The risk of procuring counterfeit electronics rises considerably during periods of component shortages. With semiconductor supplies remaining tight through the end of 2022, the industry faces a prolonged interval of increased risk.
Industry sources have used the word “desperate” to describe the current shortage situation. When a high-priced product such as an automobile can’t be manufactured for lack of a single part, procurement may circumvent approved vendor lists (AVL) for alternative sources of supply.
In electronics, there is no shortage of fly-by-night operations that falsely advertise parts; remark or mismark existing devices; or sell damaged or inferior parts as new. There are also reports of manufactured counterfeit semiconductors.
In June, anti-counterfeiting alliance ERAI posted a warning that hundreds of websites were advertising electronics components; requiring payment in advance; and never delivering orders. In July it identified multiple fraudulent websites operated by a single individual.
Although both ERAI and GIDEP – the Government-Industry Data Exchange Program – receive and process counterfeit-part complaints, comprehensive data for the components industry is difficult to find. Recent estimates suggest that that counterfeit electronics cost businesses around $250 billion a year. Data on counterfeit component incidents is not made widely available for privacy reasons.
Buyers may also turn to the open market where excess inventory from component makers, distributors and OEMs is bought and resold. Although many of these parts come from factories or from distributors authorized carry component brands, the provenance of devices can’t always be verified. Distributors that source from this market are associated with a higher risk of counterfeits.
Top-tier independent – or non-authorized — distributors have set themselves apart from shadier operations. Many have been authorized by component makers that painstakingly audit the quality control, storage and handling processes of distributors. They have also achieved standards accreditation from bodies such as the International Standards Organization (ISO) and those that oversee the defense, medical and automotive industries.
“It’s important [distributors] have the right certification,” said Art Figueroa, VP of operations and quality for independent distributor Smith. “That plays a big part in assuring quality and compliance. It tells customers you have processes in place – as well as test and inspection – so the product can be used in verticals such as automotive, military and aerospace.” Standards organizations audit handling, operating processes and quality control, he explained. Smith’s certifications have been issued by ISO, AS, ANSI and others.
Due to the pandemic, Figueroa said, Smith provides the option of virtual warehouse tours in addition to in-person meetings. “It’s helped immensely. We walk a customer through our warehouse space, receiving and the inspection lab. Seeing what we offer and having certifications puts customers at ease and demonstrates we know what we’re doing.”
Two mission critical industries – automotive and defense/aerospace – have been hard hit by the semiconductor shortage. Both sectors are highly regulated and both are seeking additional sources of supply.
“I think the most eye-opening experience of this shortage was in the automotive sector,” said Figueroa. “They’re no longer able to source directly from chip suppliers so they’ve gone to distributors or the open market to source from that supplier base. It’s been a nonstop evolution over the past 18 months as shortages have pushed through to other verticals.”
All electronics distributors report an influx of customers that haven’t used the channel in the past. Automakers historically have ordered devices directly from chip manufacturers and have cancelled orders when they no longer need the parts. As industrial and consumer electronics companies have grown exponentially, they’ve gained clout with chip suppliers and represent a relatively stable base of demand. They’ve been first in line during recent periods of component scarcity.
“Automotive demand went through the roof but it didn’t stop demand from major industrial or consumer companies,” said Tony Roybal, president, Americas Electronic Components, for distributor Avnet Inc. “Clearly, one of our jobs is to act as a buffer for upside or downside demand. But we also reposition our inventory based on our suppliers’ technology and our customer partnerships. It’s always dynamic but I’s say we are expanding our horizons regarding how we’re positioned in the supply chain.”
Authorized distributors such as Avnet buy directly from component factories and pass-through quality assurance and warranties to their OEM and EMS customers. Authorized distribution has a very low risk of passing on counterfeits.
However, the electronics industry’s anti-counterfeiting efforts overall are fragmented – chip makers have individual authentication processes, for example. That information does not always accompany parts when they are resold on the open market and some suppliers will not service products sold by unauthorized distributors.
Although there are a host of anti-counterfeiting standards available — AS, which focuses on aerospace and defense, has several — no common standard is followed across the supply chain. Most recently, technologies such as blockchain, AI, ML and digital twins are being examined as methods of authentication. The industry is also pushing for stiff consequences for counterfeiters. U.S. trade negotiations with China – and the tariff-fueled trade war – are intended to crack down on that nation.
“The counterfeit problem is a big problem and we’ve always seen it increase during spikes in demand,” Figueroa said. “We have been able to mitigate risk on the front end. We also carefully vet our suppliers.”
For suppliers, distributors and reps, ECIA provides a variety of anti-counterfeiting resources.
In general, electronics supply chain companies say the counterfeiting problem has worsened with the current shortage.
Manufacturers most frequently turn to independents when they are short on parts or seeking a hard-to-find components. Their loyalty to independents varies. Some OEMs integrate them into their supply chain to manage component shortages or excess.
“We hope that based on their experience and our quality this can lead to long-term relationships,” said Figueroa. “It’s certainly been a valuable lesson for companies in some sectors that are used setting their own terms that there’s been a paradigm shift. We want to ensure peace of mind and become an element in their supply chain that they can turn to.”