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© flynt / dreamstime.com Components | April 30, 2012

US counterfeit regulations impact global suppliers

Stringent new counterfeit-part regulations contained in the 2012 U.S. National Defense Authorization Act (NDAA) may have broad international implications, impacting hundreds of overseas companies that have supplied billions of dollars’ worth of items to the American government.
Non-U.S.-based suppliers accounted for more than $2 billion during the five-year period from 2007 to 2011, with European Union (EU) and Middle Eastern companies accounting for the bulk of the American government’s procurement spend, according to information and analytics provider IHS.

“There’s a perception that U.S. regulations such as 2012 NDAA, Section. 818. Detection and Avoidance of Counterfeit Electronic Parts,is only an issue for American companies, and that they don’t impact firms in Europe, the Mideast and elsewhere,” said Greg Jaknunas, senior product manager, supply chain solutions, at IHS. “However, the impact is beginning to be felt worldwide, as many international companies and global manufacturing facilities can directly participate in the defense supply chain and begin to see customer requests for counterfeit detection and avoidance measures that are flowed down through the supply chain.”

Even though the regulations in 2012 NDAA are from the United States, they will become an international issue as defense contractors place requirements on their suppliers, who then place similar demands on their suppliers, and so on, Jaknunas added

“The 2012 NDAA requirements will get pulled through the global supply chain,” Jaknunas observed. “Owing to the complex nature of the supply chain, it will become an international concern. In a way, this is similar to the EU’s restriction of hazardous substances (RoHS) environmental directive, which called for the elimination of six hazardous materials in electronic components and systems, most notably lead. While RoHS requirements appeared to be European in nature, they had a ripple effect worldwide as suppliers all over the world changed their products in order to continue to do business in the key EU markets.”

IHS estimates that 362 non-U.S. companies worldwide that are supplying the U.S. government could be directly impacted by the NDAA counterfeit regulations, with many more that could be indirectly affected.

The very real problem of counterfeits

Reports of counterfeit parts have soared dramatically in the last two years, presenting huge challenges for electronics manufacturing and especially the military and aerospace industry. Supply chain participants in 2011 reported 1,363 separate verified counterfeit-part incidents worldwide, a fourfold increase from 324 in 2009, according to IHS.

The bulk of these incidents were for commercial electronic components that have wide use across every major technology end market.

Counterfeit parts often are often cheap substitutes or salvaged waste components that fail to meet strict military and aerospace specifications, leading to potential failures.

To help combat the problem, President Obama on December 31, 2011 signed the fiscal year 2012 NDAA, which adds regulations for counterfeit part detection and avoidance. Members at all tiers of the defense supply chain must put counterfeit risk mitigation procedures in place, and certain steps must be completed within 270 days of the president’s signature.

Regional impact

Companies based in the European Union represent the largest group of foreign suppliers to the U.S. government.

During the five-year period from 2007 through 2011, the region accounted for $1 billion in sales, or 51 percent of the total. The area, by a large margin, also had the most number of companies—283 firms.

Next was the Middle East with $951.2 million, representing 47 percent of the global total during the past five years. This revenue was generated by just 32 companies. The region, particularly Israel, is involved in extensive defense spending, and provides technology in this area to the United States. A major purchaser and user of U.S. military equipment, Israel is also involved in the joint development of military technology and regularly engages in joint military exercises involving United States.

Other regions trailed far behind, including Asia-Pacific, with the region’s 38 companies accounting for just 2 percent of global revenue.

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