Counterfeit parts are a serious business. The top four most-counterfeited components alone affect $281.5 billion worth of semiconductor markets, and it's estimated that electronics-part counterfeiting costs U.S. semiconductor manufacturers around $7.5 billion per year. . The best way to mitigate this risk is to work within a trusted supply chain that depends on authorized manufacturers.

Were counterfeit components to make it into production, they would pose much more than a financial risk: product failure, grounded airplanes, national security, injuries, and even lost lives. U.S. Department of Defense (DoD) officials recognize these dangers and on May 6, 2014, published regulations that require defense contractors and their suppliers to take clear measures to detect and avoid using counterfeit electronics parts. Failing to follow these regulations is costly: Noncompliance can result in $5 million in penalties and losing the ability to do business with DoD in the future.

Many counterfeit components are caught before they enter a production cycle as detailed in the 2013 Semiconductor Industry Association Report, which lists stories of counterfeit components that were caught prior to being used in manufacturing. These included counterfeit semiconductors intended for use in radiation detectors that emergency responders would use in cases of a nuclear power accident and counterfeit semiconductors intended for use in nuclear submarines. The impact of a product failure in these cases would be devastating.

How to mitigate this risk? First by understanding it, knowing how and where to look for counterfeits, and then by looking for reliable sourcing through authorized distribution.

Where to look for counterfeits?

Traditionally, the defense and aerospace markets have been popular targets for counterfeit semiconductors largely because of the prevalence of discontinued parts. After all, with the acceleration of component lifecycles and the length of defense contracts, defense and aerospace products typically have much longer manufacturing lifecycles than many of their components. With the weight of millions of dollars of production lines on their shoulders, this can leave a manufacturer actively looking for passive, discrete, electromechanical, and other components on the open market if they are not working with an authorized distributor.

Another change in the counterfeit risk is the large (and growing) shift away from using defense-specific components to commercial ones. There was once a large market for defense-specific and custom electronic components, but that is no longer the case as it has become cost-prohibitive to design defense-specific electronics components and integrated circuits in low volumes. Therefore, most defense and aerospace products today mostly contain higher-volume commercial components. The average defense OEM may rely on components from as many as 35 different commercial sources to create a single product. According to research and advisory firm IHS isuppli, these commercial components represent 80 percent of the counterfeits found in the defense supply chain today. Using an authorized distributor greatly reduces this risk and simplifies the supply chain.

The detection challenge

One of the biggest challenges in detecting counterfeits is to find the right tests. Often, once a test is in place, a skilled counterfeiter has found a way to work around it.

As more outsourcing has moved offshore, the ease of accessing intellectual property and potential profit from counterfeits have led to sophisticated counterfeiting techniques. It has become virtually impossible to detect a counterfeit component simply by looking at it. Casings are nearly identical to the components that are being copied. Many times, the only way to know the difference is by either opening the parts (and thereby destroying them) or using sophisticated detection technology.

Our industry has adopted some very interesting detection technology to protect integrated circuits (ICs) from counterfeiting, including electronic-fingerprinting technology, electronic signatures, and algorithmic-authenticity detection. These methods are mostly focused on the four types of ICs (analog, memory, microprocessor, and programmable logic) that comprise more than 50 percent of the counterfeit market. The focus on these methods is coming more from component manufacturers who want to protect their revenue.

Table 1: Just four types of integrated circuits – analog, memory, microprocessor, and programmable logic – account for more than half of the counterfeit component market.

This makes sense: After all, if you are at the bank and someone tries to deposit a $50 or $100 bill, the teller is likely to bring out a light pen and check its authenticity. But who checks a $1 or a $5 bill? The cost of accepting a counterfeit $1 bill is not very high, in the end.

However, this risk analogy doesn’t carry over to electronic components. While high-end ICs represent the bulk of counterfeit components, 42 percent of counterfeit electronic components are lower-value components, according to IHS isuppli. It is not unlikely that these low-dollar parts would enter the supply chain. While the dollar impact of a counterfeit $500 IC may be greater than that of a $5 component, the actual cost of product failure is the same. As a result, vigilance against counterfeiting must be the same, and detection testing alone is not going to be enough. In this case, authorized distribution is required.

Mitigating risk by using authorized distributors

The 2014 DoD regulations on counterfeit semiconductors require defense contractors to mitigate the risk of counterfeits – the only way to do this is to focus on plugging the leaks in the supply chain. The best way to ensure a clean supply chain is to source only from original component manufacturers or their authorized distributors and resellers. According to a 2012 report by the Senate Armed Services Committee, an “overwhelming majority” of the more than one million counterfeit parts identified in an investigation of the DoD’s supply chain were sourced from the open market. In addition, an audit of the U.S. Missile Defense Agency’s independent distribution sources determined that 60 percent of the suppliers were a “moderate to high risk for providing counterfeit parts.”

That is not to say that every open-market source deals in counterfeit product. Many independent distributors have legitimate businesses serving the components’ aftermarket. However, there are also those companies that intentionally engage in the manufacture and sale of counterfeit, remarked, and substandard parts; unfortunately, these bad apples can spoil the whole bunch.

Buyers must keep in mind that gray-market products typically change hands and regions many times before they land in a broker’s stock. With each transaction and every shipment, the opportunity for the parts to be tampered with, repackaged, or relabeled is high. Without a verifiable paper trail, the ultimate seller generally cannot guarantee the authenticity or quality of the product. In contrast, an authorized distributor can provide buyers with certificates of compliance and origin.

Planning for obsolescence

For OEMs with long-field-life products, the best approach is to plan for obsolescence. OEMs should work closely with their authorized distributor partners to proactively manage their bill of materials. Avnet, for example, offers tools such as the BOM Optimizer that enables users to identify parts with potential obsolescence issues, prioritize those that could cause the greatest disruption, and develop cost-effective solutions. Designers should also pay attention to the market analysts whose sole purpose is to follow market and technology trends and communicate regularly with component manufacturers about component transitions.

When a supplier issues an end-of-life notice, an authorized distributor should offer customers a range of options, including lifetime buys, to assure ongoing supply. The distributor should also be able to recommend certified, reliable, and reputable aftermarket manufacturers who are authorized by the original component manufacturers to produce legacy components using original wafers and die (Figure 1).

Figure 1: The danger that sourced components may be counterfeit comes at the height of use and again during the “end-of-life” downswing. Graph courtesy of Avnet.

Even with all of these measures, there is only one thing that will truly stop counterfeit components from infiltrating the electronics supply chain: buyer behavior. Defense OEMs cannot afford to engage in risky sourcing behaviors. They can lose their customers, have to pay substantial fines, and endanger lives.

Buyers need to remember that they don’t just need parts: They need quality, reliable, factory-original parts, certified by an authorized distributor. There is a critical difference.

Ed Smith was promoted to president of Avnet Electronics Marketing Americas in February 2009; the 20-year-plus electronics industry veteran had, for the five years prior, led the Electronics Marketing Americas sales team as its senior vice president. Smith began his career at industrial distribution company W.W. Grainger. He then spent eight years at Avnet, where he held various sales and operational positions, including district manager in Los Angeles and Phoenix and director of sales for Avnet’s Industrial Marketing Group. He left Avnet for the opportunity to serve as president and chief executive officer of SMTEK International, an electronics manufacturing services provider, and served on its board of directors. Smith subsequently returned to Avnet in 2004 to accept the post of senior vice president of sales for Avnet Electronics Marketing Americas. He currently runs the We Will Never Forget Foundation and serves on the Electronic Components Industry Association (ECIA) board of directors and on its executive committee. Readers may reach him at [email protected] and may follow Avnet’s Twitter feed at @avnetdesignwire.

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