Version 1

    Why are counterfeit components such an issue?

    • The  consequences of system down-time or even critical system failure where counterfeit components are used in safety critical applications, such as public transport, are potentially catastrophic
    • Failure analysis often investigates the causes of failure at board (or lowest replaceable unit) level and may not detect a counterfeit component
    • Business relationships within the supply chain may be severely damaged and disputes may result in legal action especially to recover the cost of consequential loss liability including loss of revenue, profit, jobs and potential damage to reputation.  The loss of royalties where intellectual property (IP) is counterfeited is particularly important to the UK electronics industry
    • Component users may have unwittingly used non-RoHS compliant devices in a RoHS process, or more critically, safety-critical RoHS exempt applications such as avionics may have unwittingly used RoHS compliant devices in a non-RoHS process in contravention of EC legislation passed into law in 2006. 

    The Alliance for Grey Market and Counterfeit Abatement (AGMA), based in the USA, estimates that, in 2006, up to 10% of technology products sold worldwide were counterfeit, which amounted to US$100bn of sales revenues.  However, this does not take into account consequential losses. In 2007, the US Patent and Trademark Office estimated that total ‘counterfeiting and piracy (activity) drains about US$250bn out of the US economy each year and 75,000 jobs.’ The Counterfeiting Intelligence Bureau estimates that counterfeiting accounts for between 5-7% of world trade, worth an estimated $350 billion a year.

    The volume of counterfeit electronic goods is increasing rapidly. The US Patent and Trademark Office stated that, ‘in 2006, in terms of seizures – which is going to under-account for the real amount (of counterfeit goods) – 5% of the total value seized was consumer electronics. In 2007, it was 9%. Footwear and apparel are number one and two, followed by pharmaceuticals and electronics.’ 

    In June 2007 the Organisation for Cooperation and Economic Development (OECD) released a report entitled ‘The Economic Impact of Counterfeiting and Piracy’ which stated that ‘up to US$200bn of international trade could have been in counterfeit or pirated products in 2005’ and, if EU produced goods and Internet transactions were included, ‘could well be several hundred billion dollars more.’ 

    Orgalime, the European Engineering Industries Association, states that, ‘even if it were to reach a level of only 1% for the engineering products, this would represent an annual loss of over €10bn to the European engineering industry.’ 

    There are no comparable figures for the UK. However, we should have every reason to assume that the consequences of counterfeit goods to the UK economy are proportionate to those already identified in the USA and across the European Community. Taking the US Patent and Trademark Office estimates, proportionately, counterfeiting could be costing the UK economy £30bn and 14,800 jobs. 

    In the UK, as in the USA, while the volume of locally manufactured consumer electronics is relatively small, there is still a vibrant and highly innovative electronics sector specialising in the design and manufacture of professional, industrial and high-reliability electronic systems and equipment that is vulnerable to the problem of counterfeit electronic components. 

    The consequences of counterfeiting of electronic components are particularly pervasive for a number of reasons: 

    • While environmental system testing should detect counterfeit components, functional testing may not. In-service failure is often costly to rectify in any application but the  consequences of system down-time or even critical system failure where counterfeit components are used in safety critical applications, such as public transport, could be catastrophic
    • Failure analysis in many applications often investigates the causes of failure at board (or lowest replaceable unit) level and may not detect a counterfeit component as the cause. Although analysis using a specialist test facility usually detects fault at component level, many OEMs may consider it uneconomic to do so
    • Often, counterfeits are made of components that are difficult to source through official channels, which often forces component users to source parts through unofficial channels – the ‘grey market’ – through which counterfeit components invariably get into the supply chain. Sourcing of genuine parts, especially to replace failed counterfeit components, is invariably problematic
    • Business relationships within the supply chain may be severely damaged and disputes may result in legal action especially to recover the cost of consequential loss liability including loss of revenue, profit, jobs and potential damage to reputation.  The loss of royalties where IP is counterfeited is particularly important to the UK electronics industry for companies such as ARM and CSR where the bulk of their revenue comes from this source
    • Component users may have unwittingly used non-RoHS compliant devices in a RoHS process, or more critically, safety-critical RoHS exempt applications such as avionics may have unwittingly used RoHS compliant devices in a non-RoHS process in contravention of EC legislation passed into law in 2006.

    Increased levels of global trading and, in particular, the increase in manufacturing operations in low cost regions such as Asia and Eastern Europe, in part as a result of off-shoring from relatively high cost regions, has enabled the proliferation of counterfeit goods as there appears to be little cultural concern regarding or legislative protection of Intellectual Property (IP) in those low cost regions.

    Where are counterfeit components coming from and what is being done to stop it?

    In the electronics industry in particular, the supply network of OEMs has increased in complexity, in many cases spanning multiple partners spread around the globe. Controlling the activities of partners in this complex supply network, in a market where there is constant competitive pressure to reduce manufacturing costs, has become increasingly difficult. There is anecdotal evidence, for example, of ‘unofficial’ production runs of components that have taken place in original component manufacturers’ offshore facilities, which are then passed off in the grey market. 

     

    More worryingly, these unofficial production runs can and frequently do find their way into the franchised supply chain. The ever-lengthening of the supply chain provides an increasing number of process steps where counterfeit devices can be inserted. The theft and high-jacking of work in progress material, that is being trans-shipped from one facility to another, happens frequently and this material is then processed and finished outside of the OEM’s supply chain. Growth in the use of the internet as a trading platform has also increased the speed and ease with which buyers and sellers conduct transactions, which are often conducted with very little knowledge of each others' organisations and without verbal, let alone face-to-face, contact.

     

     

    The RoHS Directive in Europe has led many large electronic component manufacturers to produce both compliant and non-compliant versions of their products. In response to changing demand, many electronic component manufacturers no longer produce non-RoHS compliant components, which has made component sourcing difficult for OEMs who are exempt from the RoHS Directive. At the same time, the rapid increase in demand for RoHS compliant components generated short-term shortages  and, in some cases, the total discontinuation of certain components. In both cases, an increasing number of components have been sourced on the grey market, which has further encouraged the proliferation of counterfeit components.

     

    Technology now exists to optically copy semiconductors and create a layout design from this copy at lower cost than using previous technology, which makes it increasingly profitable and therefore likely that the range and volume of counterfeit components will further increase in the future. Companies doing business in China are especially vulnerable to the problems of counterfeit components in China. The British Electrotechnical and Allied Manufacturers' Association (BEAMA) states that ‘China remains a problem area as 95% of counterfeit products that potentially could kill are made there.’

     

    In the past, only limited types of companies were licensed to export products from China. However, since the lifting of the state monopoly on export trading rights in December 2003, exports of counterfeit goods have increased. The Quality Brands Protection Committee (QBPC) based in China, is an association of enterprises with investment in China, which works with the Chinese government to promote greater protection of IPR. QBPC members include Cisco, Epson, General Electric, Hewlett Packard, Intel, Motorola, Nokia, Philips and Sony.

     

    In 2007, Orgalime, the European Engineering Industries Association, joined a joint EU – China Working Group comprising EC officials, European industry representatives and Chinese administration officials, whose objective is to resolve IPR issues across a broad range of products.    While the majority of counterfeit goods originate today in China, there is evidence that counterfeit components are produced in other Far East countries, Eastern Europe and even in the USA. In any case, it should be anticipated that supply has the potential to move to other countries, such as Brazil, India and Russia, to meet growing demand or even if IP enforcement were tightened in China and other countries where counterfeiting is already taking place.

     

     

    What type of components are being counterfeited?

     

    The following list is drawn from several sources and demonstrates, not only the wide range of components that are known to be subject to counterfeiting, but also that the counterfeiting of relatively low unit cost components is considered to be profitable. Although, the majority of industry activity appears to be focused on the counterfeiting of semiconductors, other component types are also subject to counterfeiting. Please note this is not a comprehensive list – new component types, not listed here, are being added to the counterfeiters’ list on a regular basis:

    • Amplifiers
    • Batteries
    • Capacitors (ceramic chip, electrolytic, tantalum)
    • Circuit breakers
    • Comparators
    • Connectors
    • CPUs
    • Diodes
    • DRAMs and DRAM modules
    • Ferrites
    • Filters
    • Inductors
    • Lead-free solder
    • Linear ICs
    • Mil spec semiconductors
    • MOSFETS
    • NVSRAM modules
    • Opto couplers
    • Programmable logic devices
    • Power and power management devices
    • Potentiometers
    • Printed circuit boards
    • Resistors
    • Radio Frequency ICs
    • Software
    • Thermistors
    • Transistors

    How are components being counterfeited?

    The following list, adapted from a report on the Counterfeit Components Symposium and Workshop, November 2006 by IGG and an article entitled ‘Dealing with the problems of piracy’ by Adam Fletcher of AFDEC in Component in Electronics, December 2007, illustrates the range of counterfeiting activities and the difficulties faced by component users in trying to detect components that may be counterfeit, bearing in mind the large number of different component types, different shipments and different suppliers that even relatively small companies have to deal with:

     

    • Components marked or stamped as Lead Free are actually PbSn (lead tin) or were PbSn but are stripped and re-plated with pure Sn (tin)
    • Components with gross manufacturing errors such as no die inside or wires
    • Components with a different manufacturer’s die to that indicated by external marking
    • Components with original component manufacturer (OCM) markings
      • made by an authorised OCM offshore site no longer under their control
      • made by an unauthorised manufacturer with original component manufacturer markings and / or recent date code, may use cheaper or incorrect materials including plastics or plating
      • made by licensed offshore facility but marked as more expensive part
      • may be parts not electrically tested and/or non functioning reclaimed failures
      • may be unauthorized product overruns with no classification testing
    • Copyright infringement
      • stolen masks used to build product in unauthorized factories
      • stolen designs of an entire product by de-processing parts
      • optical copying and generation of masks without making improvements or innovations to the original design
    • Document falsification – the provision of forged Certificates of Conformance (C of C) and other documents purporting to provide evidence of traceability or even falsely claiming devices to have  higher performance capability of specification
    • Recycled components are counterfeit if sold as new but may in any case be ESD-damaged during clean-up
    • Re-marked components
      • incorrectly marked for example to pass off as a more expensive military or industrial spec part or part with higher electrical performance
      • incorrectly marked to pass off non RoHS compliant parts as compliant or vice-versa
      • date code updated
    • Unmarked surface-mount component visually unidentifiable

     

    For more information visit http://www.anticounterfeitingforum.org.uk/counterfeiting.aspx