Anatomy of an Electronics Counterfeit Operation

http://electronicspurchasingstrategies.com/2014/03/06/anatomy-counterfeiter/

If the supply chain could cobble together a worst-case scenario in counterfeit components, it would read a lot like the case of Hao Yang. Yang, a Chinese national, was prosecuted earlier this year as a co-conspirator in a scheme to sell counterfeit ICs to the U.S. military. Details of the case, outlined on the Immigration and Customs Enforcement (ICE) home page, are familiar:
1. An individual sets up a U.S.-based import and distribution firm under one or several phony identities. According to ICE: “Yang and his co-conspirators created and operated several companies in Maryland, Pennsylvania, and elsewhere, to facilitate the conspiracy, including MS Technologies and A-One Electronics in Baltimore; A-Best Technologies in China; and ARRCORD Group, SMC Group and Smooth LLC.”
2. The principals then procure counterfeit ICs from China and try to sell them as authentic mil-spec components: “The defendant imported counterfeit goods from China and fraudulently sold them as legitimate merchandise,” said U.S. Attorney Rod J. Rosenstein. “Counterfeit integrated circuits from China were falsely represented to be legitimate American-made parts.”
The counterfeit circuits received by Yang, a number of which were military-grade, were supplied by one specific co-conspirator located in China.
3. Operate as a distributor: The ICE press release doesn’t divulge how the scheme was uncovered, but from the language of the release it appears that some, if not all, the counterfeits were headed to different secondary handlers before they got into the military supply chain. “This co-conspirator sold, or attempted to sell, the circuits to various individuals, companies and government agencies in the United States,” ICE said in its report. The U.S. government organ outlined the following steps taken by the counterfeiters:

• Yang used his residence to warehouse the counterfeit goods, including counterfeit military goods, sent to him by his co-conspirators in China. He then shipped specific items to buyers in the United States based on the order information provided by his co-conspirators. Yang maintained numerous bank accounts to deposit his illegal commissions and make payments associated with his counterfeit activities. He also used the commissions he received from his co-conspirators to pay for living expenses and other purchases, including his 2010 Acura TSX sedan.
• The counterfeit circuits received by Yang, a number of which were military-grade, were supplied by one specific co-conspirator located in China. This co-conspirator sold, or attempted to sell, the circuits to various individuals, companies and government agencies in the United States. Yang then distributed the counterfeit circuits, via his domestic businesses, to the buyers in the United States sometimes in repackaged form.
• The co-conspirator paid Yang a commission of $500 per month for his distribution services. To conceal the fact that the counterfeit circuits were being imported from China, Yang and his co-conspirator formed ARRCORD Group to create the appearance that the co-conspirator’s company in China (from which the counterfeit circuits were being distributed) was actually based in the United States. By using counterfeit circuits, their malfunction or failure could likely have caused serious bodily injury or impaired military operations, personnel or national security.
• Throughout the course of the conspiracy, Yang also obtained other counterfeit goods, including computer software, DVDs, and sports jerseys, from other co-conspirators in China and Hong Kong, which he then distributed in the United States. As was the case with the counterfeit circuits, Yang and these other co-conspirators concealed the fact that the goods they sold were counterfeit and produced in China and Hong Kong. Yang received commissions from these co-conspirators of $1,000 to $2,000 per month for his distribution services.
• Between March 2011 and April 2013, Yang received hundreds of shipments from China and Hong Kong, including shipments involving integrated circuits. For example, in June 2012, Yang received two shipments of counterfeit military-grade integrated circuits sent to ARRCORD Group at his residence and also received three shipments of other counterfeit goods, including DVDs and counterfeit computer software, sent to SMC Group at Yang’s residence. The Manufacturers Suggested Retail Price of the counterfeit DVDs and computer software was over $58,000.

False-front distribution operations have been around forever and have proliferated with adoption of the Internet. These companies frequently change names and maintain multiple bank accounts. They are often one- or two-person operations.  The military market is targeted by counterfeiters because of the high value of military components and because devices that have reached their end of life (EOL) are often sold into the open market; Military equipment has a longer lifespan than commercial products so EOL components are frequently in demand.
After discovering counterfeit electronics components in its supply chain, the U.S. Department of Defense (DoD) stepped up its anti-counterfeit efforts. In December 2011, revisions to the National Defense Authorization Act (NDAA) were signed by President Obama. Among its provisions, the NDAA calls for DoD contractors and subcontractors to report counterfeit electronic parts or suspect counterfeit electronic parts via the Government Industry Data Exchange Program (GIDEP). It also specifies the need to source electronic components from “trusted suppliers” if the devices are not available directly from component manufacturers or through authorized distributors. According to ICE, Yang was selling goods as late as 2013.
The GIDEP requirements and the term “trusted supplier” have spurred controversy in the electronics supply chain. Individuals familiar with GIDEP, for example, point to a possible shortcoming in the requirement. Both buyers and sellers of suspected counterfeit parts are identified in GIDEP reports. Experts posit that companies avoid GIDEP for fear of legal repercussions and the stigma associated with counterfeiting. The ICE release doesn’t say if GIDEP played a role in the Yang case. (EPS has a call into ICE to see if that information is available).
“Trusted supplier” is also a hot button in the industry. Advocates of the authorized supply chain object to the term because it includes independent distributors. Independents differ from authorized distributors in that they are not franchised directly by component suppliers. Also, because independents buy and sell excess inventory in the open market, there’s a higher risk of sourcing counterfeits. Top-tier independents have invested in processes and equipment to minimize the risk of counterfeits and have distanced themselves from brokers – companies that speculate in electronic commodities and fly-by-night companies such as Yang’s.
The government has embarked on other efforts to stem counterfeiting such as the use of plant DNA to track components through the supply chain. Separately, the electronics industry is working on its own counterfeit-mitigation standards. Under the auspices of SAE International, an association of engineers and related technical experts in the aerospace, automotive and commercial-vehicle industries, the G-19CI committee released its first standard,  AS5553. The committee is working on a revision. In 2013, SAE released the standard (AS6081) for independent distributors.
Clearly, anti-counterfeiting has become a priority. “Counterfeit military goods pose a threat to our national security as they could end up in the wrong hands and legitimate manufacturing and high technology businesses may believe they are receiving authentic goods,” the ICE report noted, adding Homeland Security and ICE ”… will continue to protect the American public and America’s warfighters from the introduction of counterfeit, non-conforming, and substandard materials and goods from entering the United States.”
However, the electronics industry remains divided on anti-counterfeiting efforts. The authorized channel in general opposes measures that include independent distributors. Military contractors say independents are sometimes their only choice. It’s also difficult to tell just how bad the problem is. GIDEP data, which shows a decline in counterfeiting reports during 2013, is only part of the picture. The commercial supply chain collects data from industry consortia and organizations that accept and investigate anonymous tips.
Yang stopped short of being a worst-case scenario because the scheme was uncovered. As a standalone example, the Yang case counts as an anti-counterfeiting victory. In the grand scheme of things, it’s difficult to determine if it also represents progress in any of the government’s anti-counterfeiting efforts.  Yang offered a plea agreement and faces a maximum of 10 years in prison, according to ICE.

DARPA wants to scrub scourge of counterfeit computer gear

http://m.networkworld.com/community/node/84878

ew things can mess up a highly technical system and threaten lives like a counterfeit electronic component, yet the use of such bogus gear is said to be widespread.
A new Defense Advanced Research Projects Agency (DARPA) program will target these phony products and develop a tool to "verify, without disrupting or harming the system, the trustworthiness of a protected electronic component."
+More on Network World: Old electronics don't die, they pile up+
DARPA said in March it will detail a program called Supply Chain Hardware Integrity for Electronics Defense (SHIELD) that will develop a small (100 micron x 100 micron) component, or dielet, that authenticates the provenance of electronics components. Proposed dielets should contain a full encryption engine, sensors to detect tampering and would readily affix to today's electronic components such as microchips, the agency said.
DARPA said it eversions this dielet will be inserted into the electronic component's package at the manufacturing site or affixed to existing trusted components, without any alteration of the host component's design or reliability. There is no electrical connection between the dielet and the host component. Authenticity testing could be done anywhere with a handheld probe or with an automated one for larger volumes. Probes need to be close to the dielet for scanning. After a scan, an inexpensive appliance (perhaps a smartphone) uploads a serial number to a central, industry-owned server. The server sends an unencrypted challenge to the dielet, which sends back an encrypted answer and data from passive sensors-like light exposure-that could indicate tampering, DARP said.
"SHIELD demands a tool that costs less than a penny per unit, yet makes counterfeiting too expensive and technically difficult to do," said Kerry Bernstein, DARPA program manager. "The dielet will be designed to be robust in operation, yet fragile in the face of tampering. What SHIELD is seeking is a very advanced piece of hardware that will offer an on-demand authentication method never before available to the supply chain."
The idea behind SHIELD will be to develop what DARPA calls a "hardware root‐of‐trust" comprising full onboard encryption, intrusion sensors, wireless communication and power, and hardened cipher key storage.
Technical areas DARPA says the program will look to develop include a new on‐chip hardware‐root‐of‐ trust secret key containers,  passive sensors that detect potential compromises,  ID chip self‐ destruct mechanisms to counter attempted reverse engineering, new manufacturing process technologies to fabricate, personalize, and place these devices, the integration and design of the small ID chips comprising these features.

In the end, DARPA says a system that can successfully protect key core systems would be:
- Extremely low cost, with minimal impact to the component manufacturer, distributor, or end‐ user, as well as to the host component itself;
- Effective at mitigating most supply chain security threats;
- Be simple, very fast, and executable by untrained operators;
- Trustworthy, reliable, and prohibitively difficult to spoof;
- Executable at any place and at any time along the supply chain, providing instant results on‐site;
- Performed using a minimum of specialized, inexpensive interrogation equipment;
- Standardized and widely adoptable by government and industry;
- Manufacturable in high volume using standard foundry processes; and
- A value‐add to the end‐product, recognized and requested by the component consumer.

Chips Sales Top a Trillion in 2016

http://www.eetimes.com/document.asp?doc_id=1321045&

Global semiconductor unit shipments, including integrated circuits and optical, sensor, and discrete (OSD) devices are slated to break the 1 trillion mark in 2016, according to a new report. The news comes as semiconductor unit growth is expected to increase to about 8% this year, according to a February 18 report by IC Insights. In 2015, shipments are projected to grow 11% and then 12% in 2016, pushing the industry past the 1 trillion mark for the first time.

After 2016, shipments of a trillion or more chips is expected to become the norm. The forecast is based on data published in the 2014 edition of “The McClean Report—A Complete Analysis and Forecast of the Integrated Circuit Industry.” While the sheer number of semiconductor shipments is impressive, the report also takes the long view of the past four decades to show how far the industry has come.

For example, in 1978 semiconductor unit shipments totaled 32.6 billion. During the next 36 years, the average annual growth rate averaged 9.4% -- a testament to the increasing reliance on semiconductors in different aspects of modern life. However, the market is not without its slumps. Between 2008 and 2013, the annual growth rate slowed to just about 5% as a result of a worldwide economic recession. Now that most of the global economy has recovered, the growth rate is expected to reach 8%, a sign that the industry has not suffered any long-term effects and that the desire for semiconductors is still strong, especially in the increasingly popular mobile market.

The report’s historic information finds that semiconductors first topped the 100-billion shipment mark in 1987. From there, it took another 19 years, until 2006, for the market to reach 500 billion units. The next 100-billion unit mark was achieved the very next year, as the market topped 600 billion units in 2007. Thus the total of unit shipments of semiconductors has steadily increased at higher rates over time, bringing about each milestone at a quicker pace compared to the last. That is thanks in part of the consumer market and the explosive growth of items from smartphones to game consoles.

Since 1978, the percentage of ICs and OSD devices among total semiconductor shipments has remained about the same, in spite of various changes in the industry and advances in integrated circuit technology. ICs made up 21% of semiconductor units in 1978, whereas OSD devices accounted for 79% of total units. In 2016, OSD devices are expected to make up 74% of total semiconductor units compared to 26% for ICs.

Aston Martin recalls 17,590 cars due to counterfeit material

http://uk.reuters.com/article/2014/02/05/uk-autos-astonmartin-recall-idUKBREA141T420140205

(Reuters) - Aston Martin expanded a recall on Wednesday to cover most of its sports cars built since late 2007 after discovering a Chinese sub-supplier was using counterfeit plastic material in a part supplied to the British luxury sports carmaker.

Owned by Kuwaiti and private equity investors, Aston Martin said it would now recall 17,590 cars, including all of its left-hand drive models built since November 2007 and all right-hand drive models built since May 2012.

That affects about 75 percent of all vehicles built in that period, a spokeswoman said. Its Vanquish model is not affected.

Aston Martin found that Shenzhen Kexiang Mould Tool Co Limited, a Chinese subcontractor that moulds the affected accelerator pedal arms, was using counterfeit DuPont plastic material, according to documents filed with the U.S. National Highway Traffic Safety Administration.

The material was supplied by Synthetic Plastic Raw Material Co Ltd of Dongguan, according to the documents.

The cars are being recalled from model years 2008 through 2014 because the accelerator pedal arm may break, increasing the risk of a crash, according to the NHTSA documents. The engine would return to idle and the driver would be unable to maintain or increase speed, according to the documents.

Aston Martin spokeswoman Sarah Calam said there had been no reports of accidents or injuries related to the issue and 22 failed parts had been reported. She said the financial impact to the automaker was small, but did not quantify the total.

The cost of the recall is of great interest because Aston Martin has struggled to fund the development of a range of new vehicles while rivals like Bentley, owned by Volkswagen (VOWG_p.DE), and Rolls Royce, owned by BMW (BMWG.DE), have the ability to draw on the resources of their parent firms.

Aston Martin's owners include Italian private equity fund Investindustrial, Kuwait-based Adeem Investment and Prime Wagon.

Germany's Daimler AG (DAIGn.DE) also has stake of less than 5 percent in the British automaker.

Of the Aston Martin cars affected in the recall, 7,271 are in Europe and 5,001 in the United States, Calam said. The company sells cars in 41 countries.

The latest recall replaces one announced last May and expanded in October.

Because of the issue, Aston Martin is now being supplied directly by a DuPont distributor.

Both Aston Martin and chemical company Dupont (DD.N) sent people to China to directly supervise the production of all pedal arms, including verifying each bag of DuPont plastic material, Calam said.

PIRACY PROBLEM

The automaker plans to shift production of the pedal arms from China to the United Kingdom "as soon as possible" in 2014, she said.

Last May, Aston Martin initially recalled 2,832 cars globally to replace the accelerator pedal arm after finding the affected part included material that did not meet specifications, Calam said.

After another arm broke that was not part of that group, the company expanded the recall to 16,825 cars and required the use of material made by DuPont.

When one of the replacement parts broke in December during installation by a U.S. dealer in Connecticut, however, Aston Martin froze the recall and found the counterfeit plastic material was being used in place of the DuPont material, she said.

The recall includes all the cars previously repaired, Calam said. Under the recall, Aston Martin will replace the accelerator pedal assemblies.

The manufacturer of the throttle pedal assembly that included the counterfeit material is Precision Varionic International Limited, according to the NHTSA documents.

The company's quality director, John Penman, did not immediately return calls and messages seeking comment.

It is not the first time DuPont has dealt with piracy in relation to China.

U.S. prosecutors indicted a California businessman in 2011 with stealing DuPont trade secrets in order to sell them to a Chinese company. That trial is ongoing.

Lfoundry closes ex-Atmel wafer fab in France; 600 jobs lost

http://www.edn-europe.com/en/lfoundry-closes-ex-atmel-wafer-fab-in-france-600-jobs-lost.html?cmp_id=7&news_id=10003098#.Ut_-OdLTmig

Lfoundry Rousset, the French chip manufacturing site of Lfoundry GmbH, has been declared bankrupt by the Commercial Court of Paris, with an immediate stop to activities on the site from Dec. 26 and the loss of 613 jobs, according to French reports.

The move has prompted angry demonstrations by the workforce in Rousset and Marseille as well as allegations that Lfoundry in Germany misappropriated €20 million (about $27.5 million) from Lfoundry in France. The German group is now the subject of a French criminal investigation, according to a report in Le Figaro.

Analog and mixed-signal chip maker Lfoundry bought the Rousset site from Atmel Corp. in 2010 for €1 together with a lengthy order book and Atmel was the main customer for Rousset until mid-2013. However, when Atmel's requirement turned down suddenly in June 2013 the Commercial Court in Paris placed Lfoundry into receivership with a six-month observation period to give time to develop a continuation plan for the business.

A voluntary redundancy plan was sketched out in November 2013 (see Jobs to go at Lfoundry Rousset) but it has failed to postpone the closure of the business.

The Rousset site will be preserved for a further three months while efforts continue to try and find a buyer but this will be for the site and equipment rather than for the business as a going concern with employees.

General Vision Inc. (Petaluma, Calif.) has expressed an interest, according to Varmatin, a local online publication. However, General Vision is a developer of image recognition systems rather than a chip manufacturer. The company is led by French expatriate imaging experts Anne Menendez and Guy Paillet.

The German parent company Lfoundry GmbH was formed in 2008 by the management buy-out of a Renesas wafer fab in Landshut, Germany. However, it subsequently closed the Landshut fab in 2011 after if failed to find sales to replace legacy orders from the original owner of the fab.

Immediately prior to Lfoundry Rousset being put into receivership, Lfoundry GmbH entered into an agreement to acquire Micron Technology Italia, Srl. and all of its semiconductor fabrication facility assets in Avezzano, Italy (a fab originally constructed and operated by Texas Instruments). In June 2013 it was announced that the takeover would be undertaken by way of a 50:50 joint venture between an entity called LFoundry Europe and Marsica Innovation SpA, a company owned by the Italian fab's management.

The Rousset wafer fab made chips on 200-mm diameter wafers in a clean room of about 12,000 square meters. It has a manufacturing capacity of about 25,000 wafer starts per month, according to data provided by the company in 2011.

Texas Instruments Cutting 1,100 Jobs; 4Q Profit Up

http://www.manufacturing.net/news/2014/01/texas-instruments-cutting-1100-jobs-4q-profit-up?et_cid=3725660&et_rid=490548696&type=headline

DALLAS (AP) -- Chipmaker Texas Instruments Inc. said Tuesday that it will cut 1,100 jobs worldwide, about 3 percent of its workforce, to trim costs and will reduce its investments in certain markets.

The company said the cuts in its embedded processing unit and in Japan will result in $130 million in annual savings by the end of 2014. The job cuts are in the U.S., India and Japan.

The Dallas-based company also said Tuesday that its fourth-quarter net income nearly doubled as restructuring charges fell and revenue ticked up 2 percent.

Texas Instruments has been reshaping its business, paring back its wireless unit as its biggest smartphone and tablet customers develop their own chips. It is shifting its focus to industrial and automotive customers.

The embedded processing unit is not part of the wireless division. Revenue in the embedded processing business, whose products serve various industries, rose 11 percent in the fourth quarter to $604 million.

In the three months through Dec. 31, Texas Instruments' overall net income rose to $511 million, or 46 cents per share, matching analyst expectations. In the same quarter the year before, profit came to $264 million, or 23 cents per share. But the fourth quarter's results included a restructuring charge of $49 million, or 3 cents per share, which Texas Instruments did not account for when issuing its guidance.

Revenue rose to $3.03 billion from $2.98 billion. That beat the $2.99 billion expected by analysts polled by FactSet.

For the first quarter, the company said it expects revenue between $2.83 billion and $3.07 billion and earnings per share of 36 cents to 44 cents including restructuring charges of about $30 million. Analysts were looking for first-quarter earnings per share of 44 cents on revenue of $2.95 billion.

Shares slipped 10 cents to $43.75 in after-hours trading. The stock closed regular trading up 40 cents at $43.85, and is up 31 percent over the past 12 months.

Slumping Intel To Cut More Than 5,000 Jobs In 2014

SAN FRANCISCO (AP) -- Intel plans to trim more than 5,000 jobs from its workforce this year in an effort to boost its earnings amid waning demand for its personal computer chips.

The Santa Clara-based company confirmed the job cuts Friday, the day after Intel Corp. reported its profit and revenue had fallen for the second consecutive year.

The purge represents about 5 percent of the roughly 108,000 jobs that Intel had on its payroll at the end of December. The company intends to jettison the jobs without laying off workers, said Intel spokesman Bill Calder. The reductions instead will be achieved through attrition, buyouts and early retirement offers.

The company didn't estimate how much money it hopes to save by eliminating jobs. But Intel needs pare its expenses if it hopes to end a two-year slump that has seen its earnings fall from $12.9 billion in 2011 to $9.6 billion in 2013. Intel is forecasting its revenue this year will be about the same as in 2013, making it unlikely its profits can rise without cost cuts.

This marks Intel's first significant job cuts since a company insider, Bryan Krzanich, succeeded Paul Otellini as CEO eight months ago.

"We are constantly evaluating and realigning our resources to meet the needs of our business," Calder said.

Intel's financial performance is faltering because the company didn't adapt quickly enough as the growing popularity of smartphones and tablet computers undercut sales of PCs running on its chips. Worldwide PC sales have dropped from the previous year in seven consecutive quarters, an unprecedented decline.

The trend is a problem for Intel because most mobile devices don't rely on its processors.

As Intel has struggled to come up with a successful strategy for mobile computing, the company has turned into a stock market laggard.

Since Intel's stock hit a five-year high of $29.27 in May 2012, the shares have fallen by 12 percent. Meanwhile, the Standard & Poor's 500 index has climbed by 31 percent.

Intel's stock dropped 69 cents Friday to close at $25.85, then dipped another 4 cents in extended trading.

http://www.manufacturing.net/news/2014/01/slumping-intel-to-cut-more-than-5000-jobs-in-2014?et_cid=3721261&et_rid=490548696&type=cta