Mike Judd, European Editor, Circuitnet

One of the hottest topics in the electronics industry is the concern about the increasing supply onto the market of counterfeit components.

UKEA, The UK Electronics Alliance, has presented their position regarding counterfeit electronics components to UK government agencies, industry and press, in order to inform and secure more action and cooperation.

The UK Electronics Industry, represented by the UK Electronics Alliance (UKEA) was formed in 2005 as an alliance of the UK’s leading electronics industry trade associations with a combined membership of over 1,200 companies.

This shortened overview below defines the problem and consequences, suggests how the government can help and the role industry can take.

COUNTERFEIT ELECTRONCIS COMPONENTS: THE UKEA POSITION

The UK Electronics industry is worth £23 billion pounds a year and is the fifth largest in the world. It employs over 250,000 people in 11,000 workplaces[1]. The equipment it produces is pervasive, and underpins virtually every other sector of economic activity. Recent years have seen a significant increase in the amount of counterfeit electronic components coming into the UK. These components are the basic building blocks of all electronic equipment. All told, this phenomenon could be costing the UK economy up to £1bn a year[2]. In an ever more competitive global marketplace, counterfeiting creates additional costs that impede the competitiveness of UK manufacturing as a whole. The potential damage to business relationships is also significant, as is the unknowing damage to the environment that manufacturers use of counterfeits causes.

More importantly, counterfeit electronic components pose a grave risk to public safety. The consequences of a counterfeit electronic component being integrated into a safety critical application, such as a public transport network, are potentially catastrophic. The greater the volume of components entering the U.K., the more likely that such a situation could occur.

The UK Electronics Industry, represented by the UK Electronics Alliance (UKEA), accepts that we have a key role to play in mitigating the impact of this problem. However, given the risks posed by the undetected used of such components, as well as their international nature, we feel that the Government also has a key role to play and should take appropriate action to support the industry in addressing this threat.

The UK Electronics Alliance

The UKEA was formed in 2005 as an alliance of the UK’s 12 leading electronics industry trade associations. It has a combined membership of over 1,200 companies and an overall ‘reach’ of over 13,000. Its primary function is to clearly articulate the views of the electronics industry, and act as a communications channel to the Dept. for Business, Enterprise & Regulatory Reform (BERR) and other Government departments.

Defining the Counterfeiting Problem

The volume of counterfeit electronic goods is increasing rapidly on a global scale. In the U.S, 9% of total value of all seized counterfeit goods is electronic. This places electronics fourth in terms of total seizures by category, after footwear, apparel and pharmaceuticals[3]. Such growth can be attributed to a number of factors:

• As Globalisation takes hold, and electronics manufacturing increasingly moves to low cost regions, the supply network for major producers of actual electronic products[4] (as opposed to the components that make them up) has expanded exponentially. This ever-lengthening supply chain provides more and more opportunities for counterfeits to appear. Some western component manufacturers who have located facilities in China have witnessed their erstwhile business partners surreptitiously producing components at night, to lower standards, and selling them on independently as genuine goods.
• New environmental regulation[5] has unfortunately added to the number of counterfeits in existence. Some component manufacturers no longer produce components that do not comply with new regulations. However, OEM’s often serve markets (for example, the defence sector) that are exempt from this regulation for technical reasons. Counterfeiters take advantage of this situation, producing fake goods to fill a gap in the market. Conversely, there are also shortages of compliant components, because of the artificial demand created by the implementation of new legislation
• Low cost economies, especially China, are the major source of electronic components. In some parts of the developing world, it is possible to see people sitting in the street with a camping stove, removing components from cast off electronic equipment and dislodging them by hitting the board on the ground. Following superficial repair, they will be re-branded and sold. As export regulation eases, so the reach of such practices has become greater. Enforcement of anti-counterfeiting legislation in these areas is very lax. China has a conviction rate of approximately 5%[6].
• Regulation of exports in China has been relaxed significantly in recent years, resulting in a large increase in counterfeiting. The technology sector has responded to this through the formation of the Quality Brands Protection Committee (QBPC), which works with the Chinese Government to combat counterfeiting. Unfortunately, this initiative has made little progress.
• Improved technology allows counterfeits to be produced at far lower cost than previously was the case, making counterfeiting increasingly profitable. The range and volume of counterfeits is likely to increase in the future as a result.

Direct Consequences

• Electronics manufacturers employ sophisticated techniques to detect counterfeit components and expertise in identifying them is growing. However, it must be accepted that any system cannot ever be fool proof. The possibility of a critical system failure in an important sector, such as public transport, which is directly attributable to a counterfeit component not being detected is very real. This would have catastrophic consequences. As the volume of counterfeits grow, so does the risk of this occurring.
• The costs for manufacturers in terms of replacing and rectifying problems caused by counterfeits can be extensive. UK electronics manufacturers often operate on very thin profit margins as it is, due to competition from low cost economies.
• Business relationships within the electronics sector can be severely damaged, and may result in legal action to recover loss of revenue, profit, jobs and damage to reputation.
• To a large extent, the UK electronics industry depends on creation of intellectual property and the profits to be made from exploiting it. Major players in the market depend almost solely on this business model. Counterfeiting therefore threatens a major revenue stream, and the overall health of the UK sector.
• Counterfeiting can result in manufacturers unwittingly using components that contravene environmental regulation. Counterfeiters have been known to pass non-compliant components off as compliant with such regulation. This exposes manufacturers to potential legal proceedings and also, in terms of disposal of such devices, adds to the presence of hazardous materials in the environment.

How Government Can Help

The UKEA recognises that any approach to mitigating the impact of counterfeit components involves, in part, users of components sourcing them in a way that is likely to reduce the risk, as well as producers of components improving internal processes to assist manufacturers in this goal. To this end, the UKEA has formulated a series of detailed measures for companies, through UKEA trade associations, to enact.

We also acknowledge that in many cases, the root source of such counterfeits is found outside the jurisdiction of the U.K. However, we do feel that there is a specific role for the UK Government in helping to support the ongoing measures that the electronics industry is itself taking to address this problem. Specifically, we believe that Government, through the responsible departments and non-departmental bodies, should seek to:

• Devote additional resources, both in terms of staff and budget, to ensuring that existing legislation protecting Intellectual Property rights is rigorously enforced. We estimate that there are currently two staff[7] employed by HM Revenue & Customs whose responsibility lies directly with enforcing such legislation as applicable to all counterfeit goods. We believe that additional resources would help to slow the influx of counterfeit components.
• Fund a detailed review of legislative measures and initiatives already enacted to combat counterfeiting. Urgent consideration of measures enacted in the U.S. and a judgment on their applicability in the U.K should be made. These include, for example, the US Patent & Trademark Office ‘Strategy Targeting Organized Piracy’ (STOP) initiative and the recently passed ‘Stop Counterfeit Goods in Manufacturing Act’.
• Establish greater co-operation and a common approach between the UK’s main trading partners and their customs services in countering the impact of counterfeit goods. This effort should focus on playing a key leadership role in formulating the proposed international Anti-Counterfeiting Trade Agreement, and the work being undertaken by the European Commission to establishing greater protection for UK Intellectual Property.
• Work with industry to increase public awareness of the threat posed by counterfeit products. One such measure could be a reporting database, administered by HM Revenue & Customs, which might enable an accurate measurement to be made of the volume of counterfeit components entering the U.K.

The Role of Industry

The UKEA recognises that, in combination with Government action, there are a number of steps that industry can take to address the growing problem of counterfeit components. These are:

• Working together with UKEA trade associations to build better relationships between European and International organisations including Orgalime, The International Distribution of Electronics Association (IDEA), the Quality Brands Committee and the World Semiconductor Council.
• Develop, and promote the implementation of a code of best practice to include: Strong encouragement for manufacturers to source directly from the electronic components manufacturer or authorised distributor or, where this is not possible, the use of grey market operatives (brokers) with a physical operation in the UK, insistence on documentary evidence of component authenticity and/or an agreement that payment only becomes due after satisfactory verification of the origin of the goods.
• Further encouragement to minimise sourcing from the grey market by promoting awareness of the threat posed by counterfeit components and the correlation between the supply of counterfeit components and the grey market.
• Sharing best practice to ensure greater co-ordination between product and component lifecycles and encouraging the wider adoption of pro-active lifecycle management.
• Ensuring that component manufacturers exercise greater control over their sub-contractors, with particular emphasis on components not intended for use being effectively disposed of as early as possible. Component manufacturers should also improve the traceability of their products and be more diligent in ensuring that their authorised distributors end the common practise of purchasing via the grey market when their major customers make unrealistic delivery demands.
• Ensuring that authorised distributors continue to maintain and enhance manufacturers’ traceability documentation, assist in the dissemination of counterfeit product information and destroy scrap components. Distributors should also be more flexible in their willingness to supply smaller quantities, especially where the manufacturer’s minimum shipment multiple is high.