A Pig In A Poke

It’s no huge revelation that the U.S. taxpayer takes a beating in every way possible. Just so we don’t lose sight of this and mistakenly forget how seriously we’re getting ripped off we have here a report from the GAO citing their internal audit of DOD procurement. Specifically the audit showed a seriously high incidence of fake and damaged material. LINK

Unsurprisingly, a significant portion of the deficient material is from China. I’m not going to be holding my breath waiting for congress or the DOD to fix this. We’ve had this problem forever and just like when the Pentagon lost $6 billion in cash in Iraq, nobody seems to much care about it.

On the battlefield, defective parts can cost soldiers’ lives. Reportedly 40 percent of the U.S. supply chain is damaged by counterfeit or defective parts, mostly from China. (Source: Defense Talk)
Using China-manufactured hardware could also offer a convenient route for espionage on core U.S. systems. The DOD continues to use Chinese parts, though because they’re cheap. (Source: Military Factory)

China is blocking U.S. inspectors from entering Shenzhen, a manufacturing metropolis that is suspected as a source of many of the counterfeit parts. (Source: Beijing Torch Relay)

Sen. Scott Brown (R-Mass.) says not to wholly blame the Chinese, but to look at our own nation’s decisions as well. He states, “It’s easy to blame the Chinese for this. Just like it’s easy to blame the Chinese for taking our jobs and shutting down American manufacturing plants. But we’re letting this happen. And the Department of Defense needs to pay way more attention to its whole supply chain.” (Source: AP Photo)Fake parts are compromising national security, costing Americans jobs

The U.S. Government Accountability Office (GAO), the audit, evaluation, and investigative arm of the U.S. Congress has been busy investigating reports of fake and/or damaged parts in the U.S. supply chain. It has released its preliminary findings [press release] and they may come as a shock to some — though perhaps not so much for others.

I. A Huge Problem

The GAO claims that 40 percent of the U.S. Department of Defense’s supply chain is adversely impacted by fake or defective parts. From missiles, to rifles, to vehicles, problems abound. The common thread, says the GAO, is that virtually all the suspect parts originated from contractors in China.

The U.S. Immigration and Customs Enforcement (ICE) agency in 2010 seized 19,959 loads of suspected counterfeit parts and materials valued at approximately $1.4B USD. That’s a 39 percent rise from 2009. ICE also reports dealing with 2,000 intellectual property abuse claims last year, which resulted 365 arrests, 216 indictments and 170 convictions.

The Defense Criminal Investigative Service (DCIS), under the auspice of the Defense Department Inspector, has its hands full as well. It is currently actively probing 45 reports of counterfeit parts and 200 allegations of substandard or non-conforming parts.

As mentioned, most of these parts come from China.

Particularly troublesome are reports of counterfeit computer chips. Deputy Defense Secretary Bill Lynn admitted to the magazine Foreign Affairs last year that, “[A]lready, counterfeit hardware has been detected in systems that the DOD has procured.”

The report is troubling as it not only endangers national security through failures, but could be a possible route to espionage attempts as well.

The GAO report describes counterfeit seatbelt clasps delivered for Army vehicles, fake computer routers delivered to the Navy, and Air Force microprocessors that were also counterfeit.

The DCIS investigation head James Ives cited an incident in which a Texan in January 2010 was found guilty of selling counterfeit Cisco Systems Inc. (CSCO) “Gigabit Interface Converters” to the Marine Corps for use in Iraq. Bought from a Hong Kong-based Chinese vendor, the contractor obtained the systems for $25 USD a piece and resold 200 of them to the Marines for $595 a piece — for a total of $114,000 USD in profit before applicable taxes.

II. Life and Death

In the field of defense small changes can make the difference between life and death. While the failure of a graphics card or a smart phone due to subpar counterfeit parts might be disappointing, the failure of a jet fighter CPU or a soldier’s machine gun could be deadly.

Over the last couple decades U.S. companies have increasingly turned to China to provide for their supply chain. It’s hard to resist — the Chinese offer cheaper labor, parts, and assembly than anywhere else in the world and their workers are moderately skilled.

However, there are serious problems from a culture of corruption and corner cutting with the Asian giant. In July 2007 China executed the nation’s former top drug regulator after he was found taking bribes to allow counterfeit products that resulted in deaths. The U.S. has experienced this problem first hand, in recalls of children’s toys that were found to contain toxic levels of brain-damaging lead.

And most recently China’s high speed train efforts were derailed when they found contractors to be using substandard materials and dangerous cheap fillers. As a result, China was forced to slow its world-leading trains to a pace slower than its foreign competitors.

All of these are telltale signs of a bigger problems looming over the Chinese manufacturing agency. Chinese labor may be cheap. But it’s prone to espionage, defects, counterfeiting, and substandard materials.

Ultimate the U.S. Department of Defense has a budget to maintain, though, and at the end of the day it’s made the same decision many U.S. companies have — take the risk of using Chinese parts.

III. China Refuses to Cooperate with GAO

According to the GAO report, most of the counterfeit parts are coming from Shenzhen, a major manufacturing center in China’s sea-facing southern Guangdong province.

Some may recognize Shenzhen as the home of Hon Hai Precision Industry Co Ltd. (2317) subsidiary Foxconn’s massive “city” plant where over 200,000 employees toil assembling products for Apple Inc. (AAPL) and other manufacturers. The plant gained international attention last year after a string of suicides [1][2][3] highlighted poor working conditions at the company’s Chinese plant [1][2].

The GAO has sent inspectors to investigate in Shenzhen. However, they’ve met a roadblock — the Chinese government learned of this plan and moved to block the investigators’ effort to gain visas. The Chinese government demanded the U.S. inspectors postpone their trip.

U.S. Senator Scott Brown (R-Mass.), a member of the Senate Armed Services Committee and former National Guard Member, blasted the decision in an interview with CNN. But he puts most of the blame on the American government and the DOD for allowing this behavior.

He states, “It’s easy to blame the Chinese for this. Just like it’s easy to blame the Chinese for taking our jobs and shutting down American manufacturing plants. But we’re letting this happen. And the Department of Defense needs to pay way more attention to its whole supply chain.”

He says that the cost cutting not only costs “America’s jobs”, but also “national security”, as well.

“If we’re using American taxpayer dollars to buy these goods, you better make sure they’re American made, you better make sure they’re safe, you better make sure you’re doing this right,” he opines, “If not, you’re not contracting with us any more.”

Unfortunately Sen. Brown’s rhetoric seems far from the DOD’s real world daily actions.