China has long tolerated local firms producing counterfeit components and selling them outside China. That then expanded to the production of high-end electronics. This was of interest to Chinese military intelligence because the advanced electronics systems were also used by Chinese forces as developed in China. These Chinese fakes were only used by Chinese forces because exporting them risked lawsuits for IP (Intellectual Property) theft. When sold outside China, it was done covertly to avoid lawsuits and even economic retaliation. An example of this is an AESA (Active Electronically Scanned Array) radar based on the Israeli Elta EL/M-2052 system. More worrisome was the Chinese sale of counterfeit routers. A router is a common Internet electronic item because it is used to enable local computers to gain access to the Internet wirelessly (wi-fi) or via a cable connection. Routers have become a common item for military units. China has already been caught using routers for espionage. For example, Internet security researchers found that some countries were using Chinese Huawei phone software to monitor and censor journalists of the government via a commonly used router accessory called middlebox hardware. Using special middlebox software supplied by Huawei, nations can quietly censor user access to certain subjects or identifying such users and secretly pass on offending messages to someone else.
Internet security researchers discovered that a quarter of the 69 countries studied were using Huawei middlebox features for censorship, especially against local journalists distributing stories critical of the local government or specific officials. Middlebox is a term first used in 1999 to describe a growing number of hardware devices installed in networks for security reasons or system efficiency. Huawei developed middlebox hardware that worked with software features included in all Huawei phones. If a government allowed Huawei phones to be imported and sold, Huawei would, depending on the government, point to middlebox capabilities in Huawei phones that enabled the local government to easily censor Huawei phone users as well as let the government know who the offenders were. Less well known was that all data collected by Huawei middlebox systems was also sent back to China “for quality control purposes.” This is why many nations now ban the use of Chinese communications equipment.
China was dealing with questionable electronics even earlier. About a decade ago the United States discovered the widespread practice of selling discarded electronics to companies that ship it to China for “recycling”, and to save on the much higher cost of doing it in the United States. Letting China do the dirty work had some unpleasant and unexpected side-effects. The most critical one, from a military point of view, is that a lot of military electronics are junked. Now technically it is illegal to just toss (most) classified electronics in the trash, to be hauled away. The law specifies how such secret electronic trash is supposed to be destroyed and shipping the stuff off to China is not on the approved list (various forms of shredding are). The Chinese knew about this careless disposal of military electronics and alerted Chinese firms to put aside certain types of electronic trash imported from the United States. Even if the discarded components were not the latest (and most highly classified) models they still provided Chinese intelligence (and defense manufacturers) with much useful information.
The other military (and commercial) problem was that Chinese counterfeiters also bought certain electronic components from the recyclers for minimal refurbishment and elimination of identifying data. The now “new” component is used as a cheap replacement for the real thing in larger bits of equipment that are then sold as new parts for aircraft, ships, vehicles and even weapons systems. This involves using counterfeit serial numbers and other phony markings.
In the United States a growing number of people were becoming aware of how dependent America was on foreign components for military, and commercial, equipment. This was nothing new. As so many other nations began developing their economies since the 1960s a growing number of cheaper sources for raw materials and manufactured goods have shown up. Many of these have driven American suppliers out of business, leaving the U.S. dependent on foreign sources for more and more items. While there are some restrictions on using foreign made components or raw (or refined) materials that can be brought in, this has not really slowed down the growing dependence on imported items. This has reached the point where China, for example, is the source of key components of a large number of weapons and key items of military equipment. This has led to a call for laws to limit this dependence. It is believed that the major problem with this would be the additional cost of buying from the more expensive American supplier.
A lot of these counterfeit components end up in American military equipment. This fraud includes a lot of bogus items where convincing looking counterfeit chips are simply labeled as "military grade" (the most robust and durable of that item available). These sell for more than "consumer grade" (the most common) and "industrial grade" (for use in factories, where failure can cause more damage and expensive downtime). Failure in military grade parts can get people killed, just as counterfeit aircraft spare parts are a growing problem in commercial aviation.