counterfeits and the u.s. industrial base office of technology evaluation

Counterfeits and the U.S. Industrial Base

Office of Technology Evaluation

U.S. Department of Commerce – Preliminary Data (as of November 21, 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 – 64

498 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

Components12 24 36

Microcircuits 18 20 38

Distributors

Authorized Distributors

8 32 40

Independent Distributors

31 12 43

Brokers 8 1 9

Board Assemblers 11 21 32

Prime/Sub Contractors 20 61 81

Total 108 171 279

BIS Counterfeit Electronics Survey – Preliminary Data


3,791

8,040

9,1288,437

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2005 2006 2007 2008 (est.)

Total Counterfeit Incidents:OCMs, Distributors, Board Assemblers, Prime/Sub

Contractors 2005 - 2008


Counterfeit Incidents by Product Resale Value:Overall (2007)


Counterfeit Incidents by Product Resale Value:(2005 - 2008)


Counterfeit Incidents by Product Resale Value:Distributors (2007)


Counterfeit Incidents by Type (2007)


67%61% 58% 57%

33%39% 42% 43%

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


How Companies Are Uncovering Counterfeits (2007)


How Companies Are Uncovering Counterfeits: OCMs (2007)


How Companies Are Uncovering Counterfeits: Distributors (2007)


How Companies Are Uncovering Counterfeits: Prime/Sub Contractors (2007)


U.S. Customs Notifications(2005 – 2008)

Companies have increasingly uncovered counterfeits through U.S. Customs notifications.

YearNumber of Incidents

2005 3

2006 13

2007 120

2008 473


Percent of Companies With Documented Cases of Counterfeits Sold by Specific Entities


* 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 Prime/Sub Contractor Comment:

When some businesses report counterfeit parts findings via GIDEP alerts and other companies do not, authorities may think that the reporting companies have more counterfeit issues than non-reporting companies.

Distributor Comment: “The entire brokerage industry has experienced a black eye due to some unethical and/or unknowledgeable brokers. We have lost many contracts from large contract manufactures simply due to us being a ‘broker.’”

Percent of Companies Indicating Counterfeits Have Negatively Effected

Their Image or Reputation

Discrete Electronic Component Manufacturers

8%

Microcircuit Manufacturers

29%


8%


44%

Brokers 67%

Circuit Board Assemblers

6%

Prime/Sub Contractors

3%


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 150

Greater Reliance on Gray Market Parts by Brokers 140

Greater Reliance on Gray Market Parts by Independent Distributors

124

Insufficient Chain of Accountability 119

Less Stringent Inventory Management by Independent Distributors

114

Purchase of Excess Inventory on Open Market 101

Insufficient Buying Procedures 101

Inadequate Purchase Planning by OEMs 98

Greater Reliance on Gray Market by Contract Manufacturers 91

Inadequate Planning by Contract Manufacturers 88


Pre-Stock Testing By Type of Supplier(Distributors, Board Assemblers, Prime/Sub

Contractors Only)

Only 66% of Distributors, Board Assemblers, and Prime/Sub Contractors test products they purchase before placing them in inventory.

Average Percent of Incoming Parts Tested

by Type of Supplier*

OCMs 51%

OEMs 47%


50%


54%

Brokers 54%

Internet-Exclusive Sources

32%

* Based on those companies who test incoming parts.


83%

57%

74% 76%

13%

47%

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


Percent of Board Assemblers Conducting Pre-Stock Testing


Percent of Prime/Sub Contractors Conducting Pre-Stock Testing


46%

21%

16%18%

0%

15%

30%

45%

60%

75%

Distributors Prime/SubContractors

Board Assemblers OCMs

Percent of Companies Performing Inventory Audits for Counterfeits


73%

64%

15%

0%

25%

50%

75%

100%

Circuit Board Assemblers Prime/Sub Contractors Distributors

Percent of Companies Co-Mingling Identical Parts in the Same Bin


Contractor Testing Problems Five companies had problems with Non-U.S.

contractors concerning improper management or theft of electronic scrap after testing.

25 companies, 19% of those employing testing contractors, had problems with U.S.-based firms concerning faulty or forged testing. Twenty of the 25 were distributors. 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 69%

Trace Supply Chain 67%

Inform Authorized Distributors 36%

Locate Select Inventory 36%

Pull Back Inventory 24%

Perform Random Testing 21%

Wait for Additional Complaints 19%

Notify Federal Authorities 17%

Other 16%

No Steps Are Taken 15%

Notify Industry Associations 15%


Steps Taken After Notification of a Counterfeit Incident: Distributors




Trace Supply Chain 65%



Inform OCMs 45%




Other 13%



Steps Taken After Notification of a Counterfeit Incident: Circuit Board Assemblers




Trace Part Supply Chain 55%


Inform OCMs 45%





Other 10%



Steps Taken After Notification of a Counterfeit Incident: Prime/Sub Contractors




Trace Part Supply Chain 61%

Inform OCM 51%






Other 15%

Wait for Addition Complaints 4%


Steps Taken After Possession of a Counterfeit Part

Action Taken OCMs DistributorsCircuit Board Assemblers


Enter into USG or Industry Database

8% 41% 9% 20%

Retain Samples for Reference 59% 40% 21% 44%

Test Part 57% 54% 42% 54%

Enter into Company Database 51% 60% 48% 47%

Quarantine Parts 23% 42% 21% 36%

Leave Disposal to Party Filing Complaint

25% 13% 6% 8%

Random Inventory Testing 17% 39% 42% 47%

Disposal of Parts Immediately 17% 32% 15% 20%

Issue Credit 15% 67% 61% 37%

Turn Over to Law Enforcement Authorities for Analysis

13% 11% 12% 16%

Check USG or Industry Database 9% 47% 15% 35%

Other 9% 19% 9% 15%

Turn Over to Law Enforcement Authorities After Analysis

9% 14% 12% 21%

Return to OCM or Distributor - - 55% 31%


Who Ya Gonna Call?

61% of OCMs,

54% of Distributors

75% of Board Assemblers, and

52% of Prime/Sub Contractors DO NOT KNOW what authorities to contact when they encounter counterfeits.

74% 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 44%

GIDEP 14%

State/Local Authorities

9%

CBP 8%

DLA 8%

FBI 7%

FAA 6%

Department of Transportation

4%


46%

37%

6%

15%

0%

15%

30%

45%

60%

75%

Distributors OCMs Prime/SubContractors

Board Assemblers

Percent of Companies Maintaining an Internal Database to Track Counterfeits


Legal Requirements/Liabilities Related to Counterfeits

31% of companies are aware of legal requirements for the management and/or disposal of counterfeit products.

27% of companies are aware of written instructions or guidance from federal authorities on reporting counterfeit products.

41% of companies are aware of their liabilities related to the distribution, storage, and disposal of counterfeit products.

46% of companies need guidance from federal authorities with regards to civil and criminal liability, and penalties pertaining to the distribution, storage, and disposal counterfeit products.


Full-Time Employees (FTEs) Dedicated to Counterfeit Issues

Number of FTEs Dedicated to Counterfeit Issues

289332

417

513

0

100

200

300

400

500

600

2005 2006 2007 2008(est.)

Nu

mb

er

of

FT

Es

Number of Companies With At Least One FTE Dedicated to

Counterfeit Issues (2007)

Distributors 61%


38%

OCMs 27%

Circuit Board Assemblers

27%


“Fun” Facts 91% of companies accept returns from their

customers. 45 of these companies have cases of individual

customers returning counterfeit products.

42% of companies find it difficult to identify counterfeit products. However, 63% of companies find it easier to

identify counterfeits today than they did five years ago.


Industry Best Practices – 1,000+

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 authentic pictures to visually verify parts.


Industry Best Practices (cont.)

From Prime/Sub Contractors: Share all information on discovered counterfeit

parts with industry and authorities. Incorporate language into supplier contracts to

minimize liabilities and impose penalties for counterfeits.

Plan for and attempt to design out obsolescence from systems.

Create annual training sessions for staff to keep counterfeit detection up-to-date.


What Should the Federal Government Do?- Industry Suggestions

Create education and training opportunities for companies. Many companies do not know what the Federal

government is doing to combat counterfeits. Create a government-sponsored counterfeits

manual.

More prosecutions for counterfeiting, including harsher penalties.

Centralize counterfeit databases and encourage higher levels of reporting.


Press other countries, particularly China, to regulate their domestic industry and enforce intellectual property laws.

Facilitate communication and cooperation within U.S. industry, particularly between OCMs and independent distributors/brokers.

Establish programs to recycle/destroy electronic waste, the supply source for counterfeiters.

What Should the Federal Government Do?- Industry Suggestions (cont.)


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


Next Steps

Continue compliance on the DOD survey Begin final analysis of data Draft report and release public document in mid

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 [email protected]

Teresa Telesco Industry Analyst 202-482-4959 [email protected]

www.bis.doc.gov

counterfeits and the u.s. industrial base office of technology evaluation

Documents

total counterfeit incidents

industry studies

industrial capabilities

independent distributors

primesub contractors

unauthorized contractors

total survey participants

supply chain study