Misplaced Blame: The Politicization of Counterfeit Electronics

12/14/2011 – By Leonard Zuga and Michael Pecht

After more than a decade of neglect, counterfeit electronics has become a high profile issue, thanks to the U.S. Senate Armed Services Committee’s investigation of counterfeit electronic parts in military weapons systems and the proposed U.S. Senate Bill S.1228, known as the Combating Military Counterfeits Act of 2011.

Unfortunately, neither Congress nor industry nor the press have been able to articulate the concurrent changes taking place in the global electronics industrial base that enabled and encouraged the electronics counterfeiting phenomenon. As a result, the solutions are for the most part illusory.

Coping with Counterfeit Parts is an Important Element of Providing Security and Reliability to the US and Allied Supply Base (Credit Image: Bigstock)

Coping with Counterfeit Parts is an Important Element of Providing Security and Reliability to the US and Allied Supply Base (Credit Image: Bigstock)

In their paper “Bogus! Electronic Manufacturing and Consumers Confront a Rising Tide of Counterfeit Electronics,” IEEE Spectrum 45:5, 37-46 (May 2006), M. Pecht and S. Tiku noted that counterfeit electronics are not unique to military systems. They have also been found in computers and telecommunication products, automobiles, avionics, and many other systems. Whenever a product can be made at a lower cost than the original, counterfeiting can, and likely will, occur.

Counterfeiting will also be encouraged if there is a lack of supply of the original product. In fact, systems, such as those common in military weapons systems, that are in service for long periods of time are particularly susceptible to the counterfeiting of the components that compose these systems. The reason is primarily associated with obsolescence and the ensuing lack of availability of the original electronic components used in these systems.

When the demand for replacement components becomes high, the prices of such components increase, thus providing counterfeiters with opportunities to profit. In addition, replacement of obsolete parts often leads to purchases from less reliable sources such as parts brokers and independent distributors instead of authorized distributors. In the case of brokers and independent distributors, the actual sellers are often unidentified.

How this dependency on brokers and distributors evolved was becoming evident as early as 1995 as shown by Pecht in “Issues Affecting Early Affordable Access to Leading Electronic Technologies by the US Military and Government” (Circuit World 22:2, 1996).  In the late 1960s, military electronics development began to become isolated from mainstream commercial electronics where a high volume of state-of-the-art technologies were being developed for everything from consumer to computer to automotive applications. Due to military-unique requirements, specifications, and generally unprofitable procurement policies, commercial technologies rapidly advanced beyond military electronic systems and most component manufacturers saw no need to provide the military with components.

Soon after developing an understanding of this problem, U.S. Department of Defense (DoD) policy directives had begun to change by the mid 1990’s. Pecht’s historical analysis traced the development of military and government policies, regulations, and organizations that influenced both directly and indirectly, purposefully and accidentally, military systems electronics effectiveness and costs that culminated in the COTS concept and the inevitable rise of distributors as key entities in the military electronics supply chain. Though not obvious at the time, in retrospect it has been the military’s dependence on distributors and the use of unauthorized distributors, as opposed to direct procurement from manufacturers that have aided and abetted counterfeiters in developing their military market strategies.

In reaction to the budgetary pressures of the early nineties, the U.S. Department of Defense created the COTS (Commercial Off-The-Shelf) concept, eventually eschewing the long-held supply chain quality management practices of the cold war era in order to hold in check the costs of military weapons and information systems that are now central to network enabled warfare.

With the advent of COTS and the explosive global growth in commercial electronics distributors, it has become increasingly difficult to track the trade in and determine the pedigree of electronic components in the complex global electronics supply chain. Given that the military electronics component of the global electronics industry is a mere one quarter of one percent of the total electronics market, military electronics manufacturers are also now virtually dependent on the commercial electronics industry for the critical components vital to their electronic systems.

After more than three decades of steady advances in the capability to produce increasingly complex electronic components and systems China commands well over a third of the global electronics market share, making it a major, but not the only, source for COTS components and their counterfeit surrogates. However, China’s culture historically honors the ability to make imitations.

As a result China has weak intellectual property laws, and lacks enforcement regimes for violations of intellectual property rights (“The Emperor’s New Clothes: Intellectual Property Protections in China,” Campbell and Pecht, Journal of Business & Technology Law, November 2011).  These factors combine to make China the prime target for attacking the counterfeit electronics problem as opposed to placing the majority of the blame where it belongs.  Its is the buyer who has the responsibility for vetting its suppliers and determining the quality and authenticity of the products it uses in higher level assemblies sold to the military and the public.

The role of the distributor was aptly articulated by the U.S. Department of Commerce (DOC) in its January 2010 report, “Defense Industrial Base Assessment: Counterfeit Electronics.”

In this report DOC notes that distributors are now a crucial part of the global electronics supply chain, providing a bridge between electronic component manufacturers and consumers. Distributors often work as a sales arm of original component manufacturers (OCMs), marketing and selling OCM products.

However, many distributors also act as independent middlemen, and in some cases track down hard-to-find or “out of production” parts for their customers. Commensurate with the explosion in consumer electronics, mobile computing, and the wireless era, the rapid proliferation of distributors as suppliers of parts for weapon systems has compounded supply chain management for defence contractors, thereby weakening the management of the overall chain and making it increasingly susceptible to the influx of counterfeit parts.

The counterfeit military components scourge and its root causes are not a recent phenomenon, as some politicians might like their constituents to believe. There were indications that electronics component counterfeiting began to emerge as early as 1995. The Center for Advanced Life Cycle Engineering (CALCE) at the University of Maryland hosted its first symposium on the subject in 2004. And in 2004 the U.S. Government Accountability Office (GAO) analyzed the development and production of eleven Department of Defense (DoD) weapon systems and found that defense contractors’ poor practices for systems engineering activities and manufacturing and supplier quality control contributed to billions in cost overruns, years-long delays, and decreased capabilities for warfighters.

In October of 2008, Business Week magazine openly addressed the potential consequences of the Pentagon’s lax supply chain management in its article titled “Dangerous Fakes,” noting that “The American military faces a growing threat of potentially fatal equipment failure—and even foreign espionage—because of counterfeit computer components used in warplanes, ships, and communication networks.” Even counterfeit COTS communications routers made in China and sold to the Army, Navy, Air Force, and Marines are considered to be possible facilitators of foreign espionage. The problem is severe enough to warrant an annual industry seminar on counterfeit electronics and supply chain management at CALCE.

The U.S. Department of Commerce study found that out of a total of 387 companies and organizations that participated in the 2005–2008 research, representing all segments of the supply chain, 39 percent encountered counterfeit electronics during the four-year period. Moreover, information collected highlighted an increasing number of counterfeit incidents being detected, rising from 3,868 incidents in 2005 to 9,356 incidents in 2008. These counterfeit incidents included multiple versions of DoD-qualified parts and components.

Some members of the U.S. Congress would have their constituents believe that the manufacturers and suppliers of counterfeit electronics components are the sole culprits responsible for counterfeit parts finding their way into defence electronics systems. U.S. Senate Bill S.1228, known as the ‘‘Combating Military Counterfeits Act of 2011,’’ targets only particularly malicious offenders—those who already are guilty of trafficking in counterfeit goods and know that they are selling counterfeit military parts. This legislation updates the 2010 version of the act, which criminalized trafficking in counterfeit military goods and services.

According to one of the sponsors of S.1228, “This approach means the bill will not affect legitimate military contractors who might be unaware that a counterfeit chip has been entered into one of their products. It will not apply to makers of products that unintentionally fall short of military specifications. This bill is intended to help military suppliers by deterring the criminals who sell counterfeits to them or to their subcontractors.” [Senator Sheldon Whitehouse (D, RI) (Congressional Record, June 29, 2011, Senate)] This is where the authors feel that U.S. Senate Bill S.1228 errs.

Some members of the Senate Armed Services Committee have also been blaming China for allegedly sending counterfeit electronics to the U.S. for incorporation into military systems. Their questions and comments suggest that Chinese “agents” are somehow infiltrating the U.S. military and incorporating counterfeit components into key U.S. military systems.  John McCain, the top Republican on the Senate panel assessing the counterfeiting problem, has asserted that “The Chinese government can stop it.” This blame however is misplaced.

The root cause of the problem is not the Chinese, but rather the U.S. contractors who bought these parts from U.S.-based unauthorized parts distributors (brokers) who commissioned the counterfeiting of the parts for sale to the military contractors. Furthermore, these commissioned “made to order” parts are also coming from Thailand, the Philippines, Vietnam, and other countries, including the U.S., that are willing to re-label parts for a profit.

The team at the CALCE Electronic Products and Systems Center at the University of Maryland is routinely asked to investigate counterfeit electronics. CALCE has found that the responsibility for counterfeiting often lies with unauthorized American suppliers who commission the counterfeiting of parts from businesses in foreign countries, including Vietnam, China, and Thailand.

For example, Raytheon Missile Systems purchased some 1,500 Intel flash memory (semiconductor) devices for incorporation into the Harm Targeting Systems (HTSs) which are installed in F-16 fighter planes to identify and track enemy radar systems. Raytheon purchased those parts from a U.S. broker rather than from the original device manufacturer or its authorized distributor. This is analogous to purchasing a Gucci handbag on Canal Street in New York City or across the street from the Rosslyn Metro in Washington D.C.; it is very likely to be counterfeit.

Without checking the devices ahead of time, Raytheon installed those Intel chips on 28 circuit boards destined for HTS modules. The military can be grateful that the boards immediately failed, because Raytheon had to examine the boards to determine the root cause of the problem and only then did they learn that the parts were all counterfeit. Imagine if the boards had worked (for a while) and were installed in a weapon system!

The broker that Raytheon bought the parts from, VisionTech Components Inc., has since been charged with the selling of counterfeit parts, and the guilty parties have been sentenced. During the legal process, it was learned that VisionTech personnel had the ability to alter the labels and identities of electronic parts and actually gave instructions to foreign entities on how this should be accomplished and how such parts should be shipped to the U.S. In other words, the parts were commissioned by a U.S. company. In fact, the parts were not necessarily “made/fabricated” in China, but were “altered” (mostly cosmetic changes) in China and possibly also in the U.S.

VisionTech is not the only U.S. parts broker that has “duped” military contractors by selling them counterfeit electronics. Another broker, Red Hat (also called Red Hot) Distributors, operating within the borders of the U.S., had its own component alteration equipment to make cosmetic changes. In fact, the team at the CALCE Electronic Products and Systems Center has encountered nearly 30 major counterfeit parts this year alone—most of which the U.S. military is unaware of. It appears that most of these parts came from unauthorized distributors in the U.S. that were highly suspect.

The fact that foreign entities have the ability to re-label parts at a low cost should not be a reason for the U.S. to blame them, as that same ability has also been practiced here in the U.S. Instead, Senator McCain and others, including the U.S. Justice Department, should hold Raytheon accountable. What they did is unconscionable.

Furthermore, U.S. customs agents appear to not be doing their job. It is also surprising that Intel has not said anything about the possibility of their parts being counterfeited. Surely they know that the possibility exists, since they have representation on the U.S. counterfeiting taskforce.

In another incident that clearly illustrates the complexity of supply chain management and the increasing opportunities for fraud, counterfeit parts were found on Boeing’s P8-A Poseidon, the anti-submarine warfare adaptation of the Boeing 737 commercial aircraft. Boeing procured an ice detector module from BAE Systems that contained an obsolete Xilinix FPGA supplied by a U.S. testing laboratory that procured it from a U.S. distributor. The part originated in China and passed through three distributors before the testing laboratory delivered it to BAE Systems. In its corrective action letter to Boeing the U.S. Navy rightfully placed the blame squarely on Boeing’s shoulders.

As the counterfeiting problem escalates, companies are learning that sacrificing quality for price is not a good idea, but, unfortunately, doing so is a common practice that is exacerbated by difficult economic times and market conditions or the quest for speed of delivery. Any one of these factors—or all three combined—are often the motivation for companies to allow cost and expediency to override good quality assurance practices.

The concurrent degradation of the comparatively costly and manpower-intensive supply chain control and quality management practices of the pre-COTS era has resulted in a defense electronics industrial base that is increasingly susceptible to the inclusion of “military unacceptable components.”

Paper work and certifications are easily forged by counterfeiters, and unless total supply chain management from materials through the finished product all the way through the bill of materials is diligently practiced, counterfeit electronics components can creep into systems via the globalized electronics industrial base and distribution chains that we have today.

Counterfeit parts incorporated into military systems can endanger the lives of military personnel and can potentially cause other catastrophic consequences. Rectification and rework of systems where counterfeit components have been discovered is time-consuming and costly, far beyond the cost of proper vetting of suppliers and parts. The real blame lies with those brokers and contractors who fail to responsibly control and manage their supply chains through ignorance or the quest for expediency or higher profit margins.

As of late November progress appears to have been made in the Senate’s comprehension of supply chain management issues. Senator Carl Levin, the senior U.S. senator from Michigan and chairman of the Senate Armed Services Committee and a sponsor of the a sponsor of the Combating Military Counterfeits Act of 2011, told the Daily Press of Escanaba, Michigan, that “We are working on legislation that would change Pentagon rules so that contractors, not taxpayers, pay to replace counterfeit parts when they are discovered.”

In anticipation of those rules, companies must, for the reliability of the military systems they produce and the safety of the military personnel who operate them, assume their responsibilities and institute or strengthen oversight and mitigation activities to curtail the use of counterfeit electronics, including, first and foremost, buying from only properly vetted manufacturers and authorized distributors.

The views in this piece are those solely of the authors.

About the authors:

Leonard Zuga

Mr. Zuga is an analyst of emerging technologies, technology transfer, and industrial base development in the context of the global political economy. Following his service in the U.S. Navy, he worked as a program manager in the microwave components industry. He turned his attention to studying emerging and high tech markets in the early 1990s in an effort to comprehend the forces responsible for the changes taking place in telecommunications and the microwave industry.

Mr. Zuga’s interest in globalization and the cross-cultural determinants of emerging markets resulted in his book Central European Defense Markets: A Guide to Investment, Care and Caution (2001) while an independent consultant. Shortly following 9/11 until 2010, Mr. Zuga conducted extensive open-source research and analysis as a government contractor. In 2004 he wrote Central European Defense Markets: What Has Changed? Mr. Zuga’s collaboration with Dr. Michael Pecht of the University of Maryland’s Center for Advanced Life Cycle Engineering (CALCE) led to their collaboration on the book China’s Electronics Industry: 2009 Edition. He is now the managing partner of Technology and Business Insider (TBI), http://www.insidertalk.net/, and a consultant of CALCE.

Michael Pecht

Dr. Pecht (F’92) received the B.S. degree in acoustics, the M.S. degree in Electrical Engineering, and the M.S. and Ph.D. degrees in Engineering Mechanics from the University of Wisconsin, Madison, in 1976, 1978, 1979, and 1982, respectively.

He is currently a Visiting Professor of Electronic Engineering at City University of Hong Kong, Kowloon, Hong Kong. He is also a Chair Professor of Mechanical Engineering at the University of Maryland. He has been leading a research team in the area of prognostics for the past ten years and has formed the new Prognostics and Health Management Consortium at the University of Maryland. He has written more than 20 books on electronic product development, use, and supply chain management, and over 400 technical articles. He has consulted for over 100 major international electronics companies, providing expertise in strategic planning, design, test, prognostics, intellectual property, and risk assessment of electronic products and systems.

Dr. Pecht is a Professional Engineer and a Fellow of the American Society of Mechanical Engineers and of the International Microelectronics and Packaging Society (IMAPS). He was awarded the highest reliability honor, the IEEE Reliability Society’s Lifetime Achievement Award, in 2008. He has previously received the European Micro and Nano-Reliability Award for outstanding contributions to reliability research, the 3M Research Award for electronics packaging, and the IMAPS William D. Ashman Memorial Achievement Award for his contributions in electronics reliability analysis. He served as a chief editor of the IEEE Transactions on Reliability for eight years, and on the advisory board of the IEEE Spectrum. He is Chief Editor for Microelectronics Reliability and an Associate Editor for the IEEE Transactions on Components and Packaging Technology. He is the founder of the Center for Advanced Life Cycle Engineering at the University of Maryland, which is funded by over 150 of the world’s leading electronics companies.

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