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Chinese Counterfeit Goods in US Military Supply Chain – Part II

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chinese counterfeit products
In the previous article about counterfeit Chinese products, I focused on how poor supply chain management and a recalcitrant Chinese government enabled the preponderance of counterfeit goods in US military weapons.

That article focused on a Senate investigation, which proved over 700,000 suspect parts from China were used in critical US weapons systems. Such parts are not built to military standards and can lead to loss of life and also threaten national security.

In summary, Senator Carl Levin put it like this, “Our report outlines how this flood of counterfeit parts, overwhelmingly from China, threatens national security, the safety of our troops and American jobs..It underscores China’s failure to police the blatant market in counterfeit parts – a failure China should rectify. (1)”

Interestingly enough, awareness about the prevalence of counterfeit parts is not new (2). In 2008, Business Week reported that Rob P. Ernst of the Naval Air Systems Command’s Aging Aircraft Program, estimated that 15% of the replacement parts purchased by the Pentagon were counterfeit (3).

Mr Ernst, who heads research of counterfeit parts claimed that the Air Force had regular field failures in all weapons systems. In his opinion, fake parts “almost certainly” contributed to serious accidents (4).

One can only speculate whether Washington will take immediate steps to address the issue.

This segment on counterfeit parts will focus on two different aspects related to the scandal. The first is the role of unscrupulous US companies in the purchase of subpar goods.

Secondly, the article will focus on how the Chinese can and do leverage stolen technology for economic gain. Consequently, China-sourced technology has the potential to weaken not only our national security, but also our economy.




Unscrupulous US Companies to Blame

“Western consumers and companies have been complicit as active enablers of China’s ruthless business practices, environmental destruction and technology transfer all in the name of price. But so has the DoD and the defense industry…eschewing long held supply chain quality management practices of the cold war era in order to hold the costs of military weapons and information systems…in check. (5)“

The sentiments contained in the quote above are shared by the Center for Advanced Life Cycle Engineering (CALCE) at the University of Maryland. This organization which is dedicated to research on electronics reliability, believes that unscrupulous US companies are to blame (6).

China’s role in manufacturing questionable parts is well documented and CALCE blames US contractors for their use.

Strict electronics purchasing standards established during the Vietnam war were faded out during the Clinton administration. The subsequent administration continued by gutting those standards even further.

By 2004, thousands of quality control measures had been faded out. As a result, subcontractors can now consider purchasing ‘non military use’ parts when cheaper or more advanced units are available.

This means that key military components can now be outsourced from unproven and untested suppliers as long as they meet the new hurdles, ie parts are more advanced and or cheaper.

This leeway provided to subcontractors has led to disastrous results. It is the opinion of CALCE, such measures have led to cheap Chinese parts filling the military pipeline.

According to CALCE, unscrupulous companies benefited from the lax standards and the fragmented electronics parts market. Where once strict oversight abounded, there is now relatively little.

Military contractors are expected to self police, as it were, and have been doing a poor job of it. The preponderance of substandard goods proves that contractors and subs have done little to no ‘self policing’.

Even more alarming, CALCE proves that not only have some US contractors knowingly utilized counterfeit parts, but they have commissioned their production as well. What this means is that US companies have purchased components upon which the security of the United States relies, with full knowledge that the parts are not genuine.

While this contention is alarming, the idea that governmental suppliers have actively engaged in coaching Chinese on how to produce counterfeit parts that will pass inspection is a crime against America.

chinese counterfeit

A Crime Against America

Let me explain how such a thing can occur.

CALCE cites that a Raytheon missile system was knowingly compromised by bogus parts. Raytheon was complicit insofar as they eschewed a qualified original equipment manufacturer (OEM) and an authorized parts broker in order to purchase 1,500 Intel Flash memory chips from a third party.

The parts were to be used in the ‘Harm Targeting Systems’ which are installed in F-16 fighter jets. The analogy CALCE uses is that Raytheon, instead of purchasing from an official Gucci store, purchased “a Gucci handbag on Canal Street in New York City or across the street from the Rosslyn Metro in Washington D.C; (where) it is very likely to be counterfeit. (7)”

Rather than test the components, Raytheon installed them on dozens of circuit boards to be used in the fighter planes. The quality of the parts was so poor that the boards immediately failed.

At this point, the root cause of failure was determined. Substandard parts from a dodgy supplier were to blame.

The broker that Raytheon had entrusted to provide mission critical parts was VisionTech Components Inc. VisionTech, it was discovered, had instructed foreign entities on how to alter the labels and identities of electronic parts so that they would pass as legitimate.

In addition, the company coached the foreign suppliers on how to package and ship the goods to the USA to avoid scrutiny.

The Senate report showed how US weapons systems are compromised, but that is not all.

Chinese made parts are also found in a host of strategic infrastructure systems as well. Such parts could also contain malicious code or dangerous trapdoors. Such code could jeopardize everything from telecommunications systems to nuclear power plants.

This is alarming when one considers that Chinese exploitation could bring down the US power grid, telecommunications and even affect the U.S. military command system itself.

The results of Chinese economic espionage and China-based hacking are astounding.

According to Richard Clarke, the details of our next-generation fighter bomber have been stolen. Chips, routers and hardware that we import from China and other foreign suppliers, he contends, may include ‘logic bombs’, trapdoors and “trojan horses” ready to be activated on command (8).

This contention may seem far fetched, but only a few years ago this type of invasion actually occurred.

In 2009, it was discovered that China and other countries had penetrated the US electrical grid and left behind software programs which could be used to disrupt the US infrastructure.

The general consensus was that the act was only practice, to prove their capabilities in disrupting US systems.

As a result of the Senate report, an amendment to the National Defense Authorization Act for 2012 was offered and signed by President Obama on December 31, 2011.

The amendment mandated better training, reporting and supply chain control. Whether these measures prove to be successful remains to be seen.

chinese counterfeit products

Stealing Technology

A combination of factors led to breaches in national security. Culpability of actors in the supply chain as well as the Chinese have resulted in compromised quality of national weapons systems.

While the Chinese did supply shoddy and knockoff parts to US suppliers, one cannot entirely blame them. Poor quality control and greed on the part of US companies also played a role in the scandal.

The same, however, cannot be said for China’s aggressive level of economic espionage.

China, through intellectual property theft via espionage is responsible for “…the greatest transfer of wealth in history,” according to General Keith Alexander- Director of the National Security Agency. (9)

As troubling as the Senate report is, the findings of the U.S.-China Economic and Security Review Commission Hearing on “Developments in China’s Cyber and Nuclear Capabilities” is even more alarming.

The commission found that not only is the military at risk, but US technological leadership and economic power is as well. The disturbing thing is that according to the Pentagon, China, one of our biggest partners, is the most aggressive perpetrator of economic espionage.

“I don’t believe that there is precedent in history for such a massive and sustained intelligence effort by a government to blatantly steal commercial data and intellectual property.”
– US House Intelligence Committee Chairman Mike Rogers (R-Mich) (10)

Speaking at the U.S.-China Economic and Security Review Commission Hearing on “Developments in China’s Cyber and Nuclear Capabilities” Nart Villeneuve claimed that China is engaging in advanced persistent attacks (APT’s) on the US and others.

Such APT’s are not solitary events but part of a series of campaigns aimed at establishing a persistent covert presence in a target’s network so that information can be extracted as needed.

One of the main differences between this type of attack and “typical hack invasions” is that APT’s are persistent and have long term goals.

In addition, these sort of attacks are used to purloin intellectual property (IP), which is the cornerstone of advanced economies. While typical hacks target credit card numbers and such which can be used for immediate monetary gain, APT’s are used by nation states, such as the case with China (11).

By leveraging data collected by such cyber invasions, China can piggyback off the efforts of US experts. This theft allows the Chinese to bypass the costs associated with developing their ideas and technology.

In this way, they are not hindered by the time consuming effort needed to create, devise, and implement a breakthrough idea, they merely steal it.

Unhindered by the time and energy necessary to create such breakthroughs, the Chinese can focus on applying them instead.

chinese counterfeit products

Why Is U.S. Unwilling to Square Off?

Not surprisingly, the targeted areas of Chinese cyber attacks, to a great extent, mirror the industries which China wishes to develop.

The attacks cover industries such as defense, energy oil and gas, electronics and others.

Richard Bejtlich-Chief Security Officer, Mandiant, claimed that the Chinese attacks are becoming more aggressive and sophisticated as well.

When a country such as China has carte blanche to steal our secrets, it opens the door for their economic dominance. Think of it like this, while our scientists and engineers are developing breakthrough ideas and technology, the Chinese are waiting.

Once a product is proven, the Chinese either obtain the blueprints for its design or simply purchase the good and reverse engineer it. They then produce it at a governmentally subsidized low cost.

The Chinese did not have to invest time and money into the process of research and development. They were able to wait until we had a viable product and then stole it. And this happens all of the time.

In order to better explain how the Chinese benefit from stolen tech, I will use an analogy.

Imagine a university classroom filled with over 160 students. Now imagine that those 160 students are sitting down to take a final. The students have invested in books and reports and have spent countless hours in preparation to take the final.

One student, the one wearing red, has managed to be seated amongst the smartest students of the bunch. While the test is underway, this student need only cock his head to the right or left and glance behind to obtain the correct answers.

Based on his proximity to the most talented, he is sure to get a good grade, all he needs to do is to cheat.

Now imagine what the cheater could do with all that excess free time. While the other students invested time and energy into mastering the subject matter, the cheater gets a free ride. Faced with more free time, the cheater could study other subjects, work on private projects, or anything else he chooses.

The bottom line is that the cheater knows that come test day, he will be exposed to the answers of the best and brightest. If this cheating student were prudent, he could leverage his free time into success in other subjects, thus graduating with honors.

By virtue of the fact that he stole intelligence, he leveraged the opportunity of not studying by doing something else. In essence, he was given the gift of twice as much free time as the others.

China is the cheater, and the world is the university.

By stealing technology and ideas, the Chinese should be able to leapfrog the rest of the world to become innovation leaders. Fortunately for us, they have done a poor job of this so far.

“They are stealing everything that isn’t bolted down, and it’s getting exponentially worse… China has made industrial espionage an integral part of its economic policy, stealing company secrets to help it leapfrog over U.S. and other foreign competitors to further its goal of becoming the world’s largest economy” – Mike Rogers, a Michigan Republican who is chairman of the Permanent Select Committee on Intelligence (12).

The problem, however, is that due to suspect parts from China and the ecosystem of cyber-theft they have created, prudence is the best policy. In the past year alone, China and other countries stole $500 billion in blueprints chemical formulas, and other proprietary information from US companies- according to the New York Times.

And with an estimated two million Chinese working indirectly or directly for China’s intelligence gathering force, systems need to be in place both to monitor and inform about all threats to US security.

Silence about the extent of the Chinese cyber threat, according to Jason Healey- Director, Cyber Statecraft, is one of the biggest problems we face. In his opinion, corporations and/or government officials leak information about China-based attacks but not expose the gravity of the problem.

This failure to expose the reality of such intrusions, much like the failure of the military to report counterfeit tech is counterproductive and enables further exploitation.

The Senate report is exceptional as it directly confronts the role the Chinese play in compromising our military. The direct approach may prove to be the most successful.

Fear of Chinese reprisal constrains reporting on the scope and severity of Chinese attacks in the U.S. media. The logic is that, should the US alienate the Chinese, the Chinese could dump US securities, causing economic distress.

But, as Mr. Healey asks, why is it that the United States is willing to square off against China on tire imports and rare earths, but not on “the biggest transfer of wealth through theft and piracy in the history of mankind”?
References & Image Credits:
(1) Daily Tech
(2) SLDInfo.com
(3) Guardian
(4) Ibid
(5) Battle Technology
(6) Smithsonian Magazine
(7) Business Week
(8) The Diplomat
(9) SMH
(10) EEVblog

Originally published on TopSecretWriters.com


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