Levin: Chinese counterfeit chips pose major threat to Pentagon weapons

Counterfeit electronic parts from China that end up in U.S. military weapons systems pose such a serious threat to national security that Sen. Carl Levin, D-Mich., chairman of the Senate Armed Services Committee, said he plans to require Customs and Border Protection inspectors to examine all Chinese electronic components before they enter the country.

Levin, speaking at a hearing Tuesday about a committee staff investigation into counterfeit electronic parts in the Defense Department supply chain, said he plans an amendment to the 2012 Defense Authorization Act that would require such inspections and compel the Pentagon to set up an electronic parts certification program.

Levin said the amendment also would make contractors financially responsible for counterfeit parts that end up in military systems, a policy that for the most part does not exist today.

Trey Hodgkins, senior vice president of TechAmerica, the largest technology company trade group in the country, said inspecting every Chinese electronic component at the border was "cost prohibitive" and instead suggested a hierarchical inspection approach that would most closely scrutinize components used in critical systems.

The Semiconductor Industry Association estimates that counterfeiting costs U.S. semiconductor manufacturers $7.5 billion a year in lost revenue and costs U.S. workers nearly 11,000 jobs, Levin said.

Scott Paul, executive director for the Alliance for American Manufacturing, said Congress must insist that Defense stop sourcing critical components from China because the practice puts troops' lives at risk.

Levin said the committee investigated 100 cases of potential counterfeit parts and tracked them back through the supply chain, in some cases through myriad brokers scattered around the globe, and determined that "the overwhelming majority -- more than 70 percent -- led to China." The investigation also established that the raw material for these counterfeit Chinese parts was electronic waste exported from the United States to China, he said.

Thomas Sharpe, vice president of SMT Corp., Sandy Hook, Conn., described at the hearing how computer chips are remanufactured in China. In a slide set, Sharpe showed photos he took from a trip to Shantou, China, in 2010 to illustrate how used electronic chips were washed in a muddy river and then laid out to dry on a city street. To obscure the origin of these chips, Chinese workers sanded off identifying numbers and recoated them to look new.

Chinese companies have become more sophisticated in how they remanufacture old components, Sharpe said, adopting techniques to remove original part numbers without the need for recoating and a process to recondition the tops of ceramic components to look new.

Levin faulted prime defense contractors for not quickly notifying their military customers of counterfeit parts that had ended up in their systems. For example, Boeing Co. first discovered a problem with an ice detection module on the Navy P-8A Poseidon patrol aircraft when it failed in December 2009. Its supplier, BAE Systems, investigated and found it had acquired dozens of counterfeit parts that had been reworked to make them appear new, Levin said.

BAE determined that the parts likely were sanded down and remarked. The leads on many were bent and the markings were inconsistent. Parts that should have been virtually identical to one another were actually found to be of different sizes, Levin said.

BAE reported these findings to Boeing in January 2010. Committee investigators traced these counterfeit and defective parts through two U.S. distributors to a company called A Access Electronics, located in Shenzhen, China, Levi said.

Boeing did not notify the Navy of the counterfeit chips in the P8-A until August 2011 after receiving an inquiry from the committee, Levin said.

The same scenario played out with counterfeit chips discovered in the cockpit displays of Air Force C27J cargo aircraft, Levin said. L-3 Display discovered it had been sold counterfeit chips in November 2010, but did not notify the Air Force until this Sept. 19, 2011, after it was contacted by the committee.

These are just two examples of why Defense should buy certified parts, Levin said. He also said the Chinese government must step in to control its manufacturers.

But Chinese officials threatened the committee when Levin requested investigative help in a letter to the Chinese ambassador to the United States, Levin said. "Shortly after my letter, an official at the Chinese Embassy told committee staff that the issues we were investigating were 'sensitive' and that if the results of the investigation were not positive, it could be 'damaging' to the U.S.-China relationship," Levin said at the hearing.

"What is damaging to U.S.-China relations is China's refusal to act against brazen counterfeiting that is openly carried out in that country," he said.

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