Gray Markets
Kirt's Cogitations™ #172

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Gray Markets

Caveat emptor - let the buyer beware. A wave of "gray market" components has saturated the supply chain that is causing both OEMs (original equipment manufacturers) and CMs (contract manufacturers) to work overtime trying to separate the wheat from the chafe. Gray market parts are manufactured by shops that specialize in counterfeit products that are often times nearly indistinguishable from the genuine parts.

Sometimes the counterfeits work well, but often premature failure is experienced, and the unsuspecting OEMs and CMs are left having to honor warranties that were based on MTBF calculations and empirical lifetime testing performed using genuine components. In many instances, a failed component is returned to the manufacturer that supposedly provided the part, only to discover that it is a knock-off of something they make. The intended supplier loses money because some counterfeiter has part of his market share and the OEM loses money by having to service fake parts and suffer the bad public relations that results.

Ample reports come out of trade shows in China where salesmen (and saleswomen) brazenly canvass the floor with a basket of goods and a handful of fake labels offering to sell as many of the counterfeit parts as the prospective buyer needs - branded with the genuine company's logo. A couple years ago, an epidemic of gray market power supply capacitors caused massive damage; fires started in chassis, flying parts injured the unsuspecting users, electrolyte oozed out  of cans onto PCBs, and generally wreaked havoc. A lot of inventory was scrapped. Every few weeks we hear another report of counterfeit  cellphone batteries are still catching on fire. Vendors like Nokia have gone to placing holographic labels on their batteries to mark them as authentic.

A number of websites have popped up to track the gray market parts (1, 2, 3), but it is a monumental task. Although they admit that it is only an educated guess, the World Customs Organization estimates that counterfeiting accounts for 5% to 7% of global merchandise trade, equivalent to lost sales of as much as $512 billion in 2004. Seizures of the bogus parts by U.S. customs agents jumped by 46% in 2004. To put it in perspective, the total gray market for all goods, not just electronics, is believed to be larger than the total narcotics trade.