Desperate manufacturers are buying knock-off chips from unreliable sources

With demand for consumer electronics strong, and a chip shortage confounding the manufacturers of everything from smartphones to automobiles, another high-profile issue is impacting those firms that need to buy chips and those companies that sell them. According to TechRepublic, semiconductor scammers are selling counterfeit chips.

The complete process of "building" a legitimate chip can take as long as half a year. Lead times, the length of time between placing an order for chips and receiving them, has been increasing which is indicative of a shortage. The pandemic is to blame although some automobile firms failed to recognize the potential demand for cars from COVID weary consumers. When these people started ordering new vehicles, the manufacturers were dumbfounded and realized that they failed to replenish the inventory of the chips used to produce their vehicles.

Throw in the strong demand for cutting-edge chips from smartphone manufacturers, hoarding of chips by some companies, and you are left with firms that are willing to purchase these components in a panic mode, meaning that they are turning to unreliable sources to procure their chips instead of their normal supply chain; those producing knock-offs have the perfect environment for their scams.

The counterfeiters have started promoting their products using search engine ads, hardly the place where you would expect legitimate chip suppliers to fish for business. While some scammers ship fake semiconductors that are poorly made or don't work, in another version of the scam, the seller gets paid upfront for the chips. When they never arrive, the seller keeps putting off the buyer with excuses.

John Annand, an analyst and director in the infrastructure team at the enterprise IT analyst firm Info-Tech Research Group, says, "Many frauds occur simply because buyers are being pressured to release funds to hastily erected, web-based chip distributors, who just as hastily, shut down these websites by the time the promised product is supposed to arrive, destroying any potential for recourse."

Making matters worse, many manufacturers who get scammed refuse to publicly reveal that they have been ripped off because they do not want the competition to know about it. This prevents word-of-mouth from helping to shut down the counterfeiters. Another reason to keep these incidents secret comes from Mike Borza, who is the principal security technologist at Synopsys. Borza says, "Companies don't want to admit that they are not savvy enough or don't have sufficient control over their supply chain to prevent chip fraud.

Synopsys' Borza has some solutions that might reduce the purchase of knock-off chips by manufacturers. He suggests the use of "optical and electrical watermarking" on chips being delivered chips, the placement of "embedded cryptographic identity" info inside chips, and the use of "chemical or microscopic structural marking of packaging materials."

It might seem like common sense to increase the supply of chips to match the strong demand. Annand points out that fabrication plants are expensive to build and "the cleanroom facilities alone are 1,000 times cleaner than an operating theater, requiring 2 to 4 million gallons of incredibly clean water a day."

But there are more obstacles to building a chip factory than just finding the money as the IT analyst notes. "Even if we found the billions of dollars required for a modern foundry tomorrow—it would still take 18 to 24 months to build. Refitting an old plant for newer, bigger wafers could theoretically increase capacity, but even in 2011 that was a $500 million-plus proposition, assuming you could find the specialized lithography machines required," Annand states.

Selling counterfeit chips is a practice that could have serious consequences. Borza says, "They may operate incorrectly under certain conditions, or fail permanently before their normal expected lifetime. These kinds of failures can create reliability and warranty return issues, costing the product manufacturer and undermining customer trust."