Is a lack of components driving the counterfeit market? Jonathan Parry, senior vice president of Global Operations and European managing director at cables and connectors specialist PEI-Genesis, highlights how component shortage is pushing counterfeits into mission-critical sectors, and what the industry needs to do to fight the fakes.
After some respite in 2019, the global shortage of electronic components is likely to worsen in 2020 owing to a perfect storm of factors. The inevitable rise in counterfeit parts will be one that manufacturers must shield themselves against.
The perfect storm is a phrase whose origins the Oxford English Dictionary traces back to 1718, to William Makepeace Thackeray’s novel Vanity Fair. In it, the author writes:
‘…the audience could not resist it; and they and the poet together would burst out into a roar of oaths and execrations against the fictitious monster of the tale, so that the hat went round, and the bajocchi tumbled into it, in the midst of a perfect storm of sympathy.’
In the meteorological sense, a perfect storm refers to the phenomenon born at sea when warm air from a low-pressure system collides with a flow of cool, dry air at high pressure – simultaneously fuelled by warm, moist air from tropical climes.
It’s a perfect storm, then, that best describes the events over the last five years that have led to a global shortage of electronic components. The primary ingredients? Everything from the US-China trade war and Brexit, to rising copper commodity prices. Add to this, the growing adoption of electric vehicles, record sales of industrial robots and a global pandemic in the form of Covid-19, and you have quite the storm.
The great IP&E shortage
What started as a few rumblings, grew to a head in 2018, in what one publication called The Great IP&E Shortage, referring to the three types of parts that make up 80% of modern circuit boards: interconnects, passives and electromechanical (IP&E) devices.
A profound shortage of these parts, which includes capacitors, resistors, memory and other discrete components, has crippled production lines across the world as original equipment manufacturers (OEMs) wait for deliveries with increasingly eye-watering lead times. Parts that once reached customers in 14 weeks, were now taking anywhere between six and ten months, or longer.
Take just one of these – the multi-layered ceramic capacitor – a part used in everything from cars and TVs to computers and smartphones, the smallest of which is no bigger than a quarter of a millimetre. In its 2018 Q4 earnings report, audio giant Sonos acknowledged, “we anticipate lower gross margins (40-41%) in FY2019 as a result of industry-wide component shortages (primarily multi-layer ceramic capacitors or MLCCs).”
What’s more, there is often limited incentive for original component manufacturers (OCMs) to ramp-up production of these parts. Many of these components are legacy parts that have been around for decades. Price erosion has already made them less profitable, so price hikes are an easy fix when demand outstrips capacity.
They also fear being left with billions of units of inventory should the parts become obsolete before being shipped. So, it’s tempting for OCMs to focus their production capacity elsewhere, usually on devices with bigger margins, such as parts for the latest 5G smartphones or electric vehicles.
A consequence of the global component shortage is the rise in counterfeiting. The mix of shortages, price hikes and obsolescence is driving many OEMs to take shortcuts, with many choosing to buy parts from grey market suppliers. Research firm Havocscope estimates that there are some $169 billion worth of counterfeit parts in circulation in the marketplace. You don’t have to knowingly buy a fake to be affected either.
Despite being synonymous with the term fake, counterfeit parts actually include everything from unauthorised copies to those with incorrect or false markings. It also covers parts that don’t conform to the original design, model or standard; parts produced by unauthorised contractors; parts that are off-specification; and defective or used parts sold as new.
For the user, the consequences of counterfeits can range from mild: a loss of accuracy in a desktop robot used for small electronics assembly, to life-threatening: a pump failure in a portable ventilator, or an unresponsive sensor in a passenger plane.
Breaking the chain
Companies must uniquely place themselves to break the chain between component shortage and counterfeiting. Having a wide spanning inventory, held in component form as opposed to finished products is a wise move. This is because rather than holding finished products that may become obsolete, having access to components means companies can build millions of combinations of products using these parts. Combined with an automated manufacturing process with guaranteed lead times, there should be no reason for customers to turn to counterfeits.
My advice to OEMs is to be wary of the grey market. Buy from trusted distributors that have long standing relationships with the major brands. For certain brands, companies must ensure they abide by their stringent quality standards. For instance, our customers can audit our manufacturing facilities at any time, and they regularly do, once a week or so.
Over time, this transparency means companies can meet trusted advisor status for many of their customers, particularly those in the defence sector, where safety is paramount. In these sectors, price is often a secondary consideration to safety and being able to trust that your supplier will deliver parts that will protect people’s lives becomes the primary objective.
When supplying cables and connectors into hazardous areas, traceability from cradle to grave is essential, i.e tracking supplier shipments from the moment they enter the manufacturing facility to the finished product sent to customers.
Inspecting deliveries, matching shipments to records, and ensuring every person in the process logs the movement of parts means cables or connectors can be traced back to when and where in the world it was produced, where the components came from and who quality-checked the product.
We live in turbulent times and industry faces a challenge that is, while difficult, not insurmountable. Understanding the nature of fakes, choosing carefully where you buy your parts and ensuring traceability in your supply chain is what’s required to create an equally perfect storm of countermeasures.