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Xilinx-Flextronics lawsuit puts the spotlight on gray market

Posted: 30 Jan 2014 ?? ?Print Version ?Bookmark and Share

Keywords:Xilinx? Flextronics? gray market? lawsuit? counterfeit?

Xilinx, in a suit filed against Flextronics International, has revealed the dark and murky inner workings associated in what the industry has collectively labelled as the gray market. In December, Xilinx sued Flextronics, filed in the Santa Clara Superior Court of California, accusing the contract manufacturer of "fraudulent and unfair business practices." The complaint indicated that Flextronics misrepresents whom it was purchasing Xilinx parts for.

Specifically, Flextronics falsely claims to be buying for a preferred Xilinx customer, meaning one that Xilinx sells to at a lower price based on the high volumes of chips the customer buys each year, the complaint said. The suit also claims Flextronics over-orders components for preferred customers. Then Flextronics sells those parts to a different company at a higher price and pockets the difference, making "large, wrongful profits at Xilinx's expense," the complaint read.

Flextronics wouldn't comment on the suit, but a spokesperson sent a statement saying it is "committed to complying with all the laws and regulations in every jurisdiction where we operate, [and] deeply committed to operating with the highest standards of ethics and integrity."

The suit also charges Flextronics purchases gray market and counterfeit Xilinx devices from unauthorized distributors and resells them to Xilinx customers. In addition, Xilinx accuses Flextronics of making unauthorized sales of Xilinx chips to "unknown purchasers in Asia" without obtaining export licenses, a violation of US export control laws and possibly creating a threat to US national security. (Xilinx chips are used in advanced aerospace and defense systems.)

The examples Xilinx gives of how it discovered the alleged fraudulent activity reveal how the gray market works. Last June, it noticed large discrepancies between sales forecasts and consumption levels for two customers, Airvana Network Solutions and Checkpoint Systems, and so started analyzing Flextronics' purchasing history. It found that Flextronics had purchased about 60,000 more Xilinx parts than indicated by the sales forecast of Airvana, which was a preferred customer and thus got a price of $7. Meanwhile, Xilinx confirmed that Checkpoint, which was not a preferred customer and thus paid $11.50 for the same part, had about 40,000 more Xilinx parts in stock than its order history indicated. When asked, Checkpoint confirmed it had purchased the additional parts from Flextronics. Tellingly, Flextronics had previously asked Xilinx for a price quote on an order for 40,000 of these parts for Checkpoint, but had never placed the order, the complaint said.

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