Power Semiconductors

Counterfeit parts blow up in wake of chip shortage

15 July 2021

The semiconductor shortage has been raging since the beginning of the year. The lack of chips on the market has spurred a huge influx of fake electronic components.

According to a new report from the Wall Street Journal (WSJ), businesses in desperate need of semiconductors are reaching out to bad actors for parts, but are finding that when they get them, they do not work.

The flood of black-market parts is the result of a supply chain situation created by the COVID-19 pandemic. As the world went into lockdown — causing workers to stay at home — the supply chain shifted. Markets, such as the automotive market, held off on securing demand during the lockdown and took a wait-and-see approach toward the pandemic and demand.

When demand returned, chip manufacturers had already shifted their products to other areas such as consumer and communications, leaving these companies in a lurch for capacity. Until capacity can be returned, many of these industries are left in standby or with limited availability of chips.

The WSJ points to a company called BotFactory, a maker of 3D printers, which could not find any source of microchips and turned to an unknown seller. The orders were received wrapped in plastic rather than the usual protective bags and naturally only a handful worked. While the company assumed the parts were fake before the purchase, desperate times made them go with an unknown seller. Luckily, BotFactory was able to get a refund through a third-party dispute and eventually found semiconductors for its business.

These bad actors are finding a gold mine in smaller companies that are particularly starved for parts as they lack the weight of a large-scale operation and without many of the direct ties larger companies may have with chip manufacturers.

That said, the automotive market, one of the largest industries in the world, is struggling immensely from the chip shortage. In February, Ford said it was being forced to temporarily cut production in two plants in the U.S. that make its highly profitable F-150 pickups due to the shortage. Ford said it expects an earnings cut of $1 billion to $2.5 billion in 2021.

Other automotive OEMs struggling include:

  • Toyota, which had to limit production of its full-size Tundra.
  • GM, which expects an earnings cut of $1.5 to $2 billion in 2021 because of the shortage.
  • Nissan, which lowered its production in Japan.
  • FCA, which temporarily suspended production in plants in Mexico and the U.S.
  • Volkswagen, which was hit hard and has reportedly sharply cut production since December.

Fake chips are always there

The black market for semiconductors is not a new phenomenon as bad actors frequently take advantage of companies that cannot find the supply they need. Generally, these fake electronic components range from copies of the real deal to older parts that have been refurbished to look brand new.

The WSJ report said that many companies encounter counterfeit parts about three times a year, but most quality control standards inside these companies catch the parts. However, many of these counterfeit encounters go without being reported, leaving these bad actors to freely victimize other companies.

Without these counterfeit items being reported, pursuing criminal charges is nearly impossible and because the chances of getting caught are slim, it further encourages these companies to continue being bad actors.

However, given the ongoing chip shortage, antifraud measures are being increased among companies.

To contact the author of this article, email PBrown@globalspec.com

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