Dangerous Fakes

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

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

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Much of that pollution emanates from the Chinese hinterlands. BusinessWeek tracked counterfeit military components used in gear made by BAE Systems to traders in Shenzhen, China. The traders typically obtain supplies from recycled-chip emporiums such as the Guiyu Electronics Market outside the city of Shantou in southeastern China. The garbage-strewn streets of Guiyu reek of burning plastic as workers in back rooms and open yards strip chips from old PC circuit boards. The components, typically less than an inch long, are cleaned in the nearby Lianjiang River and then sold from the cramped premises of businesses such as Jinlong Electronics Trade Center.

A sign for Jinlong Electronics advertises in Chinese that it sells "military" circuitry, meaning chips that are more durable than commercial components and able to function at extreme temperatures. But proprietor Lu Weilong admits that his wares are counterfeit. His employees sand off the markings on used commercial chips and relabel them as military. Everyone in Guiyu does this, he says: "The dates [on the chips] are 100% fake, because the products pulled off the computer boards are from the '80s and '90s, [while] customers demand products from after 2000."

BusinessWeek traced the path of components from Guiyu to BAE Systems Electronics & Integrated Solutions in Nashua, N.H. The company's confidential reports to the Government-Industry Data Exchange Program were critical to this research. A unit of BAE's $15 billion U.S. division, the electronics operation makes a variety of sophisticated equipment, ranging from missile-warning systems for fighter jets to laser-targeting devices for snipers. It has reported far more counterfeiting incidents than its rivals: 45 over the past three years. Industry executives say that large figure may reflect BAE's candor or its aggressive pursuit of low-priced chips from China. The Justice Dept. is investigating BAE's military electronic-parts procurement, a company spokesman confirmed.

In a statement, the company said that it "has attempted to pursue the origin of components provided through the supply chain, [but] has no further insight, nor certification to the origins of components that are provided by supply-chain distributors." Only a "small percentage" of its parts have turned out to be counterfeit, BAE said. It now has restricted its purchases to original chipmakers and their approved distributors "except in very limited circumstances," such as when it needs a hard-to-find component.

BAE isn't unique. Other contractors that have reported counterfeit microchips to GIDEP include Boeing (BA) Satellite Systems, Raytheon (RTN) Missile Systems, Northrop Grumman (NOC) Navigation Systems, and Lockheed Martin Missiles & Fire Control. The companies all said they take the threat of counterfeits seriously but wouldn't comment on specific incidents.

The flood of counterfeit military microelectronics results largely from the Pentagon's need for parts for aging equipment and its long efforts to save money. In the mid-1990s, after the collapse of the Soviet Union, the Clinton Administration launched an initiative, continued during the Bush years, of buying all sorts of components off the shelf. In addition to the traditional pattern of purchasing equipment from original manufacturers and their large, authorized distributors, the Pentagon began doing business with smaller U.S. parts brokers that sprang up to offer low-cost items, including microchips. Federal affirmative-action goals have further encouraged the military to favor suppliers that qualify as "disadvantaged." The chips wholesale for as little as 10 cents and as much as $2,000 each, depending on their complexity and quality. The Pentagon spends about $3.5 billion a year on spare chips, many of them for planes and ships that are 10 or 20 years old.