Should the US government work in tandem with the EMS sector to drive solutions?
Despite the US Defense Logistics Agency’s noble work, it would be false to claim the electronics community at-large is protecting itself from counterfeit invasion. In short, counterfeit mitigation practices in the electronics community vary greatly and are at times haphazard. Whether the norm or exception, practices taking place at the fundamental levels of EMS and OEM purchasing operations do not create a sufficient defense against counterfeit components entering assembly lines. In short, the OEMs tend to view counterfeit testing as a commodity service, giving credence to test houses that are less equipped to discriminate between authentic and fake parts than more-established test houses.
The electronics community’s generally passive approach to the counterfeit invasion has enabled a flood of fake chips to enter the supply chain. And the number of counterfeit components entering the US supply chain appears to be growing. Adding to the mass of the problem is the advent of cloned ICs. An onslaught of clones will further degrade counterfeit mitigation efforts.
Commercial pressures to remain competitive, given an industry trend of shrinking profit margins, drive both the EMS and OEM to cut as much “fat” from the bottom line cost matrix. This agenda directly impacts purchasing strategies for components purchased on the gray market. In a typical business transaction among test houses, brokers, EMSs and OEMs, the specifics for counterfeit testing are blurred by an appearance of a “certification of authenticity.” In essence, actual testing criteria and results of the detection testing are sometimes hidden, yet they are assumed to exist and support authenticity claims. This porous practice of undocumented testing procedures springboards the problem starting with the test houses and working up the hierarchy of brokers, EMSs and on to the hands of the OEMs or end-customer.
In the time between my November column and this writing, I have received a number of comments providing a deeper look into the current business scenario. Many of the comments concurred with my reporting on the state of the industry and trends. One comment from a Tier 1 EMS added an interesting twist. To paraphrase: OEMs are willing to pay a premium for upgrading performance in the form of utilizing high-grade components and materials, but are not willing to pay one penny more for costs associated with counterfeit detection.
This is what some would call (apologies to Al Gore) “an inconvenient truth.” It’s “inconvenient” in that effective counterfeit detection will add costs to a product’s bottom line. Yet there’s “truth” in that it cannot be denied that industry practices are based mainly on hearsay test results that create a false sense of security and confidence.
The EMS’s role. In November I called upon the EMS sector to take a proactive role in the handling of components purchased from the gray market or independent distributors. The recommended process utilizes standard BoM and cost worksheet analysis to manifest the counterfeit detection test costs as a function of specified testing operations. With information at hand, the EMS and OEM (customer) can jointly select the best possible counterfeit testing coverage by studying the test levels and their associated costs, creating a “risk vs. reward” decision tree. Obviously, for those final assemblies critical to public safety or military personnel, reducing the risk of counterfeits will supersede concerns of cost adders. At least, this is what must take place to rectify the market situation.
The US government’s role. Missing from the plan of action among the EMSs and all other parties involved is a catalyst. As long as commercial competitiveness exists, EMS companies will not have the incentive to open up counterfeit detection discussions, since upgrades of testing will trigger higher costs and impede opportunities to win business. For that matter, I am calling on the US government to not only urge all OEMs and EMSs to partake in the open information exchange concerning counterfeit mitigation methods, but to serve to offset most of the added costs for counterfeit testing.
The counterfeit mitigation practice outlined below is geared for all critical devices impacting public safety and military personnel. I am not suggesting other markets are not worthy of concern, but public and military safety are the prime targets for counterfeit mitigation. I believe the US government is the elixir to rectify the B2B counterfeit detection practices as they exist today. In essence, the US government should set procedural requirements for each gray market component acquisition and, to lessen prohibitive costs, provide subsidies to cover the higher levels of counterfeit detection testing.
Below are the items that the US government must set as standard operational procedure. Item 1 establishes a clear and concise product category for focused counterfeit detection. Items 2, 3 and 4 establish operational procedures for focused counterfeit detection. Items 5 and 6 reduce the burden of cost adders for effective counterfeit detection. Item 7 is the call to arms against counterfeits for all public safety and military devices.
Electronics components cannot be viewed as just another business enterprise that struggles with knockoffs similar to products such as clothing or currency or jewelry. Rather, counterfeiting electronics components creates a dire public and military safety hazard. Counterfeits entering the supply chain are a real-time problem that beckons urgent and immediate reaction to the market status. To make a difference, the electronics community must move in concert, something that would only occur under direction of the US government. Product category assignments, directives in handling test house selections, subsidies to offset costs and news and public release alerts are all necessary actions that must be undertaken by the government. With a suitable counterfeit mitigation program taking root at the EMS-OEM level, the result will yield a more candid and righteous counterfeit mitigation selection process to better defend against counterfeits entering the supply chain.