The Pentagon's zeal to buy microchips on the cheap gives an advantage to sometimes questionable parts brokers that compete with more established suppliers. The dealings of AA Dynamic Enterprises of Anaheim, Calif., show how this works.
On July 30, the Pentagon awarded AA Dynamic a contract to supply 57 chips that manufacturer Intel (INTC) stopped producing in the late 1990s (photo, right). The parts 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 manufacture and distribute the Intel microchips. "We lost the bid because we were not 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 corporate 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 dabbles 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. The Pentagon requires its buyers to consider price and "best value." Officials say 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 confirms that the government killed three other deals, too.