China Counterfeit Parts in U.S. Military Aircraft

Dozens of suspected counterfeit parts have been installed on U.S. defense equipment from Raytheon Co. (RTN), L-3 Communications Holdings Inc. (LLL) and Boeing Co. (BA), including aircraft deployed to Afghanistan.

The Senate Armed Services Committee found counterfeit parts -- usually from China -- on at least seven aircraft, including the Lockheed Martin Corp. (LMT) C-130J transport plane, Boeing P-8A Poseidon maritime patrol and L-3 27J Spartan transport.

“Suspect electronic parts from China were installed on military systems and subsystems that were manufactured by Raytheon Co., L-3 Communications and Boeing,” said a memo from the committee’s staff, released yesterday before a hearing today.

“There is a flood of counterfeits and it is putting our military men and risk and costing us a fortune,” committee Chairman Carl Levin, a Michigan Democrat, said. None of the examples found by the committee were connected to lives lost or dramatic failures causing an aircraft crash, and the companies involved cooperated with the investigation, he said.

China supports the fight against counterfeit goods, Chinese Foreign Ministry spokesman Hong Lei said at a briefing today in Beijing.

“China’s government is actively promoting cooperation in fighting fake or counterfeit goods with relevant authorities in other countries and such efforts are welcome,” Hong said.

Deployed Aircraft

Separately, the Pentagon’s Defense Criminal Investigative Service is investigating about 40 cases involving various counterfeit items, Assistant Pentagon Inspector General for Investigative Operations James Ives said in an e-mail. The agency is conducting 225 investigations “involving potentially defective or substandard parts and components,” he said.

“The cases may involve counterfeits or improperly made parts,” Ives said.

Two new L-3 Air Force C-27J Spartans deployed to Afghanistan have displays with suspect parts, according to the committee. L3’s Integrated Systems unit notified the Air Force on Sept. 19 that 38 suspect video memory chips were installed in the display units on eight of the first 11 aircraft delivered.

The L-3 unit that made the displays learned of the suspect memory chips in November 2010, the memo said. The committee traced the chips to Hong Dark Electronic Trade in Shenzhen, China, which also delivered an earlier counterfeit part L-3 discovered in October 2009, it said.

Cockpit Displays

The display units are made by L-3 Communications Display Systems and provide pilots with diagnostic data including engine status, fuel usage, location and warning messages.

The C-27J displays were among more than 500 containing suspect Chinese parts sold to the Air Force, Navy and defense contractors for installation also on C-130J and C-17 transport and Marine Corps CH-46 helicopters, the memo said.

“Failure of the memory chip could cause a display unit to show a degraded image, lose data or even go blank,” the memo said.

L-3 Vice President Ralph Denino, in a prepared statement to the committee, said “there has been no discernible effect” on the aircraft. The company “will take whatever corrective action its customer requests and the current remedy is to replace the chips during normal scheduled depot maintenance unless a failure occurs for any reason that would necessitate immediate repairs,” he said.

Serious Problem

Arizona Senator John McCain, the senior Republican on the Armed Services Committee, said the origin of the counterfeits is cloaked by passing them through a chain of three or four sham companies.

China “should be more vigilant,” he said today in an interview on Bloomberg TV. “They know where it comes from.”

“The fact that defective parts are in aircraft that are deployed in Afghanistan is evidence of the seriousness of the problem,” Levin said in an e-mail to Bloomberg News.

The Senate committee’s investigative staff amassed a database with 1,800 cases of counterfeiting totaling about 1 million parts. It scrutinized 100 cases and found that 70 percent of the suspect parts were traced to Chinese firms, according to the memo.

“Nearly 20 percent of the remaining cases were tracked to the United Kingdom and Canada -- known resale points for counterfeit electronic parts from China,” it said.

Tighter Rules

The panel is considering ways to tighten rules against the counterfeits, Levin told reporters, including requiring the defense contractors to pay for replacing the parts with genuine items.

“There’s a lot of possibilities here,” Levin said. “Right now, there is ambiguity in some of the contracts,” he said. “It depends on some extent as to the wording of the contract, whether it is cost-plus or fixed price,” he said.

Legislation “will force contractors to tell” their subcontractors and their subcontractor’s suppliers that they need to make sure the parts being sold are legitimate, he said.

“If you out the onus on all of our contractors they will get that message back to their suppliers as well,” he said.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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