Quora: Rory-King | Twitter: @rorykingihs | LinkedIn: Rory King | Everything/Xeesm: RoryKing
I’m often asked, “What is the size of the counterfeit electronics problem?” to which there are several answers. In their own right, each answer is accurate, informative, and sheds a unique perspective on the complex issue.
In an effort to help make sense of a complicated and convoluted issue, I’ve compiled some of the key data to be aware of, which necessarily lead to some very informative reports, articles, and industry experts. In most cases, “the numbers” are staggering in size and shocking in their implications.
To put them in perspective, a ‘fake’ electronic device can be so simple as a scrap part from manufacturing that is salvaged and sold as a new, working part – or – a component from your discarded personal computer, shipped as recycled “e-waste” somewhere where the parts are plucked from the board, re-labeled as if it were intended to be a military-grade (component to withstand extreme conditions - think g-force of an F-15 or a tank reaching in excess of 140 degrees in the desert), and sold to the military as a good, working part.
To put them in perspective, a ‘fake’ electronic device can be so simple as a scrap part from manufacturing that is salvaged and sold as a new, working part – or – a component from your discarded personal computer, shipped as recycled “e-waste” somewhere where the parts are plucked from the board, re-labeled as if it were intended to be a military-grade (component to withstand extreme conditions - think g-force of an F-15 or a tank reaching in excess of 140 degrees in the desert), and sold to the military as a good, working part.
It’s not difficult to intuitively understand how quality and reliability of fake components are inferior and prone to failure, ultimately jeopardizing the safety and security of the armed forces. Worse, intentionally tampered (or maliciously designed) counterfeit hardware and software systems are said to be used to infiltrate military supply chains in order to permit outside entities to spy on communications networks, remotely disable equipment and vehicles in theaters of operations, or conduct acts of cyber warfare.
So, here they are, the counterfeit electronics by the numbers…
$1.7 Trillion and 2.5 Million
Total Value and Jobs Lost from Global Counterfeit & Pirated Products
The global counterfeiting or piracy of goods is estimated to be between 2008 estimates of $455 to $650 billion with estimates to grow to somewhere between $1,220 billion and $1,770 billion by 2015. This is the total value of goods counterfeited or pirated, but excludes economic and other impacts.
An excellent professional report by Frontier Economics called “Estimating the global economic and social impacts of counterfeiting and piracy” and published in February 2011, estimated that the current total value of counterfeit and pirated products to be between $455 and $650 billion in 2008, while expecting the value of counterfeited goods to grow to between $1,220 to $1,770 billion by 2015.
 |
| Source: Frontier Economics |
Frontier’s report goes on to quantify the dollar "impacts on the broader economy and employment" which is in addition to the value of the goods themselves. They estimate the "broader economy wide effects" on trade, foreign investment, employment, innovation, criminality and the environment are in the range of $125 million and growing.
The "employee losses" are suggested by "analysis that found that approximately 2.5 million jobs have been destroyed by counterfeiting and piracy - alternatively, if counterfeiting and piracy could be eradicated or seriously reduced, up to 2.5 million jobs could be created in the legitimate economies of the G20." In summary, estimates the total global value of counterfeit goods to be in excess of $1.7 trillion dollars by 2015, to have a broader economic impact of over $125 million, and to eliminate or replace 2.5 million jobs that would otherwise be deployed for legitimate goods by the G20.
Frontier Economics’ excellent report “Estimating the global economic and social impacts of counterfeiting and piracy” can be found here: http://bit.ly/orER67
$1.4 Billion
Retail MSRP of Counterfeit Seizures Made by U.S. in 2010
This is the total 2010 value of 19,959 seizures with a domestic value of $188.1 million dollars and an estimated Manufacturer’s Suggested Retail Price (MSRP) of $1,413 million dollars, according to U.S. Immigration and Customs Enforcement.
 |
| Source: US Customs & Border Protection US Immigration and Customs Enforcement |
Fiscal Year 2010 Seizure Statistics - Final Report, published in January 2011 can be found here: http://bit.ly/ovEBVZ
10% Equal to $100 Billion Globally
The Amount of Technology that is Counterfeit and What it’s Worth
In the electronics supply chain, some estimates are that up to 10 percent of technology products worldwide are counterfeit, equating to roughly US$100 billion in global product sales. As reported in "Bogus! Electronic manufacturing and consumers confront a rising tide of counterfeit electronics", by Michael Pecht, Sanjay Tiku, May 2006 in IEEE Spectrum magazine:
“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.”
This figure was also noted in the UK Electronics Alliance (UKEA) position paper, “UKEA Position on Counterfeit Electronic Components” (RR / V2 / 03.03.2008):
“Alliance for Grey Market and Counterfeit Abatement (AGMA), based in the USA, estimates that, in 2006, up to 10% of technology products sold worldwide are counterfeit, which amounts to US$100bn of sales revenues. However, this does not take into account consequential losses. In 2007, the US Patent and Trademark Office estimated that total ‘counterfeiting and piracy (activity) drains about US$250bn out of the US economy each year and 75,000 jobs.’”Implicitly the relevance of these numbers on the size of the counterfeit market is twofold:
- First, it zooms in on the rough order of magnitude of the “technology” or “electronics” problem relative to the overall counterfeiting and piracy of non-technology / non-electronics markets. In other words, 100 billion in technology products are counterfeit as taken from between $455 and $650 billion of the total value of all counterfeiting (est. 2008) according to Frontier Economics.
- Second, it gives a relative frame of reference that roughly 1 in 10 global technology products are suspected to be counterfeit.
 |
| Source: US Customs & Border Protection US Immigration and Customs Enforcement |
Respectively, in 2010, consumer electronics (18%) and computers/hardware (5%) made up a combined 23% of the top commodities seized by U.S. Customers and Border Protection in conjunction with U.S. Immigration and Customs Enforcement. The year previous, in 2009, consumer electronics (12%) and computers/hardware (5%) totaled 17%. These reported technology figures ranging from 17%-23% of all seizures of fake goods made by the government roughly equate to the 15% to 22% of technology counterfeits vs. total counterfeits when comparing AGMA findings with those found in Frontier Economics’ report.
40% Impacted
Percent the U.S. Department of Defense's supply chain that may be adversely impacted by fake or defective parts
 |
| Source: DailyTech LLC, June 17, 2011 |
According to a recent Commerce report, counterfeit electronics parts have infiltrated U.S. defense and industrial supply chains and almost 40 percent of companies and organizations—including the Department of Defense—surveyed for the report have encountered counterfeit electronics.1
This figure has noted in a number of industry articles and news headlines but traces back to a popular DailyTech LLC article, “U.S. GOA: 40 Percent of Defense Supply Chain Damaged by Chinese Parts” (http://bit.ly/qv3aR1).
According to this article:
“the U.S. Government Accountability Office (GAO), the audit, evaluation, and investigative arm of the U.S. Congress has been busy investigating reports of fake and/or damaged parts in the U.S. supply chain.”…
“[t]he GAO claims that 40 percent of the U.S. Department of Defense's supply chain is adversely impacted by fake or defective parts. From missiles, to rifles, to vehicles, problems abound. The common thread, says the GAO, is that virtually all the suspect parts originated from contractors in China.”When considering the complexity of global supply chains, it’s worth note that 40% is suggested as a quantification of the maximum current state of the problem, not a reflection of the where the vulnerabilities (points of failure or entry points in the supply chain) are being exploited by counterfeiters and subsequently remain difficult to shut down and defend. Industry and the government are very concerned and taking steps to continually investigate their preparedness.
26,794
Counterfeit Electronics Incidents Discovered between 2005-2008
One of the most widely-cited and comprehensive reports on the counterfeiting of electronics was “DEFENSE INDUSTRIAL BASE ASSESSMENT: COUNTERFEIT ELECTRONICS” prepared by U.S. Department of Commerce, Bureau of Industry and Security (BIS), Office of Technology Evaluation (OTE), on January 2010. In a sobering Executive Summary, it explained the Navy request which initiated an investigation that ignited much of today’s pressure, scrutiny, and calls to action surrounding counterfeits:
“In June 2007, the U.S. Department of the Navy, Naval Air Systems Command (NAVAIR) asked the Bureau of Industry and Security’s (BIS) Office of Technology Evaluation (OTE) to conduct a defense industrial base assessment of counterfeit electronics. NAVAIR suspected that an increasing number of counterfeit/defective electronics were infiltrating the DoD supply chain and affecting weapon system reliability.”…
…“The purpose of this study is to provide statistics on the extent of the infiltration of counterfeits into U.S. defense and industrial supply chains, to provide an understanding of industry and government practices that contribute to the problem, and to identify best practices and recommendations for handling and preventing counterfeit electronics.”The report included “A total of 387 companies and organizations, representing all five segments of the supply chain, participated in the study covering the 2005 to 2008 reporting period,” and highlighted “an increasing number of counterfeit incidents being detected, rising from 3,868 incidents in 2005 to 9,356 incidents in 2008”.
 |
| Source: US Department of Commerce, Office of Technology Evaluation |
It's conclusive general findings began with the statement, "all elements of the supply chain have been directly impacted by counterfeit electronics" and concluded with "most DOD organizations do not have policies in place to prevent counterfeit parts from infiltrating their supply chain."
In addition to the rise in counterfeiting itself, rate of growth could be the result of growing awareness and identification methods, as well as belief and willingness to report incidents.
In addition to the rise in counterfeiting itself, rate of growth could be the result of growing awareness and identification methods, as well as belief and willingness to report incidents.
As eloquently put in OTE study:
“The number of incidents rose dramatically, more than doubling from 3,369 incidents in 2005 to 8,644 incidents in 2008 (see Figure II-4). This large increase can be attributed to a number of factors, such as a growth in the number of counterfeit parts, better detection methods, and/or improved tracking of counterfeit incidents.”It's also statistically relevent to point the quandary of defining counterfeit incidents. According to the study, its definition of “incident” was as follows:
“For the purposes of this study, an incident is a single encounter of a suspected/confirmed counterfeit part. An incident could involve one part or a thousand parts of a component.”The U.S. Department of Commerce report is here: http://1.usa.gov/n4XAac
2011
The Year When the War on Counterfeit Electronics Officially Began?
In conclusion.... It's official: supply chain stakeholders - and anyone having an interest in global electronics value chains - must get an understanding of their vulnerabilities to counterfeits, unsafe supply networks, and risky suppliers. Fast. Counterfeit electronics are not exclusive to military supply chains. The easiest way to understand this is to understand that components used in military aviation can be used in commercial aircraft as well. Same for vehicles. Same for communications gear. Numerous other statistics of importance and implication exist. With such grave implications and supply chains fraught with existing risks and porous to perpetrators, it’s critical to stay informed and be prepared to join the cause.
The counterfeit electronics issue has finally blown wide open in Washington. Congress has started to ratchet up pressure on suppliers to drive counterfeits out of the military. In March, senators Carl Levin (D-Mich) and John McCain (R-AZ) announced a Senate Armed Services Committee investigation into these parts in the DoD supply chain. They warned that counterfeit electronic parts pose a risk to the nation's security, the reliability of its weapons systems and the safety of its military men and women. In June, Senator Sheldon Whitehouse (D-RI)introduced bipartisan legislation "Combating Military Counterfeits Act of2011" cosponsored by McCain, along with Lindsey Graham (R-SC) and Chris Coons (D-DE). It aims to crack down on counterfeiters by increasing penalties for trafficking in fake military products. This is just the beginning of much more to come on this issue.
This concludes, at least for now, counterfeit electronics by the numbers. Send me your feedback. What do you think?
