Counterfeit and substandard chips are penetrating the supply chain, industry insiders warn
Many electronic manufacturers are now turning to risky supply channels to meet demand
Global markets are already seeing an increase in prices for component and electronics as a result of the ongoing chip production crisis, but there is another negative effect that semiconductor shortage could have on supply chains: a flood of fake, substandard chips.
As Nikkei Asia reports, Japanese electronics manufacturer Jenesis is one of those that have suffered the most as a result of the fake chip phenomena in recent months.
The firm was unable to procure microcomputers from its normal sources, and its division in southern China placed an order through a site run by Chinese e-commerce giant Alibaba.
Unfortunately, when the chips arrived, they were faulty.
An expert who inspected the chips at Jenesis' request found the specifications of the chips sent from China differed completely from what Jenesis had ordered. Interestingly, the chip manufacturer's name on the packages seemed to be genuine.
Jenesis, which had already made payments for the order, was unable to contact the supplier later.
This is a warning for electronics manufacturers trying to take 'chips in distribution' shortcuts to meet increasing demands.
The term 'chips in distribution' refers to chip inventories sold by sources other than manufacturers and authorised distributors. Such chips carry no warranty from the makers, and it is usually not clear where were they sourced.
Such products may include chips taken out of discarded electronic equipment, or chips that should have been disposed of after failing to meeting quality standards.
Counterfeiters pay close attention to the market to understand which products are in short supplies. For example, when the tsunami hit Japan in 2011, fraudsters disrupted the local electrolytic capacitors supply chain and increased supply of fake capacitors. As a result, several makers of motherboards and other parts had to buy capacitors from third parties. Very soon, large volumes of fake capacitors made their way to the market.
In June, Independent Distributors of Electronics Association (IDEA) founder Steve Calabria told ZDNet the worldwide chip shortages "have opened the door for criminals to exploit the electronic component marketplace," and said he was seeing "early signs of trouble".
"Companies that have never been rated by any other company in the industry [are] showing significant quantities of parts that are in shortage," he said.
Japan's Oki Engineering, which offers chip verification services, told Nikkei Asia that it had received some 150 inquiries since launching the service in June this year.
After examining about 70 cases, Oki's testers found problematic chips in some 30 per cent of them.
The global semiconductor shortage has affected many industries, including smartphone and carmakers, since the start of the pandemic. Forced factory closures due to social distancing measures, and unseasonal weather worldwide caused by climate change, have eaten into production levels at all chip firms.
Toyota, the world's largest automaker by sales volumes, announced in August that it would slash global production for September 2021 by 40 per cent, due to the shortage.
General Motors, Nissan, Ford, Honda and Jaguar Land Rover have all also slowed or temporarily stopped production at some plants this year.
Chip-makers have warned that the supply chain disruption could continue till 2023.