High tech companies are losing billions every year to counterfeits and the gray market. In 2006 U.S. Customs recorded over 15 billion IC imports‐‐about 500 every second. Results of a study conducted by AGMA (Association for Abatement of Gray Market and Counterfeits) and KPMG, showed that one out of every ten IT products contains counterfeit semiconductors. That means 1.5 billion of those imported ICs are likely counterfeit…about 50 counterfeits every second flooding into the US. Do you know how many of those 1.5 billion (and the number is growing all the time) are yours or are in your finished products? Most manufacturers don’t realize the extent of their revenue loss to counterfeits and unauthorized sales. And, revenues are not all you are losing. Company and product reputations are being eroded and legitimate channel partners lost.
Once thought to be too complex and sophisticated for counterfeiters, semiconductors, electronics and IT (information technology) products are now hot ticket items in counterfeit manufacturing. Lost sales, however, only account for a fraction of what companies sacrifice when their intellectual property (IP) is stolen and their products illegally produced. Counterfeiters steal IP backed by million‐dollar investments in research and development, marketing, and manufacturing. Moreover, illegitimate or substandard chips present the company with additional costs to repair or replace defective products carrying their brand name.
During the past decade, billions of dollars in foreign direct investment (FDI) have flowed into a number of developing countries, such as China, leading to the proliferation of sophisticated manufacturing processes and capabilities to produce high‐tech products. Counterfeit components have long been a problem in the electronics industry, but as of late, companies are finding themselves increasingly challenged with having to deal with counterfeit components. A second contributing factor is the popularity of e‐commerce. Many counterfeiters are using the Internet to reach potential buyers, and without regulatory bodies able to police and govern all product‐listing sites or advertisements sent out over email, the Web has become a bastion for illegal sales of counterfeit products.
Why is the problem becoming more serious?
In a study by the Semiconductor Industry Association (SIA), remarking was the most common method of counterfeiting. Remarking involves scraping a label off a chip package and printing on a new label. This can involve a different and higher priced brand, or a faster chip speed, or a military grade lot number on a commercial chip. Most of the problem is coming from Shenzhen China, located on the border with Hong Kong. You can find anything in Shenzhen—original, fake, new, and old components. It’s common to find shops making fake “Samsung, Motorola,” etc. labels. The Chinese vendors say that making the labels is easy—they simply select the specific component maker’s label from the program library, then modify the data. The label quality is excellent. Other counterfeiting tricks include incorrect die, inferior packaging materials, reproduction of chip designs, packages without die, different labels on packages, false RoHS (Restriction on Hazardous Substances) notifications.
Inaccurate notifications of whether a chip has lead can impact a high tech manufacturer in two different, yet significant ways. First, if the chip contains lead but has a false RoHS notification, the manufacturer may have products restricted from sale in some countries, face a lawsuit and experience significant amounts of bad publicity. Of greater concern, however, is when a part does not contain lead and the counterfeiter asserts that it does. Parts without lead have reliability problems when used in applications in outer space such as satellites or NASA flights.
How can you solve this problem?
There are several key areas you can focus on to reduce your company’s revenue erosion from counterfeits and unauthorized sales: legal, operational and technology such as New Momentum’s Enterprise Brand Protection as well as encryption and lock & key.
Do you know if your company has a serious counterfeiting or gray market problem? Do you know how to find out if and how this problem is impacting your company?
