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In Depth October 2, 2008, 5:00PM EST

Dangerous Fakes

How counterfeit, defective computer components from China are getting into U.S. warplanes and ships

By Brian Grow, Chi-Chu Tschang, Cliff Edwards and Brian Burnsed

The harvesting of microchips in China occurs in open-air stalls David Butow

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Some of the U.S. military craft that use microchips found to be counterfeited (top to bottom) Bettmann/Corbis; George Hall/Corbis; U.S. Navy, MC2 David Didier/AP Photo; U.S. Embassy Manila/Handout/EPA/Corbis

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. Fake microchips flow from unruly bazaars in rural China to dubious kitchen-table brokers in the U.S. and into complex weapons. Senior Pentagon officials publicly play down the danger, but government documents, as well as interviews with insiders, suggest possible connections between phony parts and breakdowns.

In November 2005, a confidential Pentagon-industry program that tracks counterfeits issued an alert that "BAE Systems experienced field failures," meaning military equipment malfunctions, which the large defense contractor traced to fake microchips. Chips are the tiny electronic circuits found in computers and other gear.

The alert from the Government-Industry Data Exchange Program (GIDEP), reviewed by BusinessWeek (MHP), said two batches of chips "were never shipped" by their supposed manufacturer, Maxim Integrated Products in Sunnyvale, Calif. "Maxim considers these parts to be counterfeit," the alert states. (In response to BusinessWeek's questions, BAE said the alert had referred erroneously to field failures. The company denied there were any malfunctions.)

In a separate incident last January, a chip falsely identified as having been made by Xicor, now a unit of Intersil in Milpitas, Calif., was discovered in the flight computer of an F-15 fighter jet at Robins Air Force Base in Warner Robins, Ga. People familiar with the situation say technicians were repairing the F-15 at the time. Special Agent Terry Mosher of the Air Force Office of Special Investigations confirms that the 409th Supply Chain Management Squadron eventually found four counterfeit Xicor chips.

THREAT OF ESPIONAGE

Potentially more alarming than either of the two aircraft episodes are hundreds of counterfeit routers made in China and sold to the Army, Navy, Air Force, and Marines over the past four years. These fakes could facilitate foreign espionage, as well as cause accidents. The U.S. Justice Dept. is prosecuting the operators of an electronics distributor in Texas—and last year obtained guilty pleas from the proprietors of a company in Washington State—for allegedly selling the military dozens of falsely labeled routers, devices that direct data through digital networks. The routers were marked as having been made by the San Jose technology giant Cisco Systems (CSCO).

Referring to the seizure of more than 400 fake routers so far, Melissa E. Hathaway, head of cyber security in the Office of the Director of National Intelligence, says: "Counterfeit products have been linked to the crash of mission-critical networks, and may also contain hidden 'back doors' enabling network security to be bypassed and sensitive data accessed [by hackers, thieves, and spies]." She declines to elaborate. In a 50-page presentation for industry audiences, the FBI concurs that the routers could allow Chinese operatives to "gain access to otherwise secure systems" (page 38).

It's very difficult to determine whether tiny fake parts have contributed to particular plane crashes or missile mishaps, says Robert P. Ernst, who heads research into counterfeit parts for the Naval Air Systems Command's Aging Aircraft Program in Patuxent River, Md. Ernst estimates that as many as 15% of all the spare and replacement microchips the Pentagon buys are counterfeit. As a result, he says, "we are having field failures regularly within our weapon systems—and in almost every weapon system." He declines to provide details but says that, in his opinion, fake parts almost certainly have contributed to serious accidents. When a helicopter goes down in Iraq or Afghanistan, he explains, "we don't always do the root-cause investigation of every component failure."

While anxiety about fake computer components has begun to spread within the Pentagon, top officials have been slow to respond, says Ernst, 48, a civilian engineer for the military for the past 26 years. "I am very frustrated with the leadership's inability to react to this issue." Retired four-star General William G.T. Tuttle Jr., former chief of the Army Materiel Command and now a defense industry consultant, agrees: "What we have is a pollution of the military supply chain."

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