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U.S. Weapons Systems Riddled With Fake Chinese Parts

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Will the United States military ever be able to fully rid its supply chain of counterfeit parts? Not likely.

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An investigation by the Senate Armed Services Committee has identified roughly 1,800 instances of counterfeit electronics entering the Pentagon's supply chain, with the total number of bogus components exceeding 1 million.

A backgrounder from Committee Chairman Carl Levin and Ranking Member John McCain says that "counterfeit or suspect counterfeit electronic parts have been installed or delivered to the military for use on thermal weapons sights, on THAAD missile mission computers, and on military aircraft, including the C-17, C-130J, C-27J, P-8A Poseidon, AH-64, SH-60B, and CH-46."

Officials from Raytheon (RTN), L-3 Communications (LLL), and Boeing (BA) are on Capitol Hill today, to testify at a hearing which will "explore sources of counterfeit electronic parts and how they are made, cases where counterfeit electronic parts have penetrated the defense supply chain, and the cost and potential impact of counterfeit electronic parts on defense systems."

So, what are the sources, how are they made, and how have they penetrated the defense supply chain?

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 (HON) and Toyota (TM), as well as Raytheon, L-3, and the US Air Force -- tells me, today's electronics don't really come from anywhere else.

"I don't imagine we're talking about nuclear triggers here," Loucka says. "And we just don't make basic electronic components in the US anymore."

The parts involved included counterfeit transistors found in night vision systems used aboard the Navy's SH-60B helicopter and counterfeit memory chips installed in cockpit video display units on eight Air Force C-27J transport planes, which could provide pilots with incorrect information. And while they aren't nuclear triggers, Sen. McCain warns that unreliable bogus components could lead to "a ballistic missile interceptor failing to hit its target, [or] a helicopter pilot unable to fire his missiles."

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 says. "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."

Loucka explains that "changing military specs or sourcing rules literally requires an act of Congress," though certain systems require parts that are no longer manufactured by their original suppliers -- a situation detailed in the Armed Services Committee's report:

An electronic part may be manufactured for two years, while a defense system it is used on may be in service for more than two decades. Compounding the problem, from a manufacturer's perspective, is that DOD demand for parts is often not strong enough to warrant a part's continued production. The director of the DOD's Microelectronics Activity Unit put it this way: "The defense community is critically reliant on a technology that obsoletes itself every 18 months, is made in unsecure locations and over which we have absolutely no market share influence."
As a result, to sustain defense systems, DOD and defense contractors are often forced to purchase parts from independent distributors or brokers. Independent distributors often specialize in the trade of electronic parts that are no longer in production. There is a significant risk to purchasing parts in the independent market. There are many independent distributors who operate legitimate businesses, stock inventory, and invest in state-of-the art testing to detect and screen-out counterfeit parts. Others, however, may consist of nothing more than a website, be based in China or elsewhere, and be set up for the sole purpose of selling counterfeit parts.

Amazingly, many of the counterfeit parts sold to US military contractors are entering the country for the second time.

The Armed Services Committee report reveals fascinating details behind the fakery trade:

Much of the raw material of counterfeit electronic parts is salvaged electronic waste (e-waste) shipped from the U.S. 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.



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 first-hand 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.

Nonetheless, Chinese Foreign Ministry spokesman Hong Lei held a news briefing today in Beijing, where he asserted that China is fully committed to stamping out counterfeits.

"The Chinese government has always paid a great deal of attention to, and has promoted, cooperation with relevant overseas bodies in the fight against counterfeits," he said. "This is universally acknowledged."

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