An issue of counterfeit components has rapidly become a major concern for manufacturers of components and one of the hottest topics in the electronics industry. Counterfeit electronic devices and components are increasingly being distributed throughout the market. An exponential rise in the supply of counterfeit electronic components is a major industry headache. Statistics places electronics fourth in terms of total seizures by category, after footwear, clothing and pharmaceuticals.

Statistics and Magnitude of Counterfeit Products

Product counterfeiting accounts for more than 8% of global merchandise trade and is equivalent to lost sales of as much as $600 billion and may grow to $1.2 trillion by 2009 (U.S. Department of Commerce). In 2006, the U.S.-based Alliance for Grey Market and Counterfeit Abatement (AGMA) estimated that 8% to 10% of all technology goods (IT industry) sold worldwide was counterfeit, representing revenues of around US $100 billion. The U.S. Patent and Trademark Office estimates that counterfeiting and piracy causes damage about $250 billion (750,000 jobs) to the U.S. economy and it is higher than the GDP of more than 150 countries. The cost to industry in terms of product failures, tremendous negative impact on returns and/or brand reputation with possible litigation is potentially much more.

There is no immunity to counterfeiting that causes serious damages to many sectors of electronic market:

• Computers;
• Consumer products;
• Telecommunication;
• Automotive electronics;
• Medical devices;
• Avionics and space electronics; and
• Military systems.

The rapid emergence of many clones of the Apple i-Phone in Asia is a classic case of counterfeiting at the system level. MP3 players with NEC's logo have been sold in the grey market, but company NEC doesn't even make such products.

Combination of Key Factors Favorable to Counterfeiters

• Weak legislation and enforcement in the countries of low cost economies, especially in China. Enforcement of anti-counterfeiting legislation in these areas is very lax. China has a conviction rate of approximately 5% (China State Administration of Industry & Commerce Annual Statistics).
  
• Little cultural concern about protection of Intellectual Property (IP). Regulation of exports in China has been relaxed significantly in recent years, causing a large increase in counterfeiting.
  
• Developed technology and the growing sophistication allows counterfeits to be produced at far lower cost.
  
• Huge accumulations of electronic scrap has become the source of used components and counterfeits. Verification of scrapping is not simple and many scrapped components without adequate control during disposal may find their way onto the grey market, presenting a real problem for Original Equipment Manufacturers (OEMs) and Contract Equipment Manufacturers (CEMs).
  
• Global outsourcing and a complex supply chain--in many cases spanning multiple partners spread around the globe.
  
• Internet commerce. Internet is a market place allowing buyers and sellers to make fast trades without even meeting "face to face." Under such trading, people don't know who they are doing business with. You can buy from a company, pay for the goods and by the time you find out that those components are faulty, the Web site has closed down and the company disappeared. Broker's Forum, an Internet trading platform, has about 3,500 members. Only a few of them have supplier relationship or product inspection programs, leaving many opportunities for counterfeit product entry. The Internet has become the preferred distribution channel for counterfeit and grey market goods because of the low barrier to entry, ease of use and world wide coverage.
  
• RoHS and WEEE requirements create additional opportunities for counterfeiters. They may provide paperwork stating that devices are compliant with the European legislation for old leaded components or offer the lead-free parts to exempted industries that need components with SnPb plating for their high reliability products.
  
• Counterfeit has become an extremely profitable business, generating income that can compete with narcotics and weapons trafficking, but at much lower risk.

All these factors have created a fertile environment for the unscrupulous brokers and subcontractors to profit at the expense of legitimate business.