Distributors fight counterfeit components

By Rob Spiegel, Contributing Editor - April 6, 2010

The problem of counterfeit components is getting worse, even as OEMs, suppliers, and distributors improve their identification tactics. The Department of Commerce released a report earlier this year that showed incidents of counterfeiting rose 240 percent from 2005 to 2008. The department’s Office of Technology Evaluation studied 387 companies from five segments of the electronic supply chain from 2005 though 2008. OTE revealed that 39 percent of companies in the survey encountered counterfeit electronics during the four-year period.

The companies on the forefront of the counterfeit battle—independent distributors—uniformly report that problem is getting worse. “I believe the threat posed by counterfeit parts should be elevated from orange to red,” says Steve Calabria, president of PC Components Company, an independent distributor in Seaside Park, NJ. “OEMs are combing the market for raw materials. We’ve been selling parts in the open market since 1964, and we’re seeing record sales.”

The record sales in the open market are a result of the downturn. The global recession and nascent recovery have magnified the incidence of counterfeiting. Suppliers sliced inventory levels during the recession. When demand picked up, lead times stretched out. In response, OEMs and EMS providers went out to the open market to find components to feed production. What they found was a lot more counterfeit parts than before the downturn. “Low inventory levels in component manufacturer factories and franchised distributors have increased the need to use the open market,” says Calabria. “Allocations and shortages provide an opportunity for criminals.”

To compound the problem, counterfeiters are getting better at disguising fake parts. As one distributor commented, “They can spell Texas Instruments now.” Counterfeiters are cleverly finding new disguises as distributors get better at detection. “Counterfeiters are getting more sophisticated, so it’s getting difficult to spot counterfeit products,” says Robin Gray, executive vice president of the National Electronic Distributors Association (NEDA) in Alpharetta, GA. “Visual inspection might not be enough to detect counterfeits. Even if you random-test, they salt real product in with the bad product.”

The big independent distributors have become vigilant about identifying counterfeit parts. Their very existence depends are their ability to keep their inventory clean and honest. “Some counterfeiters are sanding the part, then recycling the resulting dust and combining it with resin. They reapply it to the top of the part, which makes it difficult to identify as counterfeit. It’s resistant to some of the solvents we use for identification,” says Debra Eggeman, executive director of the Independent Distributors of Electronics Association (IDEA) in Buena Park, CA. “So we’ve had to find other ways to identify these parts.”

The reports from the field show that most counterfeit parts continue to originate in Asia, particularly China. There are a number of sources. Some component factories run midnight “ghost” shifts where they run parts off contract while substituting cheaper materials. Other parts are pulled off e-waste products showing up in China from all over the world. “More than 90 percent of the world’s counterfeit parts are coming from China,” says Calabria from PC Components. “They may look great to the untrained eye, but a seasoned inspector can see that this part was made in China and this part was made in Mexico.”

The authorized or franchised distribution world is not immune to the flow of counterfeit parts. Distributors and suppliers have to be vigilant about returns, their point of vulnerability to counterfeit parts. “One of our biggest concerns is EMS companies who buy huge quantities from a variety of sources and co-mingle the inventory,” says Gray from NEDA. “They could have bought 10,000 parts, 5,000 from authorized distributor A, 2,000 from authorized distributor B, and 3,000 on the open market. So, when the parts are returned, it could be open-market parts getting returned to an authorized distributor.”

Avnet Inc is well aware of the vulnerability and takes measures to ensure the returns they receive are actually components they sold. “We have a strict return policy,” says Chuck Delph, SVP of sales in the Americas for Avnet Electronics Marketing Americas. “We do visual inspection to make sure what we got back is something we shipped out.”

The defense and aerospace industries have put enormous effort into identifying counterfeit parts. They have a lot at stake, since bad parts could lead to missile failure or a plane dropping out of the sky. “Defense and aerospace are keeping counterfeit parts out by training people how to spot counterfeits,” says Tom Sharpe, VP at SMT, an independent distributor in Sandy Hook, CT. “I think their mitigation strategies are going to rapidly flow down to the commercial industries, since counterfeiting is just as bad in commercial at it is in defense.”

IDEA has aggressively developed identification strategies to help its independent distributor members keep their inventory free of counterfeit parts. “It isn’t realistic to buy only from authorized sources, since it’s impossible to predict demand,” says Kristal Snider, VP at ERAI Inc, a company that analyzes rick in the electronics industry. “But some of the independent distributors are investing tens of thousands of dollars to take care of the risk of counterfeit parts.”

IDEA encourages companies in the commercial sector to take a lesson from defense in keeping inventory clean. “Independents buy from franchise distributors and franchise distributors buy from independents, so no one should be ignoring this problem,” says Eggeman from IDEA. “The military has really stepped up to develop mitigation policies so they don’t get counterfeit parts buy accident. Now we need to see the commercial side of the industry develop policies in their own organizations.”

Ultimately, the best strategy for avoiding bad parts is working with trading partners you can trust. “We work in a trusted environment where we feel we can protect our customer,” says Avnet’s Delph. “If you’re going to buy something outside a franchised partner, do some due diligence on who you’re buying from.”

The Department of Commerce stresses that companies need to create lists of trusted and “untrusted” organizations in the components industry. While associations such as IDEA continue to develop identification strategies, trust is the strongest currency to ward against counterfeit parts. “As counterfeit and substandard parts continue to enter the market at an accelerated rate, it is important to buy from sources you can trust,” says Glenn Smith, president and CEO of Mouser Electronics Inc in Mansfield, Texas.