© 2011 Rochester Electronics, LLC

Page 5

September 2011

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functional, so production continues. Malfunctions may be detected in the testing of finished products, or they may

be detected in the field – in one month or two, or maybe even longer.

Even though the purchase price of a counterfeit or gray market component can be less than the purchase price

from the original manufacturer, the actual cost of a counterfeit or substandard semiconductor can by expressed

by the Rule of Exponential Increase:

Stage at which a fault is detected in a semiconductor:

Cost of replacement:

before it is used

$X

at the sub-assembly stage

$10X

at the final assembly stage

$100X

when the product is in the hands of the dealer or distributor

$1,000X

when the product is in the hands of the ultimate customer

$10,000X

Expenses can increase at an insidious rate: return of defective product, the purchase of new raw materials, the

manufacture of replacement product, personnel to handle the claims, and possible legal actions by end users. In

some cases, manufacturers have even been bankrupted. At the very least, counterfeit component issues can

diminish stockholders’ returns and cause delays in an original manufacturers’ schedule for the development and

distribution of new products.

And that’s just the monetary downside. Can your company support the loss of reputation and good will and brand

equity that can result from a counterfeit disaster? Especially in our current economy, customers are driven to

change providers to avoid the repeat of a bad experience.

The new counterfeit-related threat is malicious insertion.

An even more sinister sideline of the counterfeit industry is a technology known as malicious insertion. In this

fairly sophisticated form of counterfeiting, which is usually effected for military and communications applications,

components are outfitted with hidden capabilities intended to cause the shutdown or the malfunction of the

equipment in which they are installed. Additional capabilities may allow the gathering of sensitive intellectual

property or intelligence.

As long as counterfeiting remains profitable, it will continue to escalate.

Counterfeiters are shrewd and opportunistic businessmen. They are quick to identify factors in the market and

quick to capitalize on them. And they are quick to change their focus in order to remain viable when they

encounter any obstacles. They see a demand and they create a supply. Of course, the parts they sell do not

operate the same as the genuine parts. Often, by the time the buyer realizes the parts are not genuine, the

counterfeiter is untraceable. He hasn’t disappeared, however. He has simply moved his operation and changed

his name. It’s so easy to do on the Internet. The profits are high and the risks are much lower than they are, for

example, in the illegal trade of drugs or weapons.

Three major market conditions attract counterfeiters:

•

Obsolete and discontinued devices: Counterfeiters provide components that are no longer available

from the original manufacturer.

•

Manufacturing shortfall that create component shortages: Counterfeiters provide components when

there are device shortages caused by insufficient manufacturing output.