Analysts: Counterfeit Chips Is a Multi-Billion Dollar Business

Counterfeit Chips Pose Threat to $165 Bullion Chip Market

by Anton Shilov
04/06/2012 | 02:57 PM

The five most prevalent types of semiconductors reported as counterfeits that have widespread commercial and military use represent $169 billion in potential annual risk for the global electronics supply chain, according to information and analytics provider IHS. Nobody can credibly estimate the worth of the counterfeit semiconductor market, but it is easy to guess that it is a multi-billion dollar business.

 

“There has been a great deal of focus on the issue of counterfeit parts in the defense industry, but the majority of reported counterfeit incidents are for commercial components which have broad use across both military and commercial applications,” said Rory King, director, supply chain product marketing at IHS.

The five most commonly counterfeited semiconductor types are analog integrated circuits (ICs), microprocessors, memory ICs, programmable logic devices and transistors, based on data from IHS. Together, these five component commodity groups accounted for slightly more than two-thirds of all counterfeit incidents reported in 2011.

Looking across the entire industry, the sum total of the application markets where these five most reported commodity groups are used represented $169 billion worth of semiconductor revenue in 2011, according to data derived from the IHS iSuppli. These commodities are used widely throughout all major semiconductor applications, i.e., computing, consumer electronics, wireless and wired communications, automotive and industrial.

As IHS recently noted, 2011 was a record year for counterfeit reporting, and incidents of counterfeit parts have tripled during the past two years. Counterfeit parts often are cheap substitutes or salvaged waste components that fail to meet quality requirements, leading to potential failures.

“Take analog ICs, for example. One out of every four counterfeit parts reported are for analog ICs - components which are used in everything from industrial and automotive situations to wireless devices, computers, or consumer electronics. A single counterfeit could impact end products in any of these markets and the potential problem is pervasive, amounting to billions of dollars of global product revenue subject to risk,” added Mr. King.

According to the IHS iSuppli, the total global analog IC market was worth $47.7 billion in 2011. These components are critical to all major application markets, evident in the sales%age taken by analog ICs in individual segments. For example, the wireless market generated 29% of global analog IC sales in 2011, amounting to $13.8 billion in revenue. 

The problem is almost as massive in the other market application markets. The consumer electronics segment in 2011 consumed $9.8 billion worth of analog ICs, or 21% of the global market. Automotive electronics amounted to $8 billion, or 17%; computing represented $6.7 billion, or 14%; industrial electronics was at $6.5 billion, or 14%; and wired communications was $2.9 billion, or 6%.

“A faulty counterfeit analog IC can cause problems ranging from a mundane dropped phone call to a serious tragedy in the aviation, medical, military, nuclear or automotive areas. Furthermore, the excessive cost of rework, repair, and customer returns for component failures is significant. For the global electronics supply chain, tackling the problem of counterfeit and fraudulent components has become an issue of paramount importance,” noted Mr. King.

For many organizations, addressing the costs and risks associated with counterfeits is not just important, it’s also regulated. On December 31, 2011, the U.S. president Barrack Obama signed the H.R.1540: national defense authorization act for fiscal year 2012. The act mandates that participants at all tiers of its global defense supply chain implement processes and systems to analyze, assess and act on counterfeit and suspect counterfeit electronic parts.

While the top five most counterfeit or fraudulent parts represent a major portion of the counterfeit problem, multiple other types of devices also are vulnerable to counterfeiting and fraud. In all, IHS has data for more than 100 types of integrated circuits, passive components, electro-mechanical devices, and other parts with counterfeit incidents reported against them.

“The industrial segment, which includes both military and aerospace devices as well as medical components, is a relatively minor consumer of the most prevalent parts that are counterfeited. However, a failure of a substandard counterfeit component in this area can have catastrophic consequences,” King said. “Organizations can use the reports of counterfeit incidents reported by others, in order to be proactively alerted of actual problematic parts in circulation throughout the supply chain. This can help organizations to avoid, quarantine, or act upon counterfeits in time,” concluded the analyst.