Counterfeit-part risk expected to rise

The number of counterfeit parts reported in the electronics supply chain historically has risen and fallen generally in concert with the annual performance of the global semiconductor industry. Chip sales and component counterfeits expanded in tandem during the period from 2001 to 2007—a time of expansion for the semiconductor industry. Counterfeits then plunged when semiconductor revenue contracted in 2008 and 2009 as the global economy went into recession. However, when semiconductor industry revenue rebounded by a hefty 33 percent in 2010, reports showed that counterfeit reports surged by a whopping 152 percent. This year the semiconductor industry is entering a new expansion cycle, with revenue growth accelerating to 4.3 percent, up from 1 percent in 2011. Growth is expected to rise to 9.3 percent in 2013. With supply chain participants in 2011 reporting 1,363 separate counterfeit-part incidents worldwide—a record level—conditions now are prime for counterfeit reports to reach new highs in 2012. Prime breeding ground for counterfeits Most electronic components appear to be experiencing a tightening of supply along with an increase in pricing and lead times. Price increases are expected to continue rising throughout 2012. IHS now predicts that demand will exceed supply in the third and fourth quarters for many widely used components, including capacitors, NAND flash, dynamic random access memory (DRAM), power semiconductors and logic chips. Such shortages represent a prime environment for counterfeiters to thrive. For example, counterfeits surged in the wake of the Japan disaster when concerns regarding supply shortages prompted panic buying of semiconductors and other components. To defend themselves against the counterfeit scourge, electronics buyers must arm themselves with knowledge. Supply chain pitfalls Amid the strain of keeping production lines running, the issue of counterfeit parts is sometimes neglected. However, companies that fail to pay attention to the issue face a range of risks. A 2009 survey conducted by IHS showed that electronics buyers have an array of concerns. For buyers in the defense and aerospace industries, concerns include failures in aircraft safety and compromises to systems that are critical to national security. For players in commercial markets, issues range from damage to company image, to erosion in customer trust, to loss in revenue, to increased delivery time, to rising risk of legal action arising from product failure. The task of avoiding the pitfalls of counterfeits is not always straightforward. “To reduce counterfeit incidents, electronics buyers strive to restrict their purchasing activities to their customary supply chains, sourcing parts directly from their suppliers or from franchised distributors,” said Rick Pierson, principal analyst for semiconductors at IHS. “However, the mandate for electronics makers is to keep their production lines running at all costs. And sometimes to do that—especially during a time of rising demand and short component supplies—they go outside of the supply chain to obtain parts.” Even franchised distributors sometimes buy excess inventory from other companies that could introduce counterfeit parts to the supply chain, Pierson noted. Forewarned is forearmed To mitigate the counterfeit problem, electronics buyers must develop a plan to ensure continuity of supply. Such plans, similar to companies’ contingency preparations for disasters, require firms to update their listing of suppliers, parts/materials, life cycles, logistics and internal operations. For every supplier, buyers must create and update the supply profile of that entity. Doing this is more important in times when counterfeit activity is on the rise. It’s also critical to identify which parts and markets are more susceptible to counterfeit activity.