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Counterfeits and the U.S. Industrial Base

Counterfeits and the U.S. Industrial Base. Office of Technology Evaluation. Bureau of Industry & Security (BIS). MISSION: Advance U.S. national security, foreign policy and economic interests.

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Counterfeits and the U.S. Industrial Base

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

  2. Bureau of Industry & Security (BIS) MISSION: Advance U.S. national security, foreign policy and economic interests. BIS develops export control policies, issues export licenses, prosecutes violators, as well as monitors the capabilities of the defense industrial base. U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  3. 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 U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  4. 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) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  5. 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 U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  6. 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 U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  7. 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 Tried to keep questions uniform across surveys. U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  8. BIS Counterfeit Electronics Survey – Preliminary Data U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  9. Total Counterfeit Incidents:OCMs, Distributors, Board Assemblers, Prime/Sub Contractors 2005 - 2008 U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  10. Counterfeit Incidents by Product Resale Value:Overall (2007) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  11. Counterfeit Incidents by Product Resale Value:(2005 - 2008) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  12. Counterfeit Incidents by Product Resale Value: Distributors (2007) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  13. Counterfeit Incidents by Type (2007) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  14. Percent of Counterfeit Incidents Involving In/Out of Production Products 2005 - 2008 U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  15. How Companies Are Uncovering Counterfeits (2007) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  16. How Companies Are Uncovering Counterfeits: OCMs (2007) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  17. How Companies Are Uncovering Counterfeits: Distributors (2007) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  18. How Companies Are Uncovering Counterfeits: Prime/Sub Contractors (2007) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  19. U.S. Customs Notifications(2005 – 2008) Companies have increasingly uncovered counterfeits through U.S. Customs notifications. U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  20. Percent of Companies With Documented Cases of Counterfeits Sold by Specific Entities U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  21. Top Countries Suspected/Confirmed to be Sources of Counterfeits* * Each company was asked to provide their top five suspected countries U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  22. 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.’” U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  23. Top 10 Reasons Identified by All Companies for Counterfeits Entering the U.S. Supply Chain U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  24. Pre-Stock Testing By Type of Supplier(Distributors, Board Assemblers, Prime/Sub Contractors Only) Only 66% of Distributors, Board Assemblers, and Prime/Sub Contractors test products they purchase before placing them in inventory. U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  25. Percent of Distributors Conducting Pre-Stock Testing U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  26. Percent of Board Assemblers Conducting Pre-Stock Testing U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  27. Percent of Prime/Sub Contractors Conducting Pre-Stock Testing U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  28. Percent of Companies Performing Inventory Audits for Counterfeits U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  29. Percent of Companies Co-Mingling Identical Parts in the Same Bin U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  30. Contractor Testing Problems • Five companies had problems with Non-U.S. contractors concerning improper management or theft of electronic scrap after testing. • 25 companies, 19% of those employing testing contractors, had problems with U.S.-based firms concerning faulty or forged testing. Twenty of the 25 were distributors. • The parts were cleared by the testing house, but were later found to be counterfeit by the customer. This is an area that deserves further analysis. U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  31. Steps Taken After Notification of a Counterfeit Incident: OCMs U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  32. Steps Taken After Notification of a Counterfeit Incident: Distributors U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  33. Steps Taken After Notification of a Counterfeit Incident: Circuit Board Assemblers U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  34. Steps Taken After Notification of a Counterfeit Incident: Prime/Sub Contractors U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  35. Steps Taken After Possession of a Counterfeit Part U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  36. Who Ya Gonna Call? 61% of OCMs, 54% of Distributors 75% of Board Assemblers, and 52% of Prime/Sub Contractors DO NOT KNOW what authorities to contact when they encounter counterfeits. 74% of distributors tell customers to contact their firm if they encounter a counterfeit product. U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  37. Percent of Companies Maintaining an Internal Database to Track Counterfeits U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  38. Legal Requirements/Liabilities Related to Counterfeits • 31% of companies are aware of legal requirements for the management and/or disposal of counterfeit products. • 27% of companies are aware of written instructions or guidance from federal authorities on reporting counterfeit products. • 41% of companies are aware of their liabilities related to the distribution, storage, and disposal of counterfeit products. • 46% of companies need guidance from federal authorities with regards to civil and criminal liability, and penalties pertaining to the distribution, storage, and disposal counterfeit products. U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  39. Full-Time Employees (FTEs) Dedicated to Counterfeit Issues U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  40. “Fun” Facts • 91% of companies accept returns from their customers. • 45 of these companies have cases of individual customers returning counterfeit products. • 42% of companies find it difficult to identify counterfeit products. • However, 63% of companies find it easier to identify counterfeits today than they did five years ago. U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  41. 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. Industry Best Practices – 1,000+ Most common responses – Don’t buy from China – Be wary of Brokers U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  42. 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. Industry Best Practices (cont.) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  43. 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. Industry Best Practices (cont.) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  44. 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. What Should the Federal Government Do?- Industry Suggestions U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  45. 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.) U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  46. 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 U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  47. Next Steps • Continue compliance on the DOD survey • Begin final analysis of data • Draft report and release public document in mid 2009 • Work with industry and government to develop and implement best practices U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

  48. BIS/OTE Contacts • Brad Botwin • Director, Industrial Studies • Office of Technology Evaluation • 202-482-4060 • bbotwin@bis.doc.gov • Teresa Telesco • Industry Analyst • 202-482-4959 • ttelesco@bis.doc.gov • www.bis.doc.gov U.S. Department of Commerce – Preliminary Data (as of November 21, 2008)

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