November 17, 2008    Volume 15, No. 20

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U.S. Government Finds Thousands Of Counterfeit Electronics From China In Avionics Weapon Supply Chain

By Richard A. McCormack

The United States military and the federal government's national security agencies are facing an unprecedented infiltration of counterfeit electronic chips, chipsets and components. In a comprehensive government-mandated survey of most of the companies involved in the avionics electronics supply chain, the Commerce Department's Bureau of Industry and Security found 7,383 electronics counterfeit incidents during 2008. This is up from 5,747 such incidents reported in 2007. It is the first such survey ever done and the results are startling

The survey was comprehensive: virtually all of the companies and organizations constituting the avionics supply chain were required to participate. Among the 482 companies and organizations completing the 80-question survey were microchip manufacturers, electronic board producers and assemblers, distributors and brokers of electronics parts, prime defense contractors and subcontractors and virtually every DOD arsenal, depot and the Defense Logistics Agency's purchasing offices.

According to a preliminary analysis of the survey results, the majority of counterfeit electronics products found in avionics systems originated in China and other Asian nations, and the majority of them were discovered only after they were "returned as defective."

The study, sponsored by the U.S. Naval Air Systems Command (NavAir), was conducted to help identify and mitigate potential problems in the avionics electronics supply chain, which has shifted off the American continent. The proliferation of counterfeit electronics components "is a broad issue and it is prevalent in the commercial and government supply chains," said study director Kevin Kurland, director of BIS's Office of Technology Evaluation. "One of the things that brought it to light was the Navy and their field operations had systems go down that affected their operational readiness."

NavAir approached BIS to conduct the survey because of the agency's 58-year history of conducting industrial base assessments. For NavAir, counterfeit electronics in avionics systems were proving to be more than a nuisance. The cost of replacing a defective, counterfeit chip or circuit board was marginal, but the downtime in operations was having a "dramatic impact from a cost and national security perspective," says Kurland. "Most of what we're hearing is that missions can't be accomplished because a board went out in a black box. We're trying to get a handle on this, [but] we are comfortable in saying the issue is prevalent."

Most of the counterfeits that have found their way into avionics systems are working without incident, but low-grade fakes that are not made for high temperature or extreme conditions "don't work when you crank them up to a certain level," says Kurland. "That's when you find out it's not the real one. That is what is scary about this. They work at certain [environmental] ranges" and then suddenly quit.

The survey disclosed a great deal about how companies find counterfeit electronic parts, what they do when they find them and to whom they report such incidents. Most counterfeit products found in military avionics systems in 2007 (3,282) were previously used microcircuits that were remarked as being higher grade than what was required for the military application. There were 740 incidents in 2007 of new microcircuits "re-marked as higher grade"; 248 incidents of used microcircuits that were being sold as being new; 214 incidents of "fake (non-working) original component manufacturer products"; 161 "seconds from scrap"; and 108 counterfeits that were made from "working copies of original designs."

The study did not look at so-called "Trojan Horses" -- electronics that were designed intentionally with nefarious bugs programmed to disable military systems in which they are embedded, "It's an issue in the back of our minds and an issue for anyone in the U.S. government worrying about counterfeits getting into the national security supply chain, but the survey couldn't ask that question," says Kurland. "I don't think any U.S. company that receives a counterfeit could deem to know what the intent of that chip getting into their system is."

Most of the fakes are getting into the avionics supply chain through brokers (35 percent), individual sales agents (28 percent), Internet sources (12 percent), independent distributors (9 percent) and authorized distributors (7 percent). Counterfeits are entering the avionics supply chain because of lax inventory management by parts brokers, a greater reliance on the gray market for the purchase of parts by brokers and independent distributors, insufficient supply chain accountability, and less stringent inventory management by independent distributors, among others.

"Only 56 percent of distributors and board assemblers test products they purchase before placing them in inventory," says the survey summary. Most all of the testing by distributors is done through visual inspections (81 percent), and checking paperwork. Only 13 percent of testing is done electronically.

"Seventeen companies -- 41 percent of those employing testing contractors -- had problems with U.S.-based firms concerning faulty or forged testing," says the study. "The parts were cleared by the testing house, but were later found to be counterfeit by the customer. This is an area that deserves further analysis."

Most companies and military organizations don't know what to do when they find counterfeit electronics. Only 19 percent of original component manufacturers notified federal authorities when they found counterfeit items; 70 percent trace the part through their supply chain. Among distributors, only 11 percent notified federal authorities; 61 percent pull back inventory; and 52 percent notify industry associations. Among assemblers, only 8 percent notify federal authorities; 8 percent notify industry associations; 8 percent said "no steps are taken"; and another 8 percent said they "wait for additional complaints."

When asked who in the federal government they contact when they find counterfeits, 56 percent of original component manufacturers, 65 percent of distributors and 75 percent of board assemblers said they "do not know what authorities to contact." Ten percent contact GIDEP; 8 percent call the FBI; 6 percent notify Customs and Border Protection; 6 percent contact IRIA, 6 percent notify IDEA; 6 percent tell DLA; and 6 percent contact state and local authorities.

"Only 38 percent of surveyed companies maintain a database to keep track of counterfeit incidents; 67 percent of circuit board assemblers co-mingle identical parts from multiple suppliers in the same bin; and 40 percent of companies stated that they find it difficult to identify counterfeits," said the survey.

Among industry's best practices the most common response was "Don't buy from China," with the second being, "Be wary of brokers."

Unlike most BIS surveys, the respondents did not view the survey as being intrusive. "We do a number of defense industrial base assessments a year and rarely do we get a lot of feedback saying thanks for surveying us," notes Kurland. "We think the survey has had a substantial positive impact." One independent distributor said: "It is encouraging that the U.S. government has finally recognized the scope of the problem and seems to be taking meaningful steps to counteract the counterfeiting plague."

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