that this issue has cost the UK alone £30bn and 14,800 jobs. (http://anticounterfeitingforum.org.uk/counterfeiting.aspx)

Steve Martin continues:

"The issue is becoming more highlighted - in a recent report by another publication, 87% of the respondents agreed that the danger of counterfeit components extended beyond military and aerospace markets. The fact that many of these parts are discontinued and harder to find, the counterfeiters are trying to take advantage of the situation with little to no regulations in regions like Asia"

The discussion continued on in a more general direction, discussing online resources where companies can report their counterfeit or suspect counterfeit finds, the two that come to prevalence are www.authorizeddirectory.com and www.erai.com/informationsharinghighriskparts.

Hailey McKeefry directed the discussion down a more nitty gritty path, and posed the question "What are the best tools and methods for spotting counterfeit parts?"

Steve Martin:

"Ongoing testing and procedures within the organization is imperative - partnering up with the key 3rd party test houses, understanding what to look for (blocktopping, remarking, dimensional tests etc)"

Tech4People, a US based manufacturer of high quality, unique communication systems:

"I can get in and get our of any Database i want today and modify the Data according to my needs. What can Manufacturers do then?"

Steve Martin answered:

"Tightening their supply chain, ensuring no gaps, more transparency and work in collaboration with their distributors, OEMs and EMS partners."

The conversation was then joined by Mark Pfutzenreuter – President and CEO Odyssey Electronics, who fielded quite an extensive question:

“What happens when a Franchise Distrubutor issues an RMA to a large OEM / CM who has purchased parts from an Independent Distributor who has sources from the open market. Now in fact the Franchise Distributor may have parts in their stock could be “Suspect Counterfeit”. The way I see it, no one in the supply chain is safe.”

In response:

“Even though distribution works on the FIFO (First In First Out) system, there are checks and balances in place to ensure that they are issuing an RMA for their product”

Kenny McGee, CEO of Component Sense directed quite an extensive question to the group and Steve Martin:

“I find it irritating that Franchise in general wants to blame the problem on the “gray market”. There are many levels of Non franchised Distributors that get lumped in together many of which are highly reputable and are working harder than anyone to beat the counterfeit problem. We will always be a necessity as franchise cannot support all parts all of the time, Many brokers these days predominantly buy from franchise because they can get stock in the most stable market we have seen in decades. That will not always be the case. Be prepared, work together and we can make our world a safer place whatever the supply and demand chain”

Ryan Lucchesi, from Accu-Sembly, an Electronic Assembly Solutions company based in the USA:

“I work with a number of brokers and non-franchised distributors who have (to my knowledge) never supplied a counterfeit part. However with more oversight, is that history reliable moving forward? I’m not sure one way or the other”

John McKay, from America II Electronics:

“There was a survey by the OCM’s stating that 57% of counterfeits came from brokers and 21% from Authorized distributors, so authorized does not always mean secure.”

Steve Martin, Components Direct:

“When we say “gray market” we are talking about broker channels with no proper warehousing, iso certs etc.”

Kenny McGee:

“In most articles, “Gray Market” refers to anyone that is not franchised. The true definition of the counterfeiters should be Black Market, as their work is illegal and fraudulent.”

Steve Martin:

“I agree with your point that when it comes to counterfeiting, the terminology should be changed”

This is something that is affecting the industry of component distribution in a very negative way, there are a variety of articles online saying not to trust the “Gray Market” at all, yet it doesn’t clarify exactly what the “Gray Market” is. This brings a new question to light, what exactly is the “Gray Market”, what is the “Black Market” and what is everything else? Are distributors that have in-house testing and the appropriate certification still classed as Gray Market? Maybe an idea for further discussion.

The conversation shifted to the testing and costs surrounding the testing of electronic components, Steven Nason from Precision Test Solutions:

“I’m curious, what is going to be the acceptable cost to make sure the parts are non-counterfeit. For us in the aerospace and military contracts the government is demanding 100% check on deliverables. But being part of the G-19 if all the tests are run to assure 100% that the parts are not counterfeit, you’re looking at hundreds of dollars, maybe thousands in screening costs. How far is the industry willing to go to support the expense of screening?” What became apparent in the discussion, is that in general customers are not willing to pay the cost of testing and screening to ensure the parts are 100% genuine.

Ryan Lucchesi’s experience agrees:

“That is one of our problems as well. When we are asked about testing, we can certainly offer it, however when customers see the cost they (in my experience) always decide to take the risk.”

This lack of willingness to pay for testing and screening is surprising, considering the impact that these components can have on the end product, Hailey McKeefry continues her line of questioning:

“Is that because they don’t understand how big the risk is? Or they figure it will cost less in the long run? It would seem to be that there are a lot of cost to reputation and customer relationships that would be hard to measure.”

George Bournazian, from B2B Marketing believes that it all boils down to money:

“I think this whole issue has just been brought to the top. It’s all about $$ in the end. However, we all seem to understand the severity of the problem when counterfeit and sub-standard devices enter products in the field. We as an industry, must all agree that this is not a way we will make money.”

Ryan Lucchesi:

“I completely agree. Our current policy is to use only Authorized Franchised Distribution. If a part is not available we will give the customer the option of a secondary manufacturer of the EOL part of the gray market, then we further break it down by offering testing. The dollar seems to rule the day, and usually customers choose gray market solutions without testing.”

Kenny was speaking with the Procurement Director of one of the biggest European military manufacturers a few weeks ago:

“He told me the pressure to cut costs on components of all sorts is greater than ever. In my own life I have found cutting cost often leaves you with egg on your face. Why risk lives in this way. Perhaps governments need to do their bit too and accept the price of admission” Ryan Lucchesi
“Most definitely, you can’t always have your cake and eat it too.”

The difficulties in providing testing are vast, as Ryan Lucchesi explains:

“I think it has a lot to do with not understanding the risks, and that when you’re already competing with cheaper overseas options that they just want to keep things as cheap as possible. As for the premiums, they can double or triple the cost of a component depending on the level of testing.

I can’t see a problem with anything from 10-30% of the part cost, for the peace of mind that it provides. Though I do have customers who pinch every penny and may not even go for that”

As the discussion is nearing the one hour time limit, Hailey starts drawing it all to a close, and asks Steve Martin to provide the attendees with some innovative methods companies are using as they institute anti-counterfeit policies.

“It used to be blacktopping, empty shells, pulls and reverse engineering but now it is much more sophisticated. Companies are adopting more stringent regulations, building awareness through customer education, recognizing the importancy of industry standard organizations like ECIA”

A real world example to illustrate the cost of testing from Douglas Alexander:

“I ordered Xilinx Spartan FPGAs from a non-franchised distributor. The parts cost about $55.00/each. The anti-counterfeiting verification for 10 parts was $1200.00. I went elsewhere, and paid $89.00 for the parts.”

Kenny Mcgee:

“It all depends on who you ultimately bought from. If $89 was from a good reliable source then you did well. We don’t charge for testing. It is my responsibility to make sure our parts are good.”

At Component Sense we test all of our components when they arrive and before they leave our warehouses. We rarely see any suspect stock these days. We handle thousands of lines of stock each week with no issues because we know where it has come from. In rare instances we come across something suspicious and usually know very quickly and relatively cheaply that parts are suspect. There after it can cost up to $2000 to be sure that the parts are counterfeit. If they fail the IDEA practices there is no point taking it further, reject the parts and save the cost of the higher level testing.

The final question that was put forward by Hailey was about SIA and various regulations and laws in this area:

“How does the National Defense Authorization Act (NDAA) require the industry, and specifically contractors, to address the counterfeit problem?”

Steve Martin:

“It is getting rolled out right now – but essentially the government has passed legislation that sanctions suppliers and contractors to allow counterfeits to enter the military supply chain.

Some argue that the regulation has gone too far and that a more balanced approach is needed – but contractors cannot pass the costs for this increased enforcement to the DoD.

Ryan Lucchesi:

“Right now from what I’ve read and am hearing from my friends and colleagues across the industry it is still too vague to really say for sure. However, as the language becomes clearer we’ll all have to adjust, hopefully with as little cost impact as possible.”

Steve Martin:

“Ultimately liability for counterfeit components is more spread throughout the supply chain”

Ryan Lucchesi:

“That is one of the biggest problems with it. If we are required to test, we have to be able to charge for it. Otherwise we simply can’t do the DoD contracts.”

A closing statement from Steve Martin summed up the discussions nicely:

“Hopefully we all work together to remedy this situation or curb it so its on the decrease instead of the increase.”

Hailey McKeefry:

“We should definitely do this again. Steve, maybe you’d like to join? We didn’t even get into reporting counterfeit parts or very deeply into obsolete or EOL as prime targets, we certainly have plenty of ground left I think!”

The discussion was then brought to a close, overall a very beneficial and enjoyable discussion, covering a wide variety of topics; and identifying a number of other topics that would be worth discussing again soon.

Hosts:
* Steve Martin – Executive Vice President of Sales from Components Direct * Hailey Lynne McKeefry – Blogger, EBN

Contributors (in Alphabetical order):
* Douglas Alexander * George Bournazian VP Account Services at B2B Marketing Communications * Hospice_Houngbo * Jacob – Electronic Engineer (Japanese electronic development corporation) * John McKay – Business Development Manager at America II * Kenny McGee – CEO of Component Sense * Lev Shapiro – Component Master Ltd. * Mark Pfutzenreuter – President and CEO Odyssey Electronics * MTS 2013 - Unidentified * Ryan Lucchesi – Purchasing Agent at Accu-Sembly * Steven Nason – Material Science Engineer at Precision Test Solutions * Susan Fourtane – Freelance Journalist * Tech4People * Veera – Unidentified


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