Counterfeit Risk & New Defense Regulations

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Counterfeit electronics pose serious economic, national security, and safety threats, while reports of counterfeits have soared dramatically in recent years. This presents huge challenges for electronics manufacturing at a time when the United States has created strict new regulations for the detection and avoidance of counterfeit electronic parts.

In the National Defense Authorization Act (NDAA) for Fiscal 2012, the U.S. now requires that members at all tiers of its global defense supply chain put in place systems and processes to address counterfeits. It’s not exclusively a U.S. concern. The regulation and its mandatory flow down requirements will impact international companies participating in global defense and electronics value chains.

If matters couldn’t be more challenging, the semiconductor industry’s infamous silicone cycle is forecasted to enter into growth period in 2012 characterized by extended lead times, higher prices, and potential shortages – a vulnerable situation for counterfeiting to take off.

Join Supply & Demand Chain Executive as they host experts from IHS and ERAI who will share trends, insight, and information on new defense regulations, counterfeit electronics, and the semiconductor industry. They will discuss what you need to know about counterfeits, regulations, and risk in 2012.

- What are U.S. regulations for the detection and avoidance of counterfeit electronic parts?
- What tools, processes, and insight can be used to comply with regulations and avoid risk?
- What is the relationship between semiconductor industry trends and counterfeiting?
- Could industry price and availability metrics foretell pending counterfeit activity?
What products will have the greatest risk in the near future?

Serious cost, risk, and regulations threaten to transcend fragile supply chains already strained by natural disasters, Geo-political turmoil, and economic instability. Don't miss this chance to learn how to combat electronics price and counterfeit risk while helping comply with regulations. Join now.

Rick PiersonRick Pierson - Senior Analyst, Semiconductors/CPT, IHS iSuppli

Rick carries with him 21 years of combined experience in the semiconductor industry with an extensive background in semiconductor product manufacturing. Leading IHS iSuppli’s Component Price Tracking (CPT) Service, Rick is responsible for leading, creating and delivering research and analysis on the electronics components market. Rick delivers business analysis and actionable advice to the suppliers and buyers of electronic components used across the electronics value chain.

Rick PiersonKristal Snider - Vice President, ERAI, Inc.

With almost two decades of experience, Kristal Snider has developed a keen understanding of the problems affecting the global electronics supply chain. Kristal is responsible for mana

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Counterfeit Risk & New Defense Regulations

  1. 1. Welcome to Today’s Webcast Counterfeit Risk & New Defense Regulations What You Need to Know About Counterfeit Risk, New Regulations, and Semiconductor Cycles April 19, 2012Copyright © 2012 IHS Inc. All Rights Reserved.
  2. 2. Today’s Speakers Kristal Snider Vice President, ERAI, Inc Rick Pierson Senior Analyst, Semiconductors/CPT, IHS Inc. Barry Hochfelder Editor, Supply & Demand Chain ExecutiveCopyright © 2012 IHS Inc. All Rights Reserved. 2
  3. 3. We want your feedbackWin an Kindle Fire for completing today’s survey 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 FireCopyright © 2012 IHS Inc. All Rights Reserved. 3
  4. 4. Join the Conversation Follow IHS on Twitter… Get the latest supply chain news, updates and trending topics from @IHS_SupplyChain Live Tweet today’s webcast: #IHSWebcastCopyright © 2012 IHS Inc. All Rights Reserved. 4
  5. 5. Understanding H.R.1540:The National Defense AuthorizationAct for FY2012 Section 818 Kristal Snider Vice President, ERAI April 2012
  6. 6. Who is ERAI?Copyright © 2012 ERAI Inc. All Rights Reserved.
  7. 7. What is the ERAI Executive Conference?Copyright © 2012 ERAI Inc. All Rights Reserved.
  8. 8. 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 2011Copyright © 2012 ERAI Inc. All Rights Reserved.
  9. 9. What is NDAA Sec. 818. “Detection and Avoidance of Counterfeit Electronic Parts”?Copyright © 2012 ERAI Inc. All Rights Reserved.
  10. 10. 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).Copyright © 2012 ERAI Inc. All Rights Reserved.
  11. 11. How does NDAA address a risk-based approach to purchasing electronic parts?Copyright © 2012 ERAI Inc. All Rights Reserved.
  12. 12. 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).Copyright © 2012 ERAI Inc. All Rights Reserved.
  13. 13. What does NDAA discuss regarding the definition of “counterfeit electronic part”?Copyright © 2012 ERAI Inc. All Rights Reserved.
  14. 14. How is industry reacting to legal and contractual matters?Copyright © 2012 ERAI Inc. All Rights Reserved.
  15. 15. What are the penalties of non-compliance? Contractors Suppliers Penalties for non- must… must… compliance • Detect and Avoid • Obtain parts from original • Jeopardize ability to sell to Counterfeits manufacturers or gov’t if fail to detect authorized dealers when counterfeits or exercise • Establish policies and possible adequate due diligence procedures to eliminate • Criminal penalties for counterfeits • Obtain obsolete parts from intentional trafficking ―trusted‖ suppliers when • Report counterfeits to necessary • Individual: $2M + up to govt. within 60 days 10 years jail • For other sources: • Company: $5M • Perform and bear cost of • inspect, test and rework or corrective action authenticate electronic • Additional offenses parts escalate penalties • Notify DoDCopyright © 2012 ERAI Inc. All Rights Reserved.
  16. 16. 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?Copyright © 2012 ERAI Inc. All Rights Reserved.
  17. 17. 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 ResolutionCopyright © 2012 ERAI Inc. All Rights Reserved.
  18. 18. 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 diligenceCopyright © 2012 IHS Inc. All Rights Reserved. • More…
  19. 19. Component Pricing &CounterfeitingPrice Trends and the Relationship toCounterfeiting Rick Pierson Principal Analyst, Semiconductors April 2012
  20. 20. Counterfeits ImpactCommercial Electronics IHS iSuppli Table 1: Top-5 Most CounterfeitedSemiconductors in 2011 (Percentage of Counterfeit Part Majority of counterfeit incidents reported were from the commercial sector Rank Commodity Type Reported Incidents % of #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 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) 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% 20Source: © 2012iSuppli Rights Reserved. Copyright IHS IHS Inc. All March 2012
  21. 21. Historical Cyclical BehaviorIndicates Bottom Reached in 2012 Return to growth from the bottom of a cycle brings increases in ASPs and a tighter supply Source – WSTSCopyright © 2012 IHS Inc. All Rights Reserved.
  22. 22. Counterfeit Incidents vs.Semi Revenues 2001 – 2011 ERAI Accounted for Over 90% of High Risk and Suspect Majority of counterfeit incidents reported were from Counterfeit Parts Verified and Reported from 2001-2011 the commercial sectorCopyright © 2012 IHS Inc. All Rights Reserved.
  23. 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.. 23Copyright © 2012 IHS Inc. All Rights Reserved.
  24. 24. Component Update – Q212 2011 ERAI/GIDEP counterfeit High level classwise report 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 Aluminum Ceramic Tantalum Grand Total 610 Lead Global Lead Global Lead Global Flexibility Time Pricing Flexibility Time Pricing Flexibility Time Pricing Amplifiers/Comparators Interface ICs Voltage Regulators/Ref ICs (Weeks) Trend (Weeks) Trend (Weeks) Trend Lead Global Lead Global Lead Global Q4 2012 18 1.7% 18 1.3% 20 1.6% Flexibility Tim e Pricing Flexibility Tim e Pricing Flexibility Tim e Pricing Forecast (Weeks ) Trend (Weeks ) Trend (Weeks ) Trend Q3 2012 18 4.1% 18 2.9% 20 3.7% Q4 2012 14 0.7% 14 0.4% 14 0.4% Forecast Apr-12 14 14 18 Q3 2012 14 1.0% 14 1.1% 14 1.1% Mar-12 14 -0.5% 12 -0.5% 18 -0.6% Apr-12 12 12 12 Connectors Resistors Magnetics (Ferrite Beads) Magnetics (Fixed Inductors) Lead Global Lead Global Lead Global Lead Global Mar-12 12 -0.2% 12 -0.2% 12 -0.2% Flexibility Time Pricing Flexibility Time Pricing Flexibility Time Pricing Flexibility Time Pricing (Weeks) Trend (Weeks) Trend (Weeks) Trend (Weeks) Trend DRAM NAND Flash NOR Flash Lead Global Lead Global Lead Global Q4 2012 12 1.7% 12 1.7% 12 1.4% 12 1.7%Forecast Flexibility Tim e Pricing Flexibility Tim e Pricing Flexibility Tim e Pricing Q3 2012 12 4.1% 12 3.7% 12 2.9% 12 2.9% (Weeks ) Trend (Weeks ) Trend (Weeks ) Trend Q4 2012 5 -0.3% 5 -4.1% 3 -5.6% Forecast Apr-12 10 10 12 12 Q3 2012 6 -0.1% 6 -2.9% 3 -4.6% Mar-12 10 0.6% 10 -0.6% 12 -0.4% 12 -0.4% Apr-12 3 4 2 Bipolar Power Power MOSFETs Small Signal Rectifiers Mar-12 3 0.0% 3 -3.2% 2 -2.6% Lead Global Lead Global Lead Global Lead Global Flexibility Time Pricing Flexibility Time Pricing Time Pricing Flexibility Time Pricing TCXO VCXO XO (Weeks) Trend (Weeks) Trend (Weeks) Trend (Weeks) Trend Lead Global Lead Global Lead Global Flexibility Tim e Pricing Flexibility Tim e Pricing Flexibility Tim e Pricing Q4 2012 18 0.4% 20 0.4% 18 0.5% 18 0.5%Forecast (Weeks ) Trend (Weeks ) Trend (Weeks ) Trend Q3 2012 18 1.2% 20 1.2% 18 1.4% 18 1.2% Q4 2012 12 1.9% 12 1.9% 12 1.9% Forecast Apr-12 14 18 14 16 Q3 2012 12 4.4% 12 4.5% 12 4.0% Apr-12 10 10 10 Mar-12 14 -0.2% 18 -0.2% 14 -0.5% 16 -0.2% Mar-12 10 -0.8% 10 -0.7% 10 -0.5% Filters Crystals (kHz) Crystals (MHz) CMOS BiCMOS Bipolar Lead Global Lead Global Lead Global Lead Global Lead Global Lead Global Flexibility Tim e Pricing Flexibility Tim e Pricing Flexibility Tim e Pricing Flexibility Tim e Pricing Flexibility Tim e Pricing Flexibility Tim e Pricing (Weeks ) Trend (Weeks ) Trend (Weeks ) Trend (Weeks ) Trend (Weeks ) Trend (Weeks ) Trend Q4 2012 12 1.7% 12 1.2% 12 1.3% Q4 2012 18 0.4% 18 0.4% 18 0.5% Forecast Forecast Q3 2012 12 3.9% 12 3.1% 12 3.2% Q3 2012 18 1.1% 18 1.0% 18 1.1% Apr-12 8 8 8 Apr-12 14 14 14 Mar-12 8 -0.5% 8 -0.3% 8 -0.5% Mar-12 14 -0.2% 14 -0.2% 14 -0.2% Source – IHS iSuppli Component Price Tracker (CPT), Component Health Watch (CHW) 24 Copyright © 2012 IHS Inc. All Rights Reserved.
  25. 25. 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 Copyright © 2012 IHS Inc. All Rights Reserved.
  26. 26. Develop a Continuityof Supply Plan Create/Update Continuity of Supply Profile for Every Supplier UpdateProduct, Market & Supply Chain Suppliers Information Part/Materials Life Cycles Flow (IHS Tools) Logistics Internal Ops Continuity of Supply Execute Disciplined Business Continuity Plan Implement Pre-Silicon Cycle Downturn Create/Update Mitigation Plan Best Practice Mitigation Learning Plan 26 Copyright © 2012 IHS Inc. All Rights Reserved.
  27. 27. 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 Copyright © 2012 IHS Inc. All Rights Reserved.
  28. 28. 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 Copyright © 2012 IHS Inc. All Rights Reserved.
  29. 29. Receive Component Price Tracker &Component Health WatchComplimentary Research for Attending Today 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 Webcasts@ihs.com* 29 *Offer limited to qualified entities until May 31st, 2012. Copyright © 2012 IHS Inc. All Rights Reserved.
  30. 30. Receive Trial Access to ERAIComplimentary 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 Webcasts@ihs.com*Copyright © 2012 IHS Inc. All Rights Reserved.
  31. 31. One IHS Counterfeit RiskMitigation Solution SetYour 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. 32. Questions? Kristal Snider Vice President, ERAI, Inc Rick Pierson Senior Analyst, Semiconductors/CPT, IHS Inc. Barry Hochfelder Editor, Supply & Demand Chain ExecutiveCopyright © 2012 IHS Inc. All Rights Reserved. 32
  33. 33. We want your feedbackWin an Kindle Fire for completing today’s survey 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 FireCopyright © 2012 IHS Inc. All Rights Reserved. 33
  34. 34. For More Information Send questions and requests for information to: Webcasts@ihs.com Follow IHS on Twitter Like IHS on Facebook Follow IHS on SlideshareCopyright © 2012 IHS Inc. All Rights Reserved. 34

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