The ‘Legally-Authorized’ Quandary

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It isn’t always a physical location but the “black” or “grey” market is a part of many local and international business transactions. The “black market” has a hint of illegality, which is one reason it is the preferred term for the unauthorized foreign exchange market because the buying and selling of hard currency outside of government supervision in certain countries is considered illegal.

The notion that the “grey” or “black” market process is illegal isn’t universally accepted in the electronics industry, however. Anyone is free to buy and sell components – as long as the enterprise is registered and ordered by a government agency. The process, though, can involve the movement of illegally obtained or tainted parts and equipment into the electronics supply chain. When this happens, the grey market suddenly darkens and all transactions occurring in it can become the subject of criminal prosecution.

Yet, the concept and practice of moving electronic products and components through the grey market persists because it’s often the place some purchasing professionals at OEMs and EMS providers, brokers and others go to when they absolutely must have certain components that aren’t readily available through “authorized channels.” It’s a secondary sourcing channel when buyers want parts immediately or at the cheapest possible price. Or, when they are just being stupid, as some industry watchers insist, due to the high probability of ending up with sub-par or counterfeit products.

Whatever you think of the folks who participate in the grey market – buyers and sellers alike – the reality is that it can be fraught with danger for the supply chain. In the grey market, guarantees of authenticity may not be available or enforceable and any promise that a product would perform as expected should be taken with more than a pinch of salt. The products may be available but they come with all kinds of risks that could threaten the health of a manufacturer’s supply chain. That’s why the U.S. Department of Defense doesn’t want any part of it anymore. (See: DoD Sets Tough Counterfeit Prevention Rules.)

The DoD wants OEMs, EMS providers, component suppliers and distributors to vouch that the parts they sell to the military would be sourced only from “legally authorized” vendors. That presents a conundrum for the industry. Most legitimate enterprises in the electronics industry would gladly say publicly that they only sell or distribute “genuine” parts. But how many of them can say counterfeit or substandard parts have never been discovered in their supply chain?

Congress has empowered the DoD to enforce and influence the imposition of rules that put the onus of proving the supply chain is counterfeit-free on electronic component suppliers and equipment makers. The Electronics Components Industry Association (ECIA) is applying pressure behind the scene and working with Congress to assure the burden is not unfairly transferred to its members.

As industry organizations try to make sure the rules governing military procurement are reasonable, companies too are left to ponder the seriousness of deciding the type of companies they can partner with to avoid falling foul of the law. It’s not enough nowadays to simply certify your company’s products as being “genuine”, it is also imperative on manufacturers to ensure their partners carry only authentic parts and be sure the extended supply chain does the same.

Identifying, certifying and engaging only with companies that have squeaky clean supply chains will gradually become the norm for this industry even for enterprises that don’t supply products to the military equipment market. The first question all companies will need to ask themselves is this: Are all participants in our supply chain “legally authorized”? It’s a high bar but, surprisingly, only the beginning.