Phil
Welcome to Board Talk this is Phil and Jim, the Assembly Brothers, who by day go as ITM Consulting. We're here to discuss your questions and problems and whatever is plaguing you in surface mount technology assembly.

Jim
Today we have a question that I’m surprised we don’t get more often. The question says, "we are just learning about the infiltration of counterfeit components. We are an EMS and we are very concerned. Is this legitimate? What can we do to protect ourselves and our customers?"

Phil
Wow, where to begin? Welcome to the greatest scourge upon our industry in who knows how long. The four horseman of the assembly apocalypse, whatever you want to call it. Yeah, be very afraid. Be very, very afraid.

Basically, there’s been all kinds of estimates. There was as many as $8 billion worth of counterfeit parts back in 2008. There's estimates of 12 percent of product out in the field are affected, but, Jim, nobody really knows.

Jim
People don't want to talk about it.

If I'm this EMS and I start saying, "I'm concerned about counterfeit components," how am I gonna tell my customers, unless I have something air tight to back it up.

My customers say, "Oh, my God," and my competitor down the street says, "Oh, no, we take care of counterfeit components, because we only buy from reputable suppliers."

Phil
Yeah, well, wow, where to begin? We know in spite of this, we hear a lot of incidents. There's been a lot of incidents of counterfeit components. Big companies small companies, OEM's, CEM's, all areas of products, and what surprises me, though, is there's an awareness.

People know about incidents, and yet there's a complacency to do anything about it. I think this is based on the myth that, we're going to let our component distributor take care of things. We deal with one of the big component distributors and they claim that they're clearing and certifying their parts. Therefore, how can we go wrong?

Well, there's a lot of ways they can go wrong.

Jim
The one that I've heard before is that a very competent and conscientious certified distributor has their inventory compromised through returns.

They sell good parts to Company A. Company A buys them, but they have a temporary large order so they have to go on the gray market and buy some extra parts of the same part number.

They mix their inventory. Now, an order gets canceled, so they have to return some parts to the registered distributor, but what happens is some of the gray market parts, which turn out to be counterfeit, get returned to the certified distributor, who does not conscientiously check the returns.

They're only worried about counterfeit coming in from the supply side. And unbeknownst to them, totally unconsciously, their inventory gets compromised.

There was a discussion held on the floor of Productronica about counterfeit components. One of the panelists said it's everywhere and you're never going to stop it. 

He said people are doing it because there are profits to be made. You can sell counterfeit components for high prices and make a lot of money. He said once you introduce that, the potential for compromise is anywhere in the supply chain.

Consider the ordinary handing clerk in a stock room. You don’t think about them. All of a sudden, this person needs to be a secured person. He cited a known example of a company that manufactured components, and some enterprising person within the company went to the scrap bin, grabbed some parts that were scrap, but still fully marked, so you couldn't identify them.

They had not yet been ground up. Takes them down to the stock room and substitutes them for good parts. Takes the good parts, goes and sells them. But now at the very manufacturing site, you’ve got a contaminated inventory. And when you think about shipping and handling and so forth, it's not something we typically think of as a controlled job.

When there are profits to be made, people will get bought off. The potential is huge.

Phil
Trust no one. We’ll be talking about the counterfeit subject quite a bit in upcoming Board Talks. But the other article we'd like to refer you to one of the best pieces of investigative journalism we’ve seen bar none.

It was in Business Week, October 8, 2008, and the article was called Dangerous Fakes. You can do a search, you’ll find it. This article should be required reading for everyone in our industry. Read it, and be afraid, be very, very afraid.

That’s it for this installment of Board Talk. In the meantime, this is Jim Hall and Phil Zarrow from ITM Consulting, the Assembly Brother of Board Talk, wishing you farewell.