A police raid on a suspected counterfeiter in China's Guangdong province turns up US $1.2 million in fake computer parts and documents--enough to produce not only complete servers and personal computers but also the packaging material, labels, and even the warranty cards to go with them. All the parts are neatly labeled with the logo of Compaq Computer Corp.
A capacitor electrolyte made from a stolen and defective formula finds its way into thousands of PC motherboards, causing the components to burst and leak and the computers to fail and eventually costing more than $100 million to rectify.
8 Local authorities in Suffolk County, N.Y., seize counterfeit electrical safety outlets--used in bathrooms, kitchens, and garages to guard against electrical shock--bearing phony Underwriters Laboratories logos. The bogus parts had no ground-fault-interrupt circuitry, and had they been installed anywhere near water, the results could have been fatal.
Dozens of consumers worldwide are injured, or merely surprised, when their cellphones explode, the result of counterfeit batteries that short-circuit and suddenly overheat.
That the world is awash in fake goods comes as no surprise to anyone who's ever strolled the streets of a major city and seen a gauntlet of sidewalk hawkers selling knockoff clothes and pirated motion pictures. But in recent years a less visible but no less insidious component of the illicit global trade has taken off: the counterfeiting of electronics components and systems, from tiny resistors to entire routers.
High-tech products--including consumer electronics, batteries, computer hardware, and electronic games--accounted for four of the top 10 products seized by U.S. Customs and Border Protection in 2004, the most recent year for which figures are available. And according to the Alliance for Gray Market and Counterfeit Abatement, a trade group founded by Cisco, HP, Nortel, and 3Com to combat illicit trafficking in their products, perhaps 10 percent of the technology products sold worldwide are counterfeit. The group estimates that legitimate electronics companies miss out on about $100 billion of global revenue every year because of counterfeiting. That figure takes into account only the profits that counterfeiters siphon off from manufacturers; it ignores the added repair and maintenance costs necessitated by defective bogus parts and the expenses of trying to identify and intercept suspected counterfeiters.
No company is immune. Counterfeit electronics have turned up in every industrial sector, including computers, telecommunications, automotive electronics, avionics, and even military systems. What's more, nearly every kind of component has been pirated, from low-level capacitors and resistors to pricey DRAMs and microprocessors. Whole servers, switches, and PCs have been faked, but more commonly, only one part in hundreds or perhaps thousands in an end product is bogus.
And that one bad component can cause lots of headaches. For example, a component that may be worth only $2 can cost $20 to replace if it is found to be counterfeit after it is mounted onto a circuit board. Even if a manufacturer catches a counterfeit item on the production line, it will still lose money from having to halt production and swap out the bogus part. And if the product finds its way onto the market and out to customers, there likely will be even bigger problems with field service calls, warranty issues, product recalls, and the like.
For the consumer, the failures of systems that use counterfeits can lead to safety and security problems. Even if the fake part works, at least initially, it still poses reliability risks, because it hasn't undergone the legitimate manufacturer's rigorous quality assurance processes.
For the manufacturer whose product line has been compromised, a less tangible but still significant problem is the tarnishing of the company's image and brand. Counterfeiters also cheat legitimate manufacturers by bypassing the research, development, and marketing that went into the original product.
Unfortunately, most companies are doing little to keep counterfeit parts out of their supply chains. Companies big and small say they can't afford to track the history of every part that goes into every board in every product they make. Indeed, many of the world's biggest manufacturers have been duped, in some cases putting fake or marginal parts into circuit boards that later failed and caused public relations nightmares. As the electronics supply chain grows more complex, with parts coming from many different suppliers all over the globe, it becomes even more difficult to police the problem. Meanwhile, the competitive pressure to slash manufacturing costs makes the trade in cheaper, less-than-legit parts ever more attractive.
Three key factors are feeding the rise in bogus electronics: the shift of manufacturing to China, with its looser enforcement of intellectual property laws and convoluted supply chains; the growing sophistication of technology that enables cheaper and more convincing fakes; and the rise of the Internet as a marketplace, allowing buyers and sellers to make fast trades without ever meeting face to face.
As many companies are learning the hard way, preventing counterfeiting requires a constant, deliberate, and multifaceted effort, vigorous monitoring of potential trouble spots, and judicious use of anticounterfeiting technologies.