Industry and government prepare counter-attacks against electronic parts counterfeiting
Technology focus -- Military COTS procurement created lucrative counterfeit electronic parts opportunities for unscrupulous component manufacturers, brokers, and distributors to satisfy demand for hard-to-find parts, but industry and government organizations are gathering their forces to fight back.
Posted by John Keller
The advent of commercial off-the-shelf (COTS) electronics procurement in the U.S. Department of Defense (DOD) a decade and a half ago ushered in a host of new benefits, not the least of which are rapid and affordable weapons acquisition, broad opportunities for technology insertion, and the ability to use the most advanced technology that does not involve parts obsolescence.
Still, when the door opened for COTS, it didn't just let in benefits; some nasty problems slithered in, as well. One of the worst of these involves counterfeit integrated circuits, which at best confront systems designers with little or no traceability as to their origins and quality, and at worst are substandard or even non-functional components that could cause aerospace and defense systems to fail at crucial times.
Experts agree that about the only way of avoiding counterfeit parts is to purchase components only through authorized sources; that means only from the original manufacturer, approved distributors, or from an aftermarket supplier that original manufacturers have authorized. Simply buying from unknown brokers on the Internet who tempt purchasers with low prices can end up in disaster.
Counterfeit electronic components are a booming business in China and other places in Asia. Those who would manufacture and deceitfully marked copycat parts are lured by demand for inexpensive components for new systems and retrofits -- particularly for hard-to-find parts whose original manufacturers have discontinued making them.
COTS procurement seeks to introduce commercial businesses practices to the way the military acquires its weapons and systems. A big part of that is competition in price and time to market. As a result, military systems designers are under more pressure than ever before to deliver technology quickly and affordably, which can drive component buyers to find the cheapest parts possible -- no matter the source.
"Over the past 20 years, the military has relaxed their requirements a lot," explains Steve McMinn, vice president of worldwide channel sales at field programmable gate array (FPGA) specialist Altera Corp. in San Jose, Calif. "I think that for most higher-level managers it would be an eye-opener to see the kind of procurement practices going on in their organizations."
Before COTS burst on the military acquisition scene in 1994, military systems designers looking for electronic parts had only a few acceptable supply chains to choose from. COTS changed that, and now there are many.
It's not a difficult scenario to understand; just follow the money. Major defense contractors put tremendous pressure on their suppliers to keep costs as low as possible, which creates a brisk demand for affordable parts -- sometimes from shady sources.
"The pool of parts they can pull from now is much larger than it used to be," explains John Sakamoto, senior director of the Altera military business unit. Put this together with the trend for systems designers to contract out subsystem manufacturing to cut costs wherever they can, and a perfect storm can gather. While there is an increase in outsourcing, "contract manufacturers operate on very slim margins," McMinn says.
It's hard to blame the buyers and sellers. This is a competitive situation for systems designers, involving razor-thin profit margins. Temptations are high to use questionable supply channels -- the so-called "gray market" -- to obtain electronic components affordably and on time.
"The number-one cause that keeps people away from the authorized sources is price, and the number-two cause is availability," explains Chris Gerrish, co-president of Rochester Electronics LLC, an authorized aftermarket chip supplier in Newburyport, Mass. Systems designers, he says, "are tasked with getting parts as inexpensively as possible. They may not be aware of the dangers of buying outside the authorized supply chain."
Aerospace and defense electronic systems designers also face unique challenges not often encountered in the consumer electronics market -- diminishing sources of necessary parts. Consumer electronics are expected to function for a few years before being replaced with newer designs. It is rarely an issue to find replacement parts at all for these kinds of systems
Military systems, however, must remain in the field for decades. During a typical system's lifetime, electronic component manufacturers often stop manufacturing certain parts as demand wanes, yet the military still needs those replacement parts to keep systems functioning in the field.
When original manufacturers quit manufacturing, or "end-of-life" certain parts as demand for them dries up, the job of supplying them often falls to aftermarket houses such as Rochester and Lansdale Semiconductor Inc. in Phoenix. These aftermarket houses make deals with the original manufacturers, either to make lifetime buys and keep inventory on the shelf, or in some cases obtain licenses to continue manufacturing relatively old parts on a small scale for organizations like the military that need the parts long term.
Sometimes, however, crucial parts fall through the cracks, and authorized sources either are unavailable to stock or manufacture these components, or component buyers use the gray market because it offers the lowest price. These circumstances pose the most serious threats of encountering counterfeit parts.
"As time progresses, the excess inventory locations start to run low on these products, but demand is still there," says Dale Lillard, president of Lansdale Semiconductor. "The Chinese realize this; all they need to do is look on the Internet to see what parts people want."
The risks involved with buying outside of authorized electronics parts distribution channels can involve unpredictable system performance if mismarked counterfeit parts make their way inside; system failures if counterfeit parts cannot withstand the environmental rigors or military applications; or even military espionage.
U.S. government agencies have documented incidents of counterfeit parts in U.S. jet fighter aircraft, communications equipment, and other systems, although counterfeit parts have never been linked to any deaths of U.S. military personnel. In addition to potential failures and degraded system performance, experts say counterfeit parts also could enable foreign intelligence agents to gain access to sensitive communications and weapons systems.
"It's a ticking time bomb," Altera's McMinn says. If organizations dip into the gray market to meet cost or schedule requirements, "the parts they buy for a year might be okay, and then they might get a load of counterfeit parts, which would cause a lot of problems."
In fact, short-term gain in price and schedule gained from drawing out of the gray market often as not can lead to long-term costs and schedule stretchouts if substandard counterfeit parts cause problems that need to be corrected.
"The components we are talking about could go into critical systems -- defense, medical, and transportation -- that could be life threatening," says Rochester's Gerrish. "If they don't work, there is a lot of cost and time that goes into recovering from that. You get a lower price on the gray market, but money is wasted on the back end with recalls, recoveries, and failures."
Counterfeit electronic parts have been vilified in the industry -- and for good reason -- since the problem started cropping up in a big way several years ago. Complicating matters is the wide disparity in the quality of counterfeit parts, as well as the severity of the offense.
It would be easy if every counterfeit part were worthless, but that's just not the case. Some counterfeit parts might do the job and never be detected. Others may have lower performance than advertised, and still others may not work at all. Not only is it difficult to catch these parts early enough to avoid problems, but once they go into systems, the parts have no traceability, and take time and expense to detect.
"The biggest issue is these parts can actually work," Altera's McMinn explains. "A counterfeit part can range from anything that doesn't have a die in it, to parts that have a speed change or parts that are wrongly marked. Some of the parts are good parts, and sometimes those parts work fine."
Altera's Sakamoto says he has seen Altera-manufactured devices that have changed hands through brokers several times, and that have had their original markings altered to indicate faster performance than the original design. Purveyors of counterfeit parts, he points out, "try to match a need with a supplier."
Adding to the problems and confusion is the inability to trace counterfeit parts lots, which makes it difficult or impossible to separate counterfeit parts from legitimate parts in a company's supply chain. "I know a procurement guy who bought slower-speed-grade parts, and started having field failures," Altera's McMinn says. "They knew there were only 200 parts with problems, but they couldn't identify the problem systems."
In the end, experts say, taking a chance with gray market parts is simply not worth the risk. "Long term it is more expensive in every way you can think of," says Rochester's Gerrish. "In labor you are working on resolving problems rather than on developing new products." If systems designers end up using counterfeit parts, "the total costs for that product are significantly higher than they are if you bought from an authorized source."
Using authorized channels
So what is to compel systems and subsystems designers to purchase electronic parts only from authorized sources and so avoid the problems of counterfeit components? It's a difficult problem because tight schedules and pricing often influence against making the right decisions.
Still, electronics component companies say the easiest solution is to stick with a reliable supply chain by purchasing only from the original manufacturers or authorized distributors.
"The biggest thing is awareness; not enough has been made of this," says Altera's Sakamoto. "There is a simple solution for this: if contractors buy from authorized, franchised distributors, then it is a non-issue. Otherwise, sooner or later they are going to get stung." He says DOD officials and prime contractors need to do a better job of making it clear to suppliers and contract manufacturers to buy from authorized parties.
"This doesn't have to be a problem at all for military contractors if they purchase parts from authorized channels," Sakamoto says. "We are doing our part to spread the word to buy only from authorized distributors," echoes Altera's McMinn.
"It's important to shore up the sales channels, and not just use the gray market," says Lansdale's Lillard. "The primary thing you can do is buy from original manufacturers and their authorized sales channels."
Purchasing officials at embedded computing specialist Curtiss-Wright Controls Embedded Computing in Leesburg, Va., try to avoid the counterfeit parts problem by planning for technology upgrades in their products before the electronic components they use go obsolete and become scarce in the market.
"We deal in a market where products have extended life cycles, and we have developed internal ways to mitigate or deal with the risks of obsolescence," says Mark Mooder, technology and product control manager at Curtiss-Wright. As a result, "we have had very limited exposure to true counterfeit components."
Curtiss-Wright's approach is designed to keep late-model technology that is readily available from original manufacturers and authorized distributors in the company's supply pipeline. "If you are not designing from the start to avoid risks, then you are going to trip into them," Mooder says. "As soon as you lose the true heritage of that component, then obviously you are introducing risk."
Ensuring ready access to authorized sources, through lifetime buys or frequent technology refresh, "gives you the greatest number of options," Mooder says. "Across the board, the large systems integrators have identified this as a concern of theirs, so it is a concern of COTS suppliers like Curtiss-Wright."
The role of DSCC
One of the most prominent military organizations that deals with electronic replacement parts is the Defense Supply Center Columbus (DSCC) in Columbus, Ohio. DSCC officials classify counterfeit parts as unauthorized copies with false markings or stampings. The organization has encountered fewer than 10 confirmed receipts of counterfeit electronic items, says a DSCC spokesman, "but we recognize it as a growing concern within the microcircuit industry."
Although DSCC officials say they have received only a small number of actual counterfeit parts, its officials have received "non-conforming" parts, which they say include unauthorized product substitutions. "Some result from delivery of non-approved parts, and when done with intent constitutes fraud," the DSCC spokesman says.
"When we have a non-conforming item, we investigate and take corrective action to keep non-conforming items out of the supply system," the spokesman says. "We will very aggressively go after any supplier that knowingly provides us non-conforming or counterfeit parts."
According to an organization statement, DSCC has a series of checks and balances in place to block the flow of non-conforming or counterfeit parts from entering the supply chains. For example, since August 2008 DSCC has excluded microcircuits from automated evaluation and award. Instead, discrete and microcircuit electronic parts are purchased manually and the organization has assigned additional staff to perform electronics parts purchases.
To further limit infiltration of defective, non-conforming, and counterfeit electronic parts, DSCC officials say, the agency started a Qualified Suppliers List Distributors (QSLD) program to follows best industry practices by using only factory authorized parts distributors.
Only independent parts distributors listed on the QSLD are able to receive contract awards for electronic parts without providing traceability prior to award, DSCC officials say. These suppliers can show they adhere to high operating standards, reducing the need for testing, engineering reviews, and other activities that can delay acquisitions and increase acquisition costs.
Once listed, QSLD suppliers are periodically audited for their adherence to the program, DSCC officials say. Even if the vendors are listed on the QSLD, however, DSCC still makes purchases manually.
If required electronic parts are not available through the QSLD program, DSCC parts buyers require suppliers to document 100 percent traceability to original component manufactures or their authorized distributors before contract award. When that cannot be done, DSCC performs testing and other engineering reviews on samples from part lots before purchase, using in-house capabilities at its electronic parts testing center.
In addition, DSCC has also expanded its use and tracking of the Government Industry Data Exchange Program (GIDEP) notices by adding resources and expanding the process to distribute periodic information solely related to suspect counterfeit electronics, officials say.
"We continue to reach out to industry and academia and are in contact with the Electronics Industry Alliance, Aerospace Industry Association, Semiconductor Industry Association, Society of Automotive Engineers, and the University of Maryland," the DSCC spokesman says.
"These organizations all have a continuous and active interest in issues impacting electronic parts and the challenges that the government and industry at large are facing in preventing the infiltration of non-conforming parts. DSCC is using this information to improve our processes and mitigate the risks associated with counterfeit material."
Industry companies and organizations are starting to deal with counterfeit parts, and warnings seem to be taking hold. "People are starting to show up asking for parts numbers we haven't sold in a long time," says Lansdale's Lillard. "Now they're starting to realize the risk of getting counterfeit parts."
Still, the time when all of industry gets a handle on the problem is still well in the future. Lillard went to a recent industry meeting attended by prime defense contractors, and when the topic of counterfeit parts came up, "they looked like a deer in the headlights," he says.
"How do you prevent this problem," Lillard asks. "What was really scaring these guys from Raytheon, Lockheed Martin, and others is there is a significant amount of counterfeit parts available on the Internet, but their procurement systems depend on the Internet. They can get parts cheaper on the Internet, but they realize they have a 30-to-50-percent chance that the part they get on the Internet could be counterfeit."
Company and trade association alliances have formed to enhance awareness of the counterfeit parts problem. Rochester, Texas Instruments in Dallas, and the Semiconductor Industry Association (SIA) in San Jose, Calif., launched the Anticounterfeiting Task Force that works with U.S. Customs and Border Protection to intercept counterfeit semiconductors and arrest suspected traffickers in counterfeit semiconductors.
The task force also works with organizations like Immigration Customs Enforcement, Naval Criminal Investigative Service, and Internal Revenue Service as well as the Department of Justice to fight electronic parts counterfeiting.
One industry problem also revolves around industry confusion on where to find authorized supply sources for electronic parts. "Customers told me they are not sure who is authorized, and who is not," says Rochester's Gerrish. "Brokers sometimes say they are authorized when they actually are not."
To help alleviate the confusion, the Anticounterfeiting Task Force created the online Electronics Authorized Source Directory (ASD) at www.authorizedcomponents.com that enables users to look up parts by manufacturer and region to come up with lists of authorized electronics parts sources in their areas.
"This information comes directly from these manufacturers," Gerrish says. "It helps tell who is legitimate, and who is not. This is something we are talking to suppliers like Intel, AMD, and Texas Instruments about. I talk to customers on a daily basis on what we can do to better educate of the dangers of substandard counterfeit parts."
Other organizations also are getting involved. The National Electronic Distributors Association (NEDA) in Alpharetta, Ga., released guidelines in February on returns in an attempt to reduce the number of counterfeit electronic parts entering the electronics supply chain.
"We thought it was a good opportunity to publish these [guidelines] as best practices for distributors." said Robin Gray, executive vice president of NEDA, in the 4 Feb. issue of EDN magazine. "About the only way counterfeit products can get into the authorized supply chain is through returns. We wanted to make sure that authorized distributors practice these types of policies and that those who don't [do so] consider implementing them as soon as possible."
The NEDA return guidelines involve sealable packaging; verification of purchase orders, quantities, and dates; and visual inspection of parts to determine whether additional handling or processing may have occurred.