Gray Market Electronics - Reaping What We've Sown

Gray market electronics components have been a problem for a long time. An extensive article appeared recently in EE Times reporting on a case based on a small operation in south Florida that was importing and re-selling counterfeit parts to military, aerospace, medical, and other product manufacturers. The Feds charged them "with conspiracy, trafficking in counterfeit goods and mail fraud for knowingly importing more than 3,200 shipments of suspected or confirmed counterfeit semiconductors into the United States, marketing some of the products as “military grade” and selling them to customers that included the U.S. Navy and defense contractors." The good news might be that this particular scam operation was caught and stopped, but the bad news is, according to the story, that many more are never prosecuted - largely because of typical bureaucratic SNAFUs in government procedures.

A couple years ago I wrote a short piece on the gray market problem, and surely it has only gotten worse. Much of the blame can be placed squarely on the shoulders of our own production equipment vendors, manufacturers (almost a misnomer anymore) and the technology export laws. The U.S. has been shipping know-how and machinery overseas for decades, but in the 1990s, the pace accelerated significantly. Now, in 2020, there are almost no significant restrictions on what kind of intellectual property (IP) or hardware can be sold or given away to other countries. The first time I remember really being alerted to the gravity of the problem was when reading in Aviation Week & Space Technology about Boeing and McDonnell Douglas setting up wing and empennage assembly operations in China. That was the early 1990s. Not long thereafter, a story appeared telling about composite material layup machinery being used to now manufacture the parts before the final assembly. Here in Erie, Pennsylvania, the GE locomotive plant until recently used to design, build, and ship locomotives from the local plant. A few years ago they began shipping "kits" to China, where they would be assembled. With such an ample supply of components that can be easily reverse engineered, China soon will not need GE's help at all to build trains. The same scenario has played out with the semiconductor industry. A decade ago we could not sell overseas the equipment for growing high purity GaAs boules, and could not sell a lot of the newest IC processing equipment. Now, it seems anything is fair game for the right price.

Millions of dollars worth of fees have been paid out to lobbyists on Capitol Hill to "persuade" legislators to change laws that have precipitated the problem. As with so many other things, America is committing national suicide by selling off or even giving away all of our proprietary technology. It's one thing selling it to long-time allies like England and Germany, but the government of China is hard Communist, with no qualms about its goal of becoming the world's largest superpower - both economically and militarily. A few years ago I wrote about all of the technology we have given and are still giving to Iraq and Afghanistan - places still largely dominated by radical Muslim terrorists who publically threaten to slit our throats and regularly kill our soldiers. A member of the royal Saudi family just offered a huge bounty for the capture of an Israeli soldier (Israel is our only real ally in the Middle East). These are among the countries we sell out our sovereignty to, and then act surprised when we discover that counterfeit components are being manufactured and sold illegally here. Electronics is not alone in the mess; pharmaceuticals, aircraft parts, clothing, and just about everything else is being sold on the gray market.

Many defense and security analysts have voiced concern over the ability of foreign IC suppliers, both legal and illegal, having the opportunity to design faults or a means of selectively usurping control into processors and programmable gate devices. Inferior packaging can make parts more prone to premature failure due to fatigue, contamination, ESD vulnerability, etc. Phony aircraft grade bolts that are significantly weaker than specifications have been discovered in military and commercial aircraft after production. Scientific American magazine has published multiple articles on the counterfeit drug problem. With all of these issues, the root causes can be traced back to the U.S. (and other first-world countries) selling off both new and surplus equipment to the highest bidder. I still remember back in the 1990s reading in disbelief about Loral selling rocket stabilization technology to China - ostensibly for a commercial launch platform, but in reality for ICBMs. Maybe the practice has been good for investors and CEO bonuses individually, but for the country, the practice has been an unmitigated disaster.

The truly sad thing is that no matter how bad things get, they are guaranteed to worsen because there's too much money and power involved to do anything about it. Consumers will continue to demand dirt cheap products while complaining about manufacturing and innovation disappearing in America, and about how politicians, in concert with industry leaders, will continue to see to it that they are provided. Ultimately, the cost of this convenience is being paid for in a loss of personal freedom and security. Pavlov rings his bell, and the dogs start drooling.

Read full EE Times article, "Chip counterfeiting case exposes defense supply chain flaw". Also, from Source Today, "Avoiding the gray market for electronic components,"  "U.S. Government Launches a Counterfeit Crackdown," "Combating counterfeit components: what buyers need to know," and "Is That a Counterfeit Component in Your Supply Chain?"

Posted May 27, 2020
(updated from original post on 11/3/2011)