The Global Chip Shortage and Brand Protection

As with the COVID-19 pandemic the worldwide microchip shortage was a global issue that few could have predicted. COVID-19 itself played a big role the ongoing supply issues but U.S. trade policy and an over reliance on a small number of fabrication plants all helped create a supply shortage that's expect to last until 2023. This disruption in the microchip market provides an opportunity for counterfeiters leading to lost sale revenue for brand owners, health and safety risks and even threats to national security.

COVID-19, Stay at Home and the Automotive Industry

The semiconductor industry has continued to grow rapidly in the past decade fueled by an ever increasing demand for silicone in consumer electronics. The industry was valued at $425.96B in 2020 and is expected to exceed $800B by 2028. The growth of wearable electronics and smart home devices has contributed heavily towards the demand for microchips in recent years but the automotive sector has played a bigger role than many realise. The wave of national lockdowns and stay at home orders at the start of the pandemic led to a slump in economic confidence and a contraction in automotive production. However, whilst vehicle production was declining the opposite was true for computer peripherals and home office equipment. As lockdowns turned from weeks into months sales of games consoles, televisions and other consumer electronics continued to rise placing further demand on microchip production. U.S. trade policy didn't help matters as some of China's largest semiconductor foundries like Semiconductor Manufacturing International Corporation (SMIC) started to be impacted by new restrictions with customers moving production to other (already overstretched) manufacturers elsewhere. The difficulty with microchip production is that suppliers cannot easily switch output to another type of chip overnight. As the demand for vehicle components started to increase towards the end of 2020 there was little that could be done to switch production.

The Counterfeit Chip Market

The market for fake consumer electronics is nothing new but in 2019 the value of counterfeit semiconductors alone was estimated at $75B. The decreased longevity of smartphones and other personal devices has exacerbated the the e-waste problem in recent years. Discarded electronics often have their circuit boards dismantled for recycling but microprocessors can find their way back into the supply chain relabeled as higher performance components than they actually are. Manufacturing a microchip requires multi-million dollar machinery, dust-free environments and a high level of expertise. It’s no surprise that with the knowledge and time required to transform a wafer of silicone into a microscopic network of billions of transistors that counterfeiters often choose to take older chips and sand down their markings only to repurpose them as a newer product. Counterfeit chips are often found on online marketplace platforms but can also make their way into the market though various brokers and secondary 'grey' markets.

The Next Big Opportunity?

The global pandemic showed how quickly counterfeiters will respond to changing market conditions to exploit high prices from demand- or supply-side shocks. The scarcity of chips used primarily in the automotive sector — and the inability for chip manufacturers to easily update production — make this a prime target for counterfeit chip suppliers in the next six to twelve months. However, with the global chip shortage expected to last potentially until 2023 this represents a larger risk for brand owners. The U.S. and EU vowed to ‘rebalance’ chip production to avoid a repeat of the current shortages but in the short term this does little to address the supply challenges or the attractive opportunities for counterfeiters looking to exploit the next big opportunity.

https://www.cnbc.com/2021/05/12/the-global-chip-shortage-could-last-until-2023-.html

https://www.fortunebusinessinsights.com/semiconductor-market-102365

https://www.reuters.com/article/us-autos-tech-chips-focus-idUSKBN29K0GA

https://semiengineering.com/combating-counterfeit-chips/

https://www.semiconductors.org/wp-content/uploads/2018/01/SIA-Anti-Counterfeiting-Whitepaper.pdf

https://www.bbc.co.uk/news/technology-57512511