What is the “Gray Market” and Why is it Full of Counterfeit Chips?

 August 9th, 2022 |   By Area51 Electronics |   0 Comments
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The Covid-19 pandemic has been hard on everyone. “Of all the industries affected by Covid-related supply chain issues, the electronics industry has arguably been hit hardest,” according to AllAboutCircuits.com. The change from in-office to work-from-home triggered an ever-rising demand for digital products. Consumers want faster networks, smarter home appliances, and fast shipping as e-commerce booms.

Demand ravenously devoured existing chips supplies, because everything from coffee machines to data centers hosting multi-million dollar e-commerce sites runs on these chips. Everything from bad weather, labor shortages, to China ordering temporary electricity reduction have led to heavy losses in available products. That’s with global semiconductor sales shipping “more units on a three-month moving basis in May” than ever before, according to John Neuffer of SIA. Ongoing competitive behaviors amongst buyers result in a lack of availability.

Certain industries, like healthcare, are demanding the federal government prioritize some sectors over others. Global medical technology company, BD (Becton, Dickinson, and Company) weighed in on the matter.

“We are spending tens of millions of dollars to purchase materials on the open market just to maintain operations. We are also making significant investments to validate potential alternatives. However, we are a highly regulated industry. Even if alternatives are available, the time it takes for new validation and regulatory approvals does not pose any short-term solutions.”

With few options, many industries have been forced to re-evaluate their supply chains. Companies that relied on a set number of authorized suppliers have turned to independent distributors to help increase stock.

The Covid-19 pandemic – with the new work-from-home model for business, the rise of e-commerce, and lockdowns resulting in temporary factory shutdowns – presented counterfeiters with a golden opportunity. With the huge spike in chip demand, counterfeiters were able to flood the marketplace. This opened new opportunities for some manufacturers to turn to other areas to prevent stalling production – areas like the gray market.

What is the “Gray Market”?

In 2012, SourceToday published the article Avoiding the Gray Market for Electronic Components. In it, the gray market was labeled as a known issue for technology manufacturers. SourceToday defined the gray market as “the unauthorized sale of new, branded products diverted from authorized distribution channels.” A 2008 study by KPMG and the Alliance for Gray Market and Counterfeit Abatement (AGMA) found more. They discovered the gray market to be worth over $58 billion.

Now, over a decade later, the counterfeit chip market exceeds over $75 billion in global value. Suffice to say, the counterfeit chip problem isn’t going away soon. Its persistence and inability to stomp out is due to its delicate legal tip-toeing. Tyler Charboneau at All About Circuits wrote it best. “We call it gray because while sales are legal, unlike the black market, sellers misrepresent them as genuine. False packaging, serialization, and hardware markings swindle buyers.”

Even worse, “gray market chips are reworked from failed tests,” reconditioned, or recycled. There is no telling, after all, when these chips could fail. This makes the verification of chips an important part of the process. Yet, for most buyers even with automated mitigation processes, it takes time.

Many companies don’t have that kind of time. With rising demand, counterfeiters have been taking advantage of this desperation.

Desperation Earns Sales

It’s no surprise that the “weakness in the global supply of semiconductors” has led to a booming gray market. Most counterfeiters don’t target companies seeking to shave off a few bucks here and there. They sell to companies risking shutdowns.

Small businesses aren’t the only victims. These sellers don’t discriminate. They supply buyers in the healthcare, automotive, and defense sectors. Healthcare, in particular, has had a hard time obtaining chips during the shortage. A majority of these chips are found in life-saving medical equipment. This includes robotic surgical systems, pacemakers, ventilators, and EKGS to even patient monitoring systems. It quickly becomes a matter of life and death if these components aren’t obtained.

A global shortage increases the risk of purchasing and using counterfeit parts. Gray market versions of electronic components are difficult to guarantee reliability or authenticity. Dr. Yiorgos Makris, a professor of electrical and computer engineering at Erik Jonsson School of Engineering and Computer Science, said this. Counterfeits are “often harvested from electronic waste using crude and poorly controlled processes.”

This results in the chips failing when they are electrically tested or first used. Those that continue to work become dangerous as there is no telling when they will give out.

When these chips fail, the results can range anywhere from small annoyances to catastrophic tragedy. It’s inconvenient when the chip in an espresso maker fails. That turns deadly when the chip is embedded in the intelligence center of a pacemaker or an F-15E.

How to Avoid Counterfeits and the Gray Market

Here’s the question. What can one do to avoid these unreliable and dangerous components? The answer, while simple, is not always enough. Shortages exacerbated problems and over the past year, companies have seen millions of dollars lost to shutdowns. It’s why the gray market still exists. It can be hard to refuse offers of instant stock.

So the answer: even though it takes time, buying from distributors with counterfeit mitigation systems in place is vital. What can manufacturers and buyers who don’t have a counterfeit mitigation system in place do? Accreditation and superb quality inspection take time to develop. And many of these buyers have little to no time.

Thankfully, manufacturers can reduce their risk exponentially by purchasing from a distributor with proper certification and a robust counterfeit mitigation process in place.

Quality is Second to None

At Area51 Electronics, quality always comes first. As an independent and authorized distributer of electronic components, having a counterfeit mitigation system and superb quality assurance inspectors are only a piece of a larger, protective whole. Our quality management system provides documentation that supports and clarifies objective purposes, responsibilities, routine practices, and more. Why? Simple, the smallest things make the biggest difference.

That means putting resources and time into setting the standards and raising the bar for counterfeit mitigation. As members of the SAE G-19D committee and a certified SAE AS6081 Counterfeit Electronic Parts: Avoidance, Detection, Mitigation, and Disposition for Distributors company, Area51 Electronics’ conforms to the highest standards of protection. We understand the need for reliability; it’s why putting people first and risk management are our top priorities.

Due diligence is required every step of the way. Being aware of the risks and avoiding the gray market is pertinent to success. Area51 Electronics is part of that forward charge for a safer and genuine tomorrow.

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