Threat of counterfeit parts to defense supply chain getting worse

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July 16, 2015

Every month the McHale Report will host an online roundtable with experts from the defense electronics industry - from major prime contractors to defense component suppliers. Each roundtable will explore topics important to the military embedded electronics market. This month we discuss the proliferation of counterfeit parts in the defense supply chain and how the Department of Defense (DoD) and industry are dealing with it.

This month’s panelists are: Tom Sharpe, Vice President, SMT Corp.; Dan Deisz, Director of Design and Technology, Rochester Electronics; Lee Mathiesen, Operations Manager, Lansdale Semiconductor; and Leon Hamiter, Consulting Engineer, Components Technology Institute Inc. in Huntsville, Alabama.

MCHALE REPORT: Is the threat of counterfeit parts getting better or worse?

SHARPE: Unfortunately, the counterfeit threat is getting much worse as counterfeiters are not only still producing traditional counterfeits – (Original Component Manufacturer (OCM) devices which have been modified/altered and misrepresented to appear as new and unused OCM devices) – they are now creating ever-increasing amounts of advanced counterfeits or “clones.” In other words they are creating their own parts, which unfortunately, are very similar physically and electrically to the real OCM parts, which makes it easier for them to defeat the inspection process. Clones, essentially, are a growing competitor in the open market to authorized supplier sales.

Escalation in detection capability and awareness within the electronics industry over the past several years has predictably inspired the counterfeiters to get better at what they do. SMT first detected highly advanced clone devices back in 2012 and they have continued to proliferate. We had to re-focus our labs on understanding what this new component threat looks like and how to reliably detect it. To do so, SMT has invested heavily in additional high-end inspection equipment, training, significant electrical testing capability, and qualified component engineers.

Traditional counterfeits are not going away anytime soon. China continues to turn a blind eye to the rights of intellectual property (IP) holders and instead provides a host-country to a billion-dollar black-market industry for the creation of counterfeit electronics. They will continue to produce large quantities of crudely refurbished used parts as long as there is a market that continues to buy it.

DEISZ: The counterfeiters are continuously improving their ability to counterfeit product. No longer is it the case of them banging parts together then washing them over a bucket in a river as portrayed in many media reports. That impression of counterfeiters is still out there, but the reality is that these folks have made real investments and are doing a far better job of how they pull parts off of boards and how they re-mark products for what we look for. They are carrying it one step further by cloning products and trying to make money off of their silicon instead of off the OCM’s product.

MATHIESEN: Yes, the more sophisticated we get at finding counterfeits the more sophisticated the counterfeiters get at producing them.

There are 3 kinds of counterfeits:

1. The wrong part in the right packaged refurbished to “look” like the part. These don’t work when put in the system so the only real loss is the procurement cost.
2. Product pulled from [electronic] waste that is the correct function, but is refurbished and marked to reflect a different date code, part number, screening level, etc. These are dangerous because they may work at room temp at least for a short time. They always fail at the worst possible moment and may cause a loss of the system and mission.
3. These are the parts that are new, look, and act just like the originals, but they may be tainted to fail or disrupt operation. These include the clones that have been surfacing lately, which begs the question… what organization of counterfeiters can afford to reverse engineer and fabricate these parts? How can they expect to compete with the OCM manufacturer who has amortized the engineering cost over hundreds of thousands of parts? Who is paying for the overhead? A nation state perhaps?

HAMITER: The findings are confusing. I’m finding some of the Counterfeit Component Avoidance Program (CCAP-101) certified suppliers of obsolete components are actually experiencing less counterfeits while others are seeing more. Those seeing fewer may be a result of better selection of whom they purchase from. There is also a focus on remanufactured or cloned parts, where the die is harvested from scrap PCBs or a similar die inventory and then packaged. Such efforts are expensive and authentic die likely come from stealing the die mask or having extra wafer runs at a particular foundry. [Editor’s note: Hamiter’s organization produces the CCAP-101]

Obsolescence challenges and the lack of funding for new military products means that future designs will go toward commercial plastic parts, which can be reliable if properly used. However, a push toward using commercial parts also increases the risk of counterfeits, which are more prevalent in commercial markets.

I remember one incident from a few years ago when an OEM specifically told a distributor that they needed a specific part with a two-year date code. The distributor, unable to find such a part, took one outside the date range and simply remarked it with the requested date code range, in other words this action made the parts counterfeit. Cost pressures could encourage more of this behavior.

MCHALE REPORT: What technology applications are hurt the most by the proliferation of counterfeit parts?

SHARPE: Counterfeits threaten every area of the electronics industry from high-reliability industry applications such as defense and aerospace, medical, automotive, energy and telecom down to the entire commercial sector.

DEISZ: The biggest risk is a catastrophic event such as a downed aircraft. The counterfeit threat is pervasive, touching medical instrumentation and the automotive sector, which is using more electronics than ever.

MATHIESEN: We always assume it is the older technology systems where spare parts have become obsolete. But that is not necessarily true. Probably more than 50 percent of the counterfeit products found are parts that are still in production at either the OCM or an authorized aftermarket manufacturer. Counterfeits are not a manufacturing problem; they are a procurement problem. If you don’t want to buy counterfeit product simply don’t buy them. Buy from the authorized chain.

MCHALE REPORT: How is the U.S. government dealing with the problem?

SHARPE: We continue to work with the government on the advanced counterfeit challenge, and share information at the right levels. One of the biggest problems with defeating traditional counterfeits has been each time a new detection method was publicized the counterfeiters were able to learn what wasn’t working and improve upon it seemingly overnight. This public sharing of detection methods needs to end with the highly advanced counterfeits of today – otherwise we will continue to educate the bad guys.

For example, a new SAE test standard, AS6171, getting released by the end of this year or shortly after, has already been defeated by clones as it is designed to detect traditional counterfeits.

DEISZ: The DoD and major DoD OEMS are much better than others at being vigilant and taking the necessary precautions to combat counterfeits. The only time it gets squishy is when you go to contract manufacturers (CMs) and they are incentivized to reduce price. You can’t be sure of what shortcuts the CMs might take to meet those price goals. DoD OEMs do far better jobs at filtering and limiting choices as far as who they buy from, but unfortunately they still don’t look everywhere for authorized solutions.

There is still a part within the DoD where there is a wicked back and forth on how to manage obsolescence in the supply chain. The OEMs more or less design in obsolescence up front and nothing has changed regardless of product price and how much time they allow up front for design. However, the DoD wants more flexibility in who they buy from and with price as they continue to deal with budget cut pressures, which creates the risk that counterfeits may find their way into a DoD system.

MATHIESEN: The government writes new laws, and has been chasing down and prosecuting more traffickers of counterfeits, and has been seeking heavier penalties. We will see just how much the Justice system believes that knowingly selling counterfeit parts to the DoD is really an act of sabotage on a DoD weapon system. The most recent prosecution of a man named Peter Picone comes up for sentencing next month. The severity of his sentence should tell us a lot about what the judges will do in the future with these saboteurs.

HAMITER: They are trying to be diligent through the Defense Federal Acquisition Regulation Supplement (DFARS) and Federal Acquisition Regulation (FAR). They also still depend on QML and trusted sources even at the Defense Logistics Agency. However, many OEMs are having issues with implementing these.

MCHALE REPORT: What is the best way to combat counterfeits?

SHARPE: Using authorized suppliers wherever possible is the best answer to the counterfeit threat. Authorized suppliers such as Avnet, Arrow, etc., and aftermarket ones like Rochester Electronics and Lansdale Semiconductor are your best bets to mitigate this growing threat. Clones have made it much more important now than it was five years ago to work with the authorized part of the supply chain wherever possible for components.

The continuously advancing clone threat will not be defeated by published inspection standards, but instead through closely guarded new detection technologies. Over the past three years, Battelle Labs in Columbus Ohio has done just that by developing the “Battelle Barricade” system specifically to counter the advanced counterfeit threat. I believe this highly advanced detection system and others like it will become part of standard mitigation processes in the years to come.

DEISZ: Part of the insidious nature of clones is that they work at room temperature, but not in extreme hot and cold environments. If a user doesn’t have the methodology to test beyond room temperature they won’t discover it doesn’t work till it gets in the field. Brokers don’t necessarily have this advantage or capability and yet claim they never see cloned counterfeit technology. How can they know? Trusted and authorized manufacturers such as us have this capability so they are really the best avenues for mitigating counterfeit threats.

MATHIESEN: BUY AUTHORIZED. Whether it is from the OCM, their authorized distributor or the authorized aftermarket manufacturer. There is no 100 percent guarantee that any amount of non-destructive testing will catch every type of counterfeit product, and 100 percent destructive testing leaves you with nothing to use in your system. If you procure product from the authorized chain the odds of obtaining a counterfeit product fall nearly to zero. If you buy product from the broker market the odds of buying a counterfeit increase dramatically. If you absolutely cannot get the product through the authorized chain it may be time to redesign the system.

HAMITER: You build a legacy of trust by being thorough in your test and inspection processes for obsolete components. Components still in production by OCMs should always be purchased only from authorized dealers.

I have not seen many counterfeits come from authorized suppliers because they have traceability to the OCM and most have the protocols in place that many open market brokers do not. The weak link is with taking inventory from customers.

The CCAP-101 Program is designed to accept only new and unused components as the OCM shipped them. We don’t even allow re-tinning of the leads. If you do that you have essentially destroyed the part as originally supplied.