Ever since December, 2011, we have been telling readers of this blog that there is a locomotive coming at the electronics industry.
In that month, a new Federal anti-counterfeiting law was proposed as an amendment to the U.S. National Defense Authorization Act for Fiscal Year 2012. We said at that time that the law, which targeted counterfeit electronics in the military supply chain, would in fact shake up the entire industry, both private and public sectors, and world wide, not simply in the U.S.
'the impact [of the 2012 National Defense Authorization Act] is beginning to be felt worldwide'
Now that law is on the books as Section 818 of the Act, and reality is making this crystal clear.
IHS iSupply, a well-regarded research and data provider, has released a study describing how Section 818 "may have broad international implications, impacting hundreds of overseas companies that have supplied billions of dollars’ worth of items to the American government." According to IHS, the new electronics anti-counterfeiting requirements will create "wrenching changes" for companies throughout the world, citing Europe as the source of most of the international Defense Department purchases.
The law will be articulated in policy by the Defense Department at the end of June, 2012, and then at the end of September will be written into the main military procurement document, known as DFARS. At that point the law will have teeth and defense contractors will need to comply.
The IHS study identifies Europe as the largest supplier of electronics to the U.S government, placing the region squarely in the sights of the new law. From 2007 through 2011, 283 European countries accounted for almost $1 billion in sales, or 51 percent of all foreign electronics sales to the U.S. military.
Most of the rest of the military electronics spend, 47%, was sourced from 32 companies in the Middle East. Only 2% of official sales are from Asia.
An IHS senior manager, Greg Jaknunas, was concerned to correct the "perception that U.S. regulations such as 2012 NDAA, Section. 818. Detection and Avoidance of Counterfeit Electronic Parts, is only an issue for American companies, and that they don’t impact firms in Europe, the Mideast and elsewhere." In fact, he said, "the impact is beginning to be felt worldwide...”
We would add that the impact of NDAA Section 818 will not only be global, it will cross from public to private sector. Many of the same facilities which supply the U.S. military also produce electronic components for commercial applications. Far more microchips are produced for industrial and consumer buyers than for the U.S. military, which buys only about 2% of the world's supply annually.
The study by iSupply also stresses that "the world must have tools that allow them [defense suppliers -- Applied DNA] to identify components at risk of counterfeits." iSupply points to its IHS Haystack database which offers key logistics information to the government and contractors.
We would add that new technological tools will also be necessary. And none is more capable and ready to begin than Applied DNA Science's SigNature DNA authentication system for microchips, now undergoing testing by the U.S. military.
The number reflects the crisis-level spike in counterfeiting of electronics, which has tripled in the last two years, states IHS. The increase in fake microchips flooding into the military supply chain has been even greater: it has quadrupled since 2009 (see our blog post). The crisis puts at risk an enormous global market for applications based on the five semiconductor types, which are used for computing, consumer electronics, wireless and wired communications, automotive and industrial purposes.
Costs to manufacturers, consumers, and the government are inevitably skyrocketing upward with the increase in the volume of counterfeits. IHS director of supply chain product marketing, Rory King, says the "..excessive cost of rework, repair, and customer returns for component failures is significant. For the global electronics supply chain, tackling the problem of counterfeit and fraudulent components has become an issue of paramount importance.”
Because the risks of counterfeiting in military applications have become so great, the Federal government has made defense contractors accountable for the presence of counterfeit electronics in their supply chain. the National Defense Authorization Act for Fiscal Year 2012 (NDAA), Section 818 mandates that prime contractors “monitor and detect” counterfeits in their supply chain, and are liable for rework and replacement costs if they do not, even setting out legal remedies such as suspension or disbarment if a pattern of non-compliance is determined. Milestones for implementing the new mandate are set for June and then September, after which the defense industry must adhere to new procurement guidelines based on the legal language.
The new mandate will inevitably affect commercial as well as military product. King points out that the same chip types are used in both commercial and military applications.
“There has been a great deal of focus on the issue of counterfeit parts in the defense industry, but the majority of reported counterfeit incidents are for commercial components which have broad use across both military and commercial applications,” King said in an IHS press release. “Take analog ICs, for example. One out of every four counterfeit parts reported are for analog ICs—components which are used in everything from industrial and automotive situations to wireless devices, computers, or consumer electronics. A single counterfeit could impact end products in any of these markets and the potential problem is pervasive, amounting to billions of dollars of global product revenue subject to risk.”
.As King points out, the same microchip types affect both commercial and military applications, so in fact the commercial sector will be severely impacted by NDAA Section 818 regulations.
A technology to authenticate microchips and thus address the crisis is now in pilot. Applied DNA Sciences DNA marking technology is being piloted by the Defense Logistics Agency, an agency of the Department of Defense. The project is managed by LMI, a not-for-profit consultancy. A major chip manufacturer as well as authorized and independent distributors are participating in the eighteen-month pilot.
Our thanks to EE Times for highlighting this story.
Latest statistics are clearly showing what everyone, surely, already knows: counterfeit electronic parts are deluging the world supply system, critically threatening military, medical, and other systems which use electronics intensively. A new report will help to quantify the extent of the crisis, and we hope, help assess the growing losses to national safety, to jobs, and to companies' bottom lines.
According to the noted supply chain research firm IHS iSupply, the number of counterfeit electronic parts found in the supply chains of US-based military and aerospace firms has quadrupled since 2009. Drawing on industry and government databases, the report documents 1,363 separate verified counterfeit-part incidents worldwide, “a total that could encompass millions of purchased parts.” Can it be surprising that the U.S. government has stepped up its anti-counterfeit effort by passing Amendment 818 of the National Defense Authorization Act for 2012? (see our earlier post here).
Huge Spike in Found Counterfeits
The huge spike in found counterfeits follows a dip in reported incidents starting with the Great Recession of 2008. The number is now far beyond what is was in early 2007, just before the economic crisis. (and, by percentage of shipped parts, the counterfeit crisis almost certainly never wavered even during the Recession).
Perhaps more startling still, IHS states that going back to 2001, the number of reported incidents has risen by a factor approaching 700.
The report also gives us a glimpse of what this means to defense suppliers, and the men and women in the armed forces. The typical Bill of Materials (BOM), or parts list, for a defense program can have from several hundred to tens of thousands of parts. A percentage of that BOM—from .5% to 5%-- typically matches parts which have turned up in the reported incidents database. In other words, hundreds and maybe thousands of parts in each BOM are typically suspect. In military supply, where even one counterfeit can have devastating consequences, thousands are suspect in every parts list.
This is also a good picture, by extension, of the situation we now face in the medical devices and automotive industries, also intensively invested in electronics, and also very high risk for counterfeit, and therefore possibly defective parts.
Counterfeit Crisis Larger Still
It’s well to keep in mind that “reported incidents,” like the number of seizures of counterfeit goods by government agencies, is an indicator, but only an indicator of the larger, global problem. The data comes from the industry database kept by an IHS partner, ERAI Inc., and from the U.S. government’s GIDEP data store, both U.S. sources. The number of incidents reported by governments and companies worldwide is without doubt much higher.
At the same time, this total admittedly under-reports the total of counterfeits found in consumer electronics and other industries, a normal outcome using statistics that rely on official reports. Such reports are much more likely to come from military and the related aerospace sectors than from consumer-facing companies, whose defective product problem is generally handled and in the case of counterfeits, hidden, by warranty service.
The consumer sector is much larger: in microchips, for example, the U.S government normally buys about 2% of the global supply.