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.