The Line
COUNCIL ON COMPETITIVENESS TO STUDY U.S. MANUFACTURING COMPETITIVENESS
The Council on Competitiveness is waking up to the faded competitive position of American industry. Nine years after the initial collapse of the U.S. manufacturing sector during the 2001 recession, the Washington, D.C.-based think tank says it is “launching a manufacturing competitiveness initiative to define a fresh approach to growth and job creation in this vital sector.” The effort is being headed by James Quickly, CEO of Deloitte Touche Tohmatsu, and Susan Hockfield, president of MIT.
“America lacks a strategy for manufacturing competitiveness,” said council president Deborah Wince-Smith in testimony before the House Science Committee. “We need policies that make America a really attractive place to invest.”
The council’s “major initiative” in manufacturing intends to “redefine” manufacturing not as “product fabrication” but as a “value creation system,” said Wince-Smith.
As part of the initiative, the council will develop a document with “sector assessment and competitiveness priorities.” It will conduct a survey of manufacturing CEOs to determine where the U.S. stands versus other countries. It will hold “competitive-edge policy roundtables” to build “action agendas on key manufacturing drivers from diverse input from around the country.” It will conduct a survey of overseas manufacturing executives to determine best practices used to attract manufacturing investment. It will benchmark successful policy approaches used by foreign countries to attract manufacturing. And it will draft policy roadmaps for manufacturing competitiveness.
It wasn’t long ago that the council believed U.S. manufacturing wasn’t important to American prosperity. At the November 2006 release of its “Competitiveness Index: Where America Stands,” report author Michael Porter of Harvard said that services “are where the high value is today, not in manufacturing. Manufacturing stuff per se is relatively low value. That is why it is being done in China or Thailand. We have to stop this notion [of believing] that manufacturing is essential. It’s a real problem because it distorts our thinking. It reflects a simplistic view of the international economy and how companies compete in their overall value chain.”
Porter argued that exporting was no longer an essential national priority because large multinational companies had set up production offshore and were serving those markets from their new foreign factories. As such, he said, “the old model where we exported stuff – and that is how we engaged in the international economy – has been shattered irrevocably.” Porter added that the U.S. trade deficit of $800 billion was “not epic” and was nothing to fear since “many other economies in the world run trade balances at this percent of GDP.”
Council President Wince-Smith argued at the time that it was a “myth” that American manufacturing was not competitive. “The United States remains the largest manufacturer in the world,” she wrote in a letter to Manufacturing & Technology News in March 2007. “Manufacturing in America is still strong – it is manufacturing employment that has declined dramatically.” Manufacturing workers were not losing their jobs because of offshore outsourcing of production, she added. They were losing their jobs because of “dramatic increases in productivity [that] enabled companies to produce more with fewer workers.”
In its 2009 annual report, the Council on Competitiveness describes some of its accomplishments over the past year, among them was a “ground breaking partnership” with the Brazilian group “Movimento Brasil Competitivo” and the Brazilian Agency for Industrial Development. It also launched the Global Council on Competitiveness that brings together leaders from 20 competitiveness organizations from around the world to exchange views.
Other accomplishments include holding a “State of Innovation Summit;” two “dialogues,” one on global technology leadership and another on “technology frontiers.” It conducted a survey of chief technology officers, which found that 85 percent of the respondents “believed that the United States is the global leader in research and development-based innovation today,” but that “fully 65 percent believed this will not be the case in five years if current trends continue.” It also kicked off a research project on how the country can deal with workers age 55 and older. “This project is part of the Aging Workers Initiative, sponsored by the U.S. Department of Labor’s Employment and Training Administration,” says the council. It is also planning to release a study funded by the Economic Development Administration that “will evaluate the feasibility of creating a center for regional leadership development linking universities, experts and practitioners.”
U.S. Venture Capital Industry Has Stopped Funding New Companies
The venture capital industry has not been good for investors over the past decade. Recently, the 10-year returns on venture capital became negative, says Ed Penhoet, director of Alta Partners in San Francisco, Calif. There are a number of reasons for the poor financial returns for investors. There has been a lack of really good ideas and the cost of commercialization has increased significantly.
“The venture capital world is shrinking as we speak and, in general, venture capitalists are investing in less and less risky projects and investing more and more in late stage” company funding, says Penhoet. The VC community has even started investing in public companies “rather than doing venture in the way it was traditionally done. The belief that venture capital will be there to catch all of this technology and invest in it and make it a commercial reality is probably under serious question at the present time.”
The federal government should consider stepping into this void, says Penhoet. “We may have to have some sort of innovation policy which requires direct” funding to companies to commercialize new technologies, especially for those in the clean energy area. “This reliance on the venture capital business to essentially provide the wherewithal for the country to move innovation through to the marketplace may be misplaced in this current environment,” says Penhoet.
The content in THE LINE is reprinted with permission from Manufacturing & Technology News.
U.S. Rocket Makers Play A Small Role In America’s Global Launch Industry
Foreign companies have taken over the majority of the global space launch industry, and the United States has only one supplier left making high-thrust liquid rocket engines and solid-rocket motors. “A substantial fraction of U.S. propulsion demand is currently met by foreign suppliers,” according to an assessment by the White House Office of Science and Technology Policy’s Science and Technology Policy Institute (STPI). “So while demand for U.S. launch vehicles is low, demand for the production of U.S. propulsion systems is even more constrained. Given this situation, most U.S. propulsion providers seem to have little business incentive for investing in new capabilities and technologies.”
U.S. space launch companies accounted for only 17 percent of global launches between 2004 and 2008, compared to 42 percent for Russia, 21 percent for Europe and 18 percent for the multinational company called Sea Launch, a partnership with Boeing, which owns 40 percent, Russia, Ukraine and Norway (Sea Launch entered into Chapter 11 bankruptcy in December 2009). “Moreover, future demand for commercial launch activity over the coming decade appears flat, indicating that U.S. launch providers will not be able to count on growth in global market demand to increase their commercial launch opportunities,” says STPI.
The U.S. industry is currently capable of serving the U.S. government, but reduced demand and the strength of foreign competitors are causing “significant stress” in the U.S. supply chain for engine systems and components. “Indeed, the limited volume makes it difficult for some providers even to maintain current capabilities as components and material suppliers shut down production lines and facilities and direct their attention to more promising markets — or even shut down completely,” according to STPI.
Few American propulsion suppliers are hiring workers, and long-term job uncertainty means that few people are entering the workforce. As workers retire, the knowledge base disappears with them, reducing the ability of propulsion providers “to create next generation propulsion systems even if there were sufficient demand,” says STPI.
There are a few entrepreneurial U.S. startups, but these companies have business models “that emphasize reliability and cost savings rather than new technology [and] are not targeting fundamental advancements in the state of propulsion technology,” notes STPI. “Nevertheless, these firms bring a new level of excitement and energy to the industry with the hope of new launch and associated propulsion systems at lower cost and, as a result, the potential for growing the market. This allows them to attract a new cohort of entry-level scientists and engineers and provide hands-on experience with building and testing new engines and motors.”
Space launches by the U.S. government are not projected to increase over the next decade. The government has averaged 15 launches per year since 2001, down from almost 23 launches per year from 1995 to 2000.
There are only three U.S. companies that provide launch services to the U.S. government: United Launch Alliance, a joint venture of Boeing and Lockheed-Martin, Orbital Sciences Corp. and Space X. These companies primarily serve the U.S. government, with only 20 percent of their launches between 1999 and 2008 provided to commercial companies. The three firms “face substantial competition from an increasing number of foreign launch providers including Arianespace (Europe), International Launch Services (Russian), the Yuzhnoye Design Bureau of Ukraine, the Indian Research Organization, the Japanese Aerospace Exploration Agency and the China Great Wall Industry Corp,” according to the White House report.
U.S. demand for launches has decreased significantly over the past 15 years. In 1997, there were 37 space launches in the United States. That number fell to only 12 in 2005, and increased to 15 in 2008.
The decline in demand is taking its toll on companies that produce propulsion systems. Pratt & Whitney Rocketdyne will supply Boeing with a new rocket engine for the Delta IV, but Lockheed Martin has decided to use an engine that is manufactured by NPO Energomash, a Russian company. “This decision avoided the significant cost associated with developing a new rocket engine,” according to STPI. “But, as an outcome of the decision, a substantial fraction of U.S. propulsion demand is now — and will continue to be for some time — filled by foreign suppliers. This dependence on foreign suppliers contributes to substantial overcapacity for U.S. space launch propulsion production, making it even more difficult for U.S. propulsion providers to sustain the industrial base in this area.”
With little demand and excess capacity, Pratt & Whitney Rocketdyne is the only U.S. company making high-thrust, high-performance liquid-rocket engines. The only U.S. company making solid-rocket motors is ATK. “Even with this consolidation, the industry has significantly more production capacity than is strictly needed to meet current demand,” according to STPI. “Industry-wide capacity utilization appears to be roughly 50 percent or less.”
The 14-page assessment is located at http://www.ostp.gov/galleries/press_release_files/OSTP Letter on Space Launch Propulsion-12 22 09.pdf.
Bekaert Corporation Expanding in Kentucky
FRANKFORT,
Ky. Bekaert Corporation in Shelbyville, Ky., announced an expansion that will create 10 new jobs and invest more than $2 million in the Commonwealth. Bekaert manufactures drawn steel wire prodects.Located in Shelby County since 1990, Bekaert plans to add a hot-dip galvanizing line to its 260,000-square-foot plant. The process provides corrosion protection for wire used in exposed environments. Currently, the plant employs 101 full-time Kentuckians.
Bekaert’s wire products are used in a variety of applications such as staples, paper clips, nails, spiral notebook wire, concrete and automotive uses. In fact, one in every four tires in the world runs on Bekaert steel cord. The company employs 23,000 people worldwide and serves customers in 120 countries.
Alternative Energy Company Bringing New Jobs to South Carolina
COLUMBIA, S.C.
The IMO Group, one of the world’s leading manufacturers of slewing rings and slew drives, as well as experts in the machine and plant manufacturing sector, will locate its first U.S. manufacturing facility in Dorchester County, South Carolina. The operation will be called IMO USA Corp. and will ultimately employ 190 workers and generate a $47 million capital investment.With headquarters in the south of Germany, the family-owned IMO has been named one of Bavaria’s Top 50 companies and listed among Europe’s 500 fastest growing companies for several years in a row. The company’s slewing rings are used in many applications, including blade, yaw and single main bearings for wind turbines up to 5+ megawatts; blade bearings for tidal stream systems; and slewing rings for construction machinery, tunneling and mining, medical technology and ship building.
GREEN MOVEMENT TAKES A TOLL ON COAL-FIRED POWER PLANT MAKERS
Last year wasn’t a very good one for the makers of coal-fired power plants. No new coal plants broke ground in 2009, while 26 proposed coal plants were defeated by public opposition or were abandoned, “the largest number of new coal plants defeated since the coal rush began in 2001,” says the Sierra Club. Last year was a “turning point” for environmentalists in their fight against coal, adds the group.
The anti’s had much to crow about. Total coal use was down in 2009. The Obama administration is considering new regulations for the disposal of ash, limiting mercury emissions, soot and CO2. The Obama administration has also blocked most new permits for mountaintop removal coal mining operations, and it is increasing oversight of existing mining operations.
“The largest new consumer of mountaintop removal coal, the Santee Copper coal plant planned for South Carolina, will not be moving forward,” says the Sierra Club. “Neither plans to significantly expand the export of coal from the Powder River Basin. After a decade-long fight, the Dakota Minnesota & Eastern Railroad project was abandoned in August. The DM&E rail project would have carried enough coal to power about 50 medium-sized coal plants.”
Of the 150 proposed coal plants announced since 2001, 111 have been defeated or abandoned, says the Sierra Club. There are 90 remaining proposals. “The landscape has shifted 180-degrees,” says Bruce Nilles, director of the Sierra Club’s Beyond Coal Campaign. “The public is rising up, demanding cleaner energy and developers and investors are taking note.”
To view the Sierra Club’s list of proposed coal plants, go to www.sierraclub.org/coal/coalnearyou.
China’s Auto Industry Surpasses America’s By More Than Three Million Vehicles
China’s automobile market grew by 45 percent in 2009, “the highest growth rate ever,” says Wilbur Ross, chairman of WL Ross & Co., and owner of International Auto Components Group (IAC). Chinese auto sales surged to 13.6 million units, “consolidating China’s top position in the global automobile market,” according to China Daily. Total sales in the United States last year were 10.4 million, down from 13.2 million vehicles in 2008.
Adds Ross: “The way things are going, China will increase its lead over the United States with the long-term competitive implications that will result. As Chinese companies become larger, more technologically advanced and more profitable, they will compete in the United States and other world markets.”
The Chinese government helped the industry by providing VAT reductions on small displacement cars, instituting a cash for clunkers program, and giving 10 percent subsidies to farmers buying new vehicles along with cash payments. The Chinese government recently announced a new cash-for-clunkers program that raises last year’s incentive from 3,000 to 6,000 yuan to 5,000 to 18,000 yuan.
Sales of minivans in China increased by 80 percent in 2009, to almost two million units. There were 221 new passenger vehicle models introduced in China last year, and there will be another 100 new introductions this year. Industry volume is expected to grow to more than 15 million units in 2010, according to Ross.
“In contrast, our government mounted a feeble 700,000 unit cash-for-clunkers program last year, administered it poorly and now has discontinued it,” Ross told the Automotive World Congress in Detroit on January 13. “Instead of complaining about China’s currency policies, which we cannot control, our government would better level the automotive playing field if it extended and enlarged cash for clunkers, simultaneously improving the environment. The contrast is stark: China has a sensible and well-implemented industry development strategy, but the United States does not. In view of our government’s rescue of GM and Chrysler, it is puzzling why they have not followed through to create a powerful industry dynamic.”
In China, sales of light vehicles have skyrocketed, from about 500,000 per month in July 2008, to 900,000 vehicles per month by August 2009, and finishing the year at more than one-million new vehicle sales per month. There is the potential for China to have a fleet of 500 million vehicles in the “foreseeable” future, said Dave Breen, U.S. automotive leader at PricewaterhouseCoopers.
Meanwhile, the U.S. market isn’t going anywhere. The average annual demand could rise to between 13.5 million to 14.2 million units, given the natural growth in the number of young drivers, says Ross. “Seventeen million units will not recur soon. That occurred at the peak of consumer’s excessive leveraging which pulled demand from future years, contributing to the subsequent 40 percent decline [in 2009].”
Last year, 60 suppliers went bankrupt in the United States, and another 200 shut down. “Five years ago, who would have thought that Delphi, Lear and Visteon would be simultaneously bankrupt,” says Ross. “More capacity elimination is needed and we believe that more suppliers will fail in 2010 and others will be distressed sellers.”
Smaller American suppliers will be hard pressed to stay in business, as foreign automakers such as Beijing Automotive, Geely, Tata and Sberbank start to globalize their production. As this happens, “the competitive position of smaller, local entities will become more difficult,” says Ross. “Given the consolidated customer base, a fragmented supplier universe never was logical. Now as OEs [original equipment companies] globalize, logic demands suppliers with symmetrical maps. Larger scale facilitates supplier-financed R&D, making them better partners for OEs…In addition, Tier One suppliers will continue to integrate backward and eliminate former subcontractors.”
Ross says IAC has brought in-house many previously purchased parts and raw materials production. The company has renegotiated union contracts, “cut non-union wages and benefits and put management on four days pay for five days work and trimmed supervisory ranks. Despite these hardships, morale is good because we have been awarded a couple of hundred million dollars of business from failed competitors.” The company has opened new facilities in Japan, China and India.
The global automobile industry has the capacity to produce 94 million cars per year “some 30 million more than we can typically sell,” said Sergio Marchionne, CEO of Chrysler Group LLC. That excess capacity is equal to 120 assembly plants “and countless supplier facilities,” added Rodney O’Neal, CEO of Delphi.
The once mighty Delphi is a fraction of its former self, O’Neal noted. Since it declared Chapter 11 bankruptcy four years ago, the company’s revenues have declined by half. The company has laid off 84,000 employees. It went from 27 business units to 10 and it has reduced specific product lines from 119 to 38.
About one-third of global automobile assembly capacity resides in Europe, where the industry remains virtually the only sector that has yet to rationalize production, says Chrysler’s Marchionne. Europe utilized 75 percent of its capacity last year, a number that may shrink to 65 percent this year. “The reason, simply put, is that European manufacturers simply do not close plants,” says Marchionne. “The reason for that is they simply do not have to. In fact, they’re often paid not to. The last time a German plant shut down, World War II had yet to begin.”
India is another fast growing market. Sales in India reached 2 million units last year, a growth rate of 17.5 percent. Revenues totaled $34 billion, and are projected to quadruple to $145 billion by 2016, according to Pawan Goenka, president of the Society of Indian Automobile Makers.
U.S. MILITARY WARNED AGAIN ABOUT ‘ERADICATION’ OF AMERICAN INDUSTRY:
‘KEY GOVERNMENT DECISION MAKERS ARE NOT GETTING THE MESSAGE’
The U.S. military risks not being able to field an army if Congress does not start addressing the loss of the American industrial base by reforming tax laws to encourage domestic production. “The defense of our country is in a perilous state,” according to Col. Michael Cole, deputy chief of staff at the Joint Enabling Command of the U.S. Joint Forces Command. “The message of the few who are aware of the problem is not reaching the key government decision makers.”
Strategies currently in place to deal with an industrial base that is increasingly unable to supply the military with manufactured parts and electronic components are not working, argues Cole. The Diminishing Manufacturing Sources and Material Shortages (DMSMS) program does not address the bigger issues involved with the “eradication” of the U.S. industrial base. The loss of U.S. industrial capability “is no ordinary budget problem that can be solved by an infusion of money, even if there was money to spare,” according to Cole in a paper on the subject. “The unfortunate aspects of DMSMS are that no U.S. agency is responsible for managing industrial policy as it relates to national defense, and the loss of the industrial base is a self-inflicted wound created ultimately by corporate tax laws that encourage offshore manufacturing.”
The U.S. manufacturing sector has been in trouble for years, but the recession made things even worse, Cole notes. An inevitable decline in the defense budget does not bode well for DoD’s ability to support the industries that are involved in the production of weapons systems. Moreover, as program managers confront reduced budgets, they are becoming more motivated to buy cheap components made overseas. “If there was ever a crisis situation with China it is likely our shipments from China would cease,” says Cole. “A country devoid of its industrial base with plenty of soldiers left to fight can hardly wage a long-term war. Knowing that Congress is aware of the DMSMS problem and has formed a commission [the U.S.-China Economic and Security Review Commission] to study it does mean that there is hope for a solution.”
Currently, the DoD “solution” is to issue regulations requiring program managers to use a “Shared Data Warehouse” on parts and supplies “so that other programs may benefit from the solution,” Cole notes. The second strategy is for program managers to perform so-called “resolution cost tradeoff studies when evaluating solutions for non-available parts” as contained in DMSMS Guidebook.
These programs have “proven ineffective,” says Cole. “The simple fact that the U.S. does not have an empowered agency to manage DMSMS and it is cheaper to manufacture offshore are the issues Congress must address.”
Cole recommends that DoD create a new “National Security Resources Board,” an idea promoted by Joe Muckerman, former director of DoD’s Office of Emergency Planning and Mobilization. Such a board would be responsible for assuring there is a strategy to deal with rebuilding American industry so that it is capable of producing the weapons systems that are needed.
Secondly, the U.S. tax structure is working against the sustainment of an industrial base upon which the military depends. The corporate tax rate of 35 percent is “embedded in the cost of each item in each weapon system sold in the United States,” Cole notes. Combined with the additional corporate taxes in 24 of 50 states, the U.S. corporate tax rate is the highest in the world, giving U.S. industry little reason to stick around. Furthermore, other nations collect value added taxes and rebate them on exported goods to the United States, leading to yet another disadvantage for American-based producers and another incentive for U.S. production to ship out.
Cole says there have been plenty of studies on the “fair tax,” which would require the imposition of a revenue neutral national sales tax on products at the final point of sale, while eliminating corporate and individual income taxes.
“With the abolition of cumulative corporate income taxes imposed on goods produced in the United States, American manufacturers would finally have the level playing field necessary to preserve the industrial base,” says Cole. Combined with creating a border-adjustable tax system, the United States might be in the position of rebuilding its industrial base. “The fair tax is by far the most comprehensive plan and a strategic answer to the DMSMS problem,” according to Cole. A fair tax proposal had 72 co-sponsors in the House of Representatives in 2007, and four sponsors in the Senate.
“One day, Congress will be forced to grapple with the effects of DMSMS and the eradication of the industrial base,” says Cole. “The best course of action is to act now to avoid dealing with the inability to acquire and sustain U.S. weapons systems during a national emergency. Tax reform through the fair tax and the National Security Resources Board oversight of the industrial base are DMSMS solutions whose time has come.”
Cole can be reached by e-mail at michael.j.cole2@us.army.mil
.U.S. Universities Remain In High Demand Among International Students
The number of international students at U.S. colleges and universities increased by 8 percent for the 2008/2009 school year to 671,616, an all-time high, according to the Institute of International Education (IIE). The number of new foreign students increased by 16 percent, following two years of 10 percent increases. The number of undergraduate foreign students increased by 11 percent compared to a 2 percent increase in graduate enrollments. International students contributed $17.8 billion to the U.S. economy for the 2008/2009 school year.
The increases can be partly attributed to the fact that the U.S. State Department has a network of 400 “EducationUSA” advising centers around the world actively promoting the benefits of a U.S. education and matching students to universities that are best for them.
India remained the leading place of origin for the eighth consecutive year, increasing by 9 percent to 103,260 students. China was in second place, with an increase of 21 percent in 2008/2009, with a total of 98,510. South Korea, in third place, increased 9 percent to 75,065. Canada was the only non-Asian country in the top five and it rose to fourth place with an increase of 2 percent to 29,697, surpassing Japan, now in fifth place after the number of students declined for the fourth consecutive year, decreasing by 14 percent to 29,264. Taiwan remained in sixth place, with 28,065 students, a 3 percent decline. The number of students from Mexico, the seventh-leading sender, remained flat, with a total of 14,850. Students from Turkey (in eighth place) increased by 10 percent to 13,263. Vietnam jumped into the ninth spot with a 46 percent increase to 12,823 students studying in America. Vietnam’s 2008/2009 growth followed increases of 45 percent in 2007/2008 and 31 percent in 2006/2007, moving it into the top 10 this year from 20th place two years ago. Saudi Arabia, the tenth leading sender, increased by 28 percent to 12,661 students, consistent with its substantial investment in government-funded scholarships.
Other increases were seen in enrollments from Nepal (in the 11th position), up 30 percent to 11,581 students; Germany (number 12), up 9 percent to 9,679 students; and Brazil (number 13), up 16 percent to 8,767 students.
The report is located at http://opendoors.iienetwork.org /?p=150649
.SCIENCE & TECHNOLOGY INDICATORS: U.S. BECOMES HIGH-TECH SLOUCH
The United States is not much of a global player in the exportation of technology products, according to the National Science Foundation. “The U.S. share of high-technology exports declined from 21 percent in 1995 to 14 percent in 2008,” says the agency’s “2010 Science and Engineering Indicators” study. China’s global share of high-technology goods exports more than tripled during that period, from 6 percent to 20 percent, “making it the single largest exporting country for high tech products,” the National Science Foundation notes.
The U.S. trade deficit in high tech goods has almost quadrupled since 2000, when it was $32 billion, to $120 billion by 2008. Meantime, China’s trade surplus in high-tech products increased by a factor of 10, from less than $13 billion in 2001 to $130 billion in 2008. The nine big Asian economies saw their surplus increase from $50 billion to more than $220 billion over that period, “an increase entirely due to an expansion of its surplus in information technology goods.”
The NSF report makes no comment about the economic repercussions of such trends.
It is located at http://www.nsf.gov/statistics/seind10/.U.S. GOVERNMENT FINDS THOUSANDS OF CHINESE COUNTERFEIT PARTS IN DOD WEAPONS AND SUPPLY CHAINS
U.S. weapon systems are being infiltrated by thousands of counterfeit and defective electronic parts, most of which are made in China. These illegal electronic circuits and assemblies are “affecting weapon system reliability,” according to a “comprehensive assessment” of the defense supply chain conducted by the Commerce Department’s Bureau of Industry and Security (BIS). Yet the military has “no policies in place to prevent counterfeit parts from infiltrating its supply chain.”
Thirty-nine percent of the companies and organizations studied have had to deal with counterfeit electronics over a four-year period. “Moreover, information collected highlighted an increasing number of counterfeit incidents being detected, rising from 3,868 incidents in 2005 to 9,356 incidents in 2008,” says the 243-page assessment. “These counterfeit incidents included multiple versions of DoD qualified parts and components.”
But the number of fake parts reported to BIS represents only those that were found. Many thousands more defective, damaged and substandard parts are likely installed throughout DoD weapons systems and are contained within DoD’s massive inventories of spare parts. Most of the fake parts that were identified were found only after a military system failed.
“Record-keeping on counterfeit incidents by organizations is very limited,” says the BIS study entitled “Defense Industrial Base Assessment: Counterfeit Electronics.” The problem is “exacerbated by demonstrated weaknesses in inventory management, procurement procedures, record keeping, reporting practices, inspection and testing protocols and communication within and across all industry and government operations. All elements of the supply chain have been directly impacted by counterfeit electronics. Most DoD organizations do not have policies in place to prevent counterfeit parts from infiltrating their supply chain.”
BIS says the government needs to create a centralized reporting system to collect information on counterfeit parts “for use by industry and all federal agencies.” Federal acquisition rules need to be changed so that contractors are not driven to purchase the lowest cost parts, which have the highest risk of being fakes. Instead, they must be rewarded for “best value” purchases, says the study. The U.S. government should also “issue clear, unambiguous legal guidance to industry and U.S. federal agencies with respect to civil and criminal liabilities, reporting and handling requirements and points of contact in the FBI regarding suspected/confirmed counterfeit parts.”
There also needs to be a way to prosecute companies or individuals that knowingly distribute counterfeit electronic parts, says BIS.
The study was conducted “to replace existing anecdotal information within the U.S. Navy and other industry and government organizations with concrete data on the impact and pervasiveness of counterfeit electronics within the U.S. supply chain.” BIS used the Defense Production Act of 1950 as the basis for which defense companies were required to complete the mandatory 80-question survey.
The report found that there are not only counterfeit replacement parts, but that original component manufacturers are using counterfeit versions of the newest electronic parts, microcircuits, bare circuit boards and other assembled circuit boards. “These parts are key elements of electronic systems that support national security missions and control essential commercial and industrial operations,” says the study.
BIS received completed surveys from 83 original component manufacturers, 98 parts distributors, 32 circuit board assemblers, 121 prime and subcontractors and 53 DoD agencies. “There is a lack of dialogue between all organizations in the U.S. defense supply chain about counterfeits,” the study concludes. “There is an assumption that others in the supply chain are testing parts” for their authenticity, when this is not happening. “There is a lack of traceability in the supply chain which is further compounded by the fact that many components are provided by offshore suppliers, making verification more difficult.” China is supplying the vast majority of bad parts.
For a copy of the 243-page report, set your browser to
