Woman salvaging components

The global trade in counterfeit consumer electronics

Counterfeiters have targeted branded goods for many years, but increasingly the fraudsters are infiltrating the supply chains of these manufacturers with the result that sub-standard knock off components end up in consumer devices.

Our images of counterfeiters usually conjure up pictures of ink-stained print employees operating their company's Heidelberg printing press forging bank notes in the small hours. But wherever a product has value that is greater than its manufacturing or recovery cost, there is an opportunity for a fraudster to clone or copy it and pass it off as an original.

For example, there are currently two countries where you can get an iPad: The United States and the Republic of China. However, you would not be surprised to learn that the version from China is just a sub-standard knock-off and anyone with a modicum of common sense would not 'multi-touch' it with a barge pole.

Anywhere between 5 and 20 per cent of electronic components in distributors' supply chains are probably counterfeit. Counterfeits cost the global electronics industry up to US$100bn per year according to Oneida Research Services in the US.

Doing everything possible to protect consumers helps companies maintain public confidence in their brands. However, what if you bought a well-known product, such as an iPad, from a reputable chain retailer? Surely the product that you will buy will be an original?

Well, in a sense.

Fake components

The certainty that all the components within the product are original could be open to question according to Ian Walker, quality assurance manager at Princeps Electronics.

Princeps Electronics is a components distributor that supplies high-quality electronic components to some well-known brands. Walker's role, as his job title implies, is to ensure that the quality of the components that his company sources is up to scratch.

What he is increasingly finding, however, is that counterfeit components are on the increase - and the methods used to counterfeit these goods are becoming progressively more intricate. Therefore the methods needed to detect them also need to be complex.

'A physical inspection of one of these components is not enough as they are often cleaned up to look like new with new serial numbers printed on them,' says Walker.

Phil Innes, director of UK-based contract electronics manufacturer Axis agrees and points out that a much closer inspection is required of each component that goes through his company's supply chain.

'The only way that you can possibly confirm whether a component is genuine or not is by X-raying it,' says Innes.

Innes points out that it would not be possible to check every single shipment from a supplier. Instead, Axis operates a three-strikes rule - where if a supplier has either wittingly or unwittingly supplied fake components, they will no longer conduct any further business with that organisation.

The way the consumer electronics industry generally works is that companies tend to put much of the onus of detecting counterfeit parts on their supply chain which, according to Ruth Thomson of Cambridge Consultants is an inherent weakness in the system which the counterfeiters know how to exploit.

'Secure systems design is only as strong as the weakest point, but we would always recommend a multi-layered approach to implementing anti-counterfeiting measures,' says Thomson who is the business development consultant for authentication systems.

Cambridge Consultants advise many consumer technology companies and well-known brands on how they can implement these multi-layered anti-counterfeiting measures. According to Thomson, there are three distinct categories of measures that organisations can implement to deter counterfeiting.

The first involves serialisation or the implementation of robust track-and-trace systems. Anti-counterfeiting measures can include the application of various on-package authentication technologies, such as radio frequency identification (RFID), 2D bar coding, nanotechnology, encryption and other similar methods, which track a product along the supply chain through package markings. RFID tracks the pallet and the package, but not the component itself. However, before it reaches the consumer, the tag is removed.

Many track-and-trace technologies and authenticity checks can only protect the component up to the first repackaging point. After that, authentication methods that are incorporated into the product itself have to be employed.

The second category of counterfeit avoidance is a combination of overt and covert authentication methods. Overt authentication would typically be some type of visible marker that would act as a deterrent to the potential counterfeiter. The covert authentication would typically include some type of invisible marker - and there are currently a number of different organic and inorganic particles that are currently being deployed.

The third category is the deployment of anti-tamper methods that would dissuade any potential fraudster from attempting to reverse-engineer a product. Electronic systems provide crucial product differentiation - especially in the highly competitive consumer electronics industry. These high-value products are obvious targets for tampering attempts, such as firmware theft, and manufacturing overproduction - as well as reverse-engineering.

Tampering can cause a tremendous negative impact, ranging from loss of competitive advantage and reduced product lifetime, to product liability, loss of addressable market, and even increased government regulation on the industry.

Victimless crime?

The conundrum that the industry faces is that all these measures can potentially cost the business in terms of loss of productivity and increased cost. Businesses would argue that this would eventually have to be passed onto the consumer in higher prices.

But consumers can be hit in other ways with far worse consequences. A fake and faulty power supply unit, transformer or battery could potentially be lethal. Admittedly, there has been no reported incident of loss of life due to the sale of a counterfeit item in the UK, which may be down in part to the rigid self-enforcement of the wiring regulations and building codes that the UK electrical contracting industry adheres to.

That does not mean that this will always be the case. Indeed, trading standards officials in virtually every local authority have reported significant increases in the sale and distribution of counterfeit components and accessories directly to consumers, claims Handley Brustad, lead officer, intellectual property at the Trading Standards Institute.

Memory cards are common counterfeit devices that are sold specifically for use in other devices, such as a mobile phones, cameras or laptops. Other counterfeits that are increasingly finding their way into the UK market include digital photoframes, says Brustad.

However, if you plug any of these peripherals or devices into your computer, you are running a significant security risk as Brustad points out that many of these devices contain malware such as computer viruses and trojans that are designed to compromise the security of your data.

Component recovery

But the biggest victims of all are not the bona fide brands and consumers, it is those nations in the developing world where people are often compelled to work in appalling circumstances to recover components the recycled e-waste that often gets illegally shipped to these countries.

The main destinations of this illegal e-waste are India and China. In the Mumbai slum shanty town of Dharavi, children as young as three can be spotted picking through piles of toxic electronic dumps to find anything that can be recycled or even repackaged to be sold as new to consumers in the prosperous developed world.

Another large area in the world for recycling e-waste is the town of Guiyu in China which, according to a CBS '60 Minutes' report produced last year, the authorities turn a blind eye to the organised crime led syndicates who are also actively involved in recovering valuable components, washing them and repackaging them.

About 70 per cent of counterfeit product comes from China. Shenzhen, a port city in Guangdon province near Hong Kong, is a nucleus of counterfeiting activity. Untrained workers on city streets remove components from old boards and sort the various valuable components.

But the next step for these components is to infiltrate the legitimate distribution channels where they will eventually make their way into the latest gadgets off the production line.

From the outset these goods may start their way from the black market or the legitimate green market - which is the legitimate resale of reconditioned products. From here, these component or device goods are offered on bulk sale through online brokerage sites.

Unlike black market products, the grey market is not usually illegal. Instead, it usually consists of products sold outside normal distribution channels by companies which may have no relationship with the producer of the goods. This form of parallel import occurs when the price of an item is significantly higher in one country than another. It is very common in the consumer electronics industry.

Typically, middlemen will buy the product from the black market and often conceal the real origin of the goods in order to inflate the price. They then sell it at a price high enough to provide a profit but under the normal market price to entice purchases. Many legitimate grey market goods are genuine. The intermediary is simply taking advantage of differences in the price of these goods between countries.

Internet trading

The anonymous nature of the Internet is making it far easier to trade internationally between organisations without the checks and balances of the past where face-to-face deals and handshakes might indicate a greater assurance on who you would be dealing with.

Shutting down a counterfeit trader's website is often a difficult task, as the counterfeiter can easily open up shop in a matter of weeks, days or even hours at a different domain under a different company.

The UK Intellectual Property Office estimates that IP-related crime costs the UK at least £9bn a year. In addition, The US Patent & Trademark office notes that 9 per cent of all counterfeit goods seized are electronic in nature.

Taken together, these figures indicate that the value of electronic counterfeit goods entering the UK could be up to £1bn. Unfortunately, there is no data available on how many seizures have actually taken place in the UK.

Additionally, there is no research to distinguish between the counterfeit electronics in industrial, medical, office, defence or consumer devices. The focus for the industry has mainly been, so far, on the higher value electronic devices and more critical devices.

Therefore, this would typically include electronics used in defence, medical devices and within industry. This is a problem that the industry has known about for a number of years and therefore much of the counter-intelligence is targeted at these sectors rather than the consumer electronics sector.

The reasoning for this has been down to consumer electronics items tending to be of lower value than other sectors, creating would be less profit per item. The assumption has been until recently that consumer electronics were at low risk of being counterfeited. However, Thomson suggests that this is far from the case.

'What the consumer electronics industry lacks in price, it more than makes up in volume, and, due to the inherent weaknesses in most supply chains' ability to check large volumes of components, it becomes very easy for the counterfeiters to target,' says Thomson.

Drastic problems often require dramatic solutions, but as the growth and future dominance of trade with China flourishes, it will grow harder to maintain the political impetus required to compel emerging economic powers like China and India to play ball.

The only thing that trade officials from Washington DC and Brussels can do is raise their intellectual property concerns with their Chinese and Indian counterparts and hope that the stern words are passed down to the regional and local authorities who, more or less, turn a blind eye to this damaging trade.

Even if the action followed the harsh words, the problem may move to other territories. Already, there is evidence that counterfeiting is becoming a profitable growth industry in Africa and dozens of other developing countries and regions around the world.

Arguably, the logical way to tackle the counterfeiters would be to put much of the grey and green market on a legal footing. These parallel imports are often necessary for the maintenance and longevity of existing electronic products.

Additionally, creating a firmer regulatory framework may also minimise the exploitation of local workers who often work in sub-Dickensian conditions under the yoke of the criminal gangs.

Further information

http://kn.theiet.org/magazine/issues/1007/weblinks.cfm

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