New electronics anti-counterfeiting provisions included inthe 2012 National Defense Authorization Act (NDAA), signed into law at the endof last year by President Obama, could reverberate across the electronics supplychain, from defense contractors all the way to commercial OEMs and component suppliers.
"Companies are still assessing what this means, but thescope and scale of application is extremely broad," says Trey Hodgkins, seniorvice president for national security and procurement policy at TechAmerica.
Counterfeit parts are a growing problem in the supply chain.Reports of counterfeits have quadrupled since 2009, rising from 324 to 1,363 in2011, according to consulting firm IHS. IHS drew the data from ERAI Inc, aninformation services firm that reports on the global electronics supply chain, andthe Government-Industry Data Exchange Program (GIDEP), a joint effort ofgovernment and industry that shares information on the life cycles of systemsand equipment. The bulk of the incidents were reported by US-based military andaerospace electronics firms.? However,the parts themselves could impact electronics products worldwide. "Mostcompanies lack the awareness and the capability to effectively detect andmitigate the growing problem," says Rory King, director of supply chain productmarketing at IHS.
The anti-counterfeiting measure, included in Section 818 ofthe NDAA, directs the Secretary of Defense to "implement a program to enhancecontractor detection and avoidance of counterfeit electronic parts." The law specificallymakes defense contractors responsible not only for detecting and avoiding theuse of counterfeit parts but also for the cost of any rework required ifcounterfeit parts are discovered to have been used in their products. Previously,such mitigation costs were negotiated on a case-by-case basis, says Hodgkins.
Elements of the DOD program, details of which are due laterthis year, are to include inspection and testing of electronic parts, processesto abolish counterfeit parts proliferation, mechanisms to enable traceabilityof parts, methodologies to identify counterfeit parts, and "the flow down ofcounterfeit avoidance and detection requirements to subcontractors,"according to the law.
That last provision, in which liability will be passed backthrough the electronics supply chain, is one of TechAmerica's main concerns.The growing problem of counterfeit parts in the military and aerospace industrywas highlighted in November, when the Senate Armed Services Committee heldhearings on the topic. But the hearings focused on defense contractors andspecialty distributors rather than commercial component makers, resellers or OEMs,says Hodgkins. The latter are only now "awakening to the fact that if they aregoing to sell their product to someone who might use it in a DOD end item,? . . . even if it's a commodity buy, then theyhave to adopt processes and assume liability."
When a part fails in a commercial system, manufacturers relyon the warranty model. They simply replace the defective part. "I suspect thecounterfeit issue is just as prevalent in the consumer electronics world, it'sjust that nobody reports" those parts failures, says King. The worry is that thenew law opens the possibility that such parts failures would require a major investigationby the manufacturer, says Hodgkins. For example, if a failure in a DOD-owned Delllaptop was due to a faulty, possibly counterfeit part, Dell might have todetermine whether the component was indeed counterfeit and also determine whatother products the component was used in.
The law will have a big impact on the gray market, as well.The military relies on the open market to source replacements for obsoleteparts -- parts that are no longer made by the original manufacturer. But aninvestigation by the Senate Armed Services Committee documents how counterfeitscan make their way through the open market and into military systems. In China,for example, commercial electronic components are harvested from circuit boardsin e-waste, their markings are removed and replaced with fake markings, andthey are then resold into the open market, sometimes as military-grade parts.
In January, the US Air Force suspended Hong Dark ElectronicTrade Company and its subsidiaries from government programs for allegedly sellingtens of thousands of counterfeits to key defense contractors. In its suspensionmemo, the Air Force said it suspected Hong Dark, an electronics recycling companyin Shenzhen, China, of supplying counterfeit electronic parts to Global IC, aUS distributor, which then supplied them to government contractors and subcontractors,including L-3 Communications, Boeing, Lockheed Martin, and Raytheon. The caseillustrates the difficulties of tracing components in the gray market. HongDark has a catalog of 84,000 components. "Companies are now scrambling to findout whether they bought any of these things and if so where they put them,"says Hodgkins.
Consequently, the new law requires the government to buyparts either directly from the manufacturer, their authorized distributors, orfrom "trusted suppliers," which includes independent distributors and brokers.Details are still being worked out, but to be categorized as trusted suppliers independentsources would likely be required to meet certain standards and be held liablein the event that they sell a counterfeit part to the government.
SMT Corporation is an independent distributor thatspecializes in sourcing and authenticating obsolete components for use bymilitary and aerospace customers. The company uses sophisticated instruments,such as scanning electronic microscopes costing $250,000, to inspect parts anddetect the latest counterfeits, says Tom Sharpe, vice president at the company.It's a constant race to keep up with new techniques developed bycounterfeiters, he says. "The old days of just being able to swab a chip withsome acetone and a Q-tip to determine whether it's been blacktopped -- thosedays are long gone," he says. "Just in past 18 months, SMT has identified fournew counterfeit processes."
Meanwhile, the Defense Department is investigating new waysof detecting counterfeits, including a technology from Applied DNA Sciences, a companythat uses plant DNA to authenticate goods in a range of industries includingbanking and textiles. The company is involved in a pilot program, run by theDefense Logistics Agency, that includes SMT Corporation and chip-maker Altera.According to a recent article on the DLA website, chips have been manufacturedand marked with botanical DNA at an Altera production plant, then moved to anindependent distributor without interrupting standard supply-chain processes.The pilot program has moved into a second phase to "determine the functional,technical, and business viability of botanical DNA throughout DLA'smicrocircuit supply chain," according to Chris Metz, director of the technicaland quality policy division for DLA Logistics Operations.
"Our model is based on going as far upstream as possible, tothe chip manufacturers," says Janice Meraglia, vice president of military andgovernment programs at Applied DNA Sciences. Once the chips are marked withDNA, then they could be checked at every stage along the supply chain forauthenticity. The fact that the military uses a "commercial off-the-shelf"sourcing model would require that all chip vendors mark all their chips, notjust those intended for specific aerospace or military applications. "It's notup to us to decide what's critical and what's not," says Meraglia. "Anon-critical item in the hands of the consumer becomes a critical item in thehands of a warfighter."
And that's just what concerns Tech America, says Hodgkins.Although Applied DNA Sciences maintains that the cost would be low -- a penny apart -- component manufacturers and OEMs are worried about the added expenseand complexity. For many commercial suppliers, the federal governmentrepresents a small fraction of sales. "Companies are looking at whether itmakes sense to do this DNA marking for all products, when this one customerrepresents only 1 to 5% of their global footprint," says Hodgkins.
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Resources:IHS data
GIDEP
ERAI
Section818 of NDAA
USAFsuspension memo
SenateArmed Services hearing testimony of Tom Sharpe of SMT Corp
DefenseLogistics Agency article
