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Counterfeit parts: Baiting the trap (Part 2)

Posted: 25 Oct 2007 ?? ?Print Version ?Bookmark and Share

Keywords:counterfeit parts? piracy? NAND flash memory?

In the article Counterfeit parts, legitimate woes story, one of the recurring questions was why Semiconductor Insights did not go through authorized distribution channels to ensure we didn't put ourselves at risk. Though our situation may be a little different from a typical engineering firm (we generally buy in small quantities and we are interested in a combination of the most advanced parts as well as older devices that may be difficult to source), a majority of the world's purchasing departments use independent part brokers to acquire components they need for production. And therein lies the problem, as most counterfeit components make their way into the global supply chain through the channels created by the independent broker.

Take a fictional example of a small to medium sized MP3 player design company. They want to design a next generation system capable of competing with the newest iPods that are soon to be released. During their design phase, a press release is issued about a new NAND flash memory part. They decide that they best way to compete is to use the latest and greatest density devices to offer superior memory space and a small footprint. The press release says that the company is sampling to customers. So using the appropriate channels, they contact the authorized distributor for the manufacturer of this new NAND flash. The authorized distributor is authorized because they look out for the best interests of the manufacturer; which not only includes getting their components designed into products that will sell well, but also determining if the applying design company has the potential to use more of their products. In this case, unfortunately, the company is not considered a big enough player to warrant getting such leading-edge samples.

Desperation as bait
The poor MP3 player design company is left with three options:

? create a design using commercially available components, which they feel will put them in the same category as other competing players in the market and gives them no real edge on their competition;

? delay their design project until the rest of the design world (aside from the big players like Apple) are able to get parts, which ultimately may give Apple the head start on their next design;

? source the parts in any way they can, from anywhere they can, so that they can create and test a prototype and be ready for mass manufacturing once the memory components are available, which will likely be at the same time as when they have finalized their design.

Why wait until the authorized distributor 'allows' you to buy the part on the open market when there is a broker in China who can sell you the part today?

This is just one of the many different scenarios for why companies risk getting counterfeit devices. Also consider companies that are using obsolete parts. When a design has been in production for a long time, there is always the possibility that one or more of the key components will be either phased out or replaced with a new and improved revision. Their authorized distributor typically warns companies when this is going to happen, and the purchasing department takes action by developing a stockpile of the parts currently being used. When they run out of parts, they have two main choices?redesign or find more parts. Chances are that the system as designed now is a cash cow for them. They have likely moved onto their next design, but considering the average length of a product development cycle, the new design could be months, maybe years, from seeing the light of day. There is a very good chance that the parts they are using will be long gone before version 2.0 comes out.

There is also the situation of an OEM whose clients use their product in their plans and a redesign of said product would require a process review that could cost them significant amounts of money. Those clients would be very opposed to any migration to a new product because of all the work involved. Situations like this make a redesign of older systems often not worth the time and effort to re-spin and redesign using a new part.

This leaves the option of finding samples somewhere else. Enter the independent broker, one who is showing a large inventory of obsolete parts that any company can use until it can release their next revision. As the parts have been around for a while there are likely many available from somewhere, just not from the authorized distributor(s) of the original manufacturer. By sending out requests for quote to the independent brokers, many sources can be identified. These parts are usually at a higher price, as they are no longer being manufactured.

Unfortunately, the designer is between a rock and a hard place. They can choose not to buy the parts and be unable to service their existing clients, which in turn could damage their relationship with them and thus reduce the chances of getting further sales or design wins; or they can bite the bullet and buy the parts. Whether it be buying leading-edge components that are just sampling, or obsolete parts that can only be sourced through them, a company is taking a risk that the parts they buy could be counterfeit.

Counterfeit roads lead to China
So why do counterfeit parts infiltrate the global supply chain and why is it usually through the independent broker? Two reasons why counterfeit parts are seeping their way into the chain: The economic boom of China and the subsequent shifting of many manufacturing operations to China and the growing use of the Internet as an acceptable tool in supplier development.

As China is going through an economic renaissance, many semiconductor manufacturers are shifting their production operations to China. As more and more leading edge or state-of-the-art components are being made in China, the chances that these products disappear off the assembly line and into the hands of the counterfeiters increase significantly. The counterfeit operation can either remark existing semiconductor packages to match that of the new part or, for the more insidious operations, reverse-engineer the entire product, manufacture it and sell it as the original. There is also a small makeshift industry of salvage that is growing in China where people dig through the refuse of manufacturing companies to find parts, which they hope to sell to prospective buyers. These parts are usually damaged in production and are useless.

There is also the rise of the Internet as a trading tool. Over the last few years, the Internet became a great place to buy and sell anything to anyone anywhere. Naturally, the day would come along where it would be possible to purchase components the same way. There are numerous web pages on the Internet that allow suppliers to post their inventory online and in real-time so that buyers, or independent brokers acting on behalf of buyers, can quickly find sources for the parts they need.

The Internet helps counterfeiters out in that it affords sellers a chance at complete anonymity. It eliminates the need for meeting face-to-face with whom you are buying parts from. You're desperately seeking a part so you search online and see that "JA Components" is showing inventory. JA could be a large international part brokerage with offices around the world or it could be a garage in China. If you are in a bind and they claim to have the inventory you will probably take the chance on buying it. Meanwhile, JA Components has produced a counterfeit part to meet your demand and ships you said product. By the time you have discovered its counterfeit and you want to recoup your investment, it is too late and JA Components has closed up shop. Strangely enough, you do another search for those same parts and another store "AJ Components" with a different email and address is showing inventory.

These unscrupulous part brokers use their anonymity to spy on the marketplace and see what parts are in demand. As demand increases, and the supply is not available, the cost rises exponentially and a counterfeiter sees a golden opportunity. Suddenly, a part that was not available a few hours ago is available in the thousands. In the global supply chain all it takes is an Internet connection to set up shop as an independent broker or distributor. For counterfeit parts, it opens the gateway from one side of the world to the other.

Countering the counterfeiters
This is not a personal attack on the independent brokerage scene. Semiconductor Insights still buys a good amount of components from independents, even though we have been a victim of buying counterfeit inventory though that method. These brokers are honest retailers, looking to fill a supply need. Many independent brokers are now taking action in trying to get counterfeit parts out of the supply chain. Counterfeit parts affect them greatly because the strength of their business operations comes from developing trust with their clients. Selling them a counterfeit component is a virtual "kiss-of-death" for their business as it could adversely affect the client's production line and spell the end of their buyer-seller relationship.

These brokers have formed the Electronic Resellers Association International to improve quality control and report within their network on parts they have received as counterfeit from brokers overseas. Flagging the disreputable brokers is their way of policing themselves. It is an uphill battle though, because like I mentioned earlier, a lot of these disreputable brokers close up shop once they have been rooted out and open up again under another name. But at least they are trying, right?

Visually, a counterfeit part is hard to distinguish from the original to the untrained eye. These parts are sold on the open market as legitimate parts and can make their way as components in legitimate products wreaking havoc for a company. These parts often make their way into downstream products because most large-scale manufacturing operations do not have the resources to inspect every part and component going into their final product.

Unfortunately, there is no easy answer to protect yourself from buying counterfeit parts. Organizations like the National Electronics Distributors Association (NEDA) and the Coalition Against Counterfeiting and Piracy (CACP) in the United States, try to educate buyers and purchasing groups to buy strictly from authorized distributors. The problem with this approach is that it is unrealistic. Every buyer is eventually going to find a situation where the authorized distributor is unable help them while an independent broker can. Because of that circumstance, there is always a chance that counterfeit parts will find an unwilling home. The onus will be on the supply chain, the buyers and the sellers, to determine methods to stop the influx of these fake components.

- Gregory A. Quirk, Technical Marketing Manager
Allan Yogasingam, Sourcing Manager
Semiconductor Insights

View Part 1 of the two-part story here.

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