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DMSMS: Counterfeits and the Industrial Base
Brad Botwin
Director, Industrial Base Studies
Office of Technology Evaluation
September 23, 2008
Bureau of Industry & Security (BIS)
MISSION: Advance U.S. national security, foreign policy and economic interests.
BIS develops export control policies, issues export licenses, prosecutes violators, as well as monitors the capabilities of the defense industrial base.
OTE Industry Assessments-Background
Under the Defense Production Act of 1950, ability to assess: Economic health and competitiveness Defense capabilities and readiness
Enable industry and government agencies to: Monitor trends and benchmark industry performance Raise awareness of diminishing manufacturing and
technological capabilities
More than 50 industry studies & 125+ surveys
Counterfeit Electronics Study-Goals
Assess the impact of counterfeit electronics on U.S. supply chain integrity, critical infrastructure, and industrial capabilities
Recommend best practices to mitigate risk to U.S. supply chain
Study sponsored by Naval Air Systems Command with support from Semiconductor Industry Association (SIA)
Counterfeit Electronics-Broad Definition
An electronic part that is not genuine because: An unauthorized copy Does not conform to original OCM design, model,
and/or performance standards Not produced by the OCM or is produced by
unauthorized contractors An off-specification, defective, or used OCM product
sold as "new" or working Has incorrect or false markings and/or documentation
Counterfeit Electronics Study-OTE surveys distributed
5 separate but related surveys targeting: Microchip & discrete electronic manufacturers – 106 Electronic board producers/assemblers – 37 Distributors and brokers of electronic parts – 144 Prime contractors and subcontractors – 147 DOD arsenals, depots, and DLA – 48
482 total survey participants
Counterfeit Electronics Study-Survey Objectives
Each survey contained approx. 80 questions Scale and scope Past problems and impact Internal procurement policies and protocols Testing, inspection, and inventory management Post-identification procedures Industry and government best practices
Tried to keep questions uniform across surveys.
Type of CompanyEncountered Counterfeits
No Counterfeit Incidents
Total
OCMs
Discrete Electronic
Components9 17 26
Microcircuits 13 15 28
Distributors
Authorized Distributors
6 19 25
Independent Distributors
25 8 33
Brokers 7 1 8
Board Assemblers 5 19 24
Total 65 79 144
BIS Counterfeit Electronics Survey – Preliminary Data
3397
5985
7383
5747
0
1000
2000
3000
4000
5000
6000
7000
8000
2005 2006 2007 2008 (est.)
Total Counterfeit Incidents:OCMs, Distributors, Board Assemblers 2005 - 2008
64%56% 53% 54%
36%44% 47% 46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 (est.)
In Production Out of Production
Percent of Counterfeit Incidents Involving In/Out of Production Products
2005 - 2008
* Each company was asked to provide their top five suspected countries
Top Countries Suspected/Confirmed to be Sources of Counterfeits*
Counterfeits Damaging a Company’s Reputation
OCM Comment: “With counterfeit goods in the market, purchasers are not sure if they received genuine or fake goods, so they tend to avoid the brand entirely.”
Distributor Comment: “When distributors or brokers trade in counterfeit parts the entire industry’s reputation is tarnished with a ‘guilty by association’ mentality.”
Percent of Companies Indicating Counterfeits Have Negatively Effected
Their Image or Reputation
Discrete Electronic Component Manufacturers
12%
Microcircuit Manufacturers
36%
Authorized Distributors
8%
Independent Distributors
45%
Brokers 63%
Top 10 Reasons Identified by All Companies for Counterfeits Entering the U.S. Supply Chain
ReasonNumber of Companies
Less Stringent Inventory Management by Parts Brokers 75
Greater Reliance on Gray Market Parts by Brokers 72
Greater Reliance on Gray Market Parts by Independent Distributors
62
Insufficient Chain of Accountability 58
Less Stringent Inventory Management by Independent Distributors
56
Inadequate Purchase Planning by OEMs 50
Insufficient Buying Procedures 49
Purchase of Excess Inventory on Open Market 48
Greater Reliance on Gray Market by Contract Manufacturers 44
Inadequate Production by OCMs 42
Pre-Stock Testing By Type of Supplier(Distributors and Board Assemblers Only)
Only 56% of Distributors and Board Assemblers test products they purchase before placing them in inventory.
Average Percent of Incoming Parts Tested
by Type of Supplier
OCMs 52%
OEMs 44%
Authorized Distributors
52%
Independent Distributors
58%
Brokers 62%
Internet-Exclusive Sources
38%
81%
59%
74%77%
13%
56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VisualInspection of
Packagesand
Paperwork
Confirm OCMPedigree
Paperwork
Inspection ofOCM
ShippingPackages
VisualInspection
ElectronicTesting
PhysicalEvaluation
Percent of Distributors Conducting Pre-Stock Testing
52%
17%13%
0%
15%
30%
45%
60%
75%
Distributors OCMs Board Assemblers
Percent of Companies Performing Inventory Audits for Counterfeits
Contractor Testing Problems
Four companies had problems with Non-U.S. contractors concerning improper management or theft of electronic scrap after testing.
17 companies, 41% of those employing testing contractors, had problems with U.S.-based firems concerning faulty or forged testing. The parts were cleared by the testing house, but were later
found to be counterfeit by the customer.
This is an area that deserves further analysis.
Steps Taken After Notification of a Counterfeit Incident: OCMs
Notify Internal Company Authorities 74%
Trace Supply Chain 70%
Inform Authorized Distributors 41%
Locate Select Inventory 39%
Pull Back Inventory 31%
Perform Random Testing 20%
Notify Industry Associations 19%
Notify Federal Authorities 19%
Other 17%
Wait for Additional Complaints 17%
No Steps Are Taken 6%
Steps Taken After Notification of a Counterfeit Incident: Distributors
Pull Back Inventory 61%
Notify Internal Company Authorities 56%
Notify Industry Associations 52%
Locate Select Inventory 50%
Trace Supply Chain 48%
Perform Random Testing 35%
Inform Authorized Distributors 30%
Inform OCMs 30%
Notify Federal Authorities 11%
No Steps Are Taken 9%
Other 8%
Wait for Additional Complaints 5%
Steps Taken After Notification of a Counterfeit Incident: Circuit Board Assemblers
Pull Back Inventory 63%
Notify Internal Company Authorities 58%
Locate Select Inventory 58%
Inform Authorized Distributors 54%
Inform OCMs 50%
Trace Supply Chain 46%
Perform Random Testing 29%
Notify Industry Associations 8%
Notify Federal Authorities 8%
Other 8%
Wait for Additional Complaints 8%
No Steps Are Taken 8%
Steps Taken After Possession of a Counterfeit Part
Action Taken OCMs DistributorsCircuit Board Assemblers
Enter into USG or Industry Database 11% 41% 4%
Retain Samples for Reference 63% 33% 13%
Test Part 56% 50% 46%
Enter into Company Database 50% 59% 42%
Quarantine Parts 26% 33% 21%
Leave Disposal to Party Filing Complaint
26% 9% 8%
Random Inventory Testing 19% 38% 42%
Disposal of Parts Immediately 17% 36% 13%
Issue Credit 15% 64% 58%
Turn Over to Law Enforcement Authorities for Analysis
15% 7% 29%
Check USG or Industry Database 11% 47% 13%
Other 11% 14% 8%
Turn Over to Law Enforcement Authorities After Analysis
11% 6% 17%
Return to OCM or Distributor 11% 33% 25%
Who Ya Gonna Call?
56% of OCMs,
65% of Distributors, and
75% of Board Assemblers DO NOT KNOW what authorities to contact when they encounter counterfeits.
71% of distributors tell customers to contact their firm if they encounter a counterfeit product.
Top Authorities Contacted(As a Percent of Total Companies)
None at all 35%
GIDEP 10%
FBI 8%
Customs and Border Protection
6%
ERAI 6%
IDEA 6%
DLA 6%
State/Local Authorities
6%
“Fun” Facts Only 38% of surveyed companies maintain a
database to keep track of counterfeit incidents. 63% of these companies are distributors.
67% of Circuit Board Assemblers co-mingle identical parts from multiple suppliers in the same bin. Only 14% of distributors do the same.
40% of companies stated that they find it difficult to identify counterfeits. However, 61% of companies find it easier to identify
counterfeits today than they did five years ago.
Industry Best Practices – 500!
From OCMs: Ensure proper disposal of
all scrap – crush all defective/unused products to prevent re-circulation.
Train all employees on how to identify and handle counterfeit parts.
Tighten contractual obligations with contract manufacturers regarding disposal of unused product.
From Circuit Board Assemblers: Audit OCMs/OEMs to ensure
that the purchased part is made within their facility and not contracted out.
Perform destructive testing if a part cannot be verified by other means.
Establish qualifications for supplier purchases.
Most common responses – Don’t buy from China – Be wary of Brokers
Industry Best Practices (cont.)
From Authorized Distributors: Ask for Certificates of
Compliance for all products purchased.
Educate your sales team regarding the risk of parts brokers.
Create a central database for identifying counterfeit suppliers.
Do not approve returns in greater quantities than the original purchase.
From Independent Distributors/Brokers:
Always purchase parts via escrow payments – Suppliers that believe in their product will not mind waiting for their money.
Audit all inventory purchased before anti-counterfeiting measures were put in place.
Follow IDEA 1010 for incoming inspections.
Use www.icphotos.org for visual verification of parts.
Company Comments “It is encouraging that the U.S. government has finally
recognized the scope of the problem and seems to be taking meaningful steps to counteract the counterfeiting plague.” - Independent distributor
“Our participation in this Assessment has heightened our level of attention and understanding concerning the importance of being proactive in combating counterfeit products … We appreciate the information that was presented within this Assessment and plan to implement appropriate internal/external actions necessary to mitigate the potential for a counterfeit incident to occur within our operation.” - Authorized distributor
Depot/DLA Unique Questions
Parts acquisition criteria Government/industry, low bid/best value, foreign sourcing Direct shipping to field
Commercial supplier criteria Platforms/subsystems affected by counterfeits
(2005-2008) Parts acquisition training Impact of DFAR Quality assurance and testing Record keeping
Next Steps
Continue compliance on the 5 surveys Verify and begin analysis of data Draft report and release public document in early
2009 Work with industry and government to
develop and implement best practices
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