Why Is The Pentagon Finding Counterfeit Chinese Electronics In Critical Military Equipment?

It’s well publicized that the U.S. government is fighting an uphill battle against counterfeit products from China, such things as fake handbags, watches, and other consumer goods. But less well known -- and much more embarrassing and potentially harmful to the U.S. -- is the increasing prevalence of fake or spurious recycled semiconductors from China presented as new making their way into the Pentagon’s supply chain, eventually to be put into the computers controlling America's military ships, jets, and missiles.

The U.S. military, still operating some weapons systems made during the 1970s and 1980s, is constantly looking for electronic parts for its thousands of antiquated machines, which contain hundreds of millions -- if not billions -- of electronic components.

In many cases, the original manufacturers of this equipment have already moved on and are not making many of these components anymore. As a result, American armed services now need to order parts from lesser-known, secondary military contractors, which in turn seek out tiers of smaller subcontractors and suppliers that deal in residual stock. As the supply chain lengthens, the likelihood of lower-level suppliers simply ordering cheaper and difficult-to-locate parts through the Internet and perhaps from firms located in southern China, the world’s hub for recycled electronics, increases.

If these parts fail -- and their failure rate is much higher than that of new equipment -- the result could be systemic loss of a key capability in navigation, targeting, signaling, or displays in critical military equipment.

Complex Pathways

The Government Accountability Office, or GAO, the U.S. government's internal auditing organization, released reports as recently as February stating that batches of fraudulent parts it discovered in its investigations included those usually found in advanced weapons systems such as the F-15 fighter, the AC-130 gunship, the B-1 and B-2 strategic bombers, the F-18 Super Hornet jet fighter, the V-22 Osprey tilt-rotor aircraft, the Trident and Los Angeles class nuclear submarines, and even the Peacekeeper nuclear missile.

Last June 24, the GAO reported that the problem of product quality maintenance and oversight of the supplier base has even affected NASA equipment, military satellites, and missile defense.

Last month, the U.S. Senate Armed Services Committee, or SASC, released results of an investigation into counterfeit supply chains, naming the SH-60B Seahawk helicopter, as well as the C-27J and C-130J transports, as other vulnerable aircraft. The SASC confirmed in its inquiry that fraudulent parts had been delivered to the military, and that, in some cases, it took contractors longer than a year to inform the Pentagon of those deliveries. In a number of cases, they did so only after being contacted by the SASC.

Following the chain back to China can be a difficult exercise in global sleuthing. The case of the Seahawk helicopter is emblematic.

The press office of helicopter giant Sikorsky, maker of the Seahawk, said it hasn't made a Seahawk airframe delivery to the U.S. Navy since the 1990s and no longer even builds the helicopter.

The infrared targeting system on the helicopter was made by Raytheon, a major defense contractor that specializes in electronics and guided missiles. Raytheon, based in Massachusetts, got the electronic chips for the system from Texas Spectrum Electronics, which in turn received them from the Technology Conservation Group in Florida. It bought them from Thomson Broadcast LLC, also based in Massachusetts. Thomson obtained them from E-Warehouse in California, which bought the parts from Pivotal Electronics in the U.K. And Pivotal originally purchased them from Huajie Electronics in Shenzhen, China.

The process reveals a global thread for a group of bogus chips that changed hands among seven companies across three countries. It is likely that nobody except the original Chinese company knew the parts were fake -- and, even then, electronics dealers in China may be swindled by their own separate domestic tiers of suppliers.

Known Unknowns

The SASC report on one small segment of the supply chain between 2009 and 2010 found 1,800 different cases of bogus components, involving more than 1 million parts. Seventy percent of its investigations into those cases led back to recycled-parts dealers in southern China. The Senate called the Government-Industry Data Exchange Program, or GIDEP, which encompasses a database of suspected fake parts, woefully lacking. During the investigative period, the GIDEP only logged 271 counterfeit products.

Last year, a U.S. Commerce Department report indicated separate cases of counterfeiting rose to 9,356 in 2010 from 3,868 in 2005.

In 2008, Robert P. Ernst, who led research into counterfeit parts for the U.S. Navy's Aging Aircraft Program, claimed that as much as 15 percent of all the replacements the Pentagon was purchasing could be considered counterfeit.

In September 2010, defense supplier Vision Tech Components was charged by the U.S. Justice Department with conspiracy and trafficking of counterfeit electronic parts to the Defense Department. The company's founder, Shannon Wren, eventually committed suicide in May of the following year. Industry experts believe that only 1 percent of the total number of parts supplied by Vision Tech were ever confiscated.

But how many counterfeit electronics are actually in the supply chain today and are now installed in the machines and computers that the military relies on? Cristina Chaplain, the director of the acquisition and sourcing management team at the GAO, said it is difficult to arrive at an authoritative figure because there is no current mechanism within the Defense Department to routinely track counterfeit parts.

Lisa Gardner, a senior analyst on the same team, said that at this point there's no baseline for giving a specific number on how many of the parts delivered every year are sham. Nor is there a conclusive way of knowing how many currently installed components within military platforms are actually fake.

The process for detection itself is arduously difficult. Components have a natural breakdown rate. Some may be faulty even though they come from legitimate suppliers; others become flawed simply from use. Additionally, the Pentagon's own database for counterfeit parts does not fully capture the picture of how many counterfeits are floating in the marketplace.

Indeed, the logistical problem is immense. A military aircraft, with millions of different parts, may have as many as 50 or 60 problem pieces. It is difficult to known which specific ones are counterfeited and then to track, record, and update government databases accordingly.

But the military faces a unique problem because its components need to work at a higher standard, need to perform under greater stresses, and need to be replaced on shorter notice. More important, human lives depend on all critical components working together effectively -- a single break could result in catastrophic failure of an entire system.

Semiconductor experts contend the problem has been around for about a decade, if not longer.

John Neumann, the assistant director of the acquisition and sourcing management team at the GAO, said it has been extremely challenging to find one example where the government can conclusively say that a crash, accident, death, or even malfunction or injury was the direct result of a counterfeit part.

Proving that the crash of an advanced aircraft was due to a single microchip is nearly impossible since circuits are easily flammable, making evidence difficult to retrieve and identify.

Congressional Anger

While a smoking gun -- a clear case where a counterfeit good has led to a downed helicopter or injured service member, for example -- remains elusive, some have already taken the issue to be a serious threat to the security and safety of U.S. soldiers.

Chief among those voices are U.S. Sens. Carl Levin, D-Mich., and John McCain, R-Ariz. The former chairs the SASC, and the latter is a longtime military advocate. At a Senate hearing last November, Levin said the failure of a single electronic part can leave a soldier, sailor, airman, or Marine vulnerable at the worst possible time. Levin claimed the current flood of counterfeits is increasing the chance that military personnel could come to harm.

Brian Toohey, the CEO of the Semiconductor Industry Association (SIA) in Washington, a trade association for major U.S. semiconductor companies, says that unlike the chips that are properly manufactured by our [legitimate] industry and operate as intended, counterfeit chips have a high risk of failure. This places our armed forces personnel, citizens, critical infrastructure and military operations across the United States and the world in peril.

The SIA said the industry estimated $7.5 billion was lost in revenue in 2010 because of counterfeiting in China, costing the U.S.11,000 jobs.

Parts recyclers in southern China are making a business out of the millions of tons of electronic garbage that are offloaded from the West to the East every year. Significant numbers make money by stripping out old microchips using crude methods and reselling them. That seems at face value to be harmless, even good business sense.

But many factories are repainting and repackaging old components, and then illegally selling them as new or high-quality components that can endure the stresses of a military environment.

Analysts say the government itself has made conflicting decisions in dealing with the problem. SIA President Brian Toohey told a congressional committee last year that requirements promulgated by the Treasury Department since 2008 have made it more difficult to identify counterfeit chips at the border. Increasingly large numbers of phony parts have almost certainly passed into the country since then.

During the Senate hearing last November, Levin said there is rampant theft of U.S. intellectual property by Chinese counterfeiters, which severely impacts our economic security. According to the senator, the current system for electronics exports from China showed a total lack of transparency, which requires legal action by the U.S., including possibly a law requiring all shipments of Chinese electronics to the U.S. to be inspected. The cost of inspections would be borne by shippers.

If such a provision carries a whiff of protectionism and overreaction, perhaps proponents of harsher legal actions are likely to be partially assuaged by requirements in the 2012 National Defense Authorization Act, which sets clear guidelines placing responsibility for checks and detection of counterfeits on defense contractors.

The Uncertain Future

From industry experts to government personnel to defense suppliers, everyone says awareness of the issue has now grown. The Defense Department is now driving to simplify supply chains and cut the number of suppliers it seeks to do business with.

Private industry is also taking the initiative and not waiting for government action.

Thomas Sharpe, vice president of the SMT Corp., an electronics-parts supplier and quality-control company that does most of its business with the aerospace and defense industries, said that awareness today of the problem is much higher than it was four to six years ago. Sharpe said initiatives by the SASC are the single strongest action that has taken place to date to expose offenders and protect U.S. armed forces from counterfeits.

Chip suppliers must now meet more stringent requirements of the Defense Department to test products before delivery. Multistep processes like those conducted at SMT include X-rays, scanning electron microscopy, exposure to solvents, and other technologically complex methods.

But not all companies can meet the new standards, and more business is now going to a smaller number of them, cutting out those who cannot deliver more stringent inspections intended to catch phony parts before they reach the military.

Another matter for concern is the evolution and increasing sophistication of counterfeiters, who are providing parts that require equipment as complex and expensive as electron microscopes to detect.

Meanwhile, the fundamental condition that led to the current predicament for the Pentagon has not changed -- nor will it any time soon.

The military is not prepared to upgrade its hardware stocks, meaning the problem of seeking out reliable electronics will continue indefinitely into the future.

While the entire semiconductor industry is the U.S. is massive -- about $150 billion last year, around five times larger than the entire music industry -- the defense share of that business is less than 1 percent. Private companies that rely on international sales and civilian business have little incentive to cater specifically to the military or keep around large piles of old equipment.

As a result, electronic waste from North America will continue heading to China for the indefinite future, and the Chinese government will be slow to curtail a thriving industry.

Experts remain split on who should take blame for the current situation. Smaller American suppliers have shown a willingness to seek out cheap products from China, and it would be ridiculous to think they have no understanding of the risks involved in sourcing from a poorly regulated market. The U.S. government was slow in previous years in holding contractors accountable. Additionally, Chinese authorities have looked the other way for years as companies put suspect equipment into the market.

According to the GAO's Neumann, a solution to the problem needs to come from a universal approach. Attacking only one part of the supply chain -- just dishonest domestic suppliers, or just one country in particular -- is unlikely to provide a long-lasting or concrete solution.