The numbers are in for counterfeit part reporting over the first half of 2024, and Richard Smith, Vice President of Business Development at ERAI, joins us to discuss the changes in counterfeit electronics activity. Test labs are delivering more results and new brands are being counterfeited. Everything procurement professionals need to hear is in this episode.
This interview was edited and formatted for clarity.
Tyler Fussner, Managing Editor, Supply Chain Connect
Hello, and welcome back to Counterfeit Chronicles. I'm your host, Tyler Fussner, Managing Editor at Supply Chain Connect. And joining me again today is Richard Smith, the Vice President of Business Development at ERAI.
Hey, Richard.
Richard Smith, Vice President of Business Development, ERAI 0:26
Tyler. Good afternoon. How are you, sir?
Fussner 0:30
I am doing well; hope you're doing well, too.
Smith 0:33
I'm doing just fine, Tyler. Thanks for asking. Richard back in
Smith 0:37
Richard, back in April, in Counterfeit Chronicles: Episode 4, we covered the counterfeit activity numbers of the first quarter of this year. And I'm excited for today's episode where we will again be taking a pulse reading on the counterfeit activity in the electronics market with an update on the 2024 numbers. So, let's get into it. Richard, how many reported counterfeit parts has ERAI logged so far in 2024? What's our current standing now that we find ourselves in Q2?
Smith 1:08
We will get into that; let me bring all your listeners up to this point so that they are aware, I'm going to be contrasting the numbers from December 31, 2023, compared with what we've seen through June 15 of this year.
The answer to your question, what we talked about in April: In 2023, for the entire year, ERAI published 786 counterfeit part reports. Through June 15 of this year, almost a full six months, you would expect the number to be half of 786. And the actual number is 696. So, we are on a run rate—if things continue—to publish considerably more counterfeit parts in 2024 than we did in 2023.
Fussner 2:06
Do you think that that means there are more counterfeit parts getting into the supply chain? Or is it that more people are being diligent and having secure counterfeit mitigation measures in place?
Smith 2:20
Well, not to be funny, Tyler, but yes. It demonstrates something I've said all along that counterfeiting is a moving target. And we're going to see that more as we go through this here. More and more companies are getting more involved in vetting their suppliers and being qualified to various standards and actually doing the inspection and testing required. So, I believe, and maybe it's a little bit of speculation at this point, I believe the industry continues to grow and improve and is doing a better job and identifying and quarantining counterfeit devices. At the same time, I think there's still ample opportunity for the counterfeiters to take advantage of and get more and more products out into the field.
Fussner 3:11
I'm curious though, Richard, of the parts that have been reported, what are the leading types of counterfeit parts so far in 2024?
Smith 3:19
Types reported at the end of 2023 (just as a basis so we know where we're coming from) 18% of all the parts reported were analog integrated circuits. Not to be confused with the brand Analog Devices, but just that type of circuit. Number two: microprocessors; microprocessor ICs; then memory ICs; programmable logic; and then a category of “other.” Typically, those categories trade places year to year.
In that top five, we did have one shake up so far this year through June 15. The “other” category is now 40%. And there are a couple of things we'll talk about in a little bit that skewed that and kicked that up quite a bit. Analog ICs is now number two at 11%; microprocessors at 10%. Programmable Logic is 8.6%. And memory is 8.3%. We did have some new players, if you will, show up in the categories, and it is “other.” The reason it's “other” is because (we'll talk about that when we get to the manufacturer involved) it is not one specific type of part.
Fussner 4:42
And of these reported counterfeit parts so far this year, is there a measurable difference between part status, as in obsolete versus active?
Smith 4:51
Yeah, there is actually. Currently, out of all the parts that are reported this year, 35.2% are obsolete and the rest are active, and a very small fraction (about less than 2%) are unknown. The number of 35% obsolete, what that tells us is roughly 45%, or more—let's call it >50%—of the reported parts so far this year are available, currently available through franchise sources.
But that should force us to ask some questions. Why are people buying counterfeit products that they could buy from their local distributors? Some of it is a question of lead time. Some of it is a lack of knowledge. At a recent event I spoke at, several people in the audience at the Q&A said, “We've got buyers that are not trained. Many of them don't know the difference between a franchise source and an independent source, and what that means.”
And I want to stipulate and point out that there are some excellent independent sources. An independent distributor is not a bad thing. Some of those companies are as good as it gets. But it is typically the lower-quality, lower-standard independents that introduce counterfeits into the supply chain.
Fussner 6:21
I think this just really emphasizes the importance of understanding who you're doing business with. Even if the part is available, you want to make sure that you are still getting a genuine part.
Smith 6:31
Absolutely. Vetting, vetting, vetting. Vendor visits when you can. Vendor qualification. We can't do too much. We can't be too sure about the companies that we're doing business with.
Fussner 6:45
And speaking of vetting and understanding who you are doing business with, I'm curious where these counterfeiters are coming from. Are the numbers so far this year revealing any geographic trends that are supplying more counterfeit parts than others?
Smith 7:00
Similar to last year, for the first six months of this year, 34% of the countries that have been reported for shipping counterfeits come from China. Thirty percent come from the U.S.A., 8.16% come from Germany, 8% from Canada, 6% from Japan. Now, what is interesting about these numbers is last year 32% came from the U.S.A. So far, we're at 30%. China last year was 27%; this year, so far, we're at 34%. That's up a little bit. Some of the smaller numbers, like Germany at 8.16%, last year, they only accounted for 3% of all the reported counterfeit devices. I did not mention South Korea at 2%. Last year, they were 7.4%. So, there's a remarkable decrease in the number of reported parts coming from that country. You still have the big ones: China and the U.S.
I want to point out that U.S.-based companies that are reported for having been the supplier of a counterfeit device, typically they are not counterfeiting the parts here in the U.S. They are more often than not buying the parts from another source, typically outside the U.S. (very likely China or some other Asian country). And what happens is, when a report is made against them, let's call it ABC Electronics in some western state, the report is made against them, it is handled by an ERAI case manager, and when the company is approached by ERAI and presented with the evidence, if they are willing to help our investigation, divulge who their supplier was, work with us, that allows us to dig deeper into the supply chain to find the true culprit, that true company who either resourced the counterfeit or made the counterfeit. If they stop at that point, refuse to divulge their supplier or where they got the parts from, the buck stops with them, and they would go down as the company that was reported for supplying the counterfeit device.
Fussner 9:33
Now, Richard, having gone through these numbers so far for this first half of the year, what stands out to you? Do you notice any trends that are arising? Any specific part types that procurement professionals should take extra precautions with? Or is it similar to what we've been dealing with over the past year or few months?
Smith 9:55
I often say that counterfeiting is a moving target. One example, fairly recently, (maybe I mentioned this before) from the year 2000 to the end of 2018, every single year, the number one most counterfeited device was some integrated circuit or another. In 2019, the number one most counterfeited device was an inexpensive multi-level ceramic chip capacitor. And that threw a wrench into things; the industry had never seen that before.
So, in 2023, for instance, the most reported manufacturer for counterfeit devices was Texas Instruments. And I have to stress this, that is not anything derogatory against TI. That just means of all the parts reported, the counterfeiters have decided for whatever reason to supply Texas Instrument products. This year, so far, the number one most reported manufacturer is a new one that has never been on the list before called 3on Systems. For instance, last year, TI (the number one most reported brand) was 9% of the total. This year, 3on Systems is 35% of the total. And that skews the part types. 3on Systems makes a lot of different parts. They make waveguides, attenuators, fans, and some other devices. But there was a company that was inundated with a lot of 3on Systems counterfeit material and that ended up being reported and published, and it has changed the numbers.
What this means is, just in the case of the capacitors years ago, a company can do all their vetting and tighten down their distributors and have their inspection processes in place for all their integrated circuits and everything is fine, and then—boom—out of nowhere, they are inundated with counterfeit capacitors, which they never inspected before because they're so inexpensive and there have never been any issues; there was no reason to. Now, inspecting capacitors that have not been purchased through the franchise supply chain has become a common practice.
In 2023, you can have all your suppliers nailed down and well vetted to supply you with TI, Xilinx, Analog, STMicro, Altera, and then—boom—out of nowhere, if you're unfortunate, you got hit with a rash of counterfeit parts from 3on Systems. The point of all this is counterfeiting is a moving target. It changes from, certainly, day to day, month to month, year to year, and we must remain vigilant and never let our foot off the gas of our risk mitigation policies and procedures.
Fussner 12:59
That's some fascinating information. Last year you said TI was the leading manufacturer that had counterfeit parts coming in its name. And they were not even in double digits being the top company. And now this year, the leading company is over 30%. That's a fascinating shift in the dynamic for procurement pros to keep an eye out. Like you said, it really emphasizes that moving target; you have got to stay vigilant at all times.
Smith 13:28
Absolutely. For a little more comparison and contrast… So far this year, for the first six months, TI is only 4% of the reported total. Now, if things remain the same, they'll be 8-9% throughout the rest of the year if the run rate stays the same. That's something that is impossible to predict. We can look at it on what's reported on a daily basis, but we can't under any circumstances accurately predict what parts are going to be reported in the future.
Fussner 14:00
Richard, with the numbers of this first half of the year, I'm curious, where is the source coming from for these counterfeit part reports? Is it independent distributors? Manufacturers? Where are these coming from and what are the numbers telling you for this first half of the year?
Smith 14:15
Interesting you should ask that because that is one of the biggest changes that we've seen this year. Last year (and typically this was the case), of all the parts reported, 67.5% came from the independent distributors. Now that makes complete sense when you figure the independent distributors are deep in the belly of the beast. They are the first line in the supply chain that is going to come across the counterfeit parts. They have advanced inspection and testing techniques, so they're very good at finding that material. Last year, 67% from independent distributors and 17.8% came from test labs, and the rest of it filtered down: less than 10% from franchised distributors; OEMs, manufacturing companies, EMS companies or contract manufacturers, they report very little—1.7% and 1.5%.
This year, so far, independent distributors went from 67.5% of all the reported parts as a source and dropped to 45.6%. So, the independent distributors are reporting less. And we say, “Well, we've got more parts than last year reported, where does that come from?” The test labs, last year, accounted for 17.8% of all the reported parts. The first six months of this year, they account for 52.15% of all the reported parts. That's a big difference. And in my unofficial, casual conversations, it appears that many of the independent distributors that are buying product, say from China, rather than bring the product here, they are hiring a test lab in China or Malaysia or Thailand and say, “Look, test these parts and if they pass testing, I will accept them and you can ship them to me. If not, they're going to be returned to my vendor.” Those tests labs are reporting that product to us.
Additionally, in the last year, we've had new test labs open up and come on board in China and Europe. We have more test labs reporting and it appears that more test labs are doing the reporting for their customers as a value-added proposition.
Smith 16:52
That is a significant change in the reporting structure of years past. It's a big deal and I think it's a welcome one. Maybe people understand the importance of testing these parts and understand, “I don't want to deal with counterfeit parts.” And it could be a lot to take on for yourself. So, maybe more people are relying on these test labs now and it's a good thing to see that we're getting some clear, concise data from independent test labs.
Smith 17:18
It is good. I have to believe that more and more people are reporting. And that's just the industry continuing to mature and do a better job. Unfortunately, more companies are being affected by counterfeits and that prompts them to put policies and procedures in place to start inspection.
We've been doing this for a long time. We got our first counterfeit part in 2020, so 24 years now, and it hasn't slowed down. And it changes. It's something that we all have to stay on top of and keep this bad product out of the supply chains.
