Front End I Electronic Components Supply Network


Waking up and smelling the


counterfeiting coffee


The FY2012 National Defence Authorisation Act (NDAA) passed at the end of last year has refocused the terms ‘Authorised Distributor’ and ‘Trusted Supplier’ in the global electronic components supply network. The resolve to drive out counterfeit electronic components from the US military supply chain is welcomed, but as Adam Fletcher suggests, further global counterfeit avoidance measures will be required to reinforce the US legislation


I


n May 2012 the Committee on Armed Services United States Senate published a report “Inquiry into Counterfeit


Electronic Parts in the Department of Defence Supply Chain”. http://www.armed-services.senate.gov/ Publications/Counterfeit%20Electronic %20Parts.pdf The report makes grim reading: a two- year study of just a small section of their supply chain revealed over 1,800 cases of suspected counterfeit electronic parts effecting over one million components. The report drew a number of important conclusions: • China is the dominant source of counterfeit electronic components • The Chinese government has failed to take steps to stop this counterfeit activity • The use of counterfeit parts in defence systems can compromise performance • The US Department of Defence (DOD) does not fully understand the scope and impact of counterfeit parts on critical defence systems • Permitting defence contractors to


recover costs incurred as a result of their failure to detect counterfeit parts does not encourage counterfeit avoidance • Reliance on un-vetted independent distributors to supply electronic parts results in unacceptable risks • Weaknesses in the testing regime for


electronic parts create vulnerabilities that are exploited by counterfeiters • The defence industry routinely failed


to report cases of suspect counterfeit parts The 2012 NDAA put into law the


8 October 2012


requirement that suppliers to the DOD and Department of Homeland Security “detect and avoid counterfeit parts in the military supply chain”. Section 818 of the Act also requires the establishment of a program of enhanced inspection of electronic parts imported from any country determined by the Secretary of Defence to be a “significant source”.


Analysis of the first-tier distributors in the 1,800 cases identified in the May 2012 report revealed that 650 independent electronic parts distributors supplied products and that 80% of these companies were located in or had a business presence in the US. Of the 130 independent distributors who had no US presence, China-based companies were by far the largest proportion, followed a long way behind by UK and Canadian suppliers. Following further analysis of the 1,800 cases it was found that 70% of the components sourced were no longer being manufactured and in short supply but a significant 30% were in current production and readily available, indicating a willingness on the part of prime contractors in the US defence supply chain to buy parts from independent distributors even when they’re readily available from the manufacturer or their authorised distributor. A further surprising finding in the report was that the US Government-Industry Data Exchange Program (GIDEP), a government database for receiving and disseminating information about non-conforming products and materials, only held data on 271 components for the period concerned, which suggests that the industry reporting


Components in Electronics


in the US is severely lacking, despite DOD instructions mandating that all occurrences of suspect and confirmed counterfeit products must be documented. The fear is that similar problems could be identified in military programs worldwide despite the best efforts of governments and a wide range of industry bodies to identify the risks and widely disseminate the information. There are of course large, financially stable and entirely legitimate independent distributors. Whilst they are not manufacturer authorised these companies are established players who provide a valuable service to their customers and therefore have a genuine role in the electronic components supply network. Unfortunately, as the authors of the US report discovered, such companies are besmirched by the many small


organisations and their industry associations who deliberately set out to undermine legitimate business and exploit gaps in the supply network to sell high value electronic parts for use in military and aerospace applications at a super normal profit. Like ecsn, many national electronic components trade associations are members of the International Distribution of Electronics Association (IDEA) - www.ideaelectronics.com - and represent a wide cross-section of the electronic components manufacturers and distributors. IDEA and its member associations have recognised the threat posed by counterfeit components for many years and have long campaigned for action. We highlight the differences between organisations by using differentiating terms such as “original components manufacturer” and “authorised distributor” to enable customers to identify suppliers where there is no ambiguity as to the source of supply. The term “authorised” is only applied to a distributor that has been contractually authorised by the component manufacturer to resell its products in agreed territories, together with all the associated warranties and guarantees. The new 2012 NDAA US legislation


requires all suppliers to DOD prime contractors to be either; Original Equipment / Components Manufacturer, an authorised distributor or a trusted supplier,


forcing small independent organisations and their business associations to desperately seek ways to legitimise their business operations. Beware of terms such as “Counterfeit Avoidance Strategies”, “device screening” “authentication”, “100% testing” etc. These Trojan Horse terms are increasingly being bandied about by small independent distributors in the hope of gaining trusted supplier status and thereby safeguarding their business. It’s to be hoped that the inclusion of the penalty “the full cost of rework or corrective work to replace counterfeit parts” in the legislation will also help prime contractors to get their electronic components supply network operating correctly with the appropriate partners. Such stringent financial penalties are likely to ensure that they monitor their system much more effectively, as the cost of getting it wrong will hit them where it hurts the most – in the bank!


But despite the risks posed, the sale of counterfeit electronic components to the global military and aerospace industries may be considered merely as a counterfeit cottage industry. It pales into insignificance when compared to the impact that huge volumes of professionally produced counterfeit electronic components are having in the commercial markets. Fortunately most of the production and consumption of these commercial counterfeit products is in China but some reach Europe via unscrupulous suppliers or as a result of direct internet based transactions.


Original component manufacturers and their authorised distributors are the only sources of supply of electronic components that guarantees the performance of the device and the availability of the resources and willingness necessary to ensure long- term availability and customer support. The old Latin maxim “Caveat Emptor” (Buyer Beware) still applies to the purchasers of electronic components for the latest military hardware just as it did to the Chariot buyers in the Roman Latin wars over 2,000 years ago.


ECSN | www.ecsn-uk.org Adam Fletcher is Chairman of Afdec/ ECSN www.cieonline.co.uk


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