Electronics Production | August 19, 2009

Counterfeit electronic components: Who's responsible?

There is a big fight brewing between brand owners and online distributors over who is responsible for stopping counterfeit products from getting into the supply chain. There are many shades of fakes and they exist across a whole range of industries.
Do you really know if the electronic components in your laptop are authentic. For that matter, how much traceability do you have into toothpaste you use every morning? Is that your job to know, or do is the product manufacturer on the hook? What about their upstream distributors?

Supply chain integrity is getting more attention these days - substandard products fraudulently sold as being a higher quality can be found throughout the global supply chain. Misrepresented dog food, dry wall, paint, pharmaceuticals and electronic components can be found almost anywhere and purchasing departments, brand owners and consumers are at risk. Who's responsible for screening these fraudulent products out of the supply chain?

The Brand Owner (1):
Component manufacturers hate fake chips because they wreck the brand reputation firms have worked so hard to create, they drive up costs by generating "product" returns, and they undermine average sales prices because they are priced well below the legit market. What can these companies do? Investigators and lawsuits are important, but amount to little more than whistling in a whirlwind when compared to the amount fraud occurring out there. Authentication technologies are becoming more available from firms like YottaMark but they are applicable in very specific circumstances.

The Brand Owner (2):
OEM's are very concerned about counterfeit components because the fakes end up in their handsets, scanners, or laptops. Warranties costs caused by fakes can be enormous and because their margins are much higher than upstream in the supply chain, brand damage can be huge. OEM's can insist that their own buyers or those of their contract manufacturers use AVL's, but AVL's are, at best, an ineffective defense against fake parts. When they have a shortage and turn to the gray market, OEMs accept the risk of getting fake parts because 100% inspections are too expensive and not feasible.

The Grey Market:
Brokers and independent distributors are the gray market and are the source through which fake parts find their way into the supply chain. Some of these firms have instituted controls, but the fakes are so good these days, these firms don't stand a chance of filtering them out. All the ISO 9000 certifications in the world won't help one bit preventing fakes from infecting the supply chain.

Like OEM's, they have to turn to the gray market on occasion. They have a brand of their own to protect, but the incentives to "go gray" can be pretty strong, especially when secondary market prices are so cheap.

Who's responsible? What can the industry do to keep fakes out of the supply chain? What should the industry do?

Author: John P. Brown is co-founder and VP of Marketing and Strategy at Verical


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