‘Gray Market’ Components: Costs and Cures

Counterfeit components in consumer electronics goods have been increasingly reported over recent years, and all evidence points to the problem growing worse and worse. Unfortunately, counterfeit electronic components such as semiconductors are tricky to spot, as they will often come falsely packaged and labeled from a dependable company. The increase in technology that allows counterfeiters to engineer extremely convincing look-a likes, alongside the internet as a primary marketplace, further exacerbates things. From a regulatory angle, semiconductors are inside the finished good, making border control processes much more elaborate. The combination of these factors is what makes electronics such an attractive industry for counterfeiters, and the growth in this business is testament to the fact. Let’s take a look at what these fake chips cost us as well as what’s being done to approach it.

Costs

One of the more painful business lessons we learn is that industry-wide costs only really result in one thing: higher prices. Competition protects the consumers when only some incumbents encounter higher costs, but when all companies in an industry are forced to invest more money in avoiding counterfeit components in their products, the cost of solid goods increase across the board. When these costs increase, prices increase. Let’s combine that with the necessary increase of governmental importing regulations and surveillance (tax money, which is really just consumer money again) and the real party who loses out is the average consumer of electronic goods. In addition to the consumer, legitimate components manufacturers lose out on sales when fakes are cheaper and easier to produce, lowering market prices with false products.

Let’s put some numbers to this speculation to give some scope to what’s at stake here. The Alliance for Gray Market and Counterfeit Abatement (AGMA) has estimated a whopping 10% of technology products sold worldwide are counterfeit. This estimate implies a ballpark of $100 billion in global revenue being absorbed into the electronics gray market (some estimates are even higher, clocking in around $170 billion). Imagine the overhead involved in analyzing each of the various components necessary for the ever-evolving spectrum of tech products available, and it’s easy to see how the costs associated with this issue are of substantial scale. A component worth a mere few dollars could cost 10 times its value in just spotting a fake and replacing it. Let alone the immense capital lost to customer service, warranty fulfillment, shipping out replacements, repairing broken tech items, and the list goes on and on. Suddenly that $100 billion estimate doesn’t sound so unreasonable.

Cures

Regulatory solutions are expensive and inefficient (needles in haystacks come to mind), spending tax money to treat the problem but far from curing it. Generally the only free lunch comes in the form of innovation. The potential value to be captured is substantial, as illustrated by the costs above. That means that innovators approaching this issue stand to derive significant profits, and investing in technologies that better differentiate the authentic from the fake is the only real long-term solution. Fortunately, that appears to be exactly what’s happening.

The US Defense Logistics Agency (DLA), in cooperation with Stony Brook, NY based Applied DNA Sciences, have managed to leverage plant DNA to construct a technology that could potentially authenticate semiconductor chips and other common components. The concept has two verification strategies, both of which are nigh impossible to fake. The process begins by jumbling a plant DNA sequence, and then mixing it with ink in order to apply it to a component or its packaging. Buyers of these components can then authentic the product by exposing it to a particular light, which results in the DNA-based mark fluorescing. The second authenticating strategy is swabbing the mark and sending it straight to Applied DNA Sciences, where they can match and verify it. Although this is all still in the testing phase, the DNA mark has already proven it’s capacity in regards to withstanding the production processes (including the high heat levels) and looks to be a promising potential measure of prevention.

Bottom Line

The costs are high in counterfeit electronic components, and unfortunately we are all contributing to foot the bill. Not only is it expensive but it is also potentially dangerous, as our dependency upon these parts extends more and more into medical and military applications. Stopping counterfeits with customary customs and quality control approaches has proven ineffective, as the gray market demonstrates consistent and considerable growth. This implies more creative strategies need to be considered. Continued investment in cutting edge ideas such as the botanical DNA mark is a step in the right direction, but continued innovation is the only way to win the technological arms race. If the cost is over $100 billion in lost revenue, the potential market for up and coming entrepreneurial endeavors focused on fixing it is also worth over $100 billion. So keep innovating, it’s the only way to get our money back.