parts

050

unknown
By Brian Grow, How are fake, defective Chinese
Chi-Chu Tschang,
Cliff Edwards, and computer components getting into
Brian Burnsed U.S. warplanes and ships?
Photography
by Name Here A BusinessWeek Investigation
David Butow/Redux

In Guiyu, circuit
boards are stripped
of their microchips,
which are stamped
with false dates

BUSINESSWEEK I OCTOB E R 6, 2008

 in depth

051

The American military faces a growing threat of potentially

fatal equipment failure—and even foreign espionage—because of
counterfeit computer components installed in older warplanes,
ships, and missiles. Thousands of fake microchips are flowing from
unruly bazaars in China to dubious kitchen-table brokers in the
U.S.—and into weapons deployed by all four branches of the mili-
tary. ¶ Senior Pentagon officials publicly play down the danger to
fighting men and women. But government and industry documents,
as well as interviews with procurement and maintenance manag-
ers, show links between fake digital parts and military breakdowns.

OCTOB E R 6, 2008 I BUSINESSWEEK

052
In November 2005, a confidential Pentagon-industry pro-
gram that tracks counterfeits issued an alert that “BAE Sys-
tems 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, reviewed by BusinessWeek,
said two batches of chips “were never shipped” by their sup-
posed manufacturer, Maxim Integrated Products in Sunny-
vale, Calif. “Maxim considers these parts to be counterfeit,”
the alert states.
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 Investi-
gations 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 epi-
sodes 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 create the danger of foreign espionage,
as well as malfunctions. The U.S. Justice Dept. is prosecut-
ing the operators of an electronics distributor in Texas—and
late last year obtained guilty pleas from the proprietors of a
company in Washington State—for allegedly selling the mili-
tary 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.
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 Federal
Bureau of Investigation concurs that the routers could allow
Chinese operatives to “gain access to otherwise secure sys-
tems” (page TK).
It’s very difficult to determine whether minuscule fake parts
have contributed to particular plane crashes or missile mis-
haps, says Robert P. Ernst, who heads research into counter-
feit parts for the Naval Air Systems Command’s Aging Aircraft
Program in Patuxent River, Md. Ernst estimates that as much
as 15% of all the spare and replacement microchips the Pen-
tagon buys are counterfeit. As a result, he says, “we are hav-
ing 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 crashes
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, adds Ernst, 48, a civilian engineer for the military for
the past 26 years: “I am very frustrated with the leadership’s

dangerous frauds
Counterfeit components are showing
up in U.S. warplanes and ships, in-
creasing chances of crashes and other
mishaps. Here are their functions:

Data: BusinessWeek research,

Defense Logistics Agency F-15 fighter jet
Used in flight computer

BUSINESSWEEK I OCTOB E R 6, 2008


inability to react to this issue.” Retired four-star General Wil-
liam G.T. Tuttle Jr., former chief of the Army Materiel Com-
mand and now a defense-industry consultant, agrees: “What
we have is a pollution of the military supply chain.”
Much of that pollution emanates from the Chinese hinter-
lands. 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
FA-18 fighter jet
Part of navigational system
E-2C hawkeye surveillance plane
Used in navigational system
in depth
053
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 func-
tion at extreme temperatures. But propri-
etor 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 prod-
ucts from after 2000.”
BusinessWeek traced the path of compo-
nents from Guiyu to BAE Systems Electron-
ics & Integrated Solutions in Nashua, N.H.
The company’s confidential alerts to the
Government-Industry Data Exchange Pro-
gram (GIDEP) 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
Ernst: Trying to laser-targeting devices for snipers. It
to get the
military to
has reported far more counterfeiting inci-
confront an dents than its rivals: 45 over the past three
urgent crisis years. Industry executives say that large
figure may reflect BAE’s candor about fake
components. It may also indicate that BAE has pursued low-
priced chips more aggressively and been willing to accept
questionable merchandise from China.
The Justice Dept. is investigating BAE’s military electronic-
parts procurement, a company spokesman confirmed. The
probe’s focus is apparently potential fraud, not espionage.
In a statement, the company stressed that it “has attempted
to pursue the origin of components provided through the sup-
ply chain, [but] has no further insight, nor certification to the
origins of components that are provided by supply-chain dis-
tributors.” The company said that only a “small percentage”
of its parts have turned out to be counterfeit. BAE added that
it now has restricted its purchases to original chipmakers and
their approved distributors “except in very limited circum-
stances,” such as when it needs a hard-to-find component.
(top) Stephen Voss; (Bottom l-r) credit tktkt
U.S.S. ronald reagan aircraft carrier
Part of long-range air-surveillance radar
OCTOB E R 6, 2008 I BUSINESSWEEK
054
The harvesting In response to BusinessWeek’s questions,
of microchips
in China occurs
BAE said its November 2005 counterfeits
in open-air alert to GIDEP had referred erroneously
stalls to “field failures.” There were no malfunc-
tions, the company said.
The flood of counterfeit military microelectronics results
largely from the Pentagon’s need for parts for aging equip-
ment and an attempt 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 origi-
nal 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 mi-
crochips. The chips wholesale for as little as 10¢ and as much
as $2,000 each, depending on their complexity and qual-
ity. 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.
Name-brand manufacturers and well-established dis-
tributors, some of which acquire the rights to make obsolete
parts, say they mark up prices 10% to 30%. Smaller brokers
settle for far less generous margins. The number of small bro-
“Is there risk? Yes, there is risk...But less
than one-quarter of 1% of what we buy
is compromised” brigadier general patricia mcquistion
BUSINESSWEEK I OCTOB E R 6, 2008
fake parts 1. In Guiyu, workers strip
commercial-grade
The trail of counterfeit microchips from circuit
microchips, from China boards and resell them as
to the Pentagon military-grade
kers increased sharply after 1994, when Congress stopped
requiring government contractors to certify that they were
either original manufacturers or authorized distributors.
The brokers have to obtain a contractor code but receive little
or no oversight. Hundreds are now operating, some out of
suburban basements and second bedrooms. A BusinessWeek
analysis of a Defense Dept. contracting database identified
at least 24 active brokers that list residential homes as their
place of business. Several have won chip contracts for “criti-
cal applications,” which the Pentagon defines as “essential to
weapon system performance...or the operating personnel.” In
many cases these entrepreneurs comb Web sites such as bro-
kerforum.net and netcomponents.com, which connect them
with traders in Shenzhen and Guiyu. The brokers sell either
directly to Pentagon procurement depots or via suppliers to
defense contractors such as BAE.
in a quiet suburb
David Butow/Redux; (Bottom left) Anthony J. Ricchiazzi
Mariya Hakimuddin owns IT Enterprise, a company she runs
with the help of her mother out of a modest one-story house
in Bakersfield, Calif. Rosebushes line the street, and a basket-
ball hoop hangs in the driveway. Hakimuddin, 42, says she has
no college education. She began brokering military chips four
years ago, after friends told her about the expanding trade.
Since 2004 she has won
Pentagon part contracts
worth a total of $2.7 mil-
lion, records show. The
Pentagon has acquired
microchips and other
parts from IT Enter-
prise for use in radar on
 in depth

055

2. Chinese trading
companies advertise
thousands of supposedly
military-grade microchips
on Web sites
3. The Defense Dept.
puts out requests for
chips, often older, hard-
to-find models used in
major weapon systems
4. Brokers in the U.S.
scan Pentagon requests
online, plug part codes
into Google, and order
from Chinese distributors
5. Chinese suppliers
send chips to American
brokers or ship them
directly to Pentagon
supply depots

the aircraft carrier USS Ronald Reagan and the antisubmarine Week, Hakimuddin blames her Web-based suppliers, but
combat system of Spruance-class destroyers. she wouldn’t name them. In January the Defense Logistics
Hakimuddin says she knows little about the parts she has Agency banned IT Enterprise, Hakimuddin, and her mother,
bought and sold. She started her business by signing up on Lubaina Nooruddin, from supplying the military. The ban ap-
the Internet for a government supplier code. After the De- plies for three years.
fense Dept. approved her application, with no inspection, she The Hakimuddins weren’t deterred. One month after
began scanning online military-procurement requests. She Mariya was barred, her husband, Mukerram, received his
plugged part codes into Google and found Web sites offering own supplier code, using the same Bakersfield address with a
low prices. She had parts shipped directly to military depots. new company name, Mil Enterprise. This time the Pentagon
“I wouldn’t know what [the parts] were caught on more quickly, banning Muker-
before I’d order them,” she says, standing ram for three years as well. He couldn’t
on her front porch. “I didn’t even know be reached for comment. People familiar
what the parts were for.” with the matter say the Defense Criminal
The Navy’s Ernst became concerned Investigative Service is looking into IT
about IT Enterprise in March 2007. His Enterprise.
team found a suspicious transistor—a In written responses to questions
Microchips for
basic type of microchip—supplied by sale in Shenzhen, about kitchen-table brokers, officials at
the firm for use in the AV-8B Harrier, a China the Defense Supply Center in Columbus,
Marine Corps fighter jet. The transistor, Ohio—the Pentagon’s primary electron-
which turned up during an inspection of a ic-parts buyer for ships, land vehicles,
military depot in Cherry Point, N.C., was supposed to contain and some aircraft—said they do not conduct background
lead in its solder joints, but didn’t. That defect could cause checks on brokers or inspect them. “The law does not pro-
the solders to crack and the plane’s flight-control system to hibit” work-at-home brokers or use of the Internet to find
fail, Ernst explains. When a member of the team telephoned parts, the statement added. “Is there risk? Yes, there is risk,”
IT Enterprise in Bakersfield, he heard children chattering in Brigadier General Patricia E. McQuistion, the center’s com-
the background, Ernst recalls. It was the “ ‘Aha!’ moment for mander, says in an interview. She estimates that “less than
me on counterfeit parts,” he says. one-quarter of 1% of what we buy is compromised.”
David Butow/Redux

Unknown to Ernst, a separate Defense Dept. inquiry later Nevertheless, after BusinessWeek’s inquiries, the center
found that at least five shipments since 2004 from IT Enter- issued new contracting rules for microchips in August. Sup-
prise had contained counterfeit military-grade microcircuits, pliers now must provide documents on the “conformance”
including those intended for the USS Ronald Reagan, accord- and “traceability” of chips when they place bids. Previously
ing to Pentagon records. During her interview with Business- such records didn’t have to be filed at the bidding stage and

OCTOB E R 6, 2008 I BUSINESSWEEK

056
were sometimes later found to be missing or faked, according
to industry and government officials.
Even after the likes of IT Enterprise are identified, it can take
time to clean up the mess. On Feb. 5 a manager at Tobyhanna
Army Depot, the Pentagon’s largest electronics-maintenance
facility, in Stroud Township, Pa., notified the supply center in
Columbus that his unit had discovered counterfeit chips sup-
plied by IT Enterprise for use in global positioning systems on
F-15 fighters, according to internal Pentagon e-mails reviewed
by BusinessWeek. The e-mails show that, as late as July 25,
the Columbus center was still trying to locate parts purchased
from IT Enterprise. A Pentagon review of GPS equipment in
repair depots now is trying to assess the “impact of counter-
feit components,” internal communications show.
In one July 24 e-mail, an F-15 engineer, whom BusinessWeek
agreed not to identify, wrote: “Suppose that a part like that
makes it onto a flight-critical piece of hardware or mission-
essential piece of hardware. The[re] is a very good chance that
the part may work…but what happens at 40[,000] ft and -50
degrees? Hardware failure. Not good.”
pending investigations
Ernst says the Hakimuddin episode helped him realize how
blind he has been. “We don’t know how big the counterfeit
problem is, and, to me, that is irresponsible.” Now he’s trying
to get others in the military bureaucracy to confront what he
considers to be a crisis: “The risk of counterfeiting is so high,
and the cost to our weapon systems is so great, that we need
to take action.” Glenn Benninger, a senior civilian engineer
at the Naval Surface Warfare Center in Crane, Ind., concurs:
“Counterfeiting has literally exploded over the last few years,
but not a lot of people have been paying attention.”
The pending investigations could force the Defense Dept.
to heed such warnings. In addition to the Justice Dept.’s
probe of BAE, there is the Pentagon’s in-
house criminal inquiry. “The DoD takes
this threat very seriously,” John J. Young
Jr., Under Secretary of Defense for Acqui-
sition, Technology, and Logistics, said in
a statement. “This security threat will re-
quire great vigilance by DoD to defeat, but
we will do everything within our power to
do so.”
In July the Commerce Dept.’s Bureau
of Industry & Security separately began
circulating a confidential 30-page sur-
vey to defense contractors, chipmakers,
and distributors. The survey, reviewed by
BusinessWeek, describes its purpose as as-
sessing “the infiltration of counterfeit elec-
tronics into military and related industrial
supply chains.” The companies are required
by law to respond. Commerce Dept. offi-
cials declined to comment.
The government’s statutory obligation
to do business with small, “disadvantaged”
Sullivan:
suppliers has apparently encouraged its sought out
dealings with microelectronic brokers that counterfeits
otherwise might seem questionable. Feder- in Shenzhen
al affirmative-action rules require that the
Pentagon make 38% of its purchases from small contractors
or subcontractors—defined as companies having 100 or fewer
employees—including those run by women, military veter-
ans, or members of certain ethnic minority groups. Mariya
Hakimuddin qualified for preferred treatment. A database of
federal contracts refers to IT Enterprise as a “Subcontinent
Asian American Owned Business.” Hakimuddin wouldn’t
discuss her ethnicity but says she was born in the U.S.

the cisco the Edmans acquired the fake

routers and other equipment
from an “unindicted co-conspir-
secure networks and “weaken
cryptographic systems.” The
50-page briefing questions

spy threat
The FBI details dangers posed by fake gear
By Brian Grow
The prosecution of an Ameri-
can company called Syren
Technology offers a tantalizing
hint of the espionage threat
posed by fake Chinese com-
puter parts. But so far neither
U.S. law enforcement nor
tech spying.
Syren’s proprietors, brothers
Michael and Robert Edman,
were indicted in Houston in
December 2007 for selling
counterfeit Cisco Systems
computer gear to the Marine
Corps, U.S. Air Force, and
ator…who lives in China and
sells counterfeit Cisco products
using various company names,
including Cyberstar Company
Ltd. and Netwave Company
Ltd.” The Edmans have pleaded
not guilty, contending that they
didn’t realize they were dealing
in counterfeit equipment.
A January 2008 FBI briefing
on the Syren investiga-
tion and others like it,
prepared for technology-
industry audiences, says
the counterfeit Cisco
whether the counterfeiting is
“for-profit or state-sponsored”
but doesn’t offer an answer.
FBI officials and prosecutors
involved in the Houston case
declined to comment. The U.S.
has said previously that China
has attempted in a variety of
ways to spy on the Pen-
CREDIT HERE

industry has publicly produced “multiple defense contractors.” components could allow
evidence of this kind of high- Federal prosecutors allege that foreign agents to disrupt

BUSINESSWEEK I OCTOB E R 6, 2008

 in depth

057
pentagon officials see counterfeiting “as a
problem that could affect national security
and health and safety” john sullivan of texas instruments

Daniel Spencer vantaged” business on Pentagon documents, says he acquires

says he made his parts from China only as a “last resort” because “sometimes
wife, Brenda, the the quality is questionable.” Neither he nor Spencer has been
legal owner of his accused of impropriety in military-supply work.
brokering busi- Contractor reports to the GIDEP counterfeit-parts data-
ness, BDS Supply. base show a total of 115 incidents over the past six years. These
“I thought we’d get episodes involved Boeing Satellite Systems, Raytheon Missile
some kind of ben- Systems, Northrop Grumman Navigation Systems, Lockheed
efit [from being Martin Missiles & Fire Control, and other major companies.
woman-owned],” Based in Corona, Calif., GIDEP was started by the Pentagon
says Spencer, 54, in 1959. The extent of counterfeiting is thought to be much
who acknowledges larger than the program’s records reflect.
that he in fact runs “Everybody believes the [GIDEP] reports are just the tip of
the company with the iceberg,” says Brian Hughitt, manager of quality assurance
his wife. Working for NASA. Hughitt says that, during testing, NASA inspectors
from home in Great have identified two shipments of counterfeit chips in the past
Falls, Mont., he says 18 months. One lot was installed in flight hardware. “That’s
he buys only from something that is going to be launched into space,” explains
legitimate suppliers and has parts shipped to him for inspec- Hughitt, declining to provide more detail. “It could have been
tion before sending them on to the Pentagon. But he admits real bad.” NASA, which helps launch military satellites and
that, despite a background in computers, he doesn’t have the missiles as well as running the space shuttle and other explo-
expertise to identify fake microchips. ration projects, is investigating the incident.
Promod Dubey, who runs Phoenix Systems Engineering, a Boeing, Raytheon, Northrop, and Lockheed Martin each
military-parts broker in Lake Mary, Fla., complains that De- said they take the threat of counterfeits seriously. But the
fense Dept. procurement offices “want the cheapest possible companies wouldn’t comment on specific incidents.
s—t they can get.” Dubey, who lists the firm as a small “disad-
the china connection
To understand the counterfeiting phenomenon, Business-
Week independently traced four incidents of phony parts that

3.5
tagon and major of “counterfeit BAE Systems reported to GIDEP. The circuitous trails all led
American defense
contractors. One
alleged method:
$ network hard-
ware manufac-
tured in China.”
back to China (as did those of at least 10 other BAE incidents
that the magazine did not investigate in detail).
In April 2007 the company reported receiving fake mili-
online penetration But Chinese tary-grade chips allegedly made by Philips Semiconductor for
of defense-industry billion computer undisclosed weapon systems. A production date stamped on
computer networks counterfeiters the supposedly military-grade chips identified them as hav-
(BusinessWeek, Amount the Penta- have remained ing been made in 1998. But NXP Semiconductors, a unit spun
“E-spionage,” gon spends each mostly beyond off from the Dutch company Philips two years ago, confirms
Cover Story, Apr. year on spare the reach that it stopped making military-grade chips in 1997.
microelectronics
21, 2008). Attacks of U.S. law BAE bought the chips from Port Electronics, a Salem (N.H.)
Data: Defense Dept.
on these networks enforcement. distributor. Robert W. Wentworth, a vice-president at Port
have proliferated, Cisco says it and an Army veteran, says in an interview that BAE asked his
but direct ties to the govern- is working with China to shut firm to find a series of older microchips to avoid a redesign
ment of China or other foreign down counterfeiters. The com- of weapon systems “that would have cost [BAE] millions.” He
rivals haven’t surfaced publicly. pany adds that it has not found declines to specify the weapons but adds: “These people [at
The FBI says a two-year any of its equipment modified BAE] were desperate to find the parts.”
Matthew Mahon

investigation called Operation for spying but concedes that BAE said in a statement that, after discovering the coun-
Cisco Raider has “disrupted espionage is “not technically terfeits in 2007, it “immediately ceased” using all indepen-
a large distribution network” inconceivable.” dent chip brokers, including Port. Following a careful review,
BAE added, it again began buying certain products from Port,

OCTOB E R 6, 2008 I BUSINESSWEEK

058
Dubious
BrokerS
BW’s probe prompts the U.S. to kill deals
By Brian Grow
The Pentagon’s zeal to buy
microchips on the cheap
gives an advantage to
sometimes questionable
parts brokers that compete
with more established
suppliers. AA Dynamic En-
terprises of Anaheim, Calif.,
shows how this works.
On July 30 the Pentagon
awarded AA Dynamic a
contract to supply 57 chips
that manufacturer Intel
stopped producing in the
late 1990s. The micropro-
cessors are used in more
than two dozen major
weapon systems, including
the B-2 “stealth” bomber.
AA Dynamic offered to sell
the chips for $29.40 each,
45% less than a $53.85 bid
by Rochester Electronics, a
large Newburyport (Mass.)
supplier of discontinued
military parts. Rochester
owns the rights to manu-
facture and distribute the
Intel microchip. “We lost the
bid because we were not
115
Number of incidents
of military microchip
counterfeiting reported
by industry over the
past six years
Source: Defense Dept.
BUSINESSWEEK I OCTOB E R 6, 2008
low man on the totem pole,”
says Tom Rogers, a senior
Rochester sales executive.
AA Dynamic is run by
Alberto Alva from a two-
story stucco house. When
BusinessWeek called a cor-
porate phone number listed
in a business database, an
answering machine said:
“Hello, you have reached
the Alva residence. We’re
not home at the moment.”
Reached on his mobile
phone, Alva, 29, says his
company primarily does
consulting and only dab-
bles in selling microchips to
the military.
Officials at the Pentagon’s
Defense Supply Center in
Columbus, Ohio, say they
received bids for the Intel
chips from 10 suppliers,
offering prices from $18.39
to $72.70 apiece. Pentagon
regulations require its buyers
to consider price and “best
value.” Officials concede
that they never inspected
AA Dynamic.
Following questions
from BusinessWeek, the
Pentagon says it canceled
AA Dynamic’s Intel-chip
contract for lack of proper
documentation. Alva con-
firms that the government
killed three other deals, too.
which it described as a “small disadvantaged and disabled
veteran-owned business.” Without commenting directly on
Wentworth’s account, BAE acknowledged that redesign-
ing older weapon technology is prohibitively expensive and
that it sometimes makes more economic sense to seek “small
quantities of the original parts.”
Port obtained the fake Philips chips from another distribu-
tor, Aapex International, in Salem, Mass. Aapex had pur-
chased the components from Hong Kong Fair International
Electronics in Shenzhen, according to BAE documents. A
brochure provided by Hong Kong Fair at its office on the 15th
floor of a well-kept commercial building says it enjoys “a good
relationship and faithful partnership” with Aapex. Jiang Hon-
gyan, 43, Hong Kong Fair’s export manager, says in an inter-
view that her company never tests the microchips it supplies
and rarely knows anything about the companies from which it
buys. “We are a trading company,” says Jiang, who wears red-
rimmed glasses and uses the English name “Snow.” She adds:
“We buy goods with one hand and sell them with the other
hand. We do not have any capability to do research, produc-
tion, or modifications.”
red flags ignored
The owner of Aapex, Marie Gauthier, says her company pur-
chased chips from Hong Kong Fair only once. She says she
doesn’t know anything about the brochure in which Hong
Kong Fair boasts of its “faithful partnership” with Aapex. She
says she made chip sales worth $2 million to Port Electronics
between 1999 and 2007. “Ninety-nine percent of it was for
BAE,” she says. BAE engineers regularly contacted Aapex in
their search for older, hard-to-find chips, Gauthier says. She
told the defense contractor she was buying parts from China.
“We notified BAE that this was high-risk,” says Gauthier.
“They begged us because they said they needed the product.”
E-mail exchanges, reviewed by BusinessWeek, confirm that
Aapex repeatedly warned Port and BAE about problematic
parts from China.
Gauthier says BAE and Port no longer buy from Aapex. “I got
thrown under the bus by BAE,” she says. “They did not want
to take responsibility, so they pointed at us.” BAE declined to
comment on her assertion or on the e-mail exchanges.
Hong Kong Fair bought the fake Philips chips from the
Guiyu Electronics Market, according to the BAE documents.
No specific vendor is listed in BAE’s GIDEP report. At Jinlong
Electronics Trade Center, proprietor Lu Weilong says he could
easily supply many types of military-grade chips, including
those acquired for BAE. As he speaks, he turns to a PC in the
back of his cluttered store and types military part numbers
into Google to see from which kinds of circuit boards they
can be extracted. “I have the circuit boards at home,” he says
confidently.
Some Chinese parts providers appear to have set up front
companies in the U.S. and sell to brokers that supply the U.S.
defense industry. JFBK of Fullerton, Calif., seems to be one
such Chinese affiliate. The company is identified in GIDEP
documents from this past June as having provided chips to
North Shore Components, a distributor in Bellport, N.Y. The
chips, used in the FA-18 fighter and E-2C Hawkeye surveil-

060
lance plane, were supposed to have been made by National
Semiconductor in Santa Clara, Calif., but they turned out to
be counterfeits of only commercial grade, according to North
Shore’s report to GIDEP. North Shore Vice-President Joseph
Ruggiero says in an interview that his company found JFBK on
the chip-trading Web site NetComponents.
JFBK’s office in a strip mall in Fullerton is a single small
room that also houses two other companies: MeiXin Technol-
ogies and New World Tech, both chip brokers. JFBK’s Web site
describes a “knowledgeable and friendly staff” with “years of
collective experience and professional support.” One after-
noon in mid-July, four women and a man, who all appeared
to be in their 20s, sat at desks with small signs tacked above
them bearing the names of the three companies. The em-
ployees answered the phone on each desk with the name of
the company designated on the card. Asked about microchip
sales, one young woman, who declined to give her name, said:
“We’re not allowed to talk about what we do.”
According to the California Department of Corporations,
JFBK and New World have been “dissolved” as legal entities
since 2000. MeiXin is still listed as active. Public records
identify a woman named JianJu Cho as the agent for JFBK.
Reached by phone while on vacation in Florida, Cho said nei-
ther she nor her staff knows much about microchips. “I don’t
have any knowledge about electronic components,” said Cho.
“All the things just depend on what our supplier tells us.” Cho
says the owners of JFBK and MeiXin are “a couple from China
and a man from Taiwan. MeiXin and JFBK [are from] China;
New World is from Taiwan.”
A company called Tongda MeiXin Electronics operates on
the 15th floor of an office building in Shenzhen. Under the Mei-
Xin nameplate is another sign that states, in Chinese, “JFBK
Shenzhen office.” Asked about the relationship between JFBK
and Tongda MeiXin, Wang Tong, general manager of MeiXin,
says: “We are their supplier.” Wang, 27, says JFBK probably
didn’t appreciate that the purportedly military-grade chips
supplied to North Shore were counterfeit because neither
MeiXin nor JFBK knows where the product came from. “They
don’t understand the technology,” says Tong. “They only do
trade. None of us understand the technology.”
Wayne Chao, secretary general of the China Electronics
Purchasing Assn., based in Shenzhen, admits that micro-
BUSINESSWEEK I OCTOB E R 6, 2008
in depth
chip counterfeiting is rife in
China: “It’s widespread, and
we acknowledge that.” Asked
why Chinese officials don’t
shut down the blatant coun-
terfeiting in public markets
in Shenzhen, Shantou, and
Guiyu, Chao says: “This is a
legal issue. Everyone wants to
blame China, but it’s difficult
to differentiate between a le-
Shenzhen:
Many of the
gitimate product and a fake.”
fake parts come U.S. chipmakers say it is not
from huge chip their job to police a disorderly
emporiums global marketplace, although
some companies are at least
trying to assess the challenge. John Sullivan, vice-president
for worldwide security at Dallas-based Texas Instruments,
has traveled to chip markets in Shenzhen to photograph al-
legedly counterfeit stockpiles and label-printing machines.
U.S. Customs & Border Protection officials at American
ports have seized eight shipments of fake military-grade
chips purportedly made by Texas Instruments in the past
three years, according to GIDEP records. Sullivan says Penta-
gon representatives have met with TI and other chipmakers.
“They’re not seeing it as just an economic problem; they’re
seeing it as a problem that could affect national security and
health and safety,” says Sullivan.
Major chipmakers blame the Pentagon and its practice of
buying from small brokers for the spread of counterfeit mili-
tary-grade chips. “We’ve been telling people [at Defense] for
10 years to buy only from us or our authorized distributor,”
says Chuck Mulloy, a spokesman for Intel. “The military is
slavishly following the low-cost paradigm but not following
the idea of checking the quality as well.”
Hong Kong Fair’s Jiang, the alleged supplier of counterfeit
chips to BAE, argues that if the U.S. military wants guaranteed
high-quality chips, it should purchase them directly from the
original manufacturers or their official franchisees. “Why do
you come to China to buy it? You know that these things in
China are cheap,” Jiang says. “Why are they cheap? They have
problems with quality.” ^
–With Keith Epstein
Read, save, and add content on BW’s new Web 2.0 topic
Bad Ammunition
In March, The New York Times reported on AEY, a tiny
Miami supplier that won a $300 million contract to provide
the U.S. Army with rifle ammunition for Afghanistan’s
security forces. AEY’s wares were outdated, and some were
David Butow/Redux
illegally purchased from China. In June its 22-year-old CEO
was indicted for conspiracy and fraud.
Read about it at http://bx.businessweek/defense-industry