Counterfeiting: Beyond the Rolex

By Bob Willis
President, ECA

When I was traveling on business in the early 1980s, I assumed the airlines and their employees were doing well. At least it appeared that way, as every flight attendant I met had a Rolex. In fact, I asked an acquaintance if she could get me one. No problem. That was until the crown dislodged and covered up the ‘6’ on the watch’s dial. That watch was worth what I paid for it, because it was obviously counterfeit. At that time, I figured no harm, no foul. I was out 40 bucks but it was my own fault. I didn’t realize the market impact of my $40 multiplied by a few million. Also, there was no consequential impact due to safety or performance problems. Jump ahead 20 years or so and it’s a whole new ball of wax.

From Local to Global:

Counterfeiting used to be primarily a local problem. It was harder to get away with when the customer was in close geographical proximity. Today’s global marketplace and digital technologies make counterfeiting easier, as the counterfeiter is anonymous to the eventual buyer. As the New Yorker cartoon goes, “On the Internet, nobody knows you’re a dog.” Or, they don’t know you’re not a legitimate business person. Counterfeiting today is a multi-billion dollar enterprise, mostly affecting brand names and consumer goods. The cases that get the most attention are fashion accessories, like the fake Rolex or the Gucci handbag that goes for $100 on a street corner in New York City. When you buy one of these, it might seem like a victimless exchange—both buyer and seller are complicit in the fact the item is a fake. But, like insider trading, there is a victim—the American economy, which loses approximately $200 billion a year from these illegal transactions.

In the electronics industry, the cases that get the most attention are identical copies of name-brand consumer
products that offer sub-par performance at a reduced cost. This is an institution within itself, and for the most part, buyers know what they are getting.

A National Security Problem:

The counterfeiting that concerns the electronic components industry is substituting counterfeit parts into name-brand products that are marketed as the real thing. This problem has impact for all parties in the
manufacturing process and can result in performance and safety problems. After all, these products could be
found in cars, airplanes, and defense and security systems. That represents a major security issue for the federal
government.

The Department of Commerce (DoC) and the Naval Air Systems Command (NAVAIR) have teamed up to address
the problem. The first major step is a study titled, “Counterfeits and the U.S. Industrial Base.” For NAVAIR,
counterfeit parts in the electronic supply chain have compromised the capabilities and readiness of DoD systems. This is viewed in parallel with the diminishing manufacturing and technological capabilities of the U.S. industrial base. DoC’s Office of Technology Evaluations (OTE) has conducted more than 50 industry studies and 125 surveys
to monitor trends and benchmark industry performance. The OTE asked the ECA engineering program to assist
with the industry survey to address counterfeits in the electronic components supply chain. Five separate, but related, surveys were sent to approximately 500 participants, including microchip and discrete electronic manufacturers, electronic board producers/assemblers, distributors, brokers, prime contractors, and DoD arsenals.

First Results at CARTS USA 2009:

A complete review of these surveys will be presented at ECA’s CARTS USA on March 30, 2009 in Jacksonville, Florida. A draft report is expected to be released in mid-2009 with the goal for industry and DoD to develop and implement best practices to ensure the integrity of the electronics supply chain. CARTS attendees will get an advance look at the results and receive information on best practices to mitigate supply chain risk.

While there are legal responsibilities for all parties to comply with federal regulations, more than 60% of survey
respondents did not know which authorities to contact when they encounter counterfeits. For the most part, companies responded with two common approaches: Don’t buy from China and be wary of brokers. In all cases, it takes two parties for counterfeiting to succeed—a seller and a willing customer. So now maybe more than ever, the bywords are “Buyer Beware.”