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Counterfeit Airbags, Counterfeit Booze, Counterfeit... Prunes?

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The global market in fakes has been pegged at $650 billion annually. Can it ever be stopped?

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Counterfeits Infiltrating the US Military

As we reported a little less than a year ago, an investigation by the Senate Armed Services Committee identified roughly 1,800 instances of counterfeit electronics entering the Pentagon's supply chain, with the total number of bogus components exceeding 1 million.

In this case, "well over 100" counterfeit parts were traced backward through the supply chain, with more than 70% coming from China and roughly 20% of the remaining parts leading to the UK and Canada -- both described in the Levin-McCain report as "known resale points for counterfeit electronic parts from China."

But, as Larry Loucka -- a Certified Supply Chain Professional and Lean Sigma Master Black Belt who has worked with companies such as Honeywell (NYSE:HON) and Toyota, as well as Raytheon (NYSE:RTN), L-3 (NYSE:LLL), and the US Air Force -- told me, today's electronics don't really come from anywhere else.

According to Loucka, who has extensive experience in sourcing equipment from China, counterfeit parts can enter the military supply chain as easily as they can slip into those of any other industry.

"Why should military parts be any different than auto parts, consumer electronics, anything, really," he told me. "They look right, they're the right size, the right dimensions, they have the correct certificate, how would you know? It's a global market and parts are parts."

That global market has been pegged at $650 billion annually, and the year-old Armed Services Committee report revealed some fascinating details behind the trade:

Much of the raw material of counterfeit electronic parts is salvaged electronic waste (e-waste) shipped from the US and the rest of the world to Hong Kong. From Hong Kong, waste is trucked to cities in mainland China, such as the counterfeiting district of Shantou in Guangdong Province, where electronic parts may be burned off of old circuit boards, washed in the river, and dried on city sidewalks. Once washed and sorted, parts may be sanded down to remove the existing part number, date code (which tells you when a part was made), and other identifying marks. In a process known as "black topping," the tops of the parts may be recoated to hide those sanding marks. State of the art printing equipment may then be used to put false markings on the parts. When the process is complete the parts can look brand new.

So, will the United States military ever be able to fully rid its supply chain of counterfeit parts?

Not likely.

In 2004, reporter Jen Lin-Liu of technology trade publication IEEE Spectrum, visited the town of Guiyu, also in Guangdong Province, and observed firsthand the success counterfeiting has brought to the area.

"The trade might be easier to stamp out if it weren't actually improving the town's economy," Lin-Liu wrote. "Signs of prosperity can be seen in the white-tiled buildings lining the dusty streets. In the center of town, several private kindergartens and a gleaming new public high school have opened. Stores sell new motorcycles, which are quickly replacing bicycles as the favored mode of transportation."

"If the electronic waste business is good, so is ours," one restaurant owner said.
No positions in stocks mentioned.
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