A recently published Defense News article said the U.S. Senate Armed Services Committee is planning to crack down on counterfeit electronic parts that end up in U.S. military weapon systems. The committee, led by Sen. Carl Levin, D-Mich., and Sen. John McCain, R-Ariz., released the results of a months-long investigation that traced the DoD supply chain back to its start for more than 100 counterfeit parts and found that 70 percent of them originated in China. "Nearly 20 percent of the remaining cases were tracked to the U.K. and Canada—known resale points for counterfeit electronic parts from China," a background memo from the committee said. Levin and McCain want the Pentagon to better enforce laws that protect the DoD supply chain, but they also admit those laws don't go far enough. According to the article, the Senate panel is considering adding language to the defense authorization act for 2012 that would hold contractors responsible for the costs of replacing a part that is discovered to be counterfeit, Levin said at a Nov. 7 press briefing. He noted that under cost-plus contracts it is difficult to make the contractor pay for a replacement part unless the government can prove the contractor bought the part knowing that it was counterfeit. Today, the multimillion-dollar price tag of replacing these parts more often falls to the government and the taxpayer, he said. Levin would like to see the Pentagon use fewer cost-plus contracts and more fixed-price ones, where bargaining above the negotiated price is limited. Levin said this could help motivate companies to take stronger steps to avoid buying counterfeit parts. According to a January report from the Commerce Department, counterfeit electronics in the defense industry are on the rise. In 2005, there were 3,868 incidents detected, compared with 9,356 in 2008, according to the report. According to Michelle Nash-Hoff, president of ElectroFab Sales in San Diego, Calif., this troublesome trend has been in the making for more than 20 years. She indentified the four main reasons behind the problem of Chinese counterfeit components:
1.Mil. Spec. qualified components replaced by off-the-shelf components
2."Buy American" requirements relaxed
3.Manufacturing outsourced offshore, mainly in China
4.Rapid obsolescence of components, especially micro-chips
Because of the public outcry excessive spending by Congress on basic items in the 1990s, the procurement regulations were changed. According to Nash-Hoff, the Defense Department, branches of the military, and their supply chain of vendors were allowed to purchase commercial off the shelf parts (COTS) if they met the same fit and function of parts made to strict military specifications. In the early 1990s, most commercial parts were still being made in the United States, with some outsourcing to the Philippines, Hong Kong, and Singapore, so this change was pretty safe.
Permitting commercial parts to replace Mil. Spec. parts, Nash-Hoff argues further, probably drove out of business the small companies that catered exclusively to the military and that provided traceability, per Mil. Spec., for parts supplied to government agencies, military contractors, and subcontractors. This was all done in the name of cost savings. Now, however, most commercial electronic components and micro chips are fabricated in China.
Second, after the end of the Cold War and the subsequent Gulf War, the provisions of the "Buy American Act" were eased to allow purchasing off -the-shelf commercial parts from foreign countries by the Defense Department and other government agencies. Previously, parts, assemblies, and systems were required to be substantially made in the United States or in a NATO country, such as Great Britain, France, and Germany.
This, according to Nash-Hoff, led to parts being made in China as more and more American companies started to outsource manufacturing in China either by selecting Chinese companies as vendors or setting up their own manufacturing plants in China. This trend accelerated after China received "most favored nation" status with the approval of the World Trade Organization treaty in the year 2000, and American companies started to build semiconductor wafer fab plants in China to produce micro-chips.
"Until we implement more stringent procurement regulations, strengthen 'Buy American' procurement regulations for defense and military components, and return more manufacturing to the United States from offshore, it will be up to manufacturers to have a system to detect and deter counterfeits," Nash-Hoff explained. "Many defense contractors have put in place strict regimen for inspecting, testing, and reporting counterfeits, but all companies need to be vigilant by inspecting, testing, and reporting."