Panel Discussion - Counterfeit Electronics and the Defense Authorization Bill

Welcome to Today’s Live Panel
Counterfeit Electronics & the Defense Authorization Bill
December 8, 2011

Copyright © 2011 IHS Inc. All Rights Reserved.

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Moderators
Barry Hochfelder
f
Editor, Supply & Demand Chain Executive

Rory Ki
R King
Director, Global Product Marketing, IHS

3

Counterfeits: A Big Deal
Risks to Company, Brand, and Performance

What is the Impact of Counterfeit Electronics?
(% Respondents)
Undermine compliance claims 44%
ANY

Compromise device/product security 37%
ND
COMPA

BRAN

Expose contractual liability 42%
&

Expose product safety / legal liability 55%
Damage brand / reputation 71%
PERFORMANC OPERATIONS

Product launch delays 36%
PRODUCT

Production line stoppages 57%
&

Customer returns/recalls 67%
Product quality/reliability failures 84%
Increase product dev’pt time/costs
dev pt 38%
CE
FINANCIAL

Add to unit costs 51%
Inhibit sales / customer sat 62%
&

Reduce expected product life 64%
Increase warranty/maint. costs
warranty/maint 65%
P

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Source: Benchmarking Counterfeit & Inferior Grade Components,
Supply & Demand Chain Executive & IHS Inc., April 2009

Counterfeits: A Huge Deal
Loss of Life and National Security in Jeopardy
"They ground aircraft and impact airplane safety" …
“Bring disrepute to our company / blacklisting from customers ”
Bring customers.
“Destroy customer trust, confidence & credibility.”
“Customers do not get product in a timely manner”
"They cause failure of safety related components in nuclear plants."
y y
“Flood market and create unjust competition with reliable sources”
"Counterfeiting causes a loss of revenue due to equipment down time."
“Increase Lab testing time” and “Increase procurement costs”
“Undermine revenues” and “Loss of customers”
"They harm patients and pose a significant risk of death."
“They increase risk of legal action and product failure”
“Increase warranty claims”
Increase claims
“Force multiple, costly QA in destructive and non-destructive examinations.”
“Compromise Security, DOD, Government” …
…“Counterfeiting Jeopardizes our missions and soldiers safety."

Shown: DailyTech LLC, June 17, 2011
Source: Benchmarking Counterfeit & Inferior Grade Components,
Supply & Demand Chain Executive & IHS Inc., April 2009

5

Today s
Today’s Panel

Marina Malenic Kristal Snider Paul Hagen
Aviation Reporter Vice President Principal
Jane’s Defense Weekly ERAI, Inc. Beveridge & Diamond

Sarah McDowall
Senior Analyst, Country
Analyst Dan Ellsworth Tom Dinges
Intelligence – Asia Pacific President and CEO Analyst, EMS & ODM
IHS Global Insight World Micro, Inc. IHS iSuppli

Mark Northrup
Glenn Bassett VP of Advanced Technical Mark Snider
Vice President, Supply Chain Operations & Strategy President and Founder
IHS, Inc. IEC Electronics. ERAI, Inc.


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Marina Malenic
Aviation Reporter Jane’s Defence Weekly
Reporter, Jane s

Company: IHS Jane’s
Speaker: Marina Malenic
Title: Aviation Reporter, Jane’s Defence Weekly
Website: www.janes.com @IHSJanes
Phone: 800.824.0768 @JDefenseWeekly
Email: info@janes.com | Marina.Malenic@Janes.com

About IHS Jane’s
With more than 100 years of experience, IHS Jane’s holds an unrivalled reputation for the
reliability,
reliability accuracy and impartiality of our information and advice trusted and relied upon by
advice,
business, government and military decision-makers worldwide.
In the specialist fields of defence, security, public safety, transport and law enforcement, IHS
Jane’s intelligence is a ‘must have’ resource for our clients, who can trust our intelligence over
that f
th t from any other open source.
th
IHS Jane’s continues to push the boundaries in open source intelligence gathering, reporting and
analysis. Our solutions offer the breadth, depth, accuracy and reach to meet a broad range of
needs.


Kristal Snider
Vice President ERAI Inc. and SAE International G 19 Committee Member
President, Inc G-19

Company: ERAI Inc.
Speaker: Kristal Snider
Title: Vice President and member SAE Intl G-19 Committee
Website: www.erai.com
Phone: 239.261.6268 @ERAI_Inc
Email: info@erai.com | ksnider@erai.com

About ERAI Inc.
ERAI is a global information services organization that monitors, investigates, reports and
mediates issues that are affecting the global supply chain of electronics ERAI is the industry's
electronics. industry s
leading source of risk assessment information and insight enabling companies to analyze risk
mitigation on vendors, customers and parts. As an organization, we utilize the power of
partnership by uniting our Members through data sharing and knowledge, which in turn provides
critical information services to our Members.


Paul E. Hagen
Principal,
Principal Beveridge & Diamond P C
Diamond, P.C.

Company: Beveridge & Diamond, P.C.
g
Speaker: Paul E. Hagen
Title: Principal
Website: www.bdlaw.com
Phone: 202.789.6000 (Company) | 202.789.6022 (Direct)
Email: phagen@bdlaw.com

About Beveridge & Diamond, P.C.
Since 1974, Beveridge & Diamond, P.C. has defined the practice of environmental law in the
U.S.
U S With almost 100 attorneys nationwide, the Firm has helped clients achieve success in
nationwide
numerous venues and in every substantive area of environmental practice, including litigation
and product stewardship. The Firm works with leading companies in the computer, consumer
electronics, semiconductor, and wireless industries on a wide-range of compliance, market
access, sustainability and enforcement matters. The Firm has assisted several clients with the
, y
development of national and global product take-back and recycling programs.


Sarah McDowall
Senior Analyst, Country Intelligence – Asia Pacific IHS Global Insight
Analyst Pacific,

Company: IHS Global Insight
Speaker: Sarah McDowall
Title: Senior Analyst, Country Intelligence – Asia Pacific
Website: www.ihsglobalinsight.com
@ihsglobalinsigh
Phone: 781.301.9325 (Company) | +44 203.159.3376 (Direct)
Email: info@ihs.com | Sarah.McDowall@ihs.com

About IHS Global Insight
IHS Global Insight offers economic and financial analysis, forecasting, and
market intelligence for 204 countries from Afghanistan to Zimbabwe. With more
than 325 economists and analysts worldwide covering 170+ industries, you can
tap into our data, insights and tools to monitor, analyze and interpret global
conditions affecting your business.


Thomas J. Dinges, CFA
Global EMS & ODM Research Practice, IHS iSuppli
Practice

Company: IHS iSuppli
Speaker: Thomas J. Dinges, CFA
g
Title: Global EMS & ODM Research Practice
Website: www.isuppli.com
Phone: 310.524.4007 @iSuppli
Email: tom.dinges@ihs.com

About IHS iSuppli
IHS iSuppli's market intelligence helps technology companies achieve market leadership. Catch
the latest teardown reports from all across the world straight from our immensely experienced
analysts. The Teardowns portal at IHS iSuppli provides deeper insights into bill of Materials
(BOM), photo analysis, component cost tables and graphical representation of mobile handsets,
personal and home entertainment electronics, and computers and data communication devices.
IHS iSuppli p
pp provides comprehensive teardowns for new and upcoming devices in the market.
p p g


Glenn Bassett
Vice President Supply Chain IHS
President, Chain,

Company: IHS
Speaker: Glenn Bassett
Title: Vice President, Supply Chain
Website: www.ihs.com
@IHS_SupplyChain
Email: info@ihs.com | Glenn.Bassett@ihs.com

About IHS
IHS (NYSE: IHS) is the leading source of information and insight in critical areas that shape
today s
today’s business landscape including energy and power; design and supply chain; defense risk
landscape, defense,
and security; environmental, health and safety (EHS) and sustainability; country and industry
forecasting; and commodities, pricing and cost. Businesses and governments in more than 165
countries around the globe rely on the comprehensive content, expert independent analysis and
flexible delivery methods of IHS to make high-impact decisions and develop strategies with
y g p p g
speed and confidence. IHS has been in business since 1959 and became a publicly traded
company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado,
USA, IHS employs more than 5,400 people in more than 30 countries around the world.


Dan Ellsworth
President and CEO World Micro Inc
CEO, Micro, Inc.

Company: World Micro, Inc.
Speaker: Dan Ellsworth
Title: President and CEO
Website: www.worldmicro.com
@WorldMicro
Email: info@worldmicro.com | dellsworth@worldmicro.com

About World Micro, Inc.
World Micro, Inc., is a global, aerospace, military, commercial, and medical electronic
component and products distributor focused on quality systems The company also leads the
systems.
industry in detection of counterfeit components and anti‐counterfeit education and training. Since
1996, World Micro has helped its customers solve difficult supply chain issues through innovative
research, design, sourcing, stocking, procurement, inventory, and management solutions. World
Micro, Inc. is privately held with headquarters in Roswell, Georgia, and an Asian distribution hub
, p y q , g ,
in Penang, Malaysia.


Mark Northrup
VP of Advanced Technical Operations & Strategy, IEC Electronics
Strategy

Company: IEC Electronics
Speaker: Mark Northrup
Title: VP of Advanced Technical Operations & Strategy
Website: www.iec-electronics.com
@IECElectronics
Phone: 315.332.4283 (Direct) | 315.573.2873 (Cell)
Email: mnorthru@iec-electronics.com
mnorthru@iec electronics.com

About IEC Electronics
IEC Electronics Corporation is a premier provider of electronic manufacturing services (“EMS”) to advanced technology
companies primarily in the military and aerospace, medical, industrial and computing sectors. The Company specializes
in the custom manufacture of high reliability complex circuit cards system level assemblies a wide array of custom cable
reliability, cards, assemblies,
and wire harness assemblies, and precision sheet metal products. As a full service EMS provider, IEC is a world-class
ISO 9001:2008, AS9100, AC7120, and ISO13485 certified company. The AS9100 certification enables IEC to serve the
military and commercial aerospace markets. The ISO13485 certification supports the quality requirements of medical
device markets. The AC7120 NADCAP accreditation is for electronics manufacturing to support the most stringent quality
requirements of the aerospace industry, as well as ITAR registered and NSA approved under the COMSEC standard.
IEC Electronics is headquartered in Newark, NY (outside of Rochester) and also has operations in Victor, NY, Rochester,
NY, Albuquerque, NM and Bell Gardens, CA. Additional information about IEC can be found on its web site at
www.iec-electronics.com. Dynamic Research and Testing Laboratories, LLC (DRTL) technical staff provides
component risk mitigation , destructive physical analysis(DPA), failure analyses, product qualifications , material
qualifications, and consulting services. Our staff offers highly respected technical expertise, personable service, and quick
response. We welcome the opportunity to discuss your needs and objectives to support your product performance and
reliability improvements. The website is at www.drtlonline.com.

Mark Snider
President and Founder ERAI Inc.
Founder, Inc

Company: ERAI Inc.
Speaker: Mark Snider
Title: President and Founder
Email: info@erai.com | mark@erai.com @ERAI_Inc

About ERAI Inc.
ERAI is a global information services organization that monitors, investigates, reports and
mediates issues that are affecting the global supply chain of electronics ERAI is the industry's
electronics. industry s
leading source of risk assessment information and insight enabling companies to analyze risk
mitigation on vendors, customers and parts. As an organization, we utilize the power of
partnership by uniting our Members through data sharing and knowledge, which in turn provides
critical information services to our Members.


ROUND 1: Issues & Implications
•U.S. Defense Authorization Act of FY 2012
•Whitehouse Bill and the Levin / McCain Amendment
•Electronic Recycling, Waste and Counterfeits
•The Role of Exports of Used and EOL Products
•Counterfeiting / Intellectual Property Rights
g y g
•China’s Role in the Electronics Supply Chain
•Asia-Pacific Commodity /Sourcing Concentrations
•Potential Implications of Counterfeit Legislation
•Globally Integrated Supply Chain
Globally
•Franchised, Authorized, & Independent Distribution
•Counterfeit Electronics & Component Obsolescence
•Supply Chain and Counterfeit Risk Mitigation


Marina Malenic
Aviation Reporter Jane’s Defence Weekly
Reporter, Jane s

Company: IHS Jane’s
Speaker: Marina Malenic
Title: Aviation Reporter, Jane’s Defence Weekly
Website: www.janes.com @IHSJanes
Phone: 800.824.0768 @JDefenseWeekly
Email: info@janes.com | Marina.Malenic@Janes.com

Panelist will provide prepared remarks on the following issues:

• The U.S. Defense Authorization Act of 2012
• The Whitehouse Bill
• The Levin / McCain Amendment
• Counterfeit Electronics Provisions


U.S. Defense A th i ti Bill f FY2012
US D f Authorization for
• U.S. Senate passed $662 billion
p
defense authorization bill for 2012
• Approved via 93-7 vote

• $527 billion for Pentagon's base
budget
• $117 billion for war spending
• $1 billion less than Pentagon’s request

• $17 5 billion for defense programs
$17.5
• Overseen by Department of Energy


U.S. Defense A th i ti Bill f FY2012
US D f Authorization for
• In defiance of a White House veto threat,
includes a provision on terrorist suspects
that would require military oversight of
detainees.

• Includes a measure that would make the
head of the National Guard a member of
the Chiefs of Staff--a move opposed by
the panel’s existing members.

• Another amendment would accelerate
the Pentagon’s deadline for a statement
of budget resources, moving it up three
years to September 2014.


"Counterfeit parts
pose an i increasing
i
risk to our national
security,
security to the
reliability of our
weapons systems
p y
and to the safety of
our men and women
in uniform.”

Arizona Senator John McCain


Counterfeit Legislation – H
C t f it L i l ti How W G t Here
We Got H
• In March 2011, Senators Levin & McCain announced a Senate Armed Service Committee
(SASC) investigation into counterfeit electronic parts and the risks they pose to the
Department of Defense (DoD) supply chain.

• In June 2011, Senator Whitehouse, proposed his own counterfeit bill, the Combating
Military Counterfeits Act of 2011, to crack down on criminals who traffic in counterfeit
military goods/services.

• November 8, 2011, the SASC held a hearing with DoD contractors, industry associations
and others in Washington, DC after which Senator Levin p
g promised a swift g
government
response. It was revealed that 1,800 incidents and over 1M parts have been reported.

• November 29, 2011, the Whitehouse measure was amended to the McCain / Levin bill
and then unanimously approved by the Senate. It has moved to the House for discussion.

• December 1, 2011, Senate passage of the Defense Authorization Act for Fiscal Year 2012

• Today, the Defense Authorization Act for Fiscal Year 2012 has been passed by the
Senate and the House of Representatives and is under revision by conference committee


Carl Levin
C l L i on th L i M C i A
the Levin-McCain Amendment
d t
• Prohibits contractors from charging the Defense Department for the cost of fixing the problem when
counterfeit parts are discovered.
discovered
• Requires the department and its contractors whenever possible to buy electronic parts from original
component manufacturers and their authorized dealers or trusted suppliers who meet established
standards for detecting and avoiding counterfeit parts.
• Requires military officials and contractors who learn of counterfeit parts in the supply chain to provide
written notification to the contracting officer, the Department of Defense Inspector General and to the
Government-Industry Data Exchange Program.
• Requires the Secretary of Homeland Security to establish a methodology for the enhanced inspection of
electronic parts after consulting with the Secretary of Defense as to the sources of counterfeit parts in
the defense supply chain.
• Requires large defense contractors to establish systems for detecting and avoiding counterfeit parts,
and authorizes reductions in contract payments to contractors who fail to do so.
• Requires DoD to adopt policies and procedures for detecting and avoiding counterfeit parts in its direct
purchases, and for assessing and acting on reports of counterfeits.
• Adopts provisions of a bill sponsored by Sen. Sheldon Whitehouse, D-R.I., to toughen criminal
sentences for counterfeiting of military goods or services.
• Requires DoD to define the term “counterfeit part,” and at a minimum to include in that definition
counterfeit part
previously used parts represented as new.”

Amendment Requirements Timeline
A d tR i t Ti li

Contractor All contractors, subcontractors and Department of
Defense employees must provide a written report
Secretary of Defense shall implement a program on suspect or detected counterfeit parts to the
for the improvement of contractor systems for the Inspector General of the Department of Defense
detection and avoidance of counterfeit electronic within 30 DAYS
parts and suspect counterfeit electronic parts
270 Days

The Secretary of Defense shall take steps to
Department of Defense address shortcomings in Department of Defense
systems for the detection and avoidance of
Secretary of Defense shall revise the counterfeit electronic parts and suspect counterfeit
t f it l t i t d t t f it
Department of Defense Supplement to the electronic parts
Federal Acquisition Regulation to address the
detection and avoidance of counterfeit 270 Days
electronic parts
180 Days
Promulgate the guidelines, policy
statements, or amendments
provided for in this Act

Day 0 Day 180 Day 270

Kristal Snider
Vice President ERAI Inc. and SAE International G 19 Committee Member
President, Inc G-19

Company: ERAI Inc.
Speaker: Kristal Snider
Title: Vice President and member SAE Intl G-19 Committee
Phone: 239.261.6268 @ERAI_Inc
Email: info@erai.com | ksnider@erai.com


• Counterfeit Electronics
• China’s Entry to WTO
• Electronic Recycling and e-Waste


Counterfeit Incidents 2005-2008
-Defense Industrial Base Assessment: Counterfeit Electronics

Copyright © 2011 ERAI Inc. All Rights Reserved.

ERAI’s Role in Combating Counterfeits


Counterfeit Incidents (ERAI, GIDEP) vs. Revenues ($Billions)
from 2001 – 2011

ERAI Accounted for Over 90% of High Risk and Suspect
Counterfeit Parts Verified and Reported from 2001-2011

What is Being Counterfeited

In a typical recent two weeks of ERAI provided data (Reported
Companies)
Five suspect counterfeit shipments (3 integrated circuits, 1
transistor, 1 capacitor), $55,169.00

• 6,233 ICs at $44,154 = $7.08 per
• 500 transistors at $1 015 = $2 03 per
$1,015 $2.03
• 200,000 capacitors at $10,000 = $0.05 per
• These are just the companies that were reported by ERAI
members,
members usually due to disputes
• These instances are seldom reported to GIDEP

Slide compliments of Fred Schipp-MDA

What is Being Counterfeited

June-July 2011 ERAI reported
186 suspect counterfeit parts

– Integrated Circuits – 81%
• Processors/Controllers – 14%
• Memory – 12% (mostly FLASH)
• Transmitter/Receivers – 7%
• Operational Amplifiers – 6%
• Programmable Logic Devices – 5%
• Digital Switches – 5%
• Converters – 4%
• Field Programmable Gate Arrays (FPGA)
– 4%
– Discrete Transistors – 8%
– Discrete Diodes – 4%
Di t Di d
– Capacitors – 4% (mostly aluminum
electrolytic)
– Inductors – 1%

Slide compliments of Fred Schipp-MDA

The Effect of China’s 2001 Entry to the WTO?


The Effect of China’s 2001 Entry to the WTO?

Copyright © 2011 ERAI Inc. All Rights Reserved

Estimated units of E-Waste in the US

Copyright © 2011 ERAI Inc. All Rights Reserved

Who is exporting e-waste?

Electronic Waste
i i
• Place of Origin: South
Carolina United States
Specifications
4 40' High Cube containers of
Computer Scrap weekly
We have 4 containers of
Electronic Scrap weekly
available for sale.
Items include, CPU, servers,
circuit boards, Cash Register
i i b d h i
(486dx2), cell phone,
laptops, non-working lcd,
etc.
Please call Jon Hoant at 704-
345-4786 to negotiate
pricing. or e-mail me
Thanks and have a great day!
Bill
NT E t
Enterprise
i

http://www.alibaba.com/product-
free/103723094/Electronic_Waste.html

Paul E. Hagen
Principal,
Principal Beveridge & Diamond P C
Diamond, P.C.

Company: Beveridge & Diamond, P.C.
g
Speaker: Paul E. Hagen
Title: Principal
Website: www.bdlaw.com
Email: phagen@bdlaw.com


• Exports of Used and EOL Products
• Take-Back laws & International Waste Shipment regimes
• The Responsible Electronics Recycling Act
• China’s Import Controls on Used Equipment and e-Waste


Exports of Used and EOL
Products
 New product take-back laws and
take back
expanding customer demands in key
markets are directing larger volumes of
equipment toward recycling and reuse.
 National laws often impose
requirements on the collection, storage,
recycling and export of wastes
wastes,
including some e-wastes.
 E-waste exports are a priority concern
for th U S
f the U.S. and many other
d th
governments with significant initiatives
underway within the Basel Convention.
 Link between U.S. exports of e-waste
and counterfeit problem? 40

Take back
Take-back Laws for Electronics

Evolving International Waste
Shipment Regimes
Shi tR i

 The Basel Convention (global)
 178 Parties (but not the U.S.)
 OECD Council Decision C(2001)107/Final
Co ncil
 OECD Expansion (e.g., Chile, Israel)
 Other “Article 11 Agreements (e g U S
Article 11” (e.g., U.S.
bilaterals)
 EU Waste Shipments Regulation
p g
 Regulation (EC No. 1013/2006) effective 2007
 EU WEEE Directive Recast

42

Exports of Used and EOL Products
p
• Basel Convention parties moving to
g
classify many types of WEEE as
hazardous wastes subject to controls
and trade bans.
• Negotiations on whether used
equipment intended for repair/reuse
must be managed as “waste.”
g
• E-waste technical guidelines
considered at COP-10 in October with
negotiations continuing in 2012.
• New logistical challenges, trade bans
and compliance costs for managing
used and end-of-life electrical and
end of life
electronic equipment world-wide.
43

E-waste Exports: U.S. Regulation
• Exports of “Hazardous Waste” regulated under RCRA.
p g
• Separate EPA rules governing exports of certain waste
for recycling to OECD countries.
• EPA CRT Rule
– Notice and consent requirements for exports destined
for recycling
– One time notice to EPA and recordkeeping
requirements for exports destined for reuse
• E-waste exports an EPA policy and enforcement priority.
• U.S. subject to Basel Convention non-party trade ban.

44

H.R. 2284: The Responsible Electronics
Recycling Act of 2011
R li A t f
• Introduced by Reps. Green (
y p (D-TX) and Thompson (
) p (D-
CA) on June 23, 2011.
• Proposes to prohibit the export of e-waste to developing
nations that are not members of the OECD or the EU, or
Liechtenstein.
• Establishes an expansive category of “restricted
electronic waste” that cannot be exported from the U S
waste U.S.
to these developing nations.
• Requires notice, prior written consent, and licensing to
export any used electronics th t are exempt from the
t d l t i that tf th
export prohibition.
• Effective 2 years after the date of enactment.
y

45

China Import Controls on Used
Equipment and E-waste
i t d E- t
• Article 25 of the Solid Waste Act of the People’s
p
Republic of China
– Prohibition on import of solid waste that is unusable as raw
materials or cannot be used in a hazard-free manner
hazard free
– Catalogue of Solid Waste Prohibited for Import
– Catalogue of Restricted Wastes that can be Used as Raw
Materials (imports allowed with approvals of AQSIQ and MEP)
– Catalogue of Automatic-Licensing Solid Waste Imports that can
be Used as Raw Materials
• Measures for Administration of Import of Mechanical and
Electrical Products identifies used products destined for
repair/refurbishment that can be imported under a
p p
MOFCOM-led program, subject to approvals.
46

Sarah McDowall
Senior Analyst, Country Intelligence – Asia Pacific IHS Global Insight
Analyst Pacific,

Company: IHS Global Insight
Speaker: Sarah McDowall
Title: Senior Analyst, Country Intelligence – Asia Pacific
Website: www.ihsglobalinsight.com
@ihsglobalinsigh
Phone: 781.301.9325 (Company) | +44 203.159.3376 (Direct)
Email: info@ihs.com | Sarah.McDowall@ihs.com


• PELTOS Country Intelligence
• Political, Economic, Legal, Tax, Operational, Security
• Country Risk Ratings
• China’s Counterfeit Problem and IPR
• Trends and Outlook


Rating Components
Institutional permanence
Representativeness
Political Internal political consensus
External political consensus
Degree of market orientation
Policy consistency and forward planning
Economic Diversity and resilience of economy
Macroeconomic fundamentals
Legislation
Transparency
Legal Independence
Experience
Coherence
Fairness
F i
Tax Level
Effectiveness
Attitudes to foreign investment
Infrastructural quality
I f l li
Operational Labor
Bureaucracy and corruption
Civil unrest
Crime
Security Terrorism
External security threats

Country Risk R ti
C t Ri k Ratings


China’s C
Chi ’ Counterfeit Problem
t f it P bl
• Key Factors

• Manufacturers want to reduce costs and maximise profits
• IPR protection as a relatively new concept
• Gap between quality of legislation and implementation
• Lack of Political will
• Corruption
• Mentality of “Catching up with the West”


Trends and Outlook
T d d O tl k

Short-term

• More high profile government crackdown campaigns on intellectual
property violations

Long-Term

• Hard to resolve problem while China remains a one-party state with
weak of rule of law

• Problem should becomes less acute as China moves from imitative
to innovative stage of development
g p


Thomas J. Dinges, CFA
Global EMS & ODM Research Practice, IHS iSuppli
Practice

Company: IHS iSuppli
Speaker: Thomas J. Dinges, CFA
g
Title: Global EMS & ODM Research Practice
Website: www.isuppli.com
Phone: 310.524.4007 @iSuppli
Email: tom.dinges@ihs.com


• Worldwide Electronics Market Shares
• China’s Role in Global Electronics
• Asia-Pacific Commodity and Sourcing Concentrations
• Globally Integrated Supply Chains


China’s growing share of the
global electronics market
l b l l t i k t


Why is China so dominant in
electronics manufacturing?
l t i f t i ?
• Historic direct labor rates were materially lower
• “Endless supply of low-cost labor” was a key early selling point
• Lack of potential for work stoppage

• Robust supply chains established locally in China
• Primary components up through packaging locally sourced in China
• High value components delivered and warehoused locally

• Productivity and in some cases automation that rivals many
Western world capabilities
• Heavy capital investment over the past two decades as
predominantly Western companies “chased cheaper labor” to
improve product margins


China’s future electronics growth
is t industrial d i l
i auto, i d t i l and wireless

Electronics revenue in China increased 18% per year from 2000 to
2010 and reached $502.2 billion driven by auto, wireless and
data processing. Growth is estimated at 8% from 2010-15 driven
p g
by industrial, auto and wireless.
.

What is China’s future role in
electronics manufacturing?
l t i f t i ?
• Primary role will shift from provider of lower cost, lower value
assembly operations f many i d t i
bl ti for industries
• Key focus on supplying local market needs
• Technology transfer and higher value-added production come into focus
gy g p
• Some industries will slow investment in country
• Combination of higher labor rates and potentially higher currency cannot
offset productivity enhancements due to stable local supply chain
• Existing infrastructure modified for higher value add local supply

• Consumer-focused industries likely have no choice
• Highly attuned in-country supply chain
• Product shipping/logistic networks would be challenged to replicate
elsewhere


The global electronics supply
chain i not all about Chi
h i is t ll b t China
Japan
• 21% of Semiconductor Supply
• 49% of O ti l C
f Optical Components
t
• 57% of Image Sensors
• 40% of Microcontrollers
• 33% of Display Drivers
• 60% of Silicon Wafers
• Key Materials and Chemicals

South Korea
• 59% of DRAM
• 49% of Data Flash Memory
• 18% of Small/Medium LCD Panels
• 51% of Large LCD Panels

Taiwan (Hsinchu)
• 67% of Pure Play Foundry
(Globally: 150 Fabless Semiconductor Firms > $30M)
• 24% of Semiconductor Supply
• 58% of Small/Medium LCD Panels
• 34% of Large LCD Panels

China (Shanghai)
• 80% of Mobile PCs

China (Shenzhen)
• 25% of Mobile Handsets
Thailand
• >25% of HDD production
57

Globally-Integrated Supply Chains
Gl b ll I t t dS l Ch i


58

Glenn Bassett
Vice President Supply Chain IHS
President, Chain,

Company: IHS
Speaker: Glenn Bassett
Title: Vice President, Supply Chain
Website: www.ihs.com
@IHS_SupplyChain
Email: info@ihs.com | Glenn.Bassett@ihs.com

• Global Silicon Markets and OEM Spend
p
• Defense Electronics & Program Extensions
• Franchised, Authorized Sources of Supply
• How Trusted Channel Integrity is Broken


Where is the silicon going today?
Faced with constraints, who gets manufacturers attention?
manufacturers’

Source: IHS iSuppli 2011


Semic
conductor Sp pending
(M
Millions of Do
ollars)

2,000
4,000
8,000
14,000
16,000
18,000
20,000

0
6 000
6,000
10,000
12 000
12,000
Hew
wlett-Packard

Samsun Electronics
ng
Apple
Dell
Nokia
Panasonic
Sony
Kingston Technology
n
Lenovo
Acer
LG Electronics
G
Motorola
Toshiba
RIM
Top 20 Global OEM Spenders

Ci
isco Systems
2010
Consumer electronics OEM are at the front of the line

NEC
Fujitsu
SanDisk
2011

Hitachi
Asust Computer
tek
61

Defense A Small Slice of the Pie
Military / Aerospace Application only 1.9% of 2010 market

Global Semiconductor Market in 2010 = $304B
Military / Aerospace
Industrial Electronics 1.9%
7.3%
Automotive Electronics
7.5%
Data Processing
38.0%

Consumer Electronics
19.1%

Wired Communications
6.3%
Wireless Communications
19.8%

62

Despite Program Extensions
Service Life Extensions

• Air
• B-52 Extended from 2025 to 2040 in 2002 - Boeing
• F-15 A-D USAF could extend by 15 years – Aviation Week
• UH-60A/L Blackhawk extends life to 2025 – Sikorsky
y
• C-17 likely be extended from 2025 to 2050

• Land
• Equipment used at higher operational rates than peacetime
requiring more repairs & overhauls – Sep 2007 CBO study
• Sea
• DDG 51 & T id t subs extended f
DDG-51s Trident b t d d from 30 years t over 40
to
• DDG-51 class ships extended from 35 to 40 years – CBO
• Trident D-5 missile system extended from 30 to 40 years
• E
Enterprise carrier b il to l
i i built last 30 years i 50+ years old
is 0 ld


No Supplier is Immune to Counterfeit Risk
Open market suppliers are not the only victims of risk

“It is not uncommon, however,
for th i d di t ib t
f authorized distributors tot
purchase parts outside of the
OCM supply chain in order to
fulfill customer requirements –
58 percent purchase parts
t h t
from other sources.

Specifically, 47 percent of
authorized distributors
th i d di t ib t
procure parts from
independent distributors, 29
percent procure from brokers,
and 27 percent procure f
d t from
Internet-exclusive sources.”
Source: U.S. Department of Commerce,
Office of Technology Evaluation,
Counterfeit Electronics S
C f Survey,
November 2009.


Broken Channel Integrity Can Occur
Generally a result of mishandled inventory or procedures

• How is Channel Integrity Compromised?
• Returns Procedures

• Inventory Buys from CM/EMS/OEM

• Supply Chain / Forecast Breakdown

• Materials Obtained Through Acquisition
g q

• Why Do People Go To Open Market?
• Two reasons only
• Price

• Shortage


Cause: Japan Crisis
The country produces over half of worldwide silicon wafers

Semiconductor Fabs
Silicon Wafer Production 3 1 Aizu Wakamatsu, Fukushima
A Shin-Etsu Kamisu, Ibaraki
Shin Etsu  ON Semiconductor (Logic)
 Fujitsu (Analog, Discrete, Memory)
B Shin-Etsu Nishigo, Fukushima  Texas Instruments (Analog, Optical)
2 Atsugi, Kanagawa
C MEMC Utsunomiya, Tochigi
6  Mitsumi (Analog, Logic)
D SUMCO Yonezawa, Yamagata 3 Goshogawara, Aomori
 Renesas (Logic)
13 10 9
4 Gunma
11
Display Manufacturing D  ON Semiconductor (Discrete, Logic)
 Hitachi Displays 1 Epicenter  Renesas (Analog, Discrete)
 Panasonic LCD B 5 Hitachinaka, Ibaraki
 Tohoku Pioneer  Renesas (Logic, Micro, Memory)
6 Iwate
4
14 Fukushima  Fujitsu (Micro, Memory)
Resins, Films, Chemicals, 12 C  T hib (Di
Toshiba (Discrete)
t )
Copper Clad Laminate… 5
8 A 7 Kofu, Yamanashi
7  Renesas (Analog, Logic, Micro)
2 Tokyo 8 Miho, Ibaraki
 Texas Instruments (Analog, Optical)
9 Miyagi
 Fujitsu (Logic, Micro)
 Rohm (Discrete, Micro)
10 Sendai, Miyagi
 Freescale (Logic)
11 Shiroishi, Miyagi
 Sony Semiconductor (Logic)
12 Tsukuba, Ibaraki
 Rohm (Discrete)
( )
13 Tsuruoka, Yamagata
 Renesas (Logic)
14 Utsunomiya, Tochigi
Source: IHS iSuppli 2011  Matushita (Discrete)
66


Effect: Japan Crisis
Integrity broken to accumulate higher priced, higher risk materials?

To what extent has your company’s increased How have prices changed for impacted
normal purchasing for commodities, materials, commodities, materials, or components?
or components believed to be impacted?

Not at all 9.2% Significant decrease in prices 0.0%
Somewhat 21.7% Slight decrease in prices 1.7%
Moderately 34.2% No change to prices 24.2%
Significantly 6.7% 60%+ Slight increase in prices 40.8%
Very significantly 2.5% Significant increase in prices 4.2% 45%
Not applicable 25.8% Not applicable 29.2%

How have you or your suppliers increased the Which of the following do you believe are true?
use of open market or other independent
supply chains to source critical parts?
Prices are/or will increase for commodities, 69.2%
materials, components or services we need
Material shortages or obsolescence will 49.2%
Not at all 18.3%
increase
Somewhat 24.2%
Counterfeiting of electronics will increase 55.0%
Moderately 10.8%
Significantly 8.3% 40%+ We will use new suppliers or open market 27.5%
Very significantly 1.7% sources to satisfy demands
Not applicable 36.7% Other 7.5%

Source: IHS Online Poll April 21-29


Dan Ellsworth
President and CEO World Micro Inc
CEO, Micro, Inc.

Company: World Micro, Inc.
Speaker: Dan Ellsworth
Title: President and CEO
Website: www.worldmicro.com
@WorldMicro
Email: info@worldmicro.com | dellsworth@worldmicro.com

• Independent Distributors
p
• Brokers and the “Open Market”
• Implications of Defense Legislation
• Methods for Selecting Trusted Independent Distributors


Dan Ellsworth
Implications for Independent President & CEO
World Micro, Inc.
Distributors Suppliers
Di t ib t & S li December 8, 2011

Three types of distributors Independent distributors
Tend to carry many in-stock SKUs

May have contracts with manufacturers

Vendor neutral

Tend to have robust quality control systems

Tend to follow the “80/20” rule

Tend to buy unneeded excess from large
OEMs and CMs (e.g. IBM, GE)

Tend to supply what franchises and brokers typically cannot:
Obsolete Parts – Factory Allocated – Custom – Excess Purchases – 3PL Stocking – Long Term Distribution

The market from an independent
Independent distributors distributor’s viewpoint

Low barrier to entry
Anyone can participate in the open market
Estimated >4,000 distributors/brokers worldwide
Some operate under many aliases
The open market supplies components
p pp p
that are:
Legitimate | Tested | Untested | Out-of-spec or Non-
functional |Fakes: Remarked, Reworked Blacktopped
Remarked Reworked,

If you choose to participate you assume high risks
©2011 World Micro, Inc.

The open market is inherently risky
“caveat emptor”
Open / broker market

Capital expenses for testing/detecting
Obtain
Ob i certifications, establish on-going
ifi i bli h i
testing/compliance programs
Get on QSLD
Q
Work with DoD, follow all guidelines
Work more closely with primes
& sub-primes
Have process for GIDEP reporting
Align i h
Ali with associations
i i
like ERAI, IDEA etc…

What does it mean to
The Defense Authorization Bill independent distributors?

Short-term iimplications
Sh t t li ti Get involved

Why it’s Benefits of using independents in mission critical applications
Important when regular supply is disrupted:

Parts will largely be inspected with robust equipment
Great reduction in counterfeit parts entering US borders
Demand for Chinese fakes disappears with modified
government purchasing habits
Provides a trusted supply channel

Human lives are at stake
Benefits and implications
when using independents
h i i d d t

At Minimum
Certs: ISO9001,AS9120,ANSI20-20A,AS13485,
ITAR compliance

Certified and listed on the QSLD list

Well document QC process

Inspectors certified to IDEA-ICE3000 standard

Technology to inspect for and detect counterfeits

ERAI, IDEA, or other memberships

Strong financial background, D&B score

Open to onsite audit

Develop a list of minimum requirements
Selecting a good independent

Thank you for your time today

Dan Ellsworth
Implications on Independent President & CEO
World Micro, Inc.
Distributors Suppliers
Di t ib t & S li December 8, 2011

Mark Northrup
VP of Advanced Technical Operations & Strategy, IEC Electronics
Strategy

Company: IEC Electronics
Speaker: Mark Northrup
Title: VP of Advanced Technical Operations & Strategy
Website: www.iec-electronics.com
@IECElectronics
Phone: 315.332.4283 (Direct) | 315.573.2873 (Cell)
Email: mnorthru@iec-electronics.com
mnorthru@iec electronics.com

• Possible OEM, CM, Supplier, OCM Reactions to Defense Bill
, , pp ,
• Designing Out Obsolescence
• Methods and Systems for Obsolescence Management


Obsolescence Reality?

Percent of Commercial Off The Shelf (COTS) parts that are out of production (un procurable) versus the
(un-procurable)
first 10 years of a surface ship sonar system’s lifecycle. (Courtesy of NAVSURFWARCENDIV Crane)

Source: The Engineering Economist, Vol. 51, No. 2, pp. 115-139, April-June 2006

12/8/2011 Created By: Mark Northrup 77 of 11

Industry reaction legislation?
Supplier CM OEM

liability liability liability

liability
li bilit liability
li bilit liability
li bilit

Tactical Response?
 Flow down through suppliers  Waive liability?
 Refusal to provide obsolete parts  End programs?


Industry reaction legislation?

Dual Path Approach?
 fund test, audit, and certify trusted obsolete parts suppliers
test audit
 design out obsolescence and / or decommission programs


Design Out Obsolescence ?
b l

The Only True C
Th O l T Component Ri k Miti ti S l ti
t Risk Mitigation Solution
Risk Mitigation Testing Strategies (IDEA -1010, AS5553, Mil-Std-1580, Custom)

Obsolescence Mitigation Methods
 Test Plan Strategy
 i.e. IDEA-1010, SAE AS5553/AS6171/AS6081, Mil-std-
1580/883/750/202/981 for substandard parts
 Certification of Test Labs
 i e ISO 17025 for technical capability proficiency and
i.e., capability, proficiency,
repeatability
 Data Archive of Component Analyses for Distribution

Enabled through Tools for EOL, Obsolescence,
Counterfeit Mitigation


B i Mi i i S
Basic Mitigation Starts with P di i Lif
i h Predictive Lifecycle
l
Forecast for Part Analysis, Selection and Refresh
Component Years to End of Life (YTEOL)
 An estimated number of years before a component becomes obsolete.

Current 1– 2 3– 4 5– 6 7– 8
Availability Years Years Years Years
Available Available Available Available Available

Available Available Available Available Available

Discontinued Discontinued Discontinued Discontinued Discontinued

EOL Discontinued Discontinued Discontinued Discontinued

End item Available Available Discontinued Discontinued Discontinued
Parts Available Available Available Discontinued Discontinued

Available Available Available Available Discontinued



End it
E d item Years
Requirement

Wh t About “The U
What Ab t “Th Unpredictable”?
di t bl ”?
Natural disasters, geo-political, economic instability…


“The Unpredictable” Makes Part
The Unpredictable
PCN/EOL Alerts a Critical Requirement
Component PCN 40% CAGR from 1997-2010 Lead-free creates 20% new EOL 2006-2007
End of Life (EOL)
Specific to RoHS/Pb-free Environmental Compliance

2003 2004 2005 2006 2007 2008 2009

Component EOL 40% CAGR from ‘97 to ‘10 Demand weakness 90% of EOL in 2009
2,600
2,500
2,400
2,300

Semiconductor MSI (Right Scale) 2,200
End of Life Parts % of Total Parts 2,100
2,000
1,900
.80 1,800

.75 1,700
1,600
.70
1,500
.65
1,400
.60
1,300
.55
1,200
.50 1,100
.45 1,000
.40 900

.35 800

.30

.25
IHS EOL insight found “demand side” primary reason for 90% of EOL
g p y
.20 actions in 2009, vs. more typical 15-20% citations during 2004-2008
.15

.10
Millions Square Inches Silicon Processed - Semi
Parts: IHS Electronics Database
.05

.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Charts Courtesy of IHS Inc., 2011

Mitigation Should Always Consider Part
Alternates from Trusted Supplier Sources

Trusted
Original Component Aftermarket Authorized Sales /
Independent
Manufacturer Manufacturer Distributor
Distributors

Mitigation Should Integrate Suspect
Counterfeit Part / Supplier Screening


Mark Snider
President and Founder ERAI Inc.
Founder, Inc

Company: ERAI Inc.
Speaker: Mark Snider
Title: President and Founder
Email: info@erai.com | mark@erai.com @ERAI_Inc


• Suspect Counterfeit and High Risk Parts
• Counterfeit Requirements within Defense Legislation
• Systems to Detect and Avoid Suspect Counterfeit Electronics
• Vendor Screening and Identification of Trusted Suppliers


1,800 Counterfeit Cases at SASC Hearing
Total Over 1 Million Individual Parts

“Failing to report suspect counterfeits and
suspect suppliers puts everybody at risk. We
need to make sure our regulations require
contractors who discover suspected counterfeit
parts in a military system to report that discovery
to the military right away.”
Senate Armed Services Committee Hearing Opening Remarks
Senator Carl Levin (D-MI) , Committee Chairman

Copyright © 2011 ERAI Inc. All Rights Reserved. 88

“Just One” Incident Can Cost Millions
Design interruptions can cost $ to over $
$0 $1M+

“According to the Missile Defense Agency, if the devices
had failed, the THAAD missile itself would likely have
failed. The cost of that fix was nearly $2.7 million”
Senate Armed Services Committee Hearing Opening Remarks
Senator Carl Levin (D-MI) , Committee Chairman
( )

THAAD Photo courtesy of Raytheon Company
Copyright © 2011 ERAI Inc. All Rights Reserved. Source: http://www.raytheon.com/newsroom/rtnwcm/groups/public/documents/image/rtn_missile_defense_gal_06.jpg

New Pending Legislation Requirements
Example from current defense amendment

• Require covered contractors to adopt and implement policies
and procedures consistent with applicable industry standards,
for the detection and avoidance of counterfeit electronic parts
and suspect counterfeit electronic p
p parts
• Mitigation of risks associated with parts obsolescence

• Development of lists of trusted and un-trusted suppliers

• Report and quarantine suspect counterfeit electronic parts


How Has ERAI Aligned Itself to Industry’s
Needs d Thi N
N d and This New Legislation?
L i l ti ?

ERAI provides proven tools to mitigate risks on
substandard parts, counterfeit parts, vendors and
even customers.
t
Trusted Suppliers High Risk Suppliers Suspect Counterfeit & High Risk Parts


ERAI’s Potential Trusted Suppliers
Mechanism to avoid blind open market purchases
Shown: SMT Corporation

Shown: World Micro, Inc.


Screening Potential Un-Trusted Suppliers
Validated market activity of high risk suppliers


ERAI Has a Proven Model Whereby Anyone
Can Report S
C R t Suspect C
t Counterfeit P t
t f it Parts


Over 90% of 5,000+ Verified Suspect
Counterfeit P t I id t f
C t f it Part Incidents from ERAI

Source: IHS Inc. 2011

That’s over 25 counterfeit part incidents per week that ERAI reports to customers!

Incidents Offer Details To Help Others
Notify, Share, Detect, & Avoid Counterfeits
N tif Sh D t t A id C t f it


In Seconds A Parts List Can Be Analyzed
Industry Average: 0.5% – 5% Match to Reported ERAI Incidents


Join Me in Thanking Our Panelists

Marina Malenic Kristal Snider Paul Hagen
Aviation Reporter Vice President Principal
Jane’s Defense Weekly ERAI, Inc. Beveridge & Diamond

Sarah McDowall
Senior Analyst, Country
Analyst Dan Ellsworth Tom Dinges
Intelligence – Asia Pacific President and CEO Analyst, EMS & ODM
IHS Global Insight World Micro, Inc. IHS iSuppli

Mark Northrup
Glenn Bassett VP of Advanced Technical Mark Snider
Vice President, Supply Chain Operations & Strategy President and Founder
IHS, Inc. IEC Electronics. ERAI, Inc.


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