Tag Archives: China

No Counterfeits, No Excuses

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In a move that already is causing no small degree of consternation, President Obama last Saturday signed a new law that places the onus squarely on the Pentagon’s supply chain for ensuring all electronics components in all defense products are legitimate.

The bill, part of the 2012 National Defense Authorization Act, requires that the Department of Defense, the Department of Homeland Security and their contractors  “detect and avoid counterfeit parts in the military supply chain.”

Counterfeits have been a known problem for years. (CIRCUITS ASSEMBLY has been warning of the issue at least since I came aboard in 2005.) I was personally told by a QA manager at one prime contractor that no less than a fourth of all the parts in some of its systems were suspected to be faked or otherwise out of compliance. And workshop after workshop told the tale of rivers of parts being shipped as e-waste to China, primarily the Shenzhen area, where they were separated and stripped from circuit boards, cleaned (usually in polluted water), sanded and remarked, and then resold into the supply chain. In a keynote at SMTAI in 2010, Tom Sharpe of independent distributor SMT Corp. noted some 29,000 incidents of counterfeits were reported to the US Department of Commerce between 2005 and 2008.

But the turning point, according to some analysts, was a Nov. 8 Senate Armed Services Committee hearing at which Congress heard compelling testimony on the sheer volume of fakes in the US military supply chain, including the results of a Government Accounting Office sting operation targeting electronics parts counterfeiters.

The evidence spurred Committee Chairman Carl Levin (D-MI) and Sen. John McCain (R-AZ) to lead a bipartisan effort to act. The result: legislation that establishes a program of enhanced inspection of electronic parts imported from any country determined by the Secretary of Defense to be a “significant source of counterfeit parts” in the DoD supply chain. The bill further requires defense contractors to establish policies and procedures to eliminate counterfeit electronic parts from their supply chains, and for the DoD to adopt policies and procedures for detecting and avoiding counterfeit parts in its own direct purchases.

Most important, the new law states those contractors that fail to detect and avoid counterfeits, or fail to exercise adequate due diligence, can be debarred. Furthermore, contractors can no longer charge the DoD for rework or related costs to remove and replace counterfeit parts, and they are held liable for any remedies required, regardless of where the counterfeit entered the supply chain.  The law affects all contractors at all tiers and is not limited to direct acquisition of parts. In other words, an EMS firm would be responsible for the counterfeit solder mask (yes, that happens) on a PCB it sourced from a fabricator in Asia (yes, that happens too).

Counterfeiting runs the gamut from the mundane to the highly sophisticated. In some cases, the trickery is performed by crude remarking and easily caught by a diligent inspector with an eye loupe. But at the upper end, it has evolved into a wholly systemic problem; again, we have been reporting on the “fourth shift” at various semiconductor factories, where workers build parts using legitimate materials and lines, but those parts are not subject to rigorous inspection and are sold “out the back” to unscrupulous third parties. In one egregious episode, VisionTech Components administrator Stephanie McCloskey was sentenced to prison and her boss, Shannon Wren, died of a drug overdose after facing similar charges for duping the US government in a long-running scam.

There is no question the supply chain has found counterfeit detection and prevention an expensive and difficult undertaking. XRF, chemical or laser etching and DNA marking are three of the more sophisticated means, although each adds time and cost to traditional inspection methods.

But the problem is too pervasive, and the risks too great, to whine about the costs. Counterfeiting has gotten completely out of hand. For those reasons, we welcome the bill and its well-conceived structure that puts the onus not on the taxpayer (via pass-along costs) but on the supplier, where it belongs. If this means contractors will have to start relying more on known-good suppliers, well, that’s not a bad thing either. I’ve seen far too many instances of high-level buyers at OEMs and EMS companies searching for parts on LinkedIn to be confident that the auditing many claim to have in place is being taken seriously.

The Chinese Diaspora

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In what might be the most fascinating labor development to come out of China this year, major ODMs are relocating workers west due to labor shortages.

One major reason companies in Shenzhen packed up their factories and moved inland (with the government’s blessing) was to chase a larger supply of lower-cost workers. Shenzhen had become too expensive, and migrants from the western farms were no longer so eager to move to the Southeast coast to take jobs. The diaspora was supposed to resolve both

But today the news out of China is much different. Quanta Computer and Compal Electronics reportedly have moved employees from east to west to support factories in Chongqing City, a municipality with a population of more than 28 million (!), due to short labor supplies.

Even in a country of 1.3 billion people, cheap, effective workers apparently are hard to come by.

The Chinese Diaspora

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In what might be the most fascinating labor development to come out of China this year, major ODMs are relocating workers west due to labor shortages.

One major reason companies in Shenzhen packed up their factories and moved inland (with the government’s blessing) was to chase a larger supply of lower-cost workers. Shenzhen had become too expensive, and migrants from the western farms were no longer so eager to move to the Southeast coast to take jobs. The diaspora was supposed to resolve both

But today the news out of China is much different. Quanta Computer and Compal Electronics reportedly have moved employees from east to west to support factories in Chongqing City, a municipality with a population of more than 28 million (!), due to short labor supplies.

Even in a country of 1.3 billion people, cheap, effective workers apparently are hard to come by.

Boston Bulls

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To the list of those bullish on the prospects for US manufacturing, add the Boston Consulting Group.

The consultancy group has issued a report that, in essence, gives China about five years before the gap between the two nations is closed.

The report contains few surprises. BCG points to steady increases in China’s wage rates and logistical costs, coupled with higher productivity in the US, as reasons for its optimism. Automation in China will have a deleterious affect on manufacturing there, as it will further reduce any labor rate advantage.

Moreover, any shift to other lower-cost nations such as Vietnam or Brmitl will be mitigated in part by those nations’ weaker infrastructures.

Pointing to past successes in fending off Taiwan and Japan, BCG says that US manufacturing sector in well into a period of adjustment and retrenchment, and “conditions are coalescing” for another American factory resurgence.

Worth a read.

Researchers’ Take on Trade Wars Hard to Swallow

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A group of researchers are asserting that onshoring low-cost manufactured goods back from China would not solve the US’s current economic woes.

The cost of an Apple iPad, they point out, includes about $10 for the workers who assemble it (and that may actually be high, from what I’ve heard). Meanwhile, each device sold helps maintain thousands of higher-paying design, software, management and marketing jobs.

OK, that’s all believable. But it’s the next part is harder to stomach. “Without China, Apple couldn’t be so successful and Apple products wouldn’t be so affordable,” said Yao Shujie, professor of economics at the University of Nottingham in England.

Not so fast. Apple’s margins are by far the highest in the industry. With lower margins, Apple might not be so profitable, but the affordability (an Apple comes at a premium for no other reason than consumers are willing to pay it) is a whole different bag of potatoes. Apple could pay a significantly higher price for onshore EMS work, yet given the fairly low labor content of an electronics assembly, could do so with no effect to the end-product price.

And it says here, those design, software, management and marketing jobs would exist regardless of where the product is manufactured.

Furthermore, the researchers extrapolate from this the idea that the effects a big change in the price of the yuan would have on US manufacturing would be fairly limited in scope. “Multinational firms that think currency appreciation is going to have a big effect on their export capacity from China to the United States are going to shift to other countries, not to the United States,” one researcher said.

Good point. But I would counter that the monies pouring from US consumers into Chinese hands serve to boost the latter’s national coffers, from which its military is deriving great benefit. Cuts in purchases of Chinese-made goods would help reduce China’s ability to assert itself militarily around the world. That would be a positive, too.

Should the US wean itself from its Chinese teat, the benefits would be seen in multiple, if somewhat less obvious, ways.

China Inc. Hits a Snag

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DigiTimes is reporting that a new round of fees levied by China on MNCs doing business there has bankrupted hundreds of electronics companies, and threatens the solvency of thousands more. The fees, which underwrite worker medical and injury insurance, are on top of government-mandated salary hikes. China has quietly extended the structure from covering just workers during their actual time of employment to underwriting their post-employment coverage as well. (Employees contribute a portion, but the businesses cover by far a majority share.)

More than 300 firms are said to have gone under already, and a Hong Kong official forecasts some 2,500 to 3,000 firms face bankruptcy this year alone.

And they say the US is unfriendly toward business.

It’s a fascinating turnabout for China Inc. and its “if we build it, they will come” attitude toward business, manufacturing in particular.

Now, there are many ways to view this. One is that, given the dollar amounts involved are rather low, the companies affected probably lacked the resources to compete over time anyway. A second is that China is targeting Taiwanese companies as part of its long-term strategy to force the island nation further under its umbrella (although from the story, non-Taiwanese companies are also being hit hard). A third is that China sees this as easy money and a way to look out for its domestic citizenry much in the way, say, the US levies Social Security taxes on alien seasonal workers even if they return to their home countries each fall and will never draw upon that retirement fund. And a fourth is that China recognizes that growth alone won’t pay for the soon-to-be top-heavy population it faces as the 1 child per family policy changes the age-plot dimension from rectangular to an upside-down pyramid.

But coupled with the staggering increase in wages seen there over the past few years — with many more to come — and China’s long-term dominance of manufacturing no longer feels like a fait accompli.

 

China Repeals Policy That Favors Chinese

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We’ve blogged about China before (see China Is More E Than E-Waste These Days).

In his article for Harvard Business Review called “What’s Wrong With America’s Innovation Policies,” Bruce Nussbaum talks about China’s “Fast Follower” innovation policy and how it’s a combination of state-driven policies that:

  1. require Western companies to partner with Chinese firms to do business
  2. demand transfer of the latest technologies in exchange for access to markets
  3. favoring “indigenous innovation” in government purchasing; fencing off green and other industries from foreign competition
  4. offering low-interest state-bank loans to local champions

Well, China has now repealed the technology policy that favored Chinese producers in government purchases of computers and other tech goods.  The policy was at odds with World Trade policies but was in place for a long time anyway.  This announcement from the Chinese Finance Ministry is the second time in a month that Beijing repealed a technology policy after complaints by its trading partners.

The Associated Press is now reporting that a brief ministry statement late Wednesday June 29 said the Chinese government would no longer enforce procurement rules that are part of a decade-old “indigenous innovation” campaign to spur domestic technology development.

“This repeal represents a forward step toward leveling the playing field in the government procurement market in China,” said Davide Cucino, president of the European Union Chamber of Commerce in China, in a written response to questions, as quoted in Product Design and Development.

Still, a great place to be in regards to profiting from China’s economic surge is, interestingly, in Education.  Parents sending their children to study in the U.S. is an insurance policy that many Chinese these days are purchasing.  While the trade playing field appears to be leveling on one hand, some argue that China is edging closer to a police state type of nation — leaving the educated, competent and savvy once again looking Westward for quality of life.

The Free Flow of Fakes

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While it’s true that counterfeit parts are pervading all aspects of the electronics supply chain (not to mention consuming all amounts of oxygen from industry pundits such as yours truly), is it possible our sense of fear is overblown?

By fear, I don’t mean “risk” — that’s the inherent chance of failure taken by, knowingly or not, using a fraudulent part. Rather, I mean the “if I do this I might get someone hurt and/or lose my job” feeling.

Yesterday, the SMEMA Council, a group of electronics assembly equipment OEMs, admonished customers to use only authorized channels for replacement parts and service. By using fake parts, SMEMA said, the risk (there’s that word again) users take is that the assembly equipment OEM could void their warranty. That’s a tough nut to swallow, considering the price tag of new placement machines, testers and screen printers.

The question I have is, why would SMEMA even feel compelled to issue such a statement? Faked parts (one old friend says in China, copyright means the “right to copy”) are ubiquitous and systemic. Two US senators this week accused China of blocking a probe into counterfeit electronics by refusing visas to investigators, but it’s hard to know whether the US is truly wants to stop the flow of knockoffs goods or just put pressure on China in order to exact other reforms or negotiating leverage. Indeed, so-called fourth shifts are not only common, they have been for years. So forgive me for being cynical when a few bureaucrats say they want to do something about it now.

In my opinion, there’s no end in sight to the free flow of fakes because, in fact, America and Europe don’t really fear the potential outcome. For a decade, manufacturing programs have been shuttled en masse to China. And while OEMs pay lip service to the notion that their IP is their livelihood, they aggressively seek out the manufacturing partners of their competitors, thus simultaneously ensuring their IP will be shared and that their products will be commoditized.

Let’s put it another way. If company ABC contracts to China and learns a few months later that every Chang, Wang and Li is walking around with a cheap duplicate of their widget, ABC may snort and snarl a few times, but will it fire the folks involved in outsourcing? Highly unlikely. But if that widget never gets built, or ships late because a machine is down or an oscillator is unavailable, heads will roll. Supply chain employee is thus naturally emboldened to take risks that they otherwise might be unwilling to contemplate. The wheel is set in motion.

SMEMA is trying to reorient customers as part of a much-welcome attempt to demand accountability, and I wish them luck, but I don’t think it will make much difference. The corporate buyer culture has changed.

Don’t believe me? Just go to the EMSInsider group on LinkedIn and look at all the listings by members looking for spare parts. Utilizing only approved vendors is nice and all, but when product needs to be shipped before the quarter’s up, the AVL is an industry anachronism.

The Non-Mentor Post

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Taking a break from the ongoing tennis match between one major CAD company and its, shall we say, less-than-pleased biggest shareholder, there’s been some interesting developments elsewhere this week.

As noted yesterday, Altium is packing up its HQ, R&D and marketing teams and moving them lock, stock and barrel to Shanghai. After hearing some of the usual chortling and catcalls, then finally speaking with Altium (late) last night, the rationale behind the move seems sound, if a bit abrupt. I’ll have more on that later today when I post the interview.

Also on the far West side of the Pacific (it doesn’t pay to sleep in this job) Fujitsu will integrate its signal integrity tool into  Zuken’s CAD suite. (Not certain yet what this means for Zuken’s own SI tools, which at the moment actually have a larger market share than Fujitsu’s.) The move would put the combined suite closer to No. 2 Ansoft in the SI arena. Mentor is still well ahead of the pack, but it’s a start.