The gray market for electronic components is currently around $60 billion annually, making up from 6 to 8 percent of the electronic components market. Though electronic counterfeiting in the electronics industry has been problematic, it’s also important to understand how it supports the electronics industry’s gray market. Electronic components sold in this way will include branded products, though these are diverted from sanctioned distributors. As a result, manufacturers can’t authorize or support such sales, which may cause issues with warranties and technical support.
Additionally, when purchased on the gray market, electronic components advertised as authentic and new may instead be used, refurbished, or even counterfeit. This can cause additional problems for the companies that use them in their products and consumers who purchase these products containing electronic components from the gray market. Electronic components can negatively affect defense, aeronautics, automotive and other industries. Repercussions from using substandard parts can be significant and sometimes even catastrophic. For this reason, it’s important to understand the dangers inherent in purchasing electronics from the gray market.
Understanding the Supply Chain for Electronic Components
To understand this gray market, electronics supply chains must first be understood, as it provides a background as to why they exist in the first place. This includes making sense of the terminology that explains how components get from manufacturers to end users.
Here are some of the most common terms used when referring to electronics suppliers:
- Allocation: This refers to when excessive demand leads to limited product supplies; manufacturers, in response, allocate smaller quantities to authorized dealers, forcing buyers to consider gray market options.
- Extended lead times: When production capacity becomes limited – as happened during the COVID pandemic due to labor shortages, lack of raw materials, and supply chain issues – a manufacturer cannot produce enough, leading to longer wait times.
- Authorized distributors: These are distributors with direct relationships with specific electronics manufacturers that offer end users technical and other support while also helping ensure parts are traceable and warranties are honored.
- Design registration: This refers to designs registered by an authorized distributor, normally due to cooperation between manufacturers, distributors, and end users working together to develop specific components; it also normally involves a preferential pricing arrangement between the manufacturer and distributor.
- Supported pricing: Authorized distributors will sometimes buy electronic parts from manufacturers in bulk to receive discounts; distributors sometimes pass on these savings to their customers, providing a source from which some enter the gray market.
- Buffer stock: These are held by a distributor, sometimes via a negotiated agreement with an authorized distributor called a letter of intent (LOI) to secure pricing and availability of certain electronic parts; when these stocks have been depleted, the distributor has the responsibility of replenishing them.
- Gray market stock: These are electronics sold by brokers or unauthorized distributors and often include obsolete or allocated parts;. However, they’re often bought through an approved vendor, the link between the manufacturer and authorized distributor is no longer there, so end users risk purchases that could include refurbished or counterfeit components.
Sometimes manufacturers must buy from a gray market source because a part can’t be found anywhere else within a reasonable time. It’s imperative in such cases to have controls and processes in place, as well as inspection equipment, to mitigate risk from any suspect components.
What Are Gray Market Electronics?
Gray market electronics are normally legal, though tracing their origin is often problematic. While they tend to cause fewer problems than black market electronics, the opaque nature of their sourcing means substandard electronics are more likely to reach end users through the gray market. Electronic components in the gray market come from various suppliers, including e-commerce websites like eBay and Amazon, parts brokers, small companies, individual component resellers, and even larger corporations with global operations. Additionally, these parts often pose unacceptable risks to end users, which is why component manufacturers dislike the gray electronics market.
Sometimes gray market electronics are just the result of an original equipment manufacturer (OEM) having excess stock, though this also may occur due to overstock by an authorized distributor. When such electronic components enter the gray market, they lose their direct link to the OEM. While it includes outdated components, the gray market also makes the chance of rejected parts entering the supply chain more likely. There’s also an issue with gray market electronics involving both branded and new electronic parts being diverted from authorized distribution networks, with some listed as authentic and new being refurbished or counterfeit.
Why Are Gray Market Electronic Components Problematic?
No matter who the end user is, the risk of purchasing off the gray market is the same. Gray market electronics can enter the supply chain at numerous points, and tracing them back to the original supplier can be problematic. With a very low chance of getting caught, a gray market electronics dealer that bends or breaks the law risks very little, while the reward is great.
Risks of gray market electronic components include:
- Cost disparity: With inevitably lower prices in the gray market, electronic components through authorized distributors will seem much higher, which may negatively affect a brand.
- Counterfeit components: This is a real danger when purchasing gray market electronic components, as with fewer safeguards, fake parts can use authentic packaging or forged labeling to make them look real; while they’re no doubt cheaper than authentic components, these fake parts can have a major impact when used in critical infrastructure.
- Liability: With a greater chance of sourcing counterfeit, defective, or refurbished parts instead of new and authentic ones, gray market electronics raise the risk of an accident or failure due to the quality or reliability of the component, providing a case for possible legal action.
- Mislabeled components: Products on the electronics gray market may be mislabeled accidentally or even purposely; without the ability to trace or test components, it’s nearly impossible to know whether they’re genuine.
- Safety concerns: Sometimes gray market electronic components, especially obsolete ones, contain harmful materials, like those banned by the Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) directive in the EU.
- Support: Should a manufacturer decide not to provide support for gray market electronic components, this can lower end-user opinion of the brand and tarnish a company’s reputation.
- Warranties: Often, gray market electronics have no valid warranty or service agreement; many electronic manufacturers invalidate warranties on parts that don’t go through the proper channels.
Over the long term, gray market electronic components can negatively affect brand reputation, costs, liability, and revenue throughout the supply chain. Makers of brand-name electronic components thus prefer their products to be sold only through authorized channels, where appropriate quality control checks and support are provided.
How to Avoid Gray Market Electronics
For end users of electronic parts, it’s important to use trustworthy suppliers. It’s essential to understand, too, that many honest small businesses provide top-quality electronic parts, while some unscrupulous global corporations may try to cut corners by supplying gray market electronics. These days, it’s easy to evaluate a company’s reputation online, where one can find whether a specific company has previously supplied counterfeit or defective components or even refurbished parts instead of new ones. End users can even buy a sample and test it before buying bulk from a new supplier.
For customers who want to avoid the dangers of gray market electronics, it’s fundamental to:
- Acquire serial numbers of components with claimed warranties before purchase, contacting the manufacturer directly to ensure it’s covered by warranty.
- Report questionable distributors that use deceptive marketing practices that make claims of new, genuine parts that are instead defective, fraudulent, or refurbished.
- Research and create relationships with suppliers who prove trustworthy through guarantees that all components sold are new and authentic; it’s important to develop partnerships with honest distributors who offer timely support from certified electronics experts and provide their customers with the right parts at the best price.
- Understand local prices by breaking down the cost of every component in a configuration and identifying any sold at a much lower price by resellers.
The best way to avoid gray market electronics is by purchasing directly from manufacturers or authorized distributors. Though good deals can be found on the gray market, electronic components that don’t meet required standards will also make up a significant amount of available stock. To avoid gray market electronics is usually the safest option.
To learn more about gray market electronics, contact Solid State Inc experts. If you already know what you need, request a quote for new and genuine electronic components.