DMSMS: Counterfeits and the Industrial Base by O3cHK9mW

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									      September 23, 2008


DMSMS:
Counterfeits and the
Industrial Base
Brad Botwin
Director, Industrial Base Studies
Office of Technology Evaluation
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.
BIS Counterfeit Electronics Survey – Preliminary Data
                                   Encountered    No Counterfeit
     Type of Company                                               Total
                                   Counterfeits     Incidents
                     Discrete
                    Electronic          9               17          26
                   Components
  OCMs
                   Microcircuits        13              15          28


                   Authorized
                                        6               19          25
                   Distributors

                   Independent
Distributors        Distributors
                                        25              8           33


                     Brokers            7               1            8


    Board Assemblers                    5               19          24


           Total                        65              79          144
             Total Counterfeit Incidents:
  OCMs, Distributors, Board Assemblers 2005 - 2008
8000
                                             7383
7000

                    5985        5747
6000


5000


4000
        3397

3000


2000


1000


   0
        2005        2006        2007       2008 (est.)
       Counterfeit Incidents by Product Resale Value:
                        Overall (2007)
3000

                                  2630

2500


                                            1956
2000



1500



1000

                                                      548
 500
                          326

          5      31                                            51        48        52
   0
        Less    $0.01-   $0.11-   $1.01-   $11-$100   $101-   $501-    $1,001-   Greater
        than    $0.10    $1.00     $10                $500    $1,000   $10,000    than
        $0.01                                                                    $10,000
 Counterfeit Incidents by Product Resale Value:
               Distributors (2007)
200                                                            189

180
160
140
120                                           101
100
 80
                               58
 60                                                       46                                       51
                                    39                                                                  43
 40                 24                   21
                                                     28                  25          29
                                                                                                                 23 26
                                                                              18          16
 20     1       2        3 3                                         1                         1             3
  0
      Less    $0.01-     $0.11-     $1.01-            $11-           $101-          $501- $1,001- Greater
      than    $0.10      $1.00       $10              $100           $500          $1,000 $10,000 than
      $0.01                                                                                       $10,000

              Authorized Distributors               Independent Distributors               Brokers
           Counterfeit Incidents by Type (2007)
                                                                                                         3282
   Used Product Re-Marked as Higher Grade
                                                  28
                                                                   740
    New Product Re-Marked as Higher Grade
                                                  23
                                     Other               303
                                                  61
  Used Product Sold as New (Not Remarked)               248
                                                  58
           Fake [non-working] OCM Product              214
                                                  24
Invalid Part Marking - Performance Unknown             208
                                                  17
                      Seconds From Scrap               161
                                              14
                                                108
         Working Copies of Original Designs
                                               59
                                              9
Unauthorized Working Part Packaged as New     18
                                              2
      Unauthorized Overrun of OCM Product     2

                                              0              500    1000   1500   2000     2500   3000   3500

                          Discretes Electronic Components                  Microcircuits
           Percent of Counterfeit Incidents
       Involving In/Out of Production Products
                     2005 - 2008
100%

90%

80%       36%
                       44%                47%             46%
70%

60%

50%

40%

30%       64%
                       56%                53%             54%
20%

10%

 0%
          2005         2006               2007         2008 (est.)

                   In Production   Out of Production
  How Companies Are Uncovering Counterfeits (2007)

                          Returned as Defective                                             482
       Markings, Appearance, Condition of Parts                                            462
                     Self-Initiated Investigations                                   384
      Customer Suspected Part Was Counterfeit                            188
                                         Testing                       165
   Discovered Defective Parts/Poor Performance                        147
                    Notification by US Customs                  106
               Returned as Wrong Merchandise             39
                            Notification by OEM         24
                            Notification by OCM       12
             Absence of Original Documentation        11
                  Returned as Excess Inventory        9
                          Notification by GIDEP       9
                             Notification by DLA      7
  Notification by Other US Government Agencies       3
     Notification by Non-US Government Agency        1
Unauthorized Overrun by Contract Manufacturers       0

                                                     0        100      200     300   400   500    600
          How Companies Are Uncovering Counterfeits:
                        OCMs (2007)
                          Returned as Defective                                                       362
       Markings, Appearance, Condition of Parts                                    222
      Customer Suspected Part Was Counterfeit                         131
   Discovered Defective Parts/Poor Performance                     109
                    Notification by US Customs                    102
                                         Testing                  100
                            Notification by OEM            20
                          Notification by GIDEP        9
                             Notification by DLA      6
  Notification by Other US Government Agencies       2
                     Self-Initiated Investigations   1
     Notification by Non-US Government Agency        1
Unauthorized Overrun by Contract Manufacturers
               Returned as Wrong Merchandise
                  Returned as Excess Inventory
                            Notification by OCM
             Absence of Original Documentation

                                                     0      50   100   150   200    250   300   350     400
          How Companies Are Uncovering Counterfeits:
                     Distributors (2007)
                     Self-Initiated Investigations                                                    383
       Markings, Appearance, Condition of Parts                                     240
                          Returned as Defective                        118
                                         Testing               64
      Customer Suspected Part Was Counterfeit                 57
               Returned as Wrong Merchandise                39
   Discovered Defective Parts/Poor Performance              38
                            Notification by OCM        12
             Absence of Original Documentation         11
                  Returned as Excess Inventory        9
                                            Other    4
                            Notification by OEM      4
                    Notification by US Customs       4
  Notification by Other US Government Agencies       1
                             Notification by DLA
Unauthorized Overrun by Contract Manufacturers
     Notification by Non-US Government Agency
                          Notification by GIDEP

                                                     0      50   100    150   200   250   300   350   400   450
         of Companies With Documented Cases of
 PercentPercent of CompaniesWithDocumented Cases of
             Counterfeits Sold by Specific Entities
      Counterfeits Sold bySpecific Entities
50%

40%      35%

30%               28%


20%
                        12%
                              9%    7%    7%
10%                                                 6%
                                                             3%          3%         2%      1%       1%
0%
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                  Top Countries Suspected/Confirmed to be
                         Sources of Counterfeits*
90
             79
80

70

60

50

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30
                                        19
20                                                   16
                                                                 12            12            12
                                                                                                               9
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                           * Each company was asked to provide their top five suspected countries
    Counterfeits Damaging a Company’s Reputation

                                         Percent of Companies Indicating
                                       Counterfeits Have Negatively Effected
   OCM Comment: “With                      Their Image or Reputation
    counterfeit goods in the          Discrete Electronic
    market, purchasers are not        Component                  12%
    sure if they received genuine     Manufacturers
    or fake goods, so they tend to    Microcircuit
    avoid the brand entirely.”        Manufacturers
                                                                 36%


                                      Authorized
   Distributor Comment: “When        Distributors
                                                                  8%
    distributors or brokers trade
    in counterfeit parts the entire   Independent
    industry’s reputation is          Distributors
                                                                 45%

    tarnished with a ‘guilty by
    association’ mentality.”          Brokers                    63%
  Top 10 Reasons Identified by All Companies for
   Counterfeits Entering the U.S. Supply Chain
                                                            Number of
                            Reason
                                                            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
                                                               62
Distributors
Insufficient Chain of Accountability                           58
Less Stringent Inventory Management by Independent
                                                               56
Distributors
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)
Average Percent of Incoming Parts Tested
          by Type of Supplier

OCMs                        52%
                                           Only 56% of
                                           Distributors and
OEMs                        44%            Board Assemblers
Authorized
                            52%
                                           test products they
Distributors
                                           purchase before
Independent
Distributors
                            58%            placing them in
Brokers                     62%
                                           inventory.
Internet-Exclusive
                            38%
Sources
Percent of Distributors Conducting Pre-Stock Testing

100%

90%
          81%
80%                                                77%
                                      74%
70%
                        59%
60%                                                                          56%

50%

40%

30%

20%
                                                                13%
10%

 0%
          Visual     Confirm OCM Inspection of     Visual     Electronic    Physical
       Inspection of   Pedigree      OCM         Inspection    Testing     Evaluation
         Packages     Paperwork    Shipping
           and                     Packages
        Paperwork
       Percent of Board Assemblers Conducting Pre-
        Percent of Board Assemblers Conducting Pre-Stock Testing
                           Stock Testing
100%
90%
80%
70%       63%
60%
50%
                                                   47%
                                      40%
40%
                        30%
30%                                                                          23%
20%
                                                                10%
10%
 0%
          Visual     Confirm OCM Inspection of     Visual     Electronic    Physical
       Inspection of   Pedigree      OCM         Inspection    Testing     Evaluation
         Packages     Paperwork    Shipping
           and                     Packages
        Paperwork
  Percent of Companies Performing Inventory
            Audits for Counterfeits
75%




60%
          52%


45%




30%


                      17%
                                      13%
15%




0%
       Distributors   OCMs       Board Assemblers
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
                                                              Circuit Board
              Action Taken              OCMs   Distributors
                                                              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
                                        26%        9%              8%
  Complaint
  Random Inventory Testing              19%        38%            42%
  Disposal of Parts Immediately         17%        36%            13%
  Issue Credit                          15%        64%            58%
  Turn Over to Law Enforcement
                                        15%        7%             29%
  Authorities for Analysis
  Check USG or Industry Database        11%        47%            13%

  Other                                 11%        14%             8%

  Turn Over to Law Enforcement
                                        11%        6%             17%
  Authorities After Analysis

  Return to OCM or Distributor          11%        33%            25%
  Who Ya Gonna Call?
56% of OCMs,                            Top Authorities Contacted
                                       (As a Percent of Total Companies)
65% of Distributors, and
                                None at all                     35%
75% of Board Assemblers
                                GIDEP                           10%
  DO NOT KNOW what
                                FBI                              8%
  authorities to contact when
  they encounter                Customs and
                                                                 6%
                                Border Protection
  counterfeits.
                                ERAI                             6%

                                IDEA                             6%
71% of distributors tell
                                DLA                              6%
  customers to contact their
                                State/Local
  firm if they encounter a      Authorities
                                                                 6%

  counterfeit product.
“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!
 Most common responses – Don’t buy from China
                       – Be wary of Brokers

From OCMs:                   From Circuit Board Assemblers:
 Ensure proper disposal of   Audit OCMs/OEMs to ensure
  all scrap – crush all        that the purchased part is
  defective/unused products    made within their facility and
  to prevent re-circulation.   not contracted out.
 Train all employees on      Perform destructive testing if
  how to identify and handle   a part cannot be verified by
  counterfeit parts.           other means.
 Tighten contractual         Establish qualifications for
  obligations with contract    supplier purchases.
  manufacturers regarding
  disposal of unused
  product.
Industry Best Practices (cont.)
From Authorized Distributors:    From Independent
 Ask for Certificates of           Distributors/Brokers:
   Compliance for all products    Always purchase parts via
   purchased.                       escrow payments – Suppliers
 Educate your sales team           that believe in their product
   regarding the risk of parts      will not mind waiting for their
   brokers.                         money.
 Create a central database       Audit all inventory purchased
   for identifying counterfeit      before anti-counterfeiting
   suppliers.                       measures were put in place.
 Do not approve returns in       Follow IDEA 1010 for
   greater quantities than the      incoming inspections.
   original purchase.             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
BIS/OTE Contacts
   Brad Botwin
     Director, Industrial Studies
     Office of Technology Evaluation
     202-482-4060
     bbotwin@bis.doc.gov

   Teresa Telesco
     Industry Analyst
     202-482-4959
     ttelesco@bis.doc.gov

   www.bis.doc.gov                      Come see us
                                        in Booth #212

								
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