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Clamping down on counterfeits

New law pushes responsibility and costs for detecting and replacing counterfeit electronics down to defense subcontractors and, potentially, commercial suppliers.

Tam Harbert, contributing editor -- EDN, February 22, 2012

Cracking down on counterfeitsNew electronics anti-counterfeiting provisions included in the 2012 National Defense Authorization Act (NDAA), signed into law at the end of last year by President Obama, could reverberate across the electronics supply chain, from defense contractors all the way to commercial OEMs and component suppliers.

"Companies are still assessing what this means, but the scope and scale of application is extremely broad," says Trey Hodgkins, senior vice president for national security and procurement policy at TechAmerica.

Counterfeit parts are a growing problem in the supply chain. Reports of counterfeits have quadrupled since 2009, rising from 324 to 1,363 in 2011, according to consulting firm IHS. IHS drew the data from ERAI Inc, an information services firm that reports on the global electronics supply chain, and the Government-Industry Data Exchange Program (GIDEP), a joint effort of government and industry that shares information on the life cycles of systems and equipment. The bulk of the incidents were reported by US-based military and aerospace electronics firms.  However, the parts themselves could impact electronics products worldwide. "Most companies lack the awareness and the capability to effectively detect and mitigate the growing problem," says Rory King, director of supply chain product marketing at IHS.

The anti-counterfeiting measure, included in Section 818 of the NDAA, directs the Secretary of Defense to "implement a program to enhance contractor detection and avoidance of counterfeit electronic parts." The law specifically makes defense contractors responsible not only for detecting and avoiding the use of counterfeit parts but also for the cost of any rework required if counterfeit parts are discovered to have been used in their products. Previously, such mitigation costs were negotiated on a case-by-case basis, says Hodgkins.

Elements of the DOD program, details of which are due later this year, are to include inspection and testing of electronic parts, processes to abolish counterfeit parts proliferation, mechanisms to enable traceability of parts, methodologies to identify counterfeit parts, and "the flow down of counterfeit avoidance and detection requirements to subcontractors," according to the law.

That last provision, in which liability will be passed back through the electronics supply chain, is one of TechAmerica's main concerns. The growing problem of counterfeit parts in the military and aerospace industry was highlighted in November, when the Senate Armed Services Committee held hearings on the topic. But the hearings focused on defense contractors and specialty distributors rather than commercial component makers, resellers or OEMs, says Hodgkins. The latter are only now "awakening to the fact that if they are going to sell their product to someone who might use it in a DOD end item,  . . . even if it's a commodity buy, then they have to adopt processes and assume liability."

When a part fails in a commercial system, manufacturers rely on the warranty model. They simply replace the defective part. "I suspect the counterfeit issue is just as prevalent in the consumer electronics world, it's just that nobody reports" those parts failures, says King. The worry is that the new law opens the possibility that such parts failures would require a major investigation by the manufacturer, says Hodgkins. For example, if a failure in a DOD-owned Dell laptop was due to a faulty, possibly counterfeit part, Dell might have to determine whether the component was indeed counterfeit and also determine what other products the component was used in.

The law will have a big impact on the gray market, as well. The military relies on the open market to source replacements for obsolete parts -- parts that are no longer made by the original manufacturer. But an investigation by the Senate Armed Services Committee documents how counterfeits can make their way through the open market and into military systems. In China, for example, commercial electronic components are harvested from circuit boards in e-waste, their markings are removed and replaced with fake markings, and they are then resold into the open market, sometimes as military-grade parts.

In January, the US Air Force suspended Hong Dark Electronic Trade Company and its subsidiaries from government programs for allegedly selling tens of thousands of counterfeits to key defense contractors. In its suspension memo, the Air Force said it suspected Hong Dark, an electronics recycling company in Shenzhen, China, of supplying counterfeit electronic parts to Global IC, a US distributor, which then supplied them to government contractors and subcontractors, including L-3 Communications, Boeing, Lockheed Martin, and Raytheon. The case illustrates the difficulties of tracing components in the gray market. Hong Dark has a catalog of 84,000 components. "Companies are now scrambling to find out whether they bought any of these things and if so where they put them," says Hodgkins.

Consequently, the new law requires the government to buy parts either directly from the manufacturer, their authorized distributors, or from "trusted suppliers," which includes independent distributors and brokers. Details are still being worked out, but to be categorized as trusted suppliers independent sources would likely be required to meet certain standards and be held liable in the event that they sell a counterfeit part to the government.

SMT Corporation is an independent distributor that specializes in sourcing and authenticating obsolete components for use by military and aerospace customers. The company uses sophisticated instruments, such as scanning electronic microscopes costing $250,000, to inspect parts and detect the latest counterfeits, says Tom Sharpe, vice president at the company. It's a constant race to keep up with new techniques developed by counterfeiters, he says. "The old days of just being able to swab a chip with some acetone and a Q-tip to determine whether it's been blacktopped -- those days are long gone," he says. "Just in past 18 months, SMT has identified four new counterfeit processes."

Meanwhile, the Defense Department is investigating new ways of detecting counterfeits, including a technology from Applied DNA Sciences, a company that uses plant DNA to authenticate goods in a range of industries including banking and textiles. The company is involved in a pilot program, run by the Defense Logistics Agency, that includes SMT Corporation and chip-maker Altera. According to a recent article on the DLA website, chips have been manufactured and marked with botanical DNA at an Altera production plant, then moved to an independent distributor without interrupting standard supply-chain processes. The pilot program has moved into a second phase to "determine the functional, technical, and business viability of botanical DNA throughout DLA's microcircuit supply chain," according to Chris Metz, director of the technical and quality policy division for DLA Logistics Operations.

"Our model is based on going as far upstream as possible, to the chip manufacturers," says Janice Meraglia, vice president of military and government programs at Applied DNA Sciences. Once the chips are marked with DNA, then they could be checked at every stage along the supply chain for authenticity. The fact that the military uses a "commercial off-the-shelf" sourcing model would require that all chip vendors mark all their chips, not just those intended for specific aerospace or military applications. "It's not up to us to decide what's critical and what's not," says Meraglia. "A non-critical item in the hands of the consumer becomes a critical item in the hands of a warfighter."

And that's just what concerns Tech America, says Hodgkins. Although Applied DNA Sciences maintains that the cost would be low -- a penny a part -- component manufacturers and OEMs are worried about the added expense and complexity. For many commercial suppliers, the federal government represents a small fraction of sales. "Companies are looking at whether it makes sense to do this DNA marking for all products, when this one customer represents only 1 to 5% of their global footprint," says Hodgkins.



IHS data



Section 818 of NDAA

USAF suspension memo

Senate Armed Services hearing testimony of Tom Sharpe of SMT Corp

Defense Logistics Agency article
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