Senate Report Reveals Extent of Chinese Counterfeit Parts in Defense Industry

On May 21, 2012, the Senate Armed Services Committee released a report on counterfeit parts in the Department of Defense supply chain. The Committee discovered counterfeit electronic parts from China in the Air Forces C-130J and C-27J cargo plane, in assemblies used in the Navy's SH-60B helicopter, and in the Navy's P-8A surveillance plane, among 1,800 cases of bogus parts.

"The systems we rely on for national security and the protection of our military men and women depend on the performance and reliability of small, incredibly sophisticated electronic components. Our fighter pilots rely on night vision systems enabled by transistors the size of paper clips to identify targets. Our soldiers and Marines depend on radios ad GPS devices, and the microelectronics that make them work, to stay in contact with their units and get advance warning of threats that may be around the next corner.The failure of a single electronic part can leave a soldier, sailor, airman, or Marine vulnerable at the worst possible time," the report says. "Unfortunately, a flood of counterfeit electronic parts has made it a lot harder to prevent that from happening."

The year-long investigation launched by Sen. Carl Levin, D-Mich., the committee's chairman, and Ranking Member Sen. John McCain, R-Ariz., found over a million suspect counterfeit parts involved in those 1,800 cases.

"Our report outlines how this flood of counterfeit parts, overwhelmingly from China, threatens national security, the safety of our troops and American jobs," Levin said. "It underscores China's failure to police the blatant market in counterfeit parts -- a failure China should rectify."

The Chinese government denied visas to Committee staff to travel to mainland China as part of the Committee's investigation. The investigation revealed that China was the dominant source of counterfeit electronic parts -- more than 70% of the parts tracked were traced to China, coming from more than 650 companies. Counterfeit parts included unauthorized copies of an authentic product and previously used parts that were made to look new and sold as new. The parts often change hands multiple times before being bought by defense contractors, who may know little about the source of the parts they buy, the report said.

"Our committee's report makes it abundantly clear that vulnerabilities throughout the defense supply chain allow counterfeit electronic parts to infiltrate critical U.S. military systems, risking our security and the lives of the men and women who protect it," said McCain. "As directed by last year's Defense Authorization bill, the Department of Defense and its contractors must attack this problem more aggressively, particularly since counterfeiters are becoming better at shielding their dangerous fakes from detection."

In November 2012, the Committee held a hearing on the investigations preliminary findings. Following that hearing, Committee Chairman Carl Levin and Ranking Member John McCain offered an amendment to the National Defense Authorization Act for Fiscal Year 2012 to address weaknesses in the defense supply chain and to promote the adoption of aggressive counterfeit avoidance practices by DOD and the defense industry. The amendment was adopted in the Senate and a revised version was included in the final bill signed by President Obama on December 31, 2011.

The law requires the Secretary of Defense to conduct an assessment of Department of Defense acquisition policies and systems for the detection and avoidance of counterfeit electronic parts not later than 180 days after the date of the enactment of the Act to:

• establish Department-wide definitions of the terms "counterfeit" or "suspect counterfeit electronic part"
• issue guidance regarding "training personnel, making sourcing decisions, ensuring traceability of parts, inspecting and testing parts, reporting and quarantining counterfeit electronic parts and suspect counterfeit electronic parts, and taking corrective actions (including actions to recover costs"
• issue or revise guidance "on remedial actions to be taken in the case of a supplier who has repeatedly failed to detect and avoid counterfeit electronic parts or otherwise failed to exercise due diligence in the detection and avoidance of such parts, including consideration of whether to suspend or debar a supplier until such time as the supplier has effectively addressed the issues that led to such failures.
• require contractors or subcontractors that suspect a counterfeit part provide a report in writing within 60 days to appropriate Government authorities and to the Government-Industry Data Exchange Program
• "establish a process for analyzing, assessing, and acting on reports of counterfeit electronic parts and suspect counterfeit electronic parts" that are reported
• require the Secretary to revise the Department of Defense Supplement to the Federal Acquisition Regulation to address the detection and avoidance of counterfeit electronic parts not later than 270 days after the date of the enactment of this Act.

The law includes provisions to help stop counterfeit electronic parts before they enter the U.S, strengthens the inspection regimen for imported parts, and gives the government wider berth in seeking assistance from the private sector in determining whether parts are authentic. It also requires that contractors or subcontractors "obtain electronic parts that are in production or currently available in stock from the original manufacturers of the parts or their authorized dealers, or from trusted suppliers who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers manufacturers or authorized distributors."

The investigation revealed that the defense industry also has routinely failed to report cases of suspected bogus parts. For example, the majority of the 1,800 cases involving counterfeit parts appear to have gone unreported to the DOD or criminal authorities. Boeing failed to report a case of a suspect counterfeit part used in the Navy's P-8A surveillance airplane until the Senate Armed Services Committee began inquiring, the report said. And L-3 Communications didn't report the suspect memory chip to the Air Force until the day before the committee's staff was scheduled to meet with the Air Force program office responsible for the program.

The Committee's report includes detailed descriptions of how counterfeits are flooding the supply chain, risking the performance and reliability of critical defense systems. In just one example described in the report, the U.S. Air Force says that a single electronic parts supplier, Hong Dark Electronic Trade of Shenzhen, China, supplied approximately 84,000 suspect counterfeit electronic parts into the DOD supply chain. Parts from Hong Dark made it into Traffic Alert and Collision Avoidance Systems (TCAS) intended for the C-5AMP, C-12, and the Global Hawk. In addition, parts from Hong Dark made it into assemblies intended for the P-3, the Special Operations Force A/MH-6M, and other military equipment, like the Excalibur (an extended range artillery projectile), the Navy Integrated Submarine Imaging System, and the Army Stryker Mobile Gun.

The Armed Services Committee reached the follow conclusions on counterfeit parts:

Conclusion 1: China is the dominant source country for counterfeit electronic parts that are infiltrating the defense supply chain.

Conclusion 2: The Chinese government has failed to take steps to stop counterfeiting operations that are carried out openly in that country.

Conclusion 3: The Department of Defense lacks knowledge of the scope and impact of counterfeit parts on critical defense systems.

Conclusion 4: The use of counterfeit electronic parts in defense systems can compromise performance and reliability, risk national security, and endanger the safety of military personnel.

Conclusion 5: Permitting contractors to recover costs incurred as a result of their own failure to detect counterfeit electronic parts does not encourage the adoption of aggressive counterfeit avoidance and detection programs.

Conclusion 6: The defense industrys reliance on unvetted independent distributors to supply electronic parts for critical military applications results in unacceptable risks to national security and the safety of U.S. military personnel.

Conclusion 7: Weaknesses in the testing regime for electronic parts create vulnerabilities that are exploited by counterfeiters.

Conclusion 8: The defense industry routinely failed to report cases of suspect counterfeit parts, putting the integrity of the defense supply chain at risk.

Of course, China denies any culpability. On May 25, 2012 an article appeared in China Defense News that stated, "The U.S. government has found yet another reason to ignore its own problems and bash China, this time accusing the country of compromising national security via the manufacture of counterfeit electronic components used by the U.S. militaryThe accuracy of the claims is questionable at best, but bigger questions should be answered first: how did counterfeit parts end up slipping into the U.S. military system in the first place? And for what purpose were the parts originally shipped for?

The U.S. has maintained a military embargo on China for 23 years. Military components and weapons aren't supposed to be officially traded between the two countries to begin with. Taking this into consideration, the U.S. ought to find out precisely who purchased the parts and how they passed muster before accusing China of wrongdoing."

I answered the question of how counterfeit parts ended up "slipping into the U. S. military system in the first place" in my blog article last fall, titled "What Led to the Problem of Chinese Counterfeit Parts." I detailed the following four main reasons for the problem of Chinese counterfeit parts:

1. Mil. Spec. qualified components replaced by off the shelf components by allowing use of "dual use technology" of commercial components
2. Relaxing "Buy American" requirements for Federal procurement
3. American companies sourcing manufacturing offshore, mainly in China
4. Rapid obsolescence of components, especially micro chips

The provisions of the National Defense Authorization for FY 2012 dont directly address these four main reasons for the counterfeit part problem. This is another typical example of Congressional legislation where they attempt to have their cake and eat it too by seeming to crack down on counterfeit parts while not endangering U. S. corporate investments in China. In order not to anger their big political donors, who include some of the corporations that export our jobs to China, they place the burden of identifying and reporting counterfeit parts on contractors and subcontractors instead of addressing the root causes I have listed above.

The new Federal procurement regulations being drafted by the Department of Defense are supposed to "address the detection and avoidance of counterfeit electronic parts," but there has been no mention of eliminating "dual use technology" of commercial parts for military/defense applications. And, there has been no discussion of tightening or strengthening the "Buy American" requirements for Federal procurement to what they were prior to 1993.

Worst of all, there has been no action by Congress on addressing the trade and tax laws that currently incentivize American manufacturers to continue to offshore manufacturing in China and other foreign countries.

Congress must act to eliminate the incentives for offshoring and provide incentives for bringing manufacturing back to America. Until these root causes are addressed, we will continue to have counterfeit parts slip into the military/defense procurement system and endanger the lives of our military personnel and threaten our national security.

Michele Nash-Hoff is president of ElectroFab Sales. She is the author of "Can American Manufacturing Be Saved?"

See Also
Viewpoint: China Poses Increasing Threat to U.S. Economy and National Security
Viewpoint: Death by China is a Global Call to Action to Confront the Dragon