CLIFTON — An electronics testing lab is for a second time the subject
of a lawsuit that alleges the company produced false test reports for
products that it said were properly working.
New Jersey Micro-Electronic Testing Inc. of Clifton is being sued by a
distributor in Dover that sold thousands of airplane brake parts judged
by the lab to be functional but that later proved to be defective.
Electrospec, the parts distributor, claims in its suit that the testing
lab improperly tested the brake parts or never performed the tests, and
that it falsified the test reports. A similar claim was made in 2005 by
a former lab employee who said his superiors directed him to fabricate
test reports, but the company said those allegations were not proved.
In the new case, none of the flawed brake parts were installed in
airplanes, but the fallout for Electrospec was massive, said Darren
Summer, the company's vice president. After an investigation by federal
inspectors, he said, the company lost millions of dollars in business
and was forced to shrink its workforce of 30 employees to eight.
Summer said he hopes the lawsuit, filed in March 2014 in Passaic County
Superior Court, will vindicate his business and shine a light on the
testing lab's practices.
"The damage is done on my end," Summer said. "Others that have used
testing from NJMET, they need to know this. These parts could be in
aircraft, in equipment that could fail."
The testing lab's attorney, Jerry Gallagher, said the company denied
the new allegations and was "completely confident that it properly
tested and thoroughly tested these parts."
Electrospec bought the brake parts from a Chinese supplier in 2008 and
sent them for testing to ensure that they were authentic, new and
functional, Summer said. The lab said 13,000 of the 20,000 parts passed
its tests, and Electrospec sold them to Hydro-Aire, a California-based
company that installs aircraft brake systems.
But Hydro-Aire's parent company performed tests of its own, revealing
that some of the parts were not working and that they likely had been
used and refurbished, said Richard Vrhovc, Electrospec's attorney.
The Federal Aviation Administration sent an alert to the airline
manufacturing industry about the faulty parts in 2012 that said they
were "not properly tested and could be counterfeit."
Vrhovc said the FAA laid the blame on Electrospec when it should rest with the testing lab.
"NJMET has been skating free on this for three years with no repercussions," he said.
Based on recent testimony from a lab test engineering manager, Vrhovc
said, Electrospec plans to amend its suit this month to include an
allegation that the lab violated the New Jersey Consumer Fraud Act.
The manager, Thomas Farinella, said in a deposition that he either
could not or did not test at least two of the criteria that the lab
agreed to review for the brake parts. Test reports show that the parts
passed in those areas anyway.
Vrhovc also questioned whether it was possible for the tests to be
performed as quickly as the lab reports said they were. One showed that a
single worker tested 6,000 parts one day and 2,500 on another, he said.
Gallagher said the lab was reviewing Farinella's testimony. He said the
untested areas would not have made a difference in determining whether
the parts were faulty. He also said the tests were performed in three to
five seconds and often by multiple operators.
Gallagher said Electrospec was using the lab as a "scapegoat" and that
Electrospec never represented that the bake parts came from China, where
counterfeits often originate. The company could have asked for a
specific authenticity test, but it did not do so, he said.
"When you buy parts like this, they can pass today and fail tomorrow,"
Gallagher said. "If they had disclosed the source of the parts, it
really would have been a game changer."
The testing lab was sued in 2005 by a former employee, Mark Williams,
who also was represented by Vrhovc. Williams said he was instructed to
falsify product-testing reports and that company engineers told him they
could not or did not know how to test parts the company agreed to test
for clients.
Gallagher denied Williams' allegations and contended that Williams'
claims were never proved. The case was resolved in a confidential
settlement in 2007.
Cowen & Co.’s semiconductor analyst Timothy Arcuri today writes that pricing is set to rise for DRAM memory chips because the entire supply chain in Asia is being rocked by the rush to produce Apple’s (AAPL) iPhone 6.
That is leading to capacity constraints, which in turn may raise prices for DRAM for Samsung Electronics (005930KS) and Micron Technology (MU), two principal suppliers to the iPhone, even though the device itself won’t see a rise in DRAM content:
Our supply chain work in Asia suggests
PC DRAM pricing is tracking to a ~3-5% M/M increase in Sept, owing to
some pre-iPhone 6 launch supply constraints. While it is too early to
see actual supply impact from Samsung ramping DRAM in S3 – likely
starting CQ2:15 (we have long said 30k wsm is max it will ultimately
produce) – Samsung is back in the supply chain on iPhone 6 for DRAM (in
addition to MU via Elpida) after being excluded for iPhone 5/5S. So, we
believe Samsung’s production has vectored to a large degree from PC DRAM
to mobile DRAM; we feel this is unexpected by the market because
Samsung mobile DRAM capacity was already tight based to some degree on
captive smartphone demand. While this will help near-term pricing, we
don’t see significant DRAM content increase in iPhone 6 unlike NAND
where the SKU’s are likely to mix up from 64GB on high-end to now
include a 128GB high-end model for both 4.7″ and 5.5″.
Arcuri thinks SanDisk (SNDK) may be a prime beneficiary of the NAND increase mentioned.
In the same report, Arcuri writes that a Chinese government investigation into Qualcomm (QCOM)
“might come to a head in the near-term,” citing his examination of the
matter and media reports. It may be Qualcomm takes a lower royalty rate,
muses Arcuri, but “We feel that, even in a worst case where the NDRC
would achieve lower royalty rates in China, QCOM would be better off to
cede major swaths of royalties in China rather than jeopardize existing
cash flows.”
Chip maker Fairchild Semiconductor International Inc. (FCS: Quote) said Monday that it will close two manufacturing facilities and reduce its wafer fabrication lines as part of a realignment of its global manufacturing operations. The company noted that the realignment will enable it to improve product quality and lower costs.
San Jose, California-based Fairchild Semiconductor said it will eliminate its internal five-inch manufacturing facilities and significantly reduce its six-inch wafer fabrication lines. This will result in the closure of its manufacturing and assembly facilities in West Jordan, Utah and Penang, Malaysia, as well as the remaining five-inch wafer fabrication lines in Bucheon, South Korea.
Fairchild said the closures of the two manufacturing facilities in West Jordan as well as Utah and its fabrication lines in Bucheon, South Korea, are planned to occur from the second quarter to the fourth quarter of 2015.
The company is working closely with customers to complete the qualifications required and build adequate supply to support their needs. During the transition, Fairchild expects its internal and external supply chain to service customer orders without disruption.
Mark Thompson, Chairman and CEO of Fairchild, said, "The realignment we are announcing today will maximize the utilization of eight-inch factories and reduce the complexity of our manufacturing footprint, while creating the flexibility to support ongoing customer demand through a greater use of external manufacturing sources. Fairchild will continue operating eight-inch wafer fabrication lines in South Portland, Maine and Mountain Top, Pennsylvania, as well as the Bucheon six- and eight-inch fabrication lines."
Fairchild will also continue to operate the assembly and test facilities in Cebu, Philippines and Suzhou, China.
Chip maker Fairchild Semiconductor International Inc. (FCS: Quote) said Monday that it will close two manufacturing facilities and reduce its wafer fabrication lines as part of a realignment of its global manufacturing operations. The company noted that the realignment will enable it to improve product quality and lower costs.
San Jose, California-based Fairchild Semiconductor said it will eliminate its internal five-inch manufacturing facilities and significantly reduce its six-inch wafer fabrication lines. This will result in the closure of its manufacturing and assembly facilities in West Jordan, Utah and Penang, Malaysia, as well as the remaining five-inch wafer fabrication lines in Bucheon, South Korea.
Fairchild said the closures of the two manufacturing facilities in West Jordan as well as Utah and its fabrication lines in Bucheon, South Korea, are planned to occur from the second quarter to the fourth quarter of 2015.
The company is working closely with customers to complete the qualifications required and build adequate supply to support their needs. During the transition, Fairchild expects its internal and external supply chain to service customer orders without disruption.
Mark Thompson, Chairman and CEO of Fairchild, said, "The realignment we are announcing today will maximize the utilization of eight-inch factories and reduce the complexity of our manufacturing footprint, while creating the flexibility to support ongoing customer demand through a greater use of external manufacturing sources. Fairchild will continue operating eight-inch wafer fabrication lines in South Portland, Maine and Mountain Top, Pennsylvania, as well as the Bucheon six- and eight-inch fabrication lines."
Fairchild will also continue to operate the assembly and test facilities in Cebu, Philippines and Suzhou, China.
Through the combined actions, Fairchild expects to incur cash restructuring and other costs of about $36 million, and non-cash charges of about $25 million for accelerated depreciation.
On completion of the realignment, Fairchild expects to realize annual savings of about $45 million to $55 million from the second quarter of 2014 financial baseline. The company also expects about 75 percent of the estimated savings to be cash savings, with the balance attributable to lower depreciation costs.
FCS is trading at $17.03, up $0.01 or 0.03 percent on a volume of 193,102 shares.
STMicroelectronics NV (STM)’s first profit
in 11 quarters, showing Europe’s largest semiconductor maker
rebounding from its phone-chip troubles, was eclipsed by rivals’
more optimistic predictions for rising demand.
The chipmaker’s shares fell as much as 4.5 percent after
its forecast for the current quarter lined up with analysts’
projections. In contrast, forecasts from Intel Corp. and Texas
Instruments Inc. topped estimates, fueling expectations that the
smartphone and personal-computer markets are picking up.
“It’s disappointing relative to peers,” said Janardan Menon, an analyst at Liberum Capital Ltd. in London. “ST’s
quarter is broadly in line, but many companies in the sector are
coming ahead of expectations.”
STMicro is reducing its reliance on the wireless business
after shutting down its unprofitable phone-chip unit with
Ericsson AB, focusing instead on the more lucrative power-management products, microcontrollers and sensors sold to the
likes of Samsung Electronics Co. and Volkswagen AG. The shift is
starting to pay off, with costs falling and margins recovering.
The company still faces challenges. Free cash flow was
negative $99 million last quarter and the return to profit --
net income was $38 million -- was helped by $100 million of
public funding as part of France’s project to aid the
development of nanoelectronics technologies. Revenue fell 8.9
percent to $1.86 billion, Geneva-based STMicro said.
Photographer: Simon Dawson/Bloomberg
STMicroelectronics NV Chief Executive Officer Carlo Ferro said, “We anticipate further... Read More
‘Realistic Numbers’
STMicro forecast sales will increase about 3 percent in the
current quarter from the second, plus or minus 3.5 percentage
points, and gross margin will be about 34.4 percent, plus or
minus 2 percentage points. Gross margin last quarter was 34
percent, topping the 33.6 percent analysts predicted.
“The outlook is a result of many things -- growth,
transition from legacy products,” Chief Executive Officer Carlo Bozotti said on a conference call. “We gave realistic numbers.
What’s important for us is making sure we have the right
trajectory.”
The shares fell 4 percent to 6.68 euros at 12:48 p.m. in
Paris, giving the company a market value of 6.1 billion euros
($8.2 billion). The stock had jumped 19 percent this year
through yesterday.
Intel, Texas
Chipmakers are well-positioned to benefit from an economic
recovery. The 18-nation euro-area has returned to growth, though
modest, and U.S. expansion is set to accelerate.
“We begin with a favorable macroeconomic backdrop and
there are areas where there is strong traction, in automotive
and industrial for example,” STMicro’s Bozotti said. “In other
areas like wireless, it’s more customer specific.”
Shares of Intel, the world’s largest chipmaker, rose to a
10-year high on July 16 after it forecast sales that indicate
demand for PCs is starting to recover among consumers.
Texas Instruments, the biggest maker of analog
semiconductors, this week forecast third-quarter profit that may
top analysts’ estimates on demand for chips used in industrial
machinery, cars and mobile-phone systems. ARM Holdings Plc, the
chip designer whose products power Apple Inc.’s iPhone and iPad,
said its revenue growth will accelerate.
Micron Technology has streamlined its organization with a new business structure aimed at serving a more diversified set of end markets.
The memory chip powerhouse will engage its customers through one of
four new business units -- computing and networking, mobile, storage,
and embedded. In addition, Micro has set up three engineering groups,
including DRAM, non-volatile memory, and advanced control development to
"help deliver the right customer and market specific products," said
Mark Adams, president of Micron, in its recent earnings conference call
with analysts. The new structure will comprise the memory solutions
group, which will be led by Brian Shirley, vice president of memory
solutions.
Adams added:
We are confident this new organization will help
us better react to unique customer requirements in a memory business
which is increasingly solutions oriented. We continue to see overall
good balance in the memory industry and we are investing in
opportunities to differentiate our products and with our customers.
Analysts said it makes sense for Micron, which is based in Boise,
Idaho, to realign its business units as the market transitions. The
memory landscape has changed over the last few years. Historically,
memory chips, which were mainly supplied to the PC sector, were a
commodity. But with the quick rise of the smartphone, mobile DRAM is becoming a larger portion of the market.
According to Cliff Leimbach, an IHS analyst for memory and storage,
mobile DRAM will account for approximately 40% of DRAM shipments
compared with just 15% in 2011. Leimbach said:
You have the mobile DRAM market quickly expanding
the last few years, and at the same time the PC market is pretty flat,”
Leimback said. PC shipments are in the low single digits, but
experienced a decline last year, which was the first in a long time. You
have a lot of DRAM players looking at this and seeing the market shift
and figuring out where they need to allocate resources.
The DRAM market has stabilized, according to Mark Durcan, Micron's
chief executive, citing several factors. Hynix's fab in Wuxi, China, has
recovered from a fire and is back online; supplier and customer
inventory levels are low; and Micron has reduced its DRAM capacity as it
converts its Singapore facility to NAND production. Durcan said:
Our outlook for memory industry conditions remains
favorable. We believe the current industry structure is fundamentally
changed and we can now manage our business focused on return based
capital and supply decisions, which was not always possible in the past.
The positive business climate was reflected in the memory maker's
latest quarterly financial results. Micron posted a 98% jump in
year-over-year revenue of $4.11 billion in its second quarter of fiscal
2014, while revenue increased 2% sequentially.
On a GAAP basis, net income in the second quarter of fiscal 2014 was
$731 million compared to net income of $358 million in the first quarter
of fiscal 2014 and a net loss of $286 million in the second quarter of
fiscal 2013. On a non-GAAP basis, net income was $989 million, compared
to net income of $881 million in the first quarter of fiscal 2014.
NAND flash revenue grew 11% sequentially due to a 35% increase in
sales volume; however, average selling prices dropped 18%. In the DRAM
space, revenue was flat as both sales volumes and average selling prices
remained stable.
The company's overall consolidated gross margin was 34% in the second
quarter of fiscal 2014 compared to 32% in the first quarter of fiscal
2014 as a result of a higher DRAM gross margin. Micron's management
expects total industry bit supply growth to reach the low to mid-20%
range for 2014, which is slightly lower than prior estimates. In
subsequent years, Micron expects a year-over-year DRAM bit supply growth
in the 20% to 30% range driven by stable wafer output coupled with
slowing process technology node migrations.
In addition, DRAM wafer production is expected to reach the
mid-single digits this year, Durcan said, due to "DRAM to NAND
conversions and the ongoing increase in process complexity as geometry
shrinks."
For NAND, Micron is projecting industry growth in the low 40% range
for 2014, which includes an increase in industry wafer production of
just over 10% with the remaining supply growth coming from technology,
Durcan said. Micron's management expects the industry to post similar
numbers in 2015, but cautioned that the growth rate could slow after
2015 as 3D NAND production comes on line.
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.
