Government chips with DNA: Policy or folly?

The US Defense Logistics Agency (DLA)'s new anti-counterfeiting requirement became effective November 15, mandating that electronic microcircuits it procures must be "marked with botanically-generated DNA marking material." It's a move to address increasing concerns about the proliferance of counterfeit components, which carries the twin worries of reliability and security. Credit to John Keller over at our sister publication Military and Aerospace Electronics who has been tracking this story and hashing out its implications to the military supply-side.

Applied DNA Sciences and Altera have been working on technology which converts plant DNA into genetic codes, to be mixed with ink to mark products or even directly infused into materials. Detectable in the simplest way with a swab or blacklight, the technology is already used in end products including wine, textiles, and European bank notes. James Hayward, head of Applied DNA, flatly states "the strongest claim in the industry [...] which is our DNA cannot be copied."

The Semiconductor Industry Association (SIA), which has more than once voiced its opposition to the DLA measure, argues that it won't solve either problem of part quality or security. "It is clear that there are better, more efficient, and less expensive technologies that accomplish more than simply identifying what entity might have applied the DNA," the SIA asserts. Among its rebuttals to the DNA marking:

• It adds extra process and costs to existing lines. That's the very opposite of what chipmakers (and any manufacturers) want to hear.


• It doesn't encompass the entire value chain. Suppliers sell direct to government, and how do you track the original qualified source for parts that have shifted through the market and industry for decades?


• It doesn't address -- and might even impact -- component performance and reliability.


• It can be defeated. The SIA says the process could be circumvented by "mimic[ing] the material of the marker when counterfeiting a product," or by coping a marker from a legit device to a counterfeit one.


• It relies upon a single small supplier. Mulitsourcing is a long-embraced strategy to ensure reliable product quality and availability; should such an important policy and marketplace decision rest on one company's shoulders? (Not to mention potential marketplace-competitive angles.) In its letter to the DLA, the SIA goes out of its way to question Applied DNA's capabilities, from its barely 17-person "operations" staff to its balance sheet and the firm's own public admittance of questionable ongoing viability ("We have sufficient funds to conduct our operations until approximately November 2012"). Note that this week Applied DNA did land another $7.5M in financing from "accredited investor" Crede CG II, so presumably it's bought some time.

Ensuring total legitimacy of government components is a lofty goal, but unrealistic. It's one thing for Intel to want to track a part cradle-to-grave for a lightning-fast consumer market lifespan or a somewhat more measured B2B environment -- but it's an entirely different animal when that end market is a 60-year-old B-52 for which parts simply no longer exist through any other means besides channel middlemen, Keller explained to us. And for this new policy to truly be effective, shouldn't every component from individual devices to their packaging to integrated system have equal assurance of legitimacy? (How many layers of "trusted" qualifications will this require?) Little wonder, Keller tells us, that chip and electronics distributors to the government are balking at the new rules; eventually that parts pipeline will slow to a trickle and cause even bigger supply headaches for government purchasers.

The SIA, which has had its own counterfeiting task force since 2006, counterproposes that the semiconductor industry, DLA, and Department of Defense (DoD) should band together "to leverage existing technologies, individual company R&D projects underway, and a multimillion dollar research and development project to select a more effective anti-counterfeit technology." JEDEC also apparently is examining the viability of the DLA's new mandate and choice of technology. Both sides are gathering momentum to make pitches to meetings in the coming weeks. Everyone recognizes the need to address the problem of counterfeit parts, and it's good to push both dialog and action along -- let's hope all sides can continue to do so responsibly.

Intel CEO Otellini retiring; is there a strategic shift?

Longtime Intel (NASDAQ: INTC) CEO Paul Otellini has announced he will retire in May 2013 after nearly 40 years at the company and only the fifth CEO in the company's 45-year history. The chipmaking giant says it will consider both internal and external candidates for the job.

"After almost four decades with the company and eight years as CEO, it’s time to move on and transfer Intel's helm to a new generation of leadership," stated Otellini. He indicated he will be "available as an advisor to management after retiring as CEO."

Otellini "managed the company through challenging times and market transitions," acknowledged Intel chairman Andy Bryant. Indeed, the electronics world these days is far from the one reliant upon PCs in which Intel once dominated when Otellini first took office -- PC demand has waned (and has started to spill over into the enterprise side), macroeconomic malaise continues to stifle demand, emerging markets aren't as hot for PCs as they once were. And despite Intel's push with Ultrabook platforms to target the mobile device upsurge, it's still largely in an uphill battle against ARM-based technologies there.

So let the speculation begin: who's next in line? In the same statement as Otellini's retirement, the company acknowledged the promotion of three new EVPs: Renee James, head of Intel's software business; Brian Krzanich, COO and head of worldwide manufacturing; and Stacy Smith, CFO and director of corporate strategy. One might assume these will be among the internal frontrunners, along with David Perlmutter, current EVP/GM of the architecture group, and Intel Capital head Arvind Sodhani. In a research note, Barclays' CJ Muse points to Intel's history of appointment-from-within as favoring this route.

(Note that a onetime heir-apparent recently left the company: Sean Maloney, EVP and chairman of the company's China group, and former co-GM of Intel's mobility group and its architecture group, stepped down in September of this year. He might be equally well-known, though, for his inspirational comeback from a stroke in Feb. 2010.)

Some think, however, that Otellini's six-month notice might be an indication that an outside candidate is preferred instead of an internally-groomed successor. JoAnne Feeney with Longbow Research is quoted suggesting Intel seeks a more radical shift than just beefing up its mobile arsenal -- it needs to get more explicitly leverage its manufacturing prowess into a business asset, perhaps including a firmer commitment to foundry offerings beyond its current dabblings.

Whomever becomes Otellini's successor, he or she will have "plenty of wood to chop," notes Muse. "While we see no change to Intel's core manufacturing advantage, we think the successor will face many challenges related to Intel's struggle in navigating the declining PC market and difficulties in transition to mobility."

FBR Research's Craig Berger agrees. "Otellini has achieved many successes during his CEO tenure at Intel, and will generally be viewed favorably by history for revenue and earnings growth, and other operational improvements achieved," he writes. "That said, Intel is quite challenged in the mobile arena, with handsets and tablets cannibalizing core PC sales, and with Intel not achieving solid success in handsets or tablets.  [...] We believe the board’s mandate for the next CEO will be to effectively create, implement and execute a low power mobile processor strategy intended to suppress the most recent advances of ARM based architecture."