Counterfeits and the U.S. Industrial Base Office of Technology Evaluation
Dec 15, 2015
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.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Counterfeit Incidents by Product Resale Value:Overall (2007)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Counterfeit Incidents by Product Resale Value:(2005 - 2008)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Counterfeit Incidents by Product Resale Value:Distributors (2007)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Counterfeit Incidents by Type (2007)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
How Companies Are Uncovering Counterfeits (2007)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
How Companies Are Uncovering Counterfeits: OCMs (2007)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
How Companies Are Uncovering Counterfeits: Distributors (2007)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
How Companies Are Uncovering Counterfeits: Prime/Sub Contractors (2007)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Percent of Companies With Documented Cases of Counterfeits Sold by Specific Entities
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
* Each company was asked to provide their top five suspected countries
Top Countries Suspected/Confirmed to be Sources of Counterfeits*
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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%
Authorized Distributors
8%
Independent Distributors
44%
Brokers 67%
Circuit Board Assemblers
6%
Prime/Sub Contractors
3%
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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%
Authorized Distributors
50%
Independent Distributors
54%
Brokers 54%
Internet-Exclusive Sources
32%
* Based on those companies who test incoming parts.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Percent of Board Assemblers Conducting Pre-Stock Testing
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Percent of Prime/Sub Contractors Conducting Pre-Stock Testing
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
46%
21%
16%18%
0%
15%
30%
45%
60%
75%
Distributors Prime/SubContractors
Board Assemblers OCMs
Percent of Companies Performing Inventory Audits for Counterfeits
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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%
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Steps Taken After Notification of a Counterfeit Incident: Distributors
Pull Back Inventory 77%
Notify Internal Company Authorities 74%
Locate Select Inventory 68%
Trace Supply Chain 65%
Notify Industry Associations 54%
Perform Random Testing 46%
Inform OCMs 45%
Inform Authorized Distributors 41%
Notify Federal Authorities 25%
No Steps Are Taken 19%
Other 13%
Wait for Additional Complaints 5%
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Steps Taken After Notification of a Counterfeit Incident: Circuit Board Assemblers
Pull Back Inventory 67%
Notify Internal Company Authorities 64%
Locate Select Inventory 64%
Trace Part Supply Chain 55%
Inform Authorized Distributors 48%
Inform OCMs 45%
Perform Random Testing 39%
No Steps Are Taken 18%
Notify Industry Associations 12%
Notify Federal Authorities 10%
Other 10%
Wait for Additional Complaints 6%
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Steps Taken After Notification of a Counterfeit Incident: Prime/Sub Contractors
Pull Back Inventory 68%
Notify Internal Company Authorities 65%
Locate Select Inventory 64%
Trace Part Supply Chain 61%
Inform OCM 51%
Inform Authorized Distributors 49%
Perform Random Testing 44%
Notify Federal Authorities 30%
No Steps Are Taken 24%
Notify Industry Associations 18%
Other 15%
Wait for Addition Complaints 4%
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
Steps Taken After Possession of a Counterfeit Part
Action Taken OCMs DistributorsCircuit Board Assemblers
Prime/Sub Contractors
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%
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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%
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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%
Prime/Sub Contractors
38%
OCMs 27%
Circuit Board Assemblers
27%
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
“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.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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.
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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.)
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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
U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)
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