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Counterfeits and the U.S. Industrial Base

U.S. Department of Commerce

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Counterfeits and the U.S. Industrial Base

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    1. Counterfeits and the U.S. Industrial Base Christopher Nelson Office of Technology Evaluation

    2. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009)

    3. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Office of Technology Evaluation (OTE) MISSION: OTE is the focal point within BIS for assessing: The effectiveness of export controls The capabilities of the U.S. industrial base to support the national defense Move Mission Statement to previous slide. Then delete this one.Move Mission Statement to previous slide. Then delete this one.

    4. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) OTE Industry Assessments -Background Under the Defense Production Act of 1950, ability to assess: Economic health and competitiveness Defense capabilities and readiness Enable industry and government agencies to: Monitor trends and benchmark industry performance Raise awareness of diminishing manufacturing and technological capabilities More than 50 industry studies & 125+ surveys

    5. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Counterfeit Electronics Study -Goals Assess the impact of counterfeit electronics on U.S. supply chain integrity, critical infrastructure, and industrial capabilities Recommend best practices to mitigate risk to U.S. supply chain Study sponsored by Naval Air Systems Command with support from Semiconductor Industry Association (SIA)

    6. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Counterfeit Electronics -Broad Definition An electronic part that is not genuine because: An unauthorized copy Does not conform to original OCM design, model, and/or performance standards Not produced by the OCM or is produced by unauthorized contractors An off-specification, defective, or used OCM product sold as "new" or working Has incorrect or false markings and/or documentation

    7. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Counterfeit Electronics Study -OTE surveys distributed 5 separate but related surveys targeting: Microchip & discrete electronic manufacturers – 106 Electronic board producers/assemblers – 37 Distributors and brokers of electronic parts – 144 Prime contractors and subcontractors – 147 DOD arsenals, depots, and DLA – 64 498 total survey participants

    8. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Counterfeit Electronics Study -Survey Objectives Each survey contained approx. 80 questions Scale and scope Past problems and impact Internal procurement policies and protocols Testing, inspection, and inventory management Post-identification procedures Industry and government best practices Questions were made uniform across surveys.

    9. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Counterfeit Electronics Study -Themes Lack of dialogue between all parties Insufficient chain of accountability Assumption that others in the supply chain are testing the product Record keeping is non-existent No one knows who to contact in the Federal government There needs to be stricter testing protocols and monitoring Most DOD organizations do not have policies in place to prevent counterfeit parts from infiltrating their supply chain No type of company or organization has been untouched by counterfeit electronic parts Everyone must work together to solve the problem.

    10. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009)

    11. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Total Counterfeit Incidents: OCMs, Distributors, Board Assemblers, Prime/Sub Contractors 2005 - 2008

    12. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Counterfeit Incidents by Product Resale Value: Overall (2008 est.)

    13. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Counterfeit Incidents by Product Resale Value: (2005 - 2008)

    14. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009)

    15. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Percent of Counterfeit Incidents Involving In/Out of Production Products 2005 - 2008

    16. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009)

    17. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) U.S. Customs Notifications (2005 – 2008) Companies have increasingly uncovered counterfeits through U.S. Customs notifications.

    18. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009)

    19. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Counterfeits Damaging a Company’s Reputation Prime/Sub Contractor Comment: When some businesses report counterfeit parts findings via GIDEP alerts and other companies do not, authorities may think that the reporting companies have more counterfeit issues than non-reporting companies. Distributor Comment: “The entire brokerage industry has experienced a black eye due to some unethical and/or unknowledgeable brokers. We have lost many contracts from large contract manufactures simply due to us being a ‘broker.’”

    20. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Top 10 Reasons Identified by All Companies/Organizations for Counterfeits Entering the U.S. Supply Chain

    21. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Percent of Companies/Organizations Conducting Any Type of Pre-Stock Testing on Parts

    22. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Percent of Companies Performing Inventory Audits for Counterfeits

    23. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Percent of Companies Co-Mingling Parts From Different Companies in Same Bin

    24. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Contractor Testing Problems 22 companies, 30% of those employing U.S.-based testing contractors, had problems concerning faulty or forged testing. Eighteen of the 22 were distributors. The parts were cleared by the testing house, but were later found to be counterfeit by the customer. 5 OCMs and one Prime/Sub Contractor had problems with Non-U.S. contractors concerning improper management or theft of electronic scrap after testing. Testing is an area that deserves further analysis.

    25. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Steps Taken After Notification of a Counterfeit Part

    26. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Steps Taken After Possession of a Counterfeit Part

    27. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Who Ya Gonna Call? 59% of OCMs, 57% of Distributors 75% of Board Assemblers, and 47% of Prime/Sub Contractors DO NOT KNOW what authorities to contact when they encounter counterfeits. 63% of companies tell customers to contact their firm if they encounter a counterfeit product.

    28. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Percent of Companies Maintaining an Internal Database to Track Counterfeits

    29. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) GIDEP Reporting Reasons for Not Reporting to GIDEP: “We are unaware of reporting agencies. We would be happy to participate if we were aware of these programs.” – Independent Distributor Reporting to GIDEP will inaccurately “show that our company has no control over purchasing operations by buying counterfeit products.” – Independent Distributor

    30. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Full-Time Employees (FTEs) Dedicated to Counterfeit Issues

    31. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) “Fun” Facts 91% of companies accept returns from their customers. 40% of these companies re-stock product returned by customers. 14% of companies accepting returns have had cases of individual customers returning counterfeit products. 46% of companies/organizations find it difficult to identify counterfeit products. However, 57% find it easier to identify counterfeits today than they did five years ago.

    32. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) DOD Identification of Counterfeits Comments: “Once [parts] reach the shop floor they are assumed to be legitimate and are only discovered if they fail.” – Non-DLA Organization “The process for identification of counterfeit parts is undefined.” – Non-DLA Organization “Our inspectors do not inspect to the degree that would normally identify counterfeit electronics.” – DLA Organization

    33. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Tracking of Counterfeits – Department of Defense

    34. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) DOD Testing of Parts Comments: “Visual inspection is the only method practical for the depot…it is not practical to believe the part would or could be determined to be counterfeit.” - Non-DLA Organization “We do not have any personnel or facilities available for testing” - DLA Organization “Parts and components look too much alike to distinguish the difference between what is real or counterfeit.” - Non-DLA Organization

    35. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Internal Actions Taken to Prevent Infiltration of Counterfeits - DOD

    36. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) DOD Comments on Counterfeits “There were no known suspected/confirmed counterfeit parts acquired by [DLA organization] during the indicated time period. There are no procedures in place at [DLA organization] to screen/track counterfeit parts.” “As [DLA organization] has no procedure to determine whether a product is suspected or confirmed to be counterfeit, we cannot suspect or confirm any of our parts are counterfeit. We would only be aware of a counterfeit issue if it failed.” “There is no doubt that counterfeit components are in our supply system, yet we still have no method of identifying it or controlling those suppliers that sell counterfeit components. [This] indicates that we have inadequate procuring procedures to address this issue.”

    37. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Industry Best Practices – 1,100+ From OCMs: Ensure proper disposal of all scrap – crush all defective/unused products to prevent re-circulation. Train all employees on how to identify and handle counterfeit parts. Tighten contractual obligations with contract manufacturers regarding disposal of unused product. From Circuit Board Assemblers: Audit OCMs/OEMs to ensure that the purchased part is made within their facility and not contracted out. Perform destructive testing if a part cannot be verified by other means. Establish qualifications for supplier purchases.

    38. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Industry Best Practices (cont.) From Authorized Distributors: Ask for Certificates of Compliance for all products purchased. Educate your sales team regarding the risk of parts brokers. Create a central database for identifying counterfeit suppliers. Do not approve returns in greater quantities than the original purchase. From Independent Distributors/Brokers: Always purchase parts via escrow payments – Suppliers that believe in their product will not mind waiting for their money. Audit all inventory purchased before anti-counterfeiting measures were put in place. Follow IDEA 1010 for incoming inspections. Use authentic pictures to visually verify parts.

    39. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Industry Best Practices (cont.) From Prime/Sub Contractors: Share all information on discovered counterfeit parts with industry and authorities. Incorporate language into supplier contracts to minimize liabilities and impose penalties for counterfeits. Plan for and attempt to design out obsolescence from systems. Create annual training sessions for staff to keep counterfeit detection up-to-date. From DOD Organizations: Train personnel on how to identify and intercept counterfeit parts. Eliminate the requirement to purchase from the “lowest bidder” and encourage purchasing based on best value. Implement internal testing/screening procedures for counterfeits.

    40. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) What Should the Federal Government Do? - Industry Suggestions Create education and training opportunities for companies. Many companies do not know what the Federal government is doing to combat counterfeits. Create a government-sponsored counterfeits manual. More prosecutions for counterfeiting, including harsher penalties. Centralize counterfeit databases and encourage higher levels of reporting.

    41. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Press other countries, particularly China, to regulate their domestic industry and enforce intellectual property laws. Facilitate communication and cooperation within U.S. industry, particularly between OCMs and independent distributors/brokers. Establish programs to recycle/destroy electronic waste, the supply source for counterfeiters. What Should the Federal Government Do? - Industry Suggestions (cont.)

    42. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Company Comments “It is encouraging that the U.S. government has finally recognized the scope of the problem and seems to be taking meaningful steps to counteract the counterfeiting plague.” - Independent distributor “Our participation in this Assessment has heightened our level of attention and understanding concerning the importance of being proactive in combating counterfeit products … We appreciate the information that was presented within this Assessment and plan to implement appropriate internal/external actions necessary to mitigate the potential for a counterfeit incident to occur within our operation.” - Authorized distributor

    43. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) Next Steps Complete final analysis and vetting of data Continue drafting report Finalize report and release public document in mid 2009 Work with industry and government to develop and implement best practices

    44. U.S. Department of Commerce – Preliminary Data (as of March 4, 2009) BIS/OTE Contacts Christopher Nelson Trade and Industry Analyst Office of Technology Evaluation 202-482-4727 cnelson@bis.doc.gov www.bis.doc.gov

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