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.

1. Categorize public safety and military products. As in other markets and similar roles, the US government must identify those categories of product that warrant focused attention on counterfeit detection. Thus, we can distinguish a critical safety product such as a passenger jet having the most significant burden of safety concerns. With this, levels or categories of product can be rated as Level 1, 2 and beyond. For the purpose of this discussion, we seek the US government to specify all public transport and military devices as the highest safety standard (Level 1).
2. Specify components in question. The EMS, OEM and end-customer (if applicable) must publish to all parties the components sourced from independent brokers or directly from the gray market.
3. Full reveal of counterfeit detection plan. An open book review of testing of such components must be manifested as part of the BoM study. The information to be included is the specific testing proposed, mandatory full data review of test results (when testing is complete) and corresponding cost adders. This information shall be distributed to the EMS and OEM for review.
4. Plan of counterfeit defense. A risk vs. reward decision tree shall be set to weigh the level of most effective testing level options and corresponding cost adders. Agreement to the selection of testing levels and the final cost adders are to be agreed to made by the OEM or end-customer (DoD, for example).  
5. Not a profit center. The EMS shall not mark up or take profit against any cost associated with the management and cost for counterfeit detection. All costs for counterfeit mitigation shall be billed as an add-on expenditure and are not to be included in the unit price worksheet “roll up.”
6. Offsetting counterfeit detection costs. This may be the most important detail that the US government controls. Because counterfeits in critical products impacting public safety are being addressed, the US government shall provide financial subsidies to offset the added cost for counterfeit detection in the form of tax credits, rebates and providing preference in business awards for those OEMs and EMS companies enacting proper vigilance toward counterfeit mitigation practices.
7. Raise awareness within the public and private sectors. The US government must reach out to all OEMs to raise awareness of counterfeit mitigation issues. In doing so, the government must educate OEMs to better comprehend the differences in test houses and the essentials in dealing with “Level 1” products. To accomplish these tasks, government will circulate public service announcements and direct news releases to the electronics community.

Summary
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.

Joseph Fama is a senior executive with experience in the global EMS marketplace, including 25 years with Singaporean, Chinese and American EMS and display systems companies in sales and marketing; joefama@gmail.com.