Fake chips moving East amid industry crackdown

Emerging markets such as China are reinvigorating chip counterfeiting problem

Although chip makers have developed better strategies to combat counterfeiting, the absence of strong intellectual-property laws in emerging markets such as China means that the days of counterfeit chips are not over, according to industry experts.

About five years ago, chip counterfeiting was a rampant problem for the processor industry, said Dean McCarron, principal analyst with Mercury Research  in Cave Creek, Arizona, and a veteran chip industry watcher. Unscrupulous distributors or fronts for organized-crime syndicates could purchase bulk amounts of PC processors or memory chips on the regular market, and change the identifying characteristics of the chip's label in order to make the processor appear more powerful than it really was.

A more powerful chip would command a higher price on the "gray market," a network of secondary distributors that while not illegal, is not considered the chip manufacturer's official channel. Many of the chips bought on the gray market were legitimate, but enough were "re-marked" or tampered with to cause system problems and raise the ire of users and chip vendors.

Re-markers would change the label or reset the maximum clock speed on a processor in order to resell the product for a premium, McCarron said. At the time, industry leader Intel was delivering processors on cartridges that could be easily tampered with by a counterfeiter who knew how to work a soldering iron, he said.

Counterfeiting was a significant problem for Intel around 1996 and 1997, said Chuck Mulloy, a company spokesman. Intel's Pentium II chip was often reset to a higher clock speed than the chip was rated for, leading to a higher than usual rate of failures with those overclocked chips.

Advanced Micro Devices (AMD) also had problems with re-marked chips in past years, said John Greenagel, currently a spokesman for the Semiconductor Industry Association and formerly employed by AMD. In that company's case, it once contracted with a vendor that AMD had hired to destroy bad chips that had been deemed unsuitable for sale. That vendor would turn around and sell the chips to a re-marker, who would label the bad chips and sell them to unsuspecting users, he said.

Intel and AMD have learned from their experiences. Neither company sells processors in cartridge packaging anymore, opting for packaging technologies that would require sophisticated equipment to alter the processor's internal clock rate, McCarron said.

Intel also designed technology directly into its chips that made it much more difficult to change the factory-set clock rate of its processors, Mulloy said. It also set up a Web page (http://www.intel.com/support/processors/sb/CS-015477.htm) where users can download a utility that will examine their processor for authenticity, he said.

AMD sells processors in trays to its major customers, like Hewlett-Packard  and other large system builders, said Jonathan Seckler, product manager for AMD's Athlon 64 desktop processor. Those trays can be tracked by serial numbers, so that if a re-marked chip is found in the market AMD can tell which manufacturer bought the chip, and track down the counterfeiter accordingly, he said.

Individual system builders buy AMD chips in boxes, which are sealed with stickers and holograms that indicate whether the box has been opened since it left AMD's facilities, Seckler said. AMD also has a Web page (http://www.amd.com/pibsecurity) where users can verify that their processor is a legitimate AMD product.

Another factor helping to reduce the prevalence of counterfeiting is the decline in chip prices since 1999 and 2000. The high prices for memory chips around that period led to a number of hijackings at chip assembly plants in the San Francisco Bay Area around that time, McCarron said.

Counterfeiting activity in the major U.S. port of Los Angeles seems to also have decreased since that period, said Wesley Hsu, assistant U.S. attorney for the Central District of California. "It seems like [chip companies] are doing a pretty good job of technologically solving the problem," he said.

While counterfeiting in the U.S. is not as much of a problem as it was five years ago, much of the activity has moved to Asia and grown more sophisticated, said Daryl Hatano, vice president of public policy with the Semiconductor Industry Association, a trade organization based in San Jose, California.

In April, a truck delivering chips from Maxim Integrated Products  was hijacked in Malaysia, Maxim said in a release. The stolen chips were worth around $2.2 million, and had been marked with the appropriate speeds but had not gone through Maxim's final testing procedure, the company said.

Earlier this year, AMD revealed that police in Taiwan had arrested several suspects who had re-marked AMD chips for resale in Germany, China, and elsewhere. The company's German subsidiary said none of the re-marked chips have shown up in that country, but it remains unclear if re-marked AMD chips surfaced in China.

U.S. chip companies are starting to see more and more violations of their intellectual property coming out of China, Hatano said. One recent example involved a group that was stripping away layers of a chip to expose the processor core. Since chips are made by etching features onto a silicon wafer over a photo of the design, a counterfeiter could obtain the chip's blueprint by photographing each layer as it is removed, he said.

This level of counterfeiting goes beyond the traditional level of sophistication needed for chip hacking, Hatano said. In most cases of chip counterfeiting using this technique, a chip foundry must look the other way when a company claims to have a new design that needs manufacturing from one of the various foundries in China or Taiwan, he said.

The answer, at least in China, is more stringent anticounterfeiting regulations and stronger enforcement of existing rules, Hatano said.

"We want criminal law to be a real deterrent," Hatano said. "But just having the laws and regulations isn't enough, you have to have evidentiary procedures."

The World Semiconductor Council has called on governments to implement full intellectual property rights and enforcement measures, noting that such compliance is part of the obligations of members of the World Trade Organization. The council has called on foundries in Asia to insist upon written verification of the authenticity of a design submitted for manufacturing, such as a declaration that the designer is the rightful owner of the intellectual property contained within the chip.

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Copyright © 2005 IDG Communications, Inc.