Risk of counterfeits to rise as semiconductor demand grows

IHS analysis points to link between component growth cycles and reports of counterfeits

A new report from industry analyst firm IHS warns of a rise in counterfeit components as the semiconductor market begins another accelerated growth phase. Citing a historic link between semiconductor growth cycles and reported incidents of counterfeit parts, IHS points to awareness, risk mitigation, and contingency planning as keys to keeping the supply chain as secure as possible.

According to IHS, chip sales and component counterfeits expanded in tandem from 2001 to 2007, an expansion period in the semiconductor market. Counterfeits then plunged when global semiconductor revenue shrunk during the 2008-2009 recession. The market rebound in 2010 was accompanied by another spike in counterfeit parts—while semiconductor revenue grew 33% in 2010, reports of counterfeit parts surged 152%.

Revenue growth in semiconductors is expected to grow more than 4% this year, on its way to 9% growth in 2013, IHS reports.

“The semiconductor industry is exhibiting the classic signs of the start of a new growth cycle, with tightening supplies, broad-based price increases and a lengthening of lead times for the delivery of products,” said Rick Pierson, principal analyst for semiconductors at IHS. “These are prime conditions for suppliers of counterfeit parts, which are eager to fill supply gaps with their fake goods. For semiconductor purchasers, the rise in counterfeits represents a major risk, bringing downsides in terms of financial losses, damage to company reputations and even safety concerns in some products.”

In addition to price increases, IHS is predicting that demand will outstrip supply in the third and fourth quarters this year for many widely used components, including capacitors, NAND flash, dynamic random access memory (DRAM), power semiconductors and logic chips. The conditions create a prime environment for counterfeiters.

“Counterfeiters have gotten more sophisticated,” Pierson said. “They watch the market and know where the weaknesses are. They know which products are in short supply and can generate profits. And they also know when market conditions are shifting in their favor.”

Reports of counterfeit parts also increased following last year’s tsunami in Japan and subsequent panic-buying in many markets. Since then, industry watchers are placing a renewed focus on supply chain planning and risk mitigation and recommending that end users get closer to their suppliers—by buying directly from the manufacturer or their authorized distributors and placing more stringent requirements on independent or open-market distributors.

“To mitigate the counterfeit problem, electronics buyers must develop a plan to ensure continuity of supply,” IHS said. “Such plans, similar to companies’ contingency preparations for disasters, require firms to update their listing of suppliers, parts/materials, life cycles, logistics and internal operations. For every supplier, buyers must create and update the supply profile of that entity.

“Doing this is more important in times when counterfeit activity is on the rise. It’s also critical to identify which parts and markets are more susceptible to counterfeit activity.”

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