U.S. Military Bemoans Its China Counterfeit Problem

November 10, 2011

This is not exactly a new problem for the U.S. military. There was a report issued in 2008 that identified counterfeits in the military supply chain as a big issue, noting that the problem stems from Clinton-era cost-cutting measures relating to procurement. Given this year’s Penatagon budget, which is much higher than many countries’ GDPs, the most surprising part of this whole story is that the U.S. military is actually engaged in saving money. God knows what they’re spending the rest of it on.

The latest complaints come from members of the Senate Armed Services Committee, which held a hearing this week on the counterfeit parts scourge and reported the following findings:

The U.S. Senate Armed Services Committee said its researchers had uncovered 1,800 cases in which the Pentagon had been sold electronics that may be counterfeit.

“A million parts is surely a huge number. But I want to repeat this: we have only looked at a portion of the defence supply chain. So those 1,800 cases are just the tip of the iceberg,” said Senator Carl Levin. (Telegraph)

[ . . . ]

In more than 70 percent of the cases in which investigators traced parts back to their source, the trail led to China. And nearly 20 percent of the remainder were traced to Britain and Canada — resale points for counterfeit Chinese parts[.] (Washington Post)

[ . . . ]

The Senate Armed Services Committee found counterfeit parts — usually from China — on at least seven aircraft, including the Lockheed Martin Corp. C-130J transport plane, Boeing P-8A Poseidon maritime patrol and L-3 27J Spartan transport.

“Suspect electronic parts from China were installed on military systems and subsystems that were manufactured by Raytheon Co., L-3 Communications and Boeing,” said the memo from the committee’s staff[.] (Bloomberg)

OK, this is obviously a big problem both in terms of the number of parts as well as the safety/security ramifications. Senator John McCain, ranking member on the committee, was absolutely right when he said that risks of hardware failure (e.g. planes, missiles) due to this problem are unacceptable.

Neither can I argue with Senator Levin’s pronouncement: ““We cannot allow our national security to depend on electronic scrap salvaged from trash heaps by Chinese counterfeiters[.]”

On the other hand, some of the criticism of China seems a bit odd. First, the emphasis on aggregate statistics by country of origin certainly singles out China as the bad guy. But seriously, we’re talking about electronics manufacturing. Where else is the stuff going to come from, particularly when price is an issue?

Second, Levin went after China’s intellectual property system directly, pointing out that counterfeit markets exist in Shenzhen and that “China’s authoritarian rulers could stop the counterfeiting ‘if they want to stop it.’”

Old story, no easy solutions. China has a big IP problem, as everyone recognizes. But it’s a complex matter that covers a lot of territory; a lot more is going on here than counterfeit chips ending up in U.S. military hardware.

As I’ve said countless times on this blog, yes, the government could shut down those markets or police the hell out of the DVD sellers on the street corners. Maybe they should. However, each dollar spent doing that comes out of someone else’s budget. Is Levin seriously telling the government here how they should prioritize their IP enforcement expenditures? Should China cut the budget of the guys investigating fake pharmaceuticals to make the U.S. military happy?

The committee report said that China should “act promptly” on this issue. I don’t think that kind of entreaty is likely to fly here in Beijing.

Additionally, Levin’s use of the word “authoritarian” is telling. Specifically, it tells me that he doesn’t know enough about China. The IP problem is not one that can be easily fixed by an edict from the Central Government. It is a nationwide problem, with many of the counterfeiting operations being shielded by local governments. If Levin thinks that an official in Beijing can simply reach down (in a figurative sense) and tell local officials to cut this shit out, then he’s living in a dream world.

Third, it appears that Levin is pissed off because China did not cooperate with U.S. investigators:

[C]ommittee staff members were stopped in Hong Kong and refused visas into China by officials who warned that their investigation was “sensitive and could be damaging to U.S.-China relations.” (Washington Post)

I don’t know the details here, but I’m not surprised. These weren’t agents of the FBI or investigators from the FDA (both agencies have offices here), but committee staffers. Perhaps Beijing was worried about a political fishing expedition? If that was the case, they certainly wouldn’t want to let these guys run loose in local manufacturing facilities. (One wonders what would have happened if Beijing had sent over a delegation from the State Council to inspect American factories.)

I’m certainly not a fan of nationalists, but I actually think this guy has a point:

Song Xiaojun, a former Peoples’ Liberation Army officer who has become a nationalistic commentator in the Chinese media said the US had “got itself into the position it is in”.

“The US has been dismantling its factories since the 1960s,” he said. “And since the Clinton government, the US has turned a blind eye towards military requisitioning. As it keeps cutting its procurement budget, weapons dealers will keep providing cheaper quality products,” he added. (Telegraph)

Who is primarily responsible for this problem? The U.S. contractors who included these counterfeits into their systems. And they are only doing this because of cost concerns mandated by U.S. government policy. Note that in the end, the recommendations of the committee had nothing to do with China and everything to do with increased quality control and remediation measures on behalf of contractors.

China, with its well-known IP problems, is a convenient target here, but I think that these criticisms are ultimately misplaced. While the parts originated in China, the problem is an American one.

12 thoughts on “U.S. Military Bemoans Its China Counterfeit Problem

  1. Bob Walsh

    US Defense contractors are to blame; they are the entities charged with supplying what the contract specifies, and so they should accept responsibility for shoddy goods, no matter where they are made.

    As for Clinton-era cost cutting, it was Al Gore’s intention that the military use common sense and be able to procure more items as “commercial off-the-shelf” (COTS), rather than issuing a request for bids. The RFP process gave us the golden toilet seats and $117 hammers, leading to Senator Wm Proxmire’s creation of the “Golden Fleece Award”. I was in the Army back then, and the COTS process actually let our commanders procure faster and cheaper than if what we needed had to come through the Army supply chain.

    As for counterfeit components, I don’t think this is a reflection of the COTS procurement process. It’s a matter of defense contractors looking to gouge back an even larger profit margin, by both sourcing from China, and then fudging the QC process.

    China is not to blame, and I do second Song Xiaojun’s comment.

  2. JNMohs

    Please tell me that Congressmen are just playing dumb, and all this naive finger pointing is just a way of covering up some sort of grand strategy. They can’t really believe China is going to cooperate with those inspections. Policymakers appear willing to trade national security for a 1/100th of a cent discount on some high tech part. This is a slightly more complex version of the transaction where a capitalist sells rope to his hangman.

    1. Stan Post author

      Congressmen playing dumb? I never . . .

      Look, all this entails is tweaking the procurement system and rewriting contracts so that these guys have to indemnify the military under certain situations. All the rest is political theater.

  3. S.k. Cheung

    I don’t get it. When the US military buys hardware from these contractors, do they not know where the contractors are sourcing the parts? If they are aware that some parts are sourced from china, then what makes them “counterfeit”? On the other hand, if they don’t know where parts are being sourced, isn’t that a major futz up of due diligence?

    And if products are materially defective, isn’t there some QC mechanism in place to detect that?

    Ultimately, it’s caveat emptor, whether it’s joe schmo down the street, or the US military.

    1. Stan Post author

      This is the real news. And what’s worse is that this issue has apparently been around for several years. I generally don’t get outraged over anything, but this is maddening considering the U.S. defense budget.

  4. HI

    When my wallet gets stolen it’s my fault for not watching it closely, not the thief’s fault for stealing it from me. So I should stop pointing fingers at the thief. Great logic there, Stan.

    1. Stan Post author

      Valiant, if unconvincing, effort. If perhaps your eyes were contractually liable for the wallet’s loss, then the analogy would make sense to me. Problem is, there is no thief in this scenario. The gov’t is not worried about the IP infringement per se, but shoddy parts.

      Try another analogy.

      1. HI

        Valiant, if unconvincing effort to address the basic “blame the victim” problem with your posting’s main argument. Try some other tangentially-relevant arguments.

        1. S.k. Cheung

          This is not” blame the victim” in the sense of a rape case or anything of that nature. In your initial example as the analogy to the current topic, whose wallet is getting stolen? The US military is willfully buying stuff from defense contractors, and willfully handing over the money. The problem is they don’t know exactly what they’re buying. There is no wallet, and there is no thief. There is a “victim”, who didn’t do their due diligence and who forgot about buyer-beware.