An Overview of Historical Trends Relating to

Suspect Counterfeit, Non-Conforming and

High Risk Electronic Components

Mark Snider

President, ERAI, Inc.

DMSMS

December 4, 2013

www.erai.com

© 2013 ERAI Inc.

1/28/2014

Introduction to ERAI, Inc.

Founded in 1995, ERAI is an information servicesorganization that monitors, investigates andreports issues affecting the global electronicssupply chain.

ERAI provides tools to mitigate risks onsubstandard parts, counterfeit parts, vendorsand even customers.

Subscribers includeOEMs, CMs, Distributors, OCMs, governmentagencies and industry associations.

Actively involved in a number of committeesand task forces addressing the counterfeitissue.

© 2013 ERAI Inc.

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Today’s Objectives3

Analyze the number of counterfeit incidents vs. the number of reporting entitiesand measure reporting trends.

Evaluate the amount of data collected when sharing data is mandated vs.voluntary.

Assess if counterfeit encounters are or are not on the decline.

Identify the most frequently counterfeit product type.

Confirm who is most likely to report and when.

Compare counterfeit activity against supply chain activity.

Determine if there has been a change in procurement practices by analyzingchanges in the number of counterfeit/nonconforming part escapes againstproduct obsolescence.

Reveal at what level of inspection most nonconforming and suspectcounterfeit parts are identified. © 2013 ERAI Inc.

In June 2007 The US Department

of the Navy, (NAVAIR), asked

the Bureau of Industry and

Security’s Office of Technology

and Evaluation to conduct a

defense industrial base

assessment of counterfeit

electronics.

NAVAIR suspected an increasing

number of counterfeit/defective

parts were infiltrating the DoD

supply chain and sought to

verify and quantify their

suspicions.

BIS Study – June 2007

© 2013 ERAI Inc.

NAVAIR was correct

- Industry leaders ring alarm bells5

January 2002 - ERAI began collecting and publishing counterfeit and

nonconforming part data.

January 2004 - ERAI traveled to China to see first hand the recycling

and refurbishing activities that were fueling the supply of counterfeit

parts.

Late 2004 - US Chamber of Commerce launched the CACP (Coalition

Against Counterfeit and Piracy).

June 2006 - SIA Launched the Anti-Counterfeiting Task Force

October 2006 - IDEA-STD-1010-A Acceptability of Electronic

Components Distributed in the Open Market) published.

Industry leaders were assembling at conferences & symposiums

looking for information and guidance.

Discussions underway within SAE to create a standard to supplement

ISO and AS9100/AS9120 that would specifically address counterfeit

avoidance.

© 2013 ERAI Inc.

Counterfeit Incidents Steadily Rise- As of June 1, 2007, ERAI had reported 1,554 incidents

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BIS Data Source & Survey Period7

Survey Period - 2005-2008

Data Source

- 387 companies representing 5 segments of the supply chain

1. 83 OCMS

2. 98 distributors and brokers (45 authorized | 53 unauthorized)

3. 32 circuit board assemblers

4. 121 prime contractors and subcontractors

5. 53 Department of Defense (DoD) agencies

© 2013 ERAI Inc.

What We Discover When Information Sharing Is Not Optional39% encountered counterfeit electronics during the four year period.

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50% of OCMs encountered

counterfeit parts

26% of DOD agencies

encountered counterfeit parts

55% of distributors encountered

counterfeit parts26% of prime contractors and subcontractors encountered

counterfeit parts 34% of circuit board assemblers encountered

counterfeit parts

Data was collected under authority delegated to the U.S. Departmentof Commerce under Section 705 of the Defense Production Act of

1950, as amended (50 U.S.C. App. Sec. 2155) and Executive Order

12656.© 2013 ERAI Inc.

29,910 Counterfeit Encounters Reported- BIS Study 2005-2008 | 90% from OCMs

© 2013 ERAI Inc.

3369

7295 74868644

454

750938

613

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2005 2006 2007 2008

OCMs Distributors (AD & ID) Circuit Board Assemblers Prime Contractors DOD

OCM = 26,794

Distributors = 2,755

CB Assemblers = 154

Prime Contractors = 207

DOD = ?

26% (14 out of 53) of the DoD agencies surveyed encountered counterfeits. The incidents were not tracked. The number of

incidents is unknown.

Co

un

terf

eit

Par

tEn

cou

nte

rs

9

2,5555 Counterfeit Encounters- ERAI & GIDEP 2005-2008

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Data Source Reporting Comparison- 2005-2008

OCM = 3

Distributors = 3

CB Assemblers = 0

Primes & Subs = 10

(DoD) agencies = 1

OCM = 42 out of 83

Distributors = 54 out of 98

CB Assemblers = 11 out of 32

Primes & Subs = 31out of 121

(DoD) agencies = ?

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GIDEPBIS Study Period

BISBIS Study Period

While it is likely organizations surveyed by BIS were also Members of GIDEP, unless required to reveal counterfeit

encounters, the data was not willingly shared.

© 2013 ERAI Inc.

Data Source Reporting Comparison- 2009-2013

OCM = 3

Distributors = 3

CB Assemblers = 0

Primes & Subs = 10

(DoD) agencies = 1

Other = 1

OCM = 5

Distributors = 27

CB Assemblers = 11

Primes & Subs = 32

(DoD) agencies = 5

Other = 1

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GIDEP 2005-2008BIS Study Period

GIDEP 2009-2013Post BIS Study Period

58 Counterfeit Encounters

18 Unique Reporting Sources460 Counterfeit Encounters

81 Unique Reporting Sources

© 2013 ERAI Inc.

Data Source Reporting Trend- 2009-2013

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Data Source Reporting 10-year Trend- GIDEP 2003-2013

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Reported Parts 10-year Linear TrendERAI 2003-2013

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Who is Most Likely to Share?16

Why More Data can be Found Within ERAI

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ERAI’s membership is open to all sectors of the supply chain, without

geographic restrictions, and is not limited to defense and

aerospace.

ERAI’s reporting mechanism does not require the reporting entity to

publicly identify its supplier.

As awareness increases, suppliers deeper within the supply chain

are catching counterfeit and nonconforming parts keeping themout of the hands of top tier Independents that sell directly to

government contractors.

Because of concerns over brand damage, legal

repercussions, unwanted media attention, etc., DoD primes and

sub-primes will likely attempt to flow the responsibility of reporting totheir supplier which may result in fewer GIDEP alerts.

Forthcoming US Government regulations will require DoD and its contractors to report

“counterfeit electronic parts or suspect counterfeit electronic parts” via GIDEP. The

impact these regulations will have on the amount of data captured cannot be predicted.© 2013 ERAI Inc.

Reporting Should not Damage a Company’s

Reputation18

The defense and aerospace industry has

recognized the reporting of counterfeit

part incidents as a key practice to

addressing the counterfeiting threat.

The stigma of being known as a source or

receiver of counterfeit or substandard

parts has been one of the reasons behind

the failure to report such activities.

© 2013 ERAI Inc.

1/28/2014

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Trends cannot be accurately measured without

industry-wide cooperation and participation.

Data sharing is vital to the effectiveness of

ERAI & GIDEP.

© 2013 ERAI Inc.

Does Counterfeit Activity Fluctuate along with

Market Demand?20

Most Frequently Reported Part Types21

Reported Part Types Trend Over Time22

Obsolescence Trend23

Obsolescence Trend24

Obsolescence Incidence

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How are Most Counterfeits Identified?- Are Counterfeits Slipping through the Cracks?

It is widely stated that

counterfeiters are evolving their

processes; however, the

incidents being reported to ERAI

and GIDEP are detected using

widely accepted screening

processes like those called out in

AS5553-A, AS6081, CCAP-

101, IDEA-STD-1010-B, etc.

© 2013 ERAI Inc.

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Are more sophisticated counterfeit parts slipping through the cracks?

© 2013 ERAI Inc.

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Counterfeit Detection Methods

Revisions to the ERAI

Nonconforming Parts

Database will provide:

• Standardized language

to be used throughout

the entire supply chain.

• Measurable data set.

• Searchability by

nonconformance type.

• Photo library by

nonconformance type.

• Downloadable

Screening Check list.

© 2013 ERAI Inc.

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Data Trends Conclusions

Counterfeit incidents appear to have a correlation to

market fluctuations.

A decline in the number of active parts being reported

suggests organizations are limiting procurements from

the open market to allocation or obsolescence.

Counterfeit trends are relatively consistent over time.

Data trends can help us with assumptions not

conclusions.

Despite being encouraged to voluntarily report, data is

not being widely shared.

© 2013 ERAI Inc.

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THANK YOUSend questions and requests for information to:

mark@erai.com

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Avoidance, Detection, Disposition and Reporting

© 2013 ERAI Inc.