July 28, 2022

How the Shortage Market is Creating More Obsolescence and Counterfeiting

Datalynq Team

Sourceability Solutions Engineer Vernon Densler recently discussed the issue at the Symposium on Counterfeit Parts and Materials 2022. He addressed when the shortage will end, how it’s changing the microelectronics industry, and what companies can do to mitigate the impact of rising obsolescence and counterfeit risks.

Here are some of the major points covered in Vernon’s eye-opening presentation.

The Shortage Market Isn’t Ending Anytime Soon

In the spring of 2021, market analysts believed the shortage market would end in the second quarter of 2022. At that time, the prevailing belief was that chipmakers and foundries would bring enough new production capacity online to close the supply-demand gap. But those forecasts proved inaccurate due to a pair of black swan events.

The most significant complication has been a COVID-19 flare-up in the Chinese mainland that began in January. Local leaders ordered strict lockdowns in areas with record-high coronavirus cases. The quarantine mandates severely disrupted the production and transportation of electronic components. Although many lockdowns have been lifted, manufacturers with factories in the region are several months behind on their production schedules.

In addition, Russia’s war in Ukraine broke several links in the global semiconductor supply chain. Component makers lost access to important raw materials such as neon gas, nickel, and palladium.

China's COVID resurgence and the war in Eastern Europe have greatly extended production equipment delivery dates. As a consequence, many semiconductor industry experts believe the shortage market will continue into 2024.

How Obsolescence and Shortages Are Increasing Counterfeit Risk?

The shortage market lasting almost two years has negatively impacted electronics companies beyond accelerating obsolescence. It has curtailed product availability and raised prices across the board, which has eroded profitability. And it’s sparked a significant increase in microelectronics counterfeiting and fraud.

Since the traditional marketplace couldn’t support manufacturers, they’ve become more desperate. Firms have abandoned supplier vetting practices and have paid unproven sources upfront to keep their production lines running. Those conditions have cultivated an environment that criminals have eagerly exploited.

The Independent Distributors of Electronics Association (IDEA) reported an increase in fake components in the global supply chain last summer. Moreover, the Electronic Retailer Association International (ERAI) discovered that a single fraudster bilked companies out of more than $300,000 in a few months. The organization determined that wire fraud cases reached a record high in 2021 as scam artists deceived firms with promises of quickly delivering hard-to-find parts. The ERAI also recorded 504 counterfeit part incidences last year, up from 463 occurrences in 2020.

Until the semiconductor industry’s shortage market ends, counterfeiting and wire fraud rates will continue. But that doesn’t mean OEMs, CMs, and EMS providers can’t take steps to protect their businesses from these threats.

Shortage Response Will Drive Component Obsolescence

Because of its staggering negative economic impact, leading chipmakers have responded to the shortfall by investing heavily in expanding their production capacity.

In the long-term, Intel, Samsung, and TSMC’s multibillion-dollar fabs will benefit electronics companies worldwide. More capacity will make the industry more resistant to predictable volatility and unexpected disruptions. Unfortunately, the expensive and complicated process of building, equipping, and staffing component plants takes a long time. Many chip factories announced in the last few years won’t go online until 2025, when the chip shortage is over.

Most of those factories will produce state-of-the-art components because of high demand and per-unit profitability. Companies are now removing older parts from their portfolios to free up resources to make newer components. IHS Markit found that chipmakers began to increase sending out EOL and PCNs in mid-2021.

At the same time, the automotive industry is betting big that the vehicle electrification trend will be a massive revenue driver and is dedicating significant capital to next-generation SoCs and memory modules to power their fleets. As car companies book more manufacturing space to produce advanced microelectronics, even more aging parts will become obsolete.

What do these developments ultimately mean for OEMs, CMs, and EMS providers?

Electronic components used in their product will never come back after the chip shortage ends. And future waves of obsolescence will hit so quickly that there will be no last-time-buy opportunities.

What Can Be Done to Reduce Obsolescence and Counterfeiting Risks?

While the causes of the obsolescence and counterfeiting trends are complex, the solution to mitigating these problems are straightforward.

First, electronics companies must establish Shortage & Obsolescence Plans, Teams, and Processes, which means devoting resources to creating practices and assigning personnel to deal with marketplace volatility. Launching these programs is especially important for device and equipment manufacturers with Defense Department contracts. Firms can better handle their impact by preparing for electronic component availability issues before they happen.

Sourceability built Datalynq to help companies establish their shortage and obsolescence plans, teams, and processes up and running. Its unparalleled market intelligence tools exist to help companies for the inevitable volatility and unexpected disruptions.

Along similar lines, firms need to establish Counterfeit Avoidance practices to keep fake parts out of their supply chains. OEMs, CMs, and EMS providers should only work with reputable vendors and marketplaces that maintain rigorous supplier rating standards. And it’s critical that buyers only work with merchants that have world-class quality control procedures in place.

Distributors that appear out of nowhere with large quantities of unobtainable parts that seem too good to be true usually are.

Counterfeit avoidance rules must be adhered to even under the most adverse conditions. It can be tempting to break the rules, but the consequences of being ripped off by a fraudster or counterfeiter aren’t worth the risk.

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In this presentation, Sourceability Solutions Engineer Vernon Densler discusses the transaction data-fueled shortage and obsolescence management methods he developed over two decades that power Datalynq's digital platform.

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