SAN FRANCISCO -- Although chip makers have developed better strategies for combating 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 PC processors or memory chips on the regular market in bulk and then change the identifying characteristics of the chip's label to make the processor appear more powerful than it really was.
A more powerful chip naturally commanded 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 and sold 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 so they could resell the product for a premium, McCarron said. At the time, industry leader Intel was delivering processors on cartridges that a counterfeiter who knew how to work a soldering iron could easily tamper with, he said.
While U.S. counterfeiting is less of a problem than 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.
Rampant in the 1990s
Counterfeiting was a significant problem for Intel around 1996 and 1997, according to Chuck Mulloy, a company spokesperson. 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 has 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. That company once contracted with a vendor the company to destroy chips deemed unsuitable for sale, but the vendor turned around and sold the chips to a re-marker, who then labeled the bad chips and sold them to unsuspecting users, Greenagel said.
Intel and AMD have learned from their experiences. Neither company sells processors in cartridge packaging anymore, opting for packaging technologies that resist alteration of the processor's internal clock rate except with sophisticated equipment, McCarron said.
Intel has designed technology directly into its chips to make changing the factory-set clock rate of its processors much more difficult, Mulloy said. It has also set up a Web page where users can download a utility that will examine their processor for authenticity, he said.
AMD now sells processors in trays to its major customers (such as Hewlett-Packard), said Jonathan Seckler, product manager for AMD's Athlon 64 desktop processor. Those trays can be tracked by serial numbers; so if a re-marked chip is found in the market, AMD can tell which manufacturer bought the chip and can 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 where users can verify that their processor is a legitimate AMD product.
Counterfeiting Moves East
Another factor helping to reduce the prevalence of chip counterfeiting domestically is the decline in chip prices since 1999 and 2000. The high prices for memory chips at around that time led to a number of hijackings at chip assembly plants in the San Francisco Bay Area, McCarron said.
Counterfeiting activity in the major U.S. port of Los Angeles seems to also have decreased since then, 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.
On the other hand, 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 manufacturingn, he said.
The answer, at least in China, is more-stringent anti-counterfeiting 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 one obligation 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.
