Counterfeit Risk & New Defense Regulations

Welcome to Today’s Webcast

Copyright © 2012 IHS Inc. All Rights Reserved.

Counterfeit Risk & New

Defense Regulations What You Need to Know About Counterfeit Risk, New

Regulations, and Semiconductor Cycles

April 19, 2012

Copyright © 2012 IHS Inc. All Rights Reserved. 2

Today’s Speakers

Kristal Snider

Vice President, ERAI, Inc

Rick Pierson

Senior Analyst, Semiconductors/CPT, IHS Inc.

Barry Hochfelder

Editor, Supply & Demand Chain Executive


Survey Offer: Everyone who completes the survey at the

conclusion of today’s live event will be entered into

a drawing to win an Kindle Fire

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Join the Conversation

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updates and trending topics from

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Understanding H.R.1540: The National Defense Authorization Act for FY2012 Section 818

Kristal Snider

Vice President, ERAI

April 2012

Copyright © 2012 ERAI Inc. All Rights Reserved.

Who is ERAI?


What is the ERAI Executive Conference?


What is H.R.1540: The National Defense

Authorization Act for Fiscal Year 2012?

“Counterfeit parts pose an

increasing risk to our

national security, to the

reliability of our weapons

systems and to the safety

of our men and women in

uniform.”

Arizona Senator John McCain

Nov 8th 2011


What is NDAA Sec. 818. “Detection and

Avoidance of Counterfeit Electronic Parts”?


What are “Trusted Supplier” requirements

to assess potential sources of supply?

• (e) IMPROVEMENT OF CONTRACTOR SYSTEMS FOR DETECTION AND AVOIDANCE OF COUNTERFEIT

ELECTRONIC PARTS

• IN GENERAL.—Not later than 270 days after the date of the enactment of this Act, the Secretary of Defense shall

implement a program to enhance contractor detection and avoidance of counterfeit electronic parts.

• ELEMENTS.—The program implemented pursuant to paragraph (1) shall—

• require covered contractors that supply electronic parts or systems that contain electronic parts to establish policies and

procedures to eliminate counterfeit electronic parts from the defense supply chain, which policies and procedures shall

address—

• the training of personnel;

• the inspection and testing of electronic parts;

• processes to abolish counterfeit parts proliferation;

• mechanisms to enable traceability of parts;

• use of trusted suppliers;

• the reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts;

• methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit part

is, in fact, counterfeit;

• the design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and

suspect counterfeit electronic parts; and

• the flow down of counterfeit avoidance and detection requirements to subcontractors; and (B) establish

processes for the review and approval of contractor systems for the detection and avoidance of

counterfeit electronic parts and suspect counterfeit electronic parts, which processes shall be

comparable to the processes established for contractor business systems under section 893 of the Ike

Skelton National Defense Authorization Act for Fiscal Year 2011 (Public Law 111–383; 124 Stat. 4311;

10 U.S.C. 2302 note).


How does NDAA address a risk-based

approach to purchasing electronic parts?


What are the “flow down” requirements in

the supply chain? What will this mean?

• (e) IMPROVEMENT OF CONTRACTOR SYSTEMS FOR DETECTION AND AVOIDANCE OF COUNTERFEIT

ELECTRONIC PARTS

• IN GENERAL.—Not later than 270 days after the date of the enactment of this Act, the Secretary of Defense shall

implement a program to enhance contractor detection and avoidance of counterfeit electronic parts.

• ELEMENTS.—The program implemented pursuant to paragraph (1) shall—

• require covered contractors that supply electronic parts or systems that contain electronic parts to establish policies and

procedures to eliminate counterfeit electronic parts from the defense supply chain, which policies and procedures shall

address—

• the training of personnel;

• the inspection and testing of electronic parts;

• processes to abolish counterfeit parts proliferation;

• mechanisms to enable traceability of parts;

• use of trusted suppliers;

• the reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts;

• methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit part

is, in fact, counterfeit;

• the design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and

suspect counterfeit electronic parts; and

• the flow down of counterfeit avoidance and detection requirements to subcontractors; and (B)

establish processes for the review and approval of contractor systems for the detection and avoidance

of counterfeit electronic parts and suspect counterfeit electronic parts, which processes shall be

comparable to the processes established for contractor business systems under section 893 of the Ike

Skelton National Defense Authorization Act for Fiscal Year 2011 (Public Law 111–383; 124 Stat. 4311;

10 U.S.C. 2302 note).


What does NDAA discuss regarding the

definition of “counterfeit electronic part”?


How is industry reacting to legal and

contractual matters?


What are the penalties of non-compliance?

Contractors must…

• Detect and Avoid Counterfeits

• Establish policies and procedures to eliminate counterfeits

• Report counterfeits to govt. within 60 days

• Perform and bear cost of rework or corrective action

Suppliers must…

• Obtain parts from original manufacturers or authorized dealers when possible

• Obtain obsolete parts from ―trusted‖ suppliers when necessary

• For other sources:

• inspect, test and authenticate electronic parts

• Notify DoD

Penalties for non-compliance

• Jeopardize ability to sell to gov’t if fail to detect counterfeits or exercise adequate due diligence

• Criminal penalties for intentional trafficking

• Individual: $2M + up to 10 years jail

• Company: $5M

• Additional offenses escalate penalties


What are Supply Chain implications for..

• International Companies…

Are We In Scope?

• Ignorance…

If We Ignore Counterfeits, Will All This Eventually Go Away?

• Systems Integrators…

Why Should I Assess “black box” Items?

• Contract Manufacturers and Suppliers…

Can’t I pass all responsibility to them?


What does ERAI offer to assist with NDAA?

• Part Sourcing

• Company Search and AVL Management / Enforcement

• Detailed Information Regarding Reported Suppliers

• Reported Companies Database & Supplier Screening Tools

• Detailed Information Regarding Reported Parts

• Reported Parts Database and Part Screening Tools

• Images and Test/Nonconformance Reports

• ERAI Member Search

• BOM Analysis, Monitoring, and Incident Alerting

• Complaint Filing & Incident Resolution


Your Action Item: Join us May 17-18!

www.ERAI.com | ERAI Executive Conference

Featured Speakers Include:

• Director Legal Affairs and Tax, AIA

• Procurement Quality Assurance, NASA

• Executive Director, IDEA

• G-19 Committee Chairman, SAE International

• Director of Advanced Technical Operations, IEC Electronics

• Senior Semiconductors/CPT Analyst, IHS iSuppli

Presentation topics include:

• New reporting requirements

• The term ―counterfeit‖ as it is currently defined

• Processes to abolish counterfeit part proliferation

• New personnel training requirements

• Sourcing and procurement

• Obsolescence, compliance and counterfeit risks

• Component pricing forecasts, analysis, and benchmarking capabilities

• Health status and outlook of the overall supply and demand for

electronic components

• Supply chain traceability

• Identifying ―trusted sources‖

• Debarring sources who have failed to exercise due diligence

• More…

http://www.erai.com/

Component Pricing & Counterfeiting

Price Trends and the Relationship to

Counterfeiting

Rick Pierson

Principal Analyst, Semiconductors

April 2012


Counterfeits Impact

Commercial Electronics

20

Part Type Industrial Automotive Consumer Wireless Wired Compute Other

Analog IC 14% 17% 21% 29% 6% 14% 0%

Microprocessor IC 4% 1% 4% 2% 3% 85% 0%

Memory IC 3% 2% 13% 26% 2% 53% 1%

Programmable Logic IC 30% 3% 14% 18% 25% 11% 0%

Transistor 22% 12% 25% 8% 10% 22% 0%

Source: IHS iSuppli March 2012

IHS iSuppli Table 2: Percentage of Market Revenue for Most Commonly Counterfeited Product Types by

Application Market in 2011 (Percentage Share of Revenue in Millions of U.S. Dollars)

Rank Commodity Type% of Reported Incidents

#1 Analog IC 25.2%

#2 Microprocessor IC 13.4%

#3 Memory IC 13.1%

#4 Programmable Logic IC 8.3%

#5 Transistor 7.6%

Source: IHS Parts Management 2012

IHS iSuppli Table 1: Top-5 Most Counterfeited

Semiconductors in 2011 (Percentage of Counterfeit Part Majority of counterfeit incidents reported

were from the commercial sector


Historical Cyclical Behavior

Indicates Bottom Reached in 2012

Source – WSTS

Return to growth from the

bottom of a cycle brings

increases in ASPs and a

tighter supply


Counterfeit Incidents vs.

Semi Revenues 2001 – 2011

ERAI Accounted for Over 90% of High Risk and Suspect

Counterfeit Parts Verified and Reported from 2001-2011 Majority of counterfeit incidents reported were from

the commercial sector


23

Component Pricing on the Rise

•Signs are appearing that a rise in semiconductor

component pricing is in effect

•While broad-based price increases are not uncommon in

the semiconductor industry, most electronic components

are entering a phase of some sort of price increase

•This pricing situation should continue through 2012 – with

some exceptions

•When pricing trends upward, lead times tend to extend as

well moving out beyond normal levels

•This type of price & availability environment is the perfect

scenario for counterfeit components to thrive..


Component Update – Q212

24

Source – IHS iSuppli Component Price Tracker (CPT), Component Health Watch (CHW)

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Q4 2012 14 0.7% 14 0.4% 14 0.4%

Q3 2012 14 1.0% 14 1.1% 14 1.1%

Apr-12 12 12 12

Mar-12 12 -0.2% 12 -0.2% 12 -0.2%

Voltage Regulators/Ref ICs

Fore

cast

Amplifiers/Comparators Interface ICs Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Q4 2012 18 1.7% 18 1.3% 20 1.6%

Q3 2012 18 4.1% 18 2.9% 20 3.7%

Apr-12 14 14 18

Mar-12 14 -0.5% 12 -0.5% 18 -0.6%

TantalumAluminum Ceramic

Fo

reca

st

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Q4 2012 12 1.7% 12 1.7% 12 1.4% 12 1.7%

Q3 2012 12 4.1% 12 3.7% 12 2.9% 12 2.9%

Apr-12 10 10 12 12

Mar-12 10 0.6% 10 -0.6% 12 -0.4% 12 -0.4%

Magnetics (Ferrite Beads)

Fo

recast

Connectors Resistors Magnetics (Fixed Inductors)

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Q4 2012 18 0.4% 20 0.4% 18 0.5% 18 0.5%

Q3 2012 18 1.2% 20 1.2% 18 1.4% 18 1.2%

Apr-12 14 18 14 16

Mar-12 14 -0.2% 18 -0.2% 14 -0.5% 16 -0.2%

Small Signal

Fo

recast

Bipolar Power Power MOSFETs Rectifiers

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Q4 2012 12 1.7% 12 1.2% 12 1.3%

Q3 2012 12 3.9% 12 3.1% 12 3.2%

Apr-12 8 8 8

Mar-12 8 -0.5% 8 -0.3% 8 -0.5%

Crystals (MHz)Filters Crystals (kHz)

Fore

cast

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Q4 2012 5 -0.3% 5 -4.1% 3 -5.6%

Q3 2012 6 -0.1% 6 -2.9% 3 -4.6%

Apr-12 3 4 2

Mar-12 3 0.0% 3 -3.2% 2 -2.6%

NAND Flash NOR Flash

Fore

cast

DRAM

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Q4 2012 12 1.9% 12 1.9% 12 1.9%

Q3 2012 12 4.4% 12 4.5% 12 4.0%

Apr-12 10 10 10

Mar-12 10 -0.8% 10 -0.7% 10 -0.5%

XO

Fore

cast

TCXO VCXO

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Flexibility

Lead

Time

(Weeks)

Global

Pricing

Trend

Q4 2012 18 0.4% 18 0.4% 18 0.5%

Q3 2012 18 1.1% 18 1.0% 18 1.1%

Apr-12 14 14 14

Mar-12 14 -0.2% 14 -0.2% 14 -0.2%

BipolarCMOS BiCMOS

Fore

cast

High level Class Major Class # of parts

Analog IC IC 191

Capacitor PAS 37

Diode DIS 45

Interface IC 63

Logic IC IC 30

Memory IC IC 163

Transistor DIS 81

Grand Total 610

2011 ERAI/GIDEP counterfeit High level classwise report


Risk Scenario

• Semiconductor ―Silicon Cycle‖ Effect

• Demand Soars, Prices and Lead-Times Increase

• Ensuring Continuity of Supply Becomes Number One Priority

• Shortage of Critical Components Occurs

• Best in Class Procurement Breaks from Disciplines and Procures

Components Outside of Qualified Supply Chain

• This Environment and Subsequent Actions Continue to Fuel the Counterfeit

Component Market and Give Rise to the Growth


Develop a Continuity

of Supply Plan

26

Update Suppliers

Part/Materials

Life Cycles

Logistics

Internal Ops

Create/Update

Continuity of Supply Profile for Every Supplier

Create/Update

Mitigation

Plan

Product, Market & Supply Chain

Information

Flow (IHS Tools)

Continuity of

Supply Execute

Disciplined

Business

Continuity Plan

Best Practice

Learning

Implement Pre-Silicon Cycle Downturn

Mitigation Plan


2012 Pricing Outlook Shows Change

• Suppliers reporting recent positive book-to-bill

• This is a sign of a return to growth and suppliers will adjust their pricing

strategies accordingly

• Manufacturing run rates will increase as bookings increase

• Orders are being placed now to replenish channel inventory

• Companies are focusing on Continuity of Supply and Inventory

Management


Conclusions

• Counterfeit Suppliers are in Lock-Step with the Market • As the market tightens for specific components, counterfeit will saturate it

• Capacity for counterfeit manufacturing has been expanded to meet current

demand

• Constant Vigilance and Discipline are Critical • 24/7 Monitoring of the Global Market and Trends are Mandatory

• Key Performance Indicators such as Price, Availability and Part Life Cycle

Maturations Provide Critical Market Intelligence into specific ―at-risk‖

products


Receive Component Price Tracker &

Component Health Watch Complimentary Research for Attending Today

29

*Offer limited to qualified entities until May 31st, 2012.

How to Receive Research?

1) Complete the Survey and Specify ―YES‖ to ―Are you

interested in the CPT / CHW trial offer?‖

2) Or send Email with Subject Line “CPT / CHW” to

[email protected]*


Receive Trial Access to ERAI Complimentary for Attending Today

How to receive this offer?

1) Complete event Survey & Specify “YES” to the ERAI

trial offer

2) Or send Email with Subject Line “April 19th

Webcast” to [email protected]*

mailto:[email protected]*

mailto:[email protected]*


One IHS Counterfeit Risk

Mitigation Solution Set

Your Critical Solution Workflow Elements:

4DOnline & CAPSTM Electronics Database & Tools: The largest and most-advanced component

selection, lifecycle-planning, BOM management, and procurement information and analysis solutions.

ERAI Counterfeit and High Risk Parts & Supplier Screening: The industry’s only leading source for

databases and tools to proactively mitigate the risks of counterfeit and substandard parts and suppliers.

Haystack Gold : Logistics Management System with parts and sourcing data for 100+ million items in

the U.S. Federal Supply Catalog and over 70 U.S. Army, Navy, Air Force and related databases.

PCNalert : PCN, EOL, and Counterfeit BOM Alerting Services to actively monitor BOM, AML, and part

lists for critical incidents which pose risks to design, sourcing, manufacturing, and compliance.

Component Health Watch (CHW)™ : Component supply and demand health status and outlook and

forecasts of key commodities for electronic components.

Component Price Tracker (CPT)™ : Price analysis and benchmarking service which provides current

global component pricing and forecasts for high-volume, multi-sourced electronic components.

Teardown Analysis Service: BOM design, cost model, component pricing and component

identification for the highest quality view available for the design and manufacturing of products.

IHS Standards Expert: Access to critical standards including SAE AS5553: Counterfeit Electronic

Parts; Avoidance, Detection, Mitigation, and Disposition

IHS Military Specs & Standards: More than 107,000 specs from US DoD and related agencies.

31

Copyright © 2012 IHS Inc. All Rights Reserved. 32

Questions?

Kristal Snider

Vice President, ERAI, Inc

Rick Pierson

Senior Analyst, Semiconductors/CPT, IHS Inc.

Barry Hochfelder

Editor, Supply & Demand Chain Executive


Survey Offer: Everyone who completes the survey at the

conclusion of today’s live event will be entered into

a drawing to win an Kindle Fire

We want your feedback Win an Kindle Fire for completing today’s survey

33


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