Two Americans have been arrested for selling thousands of counterfeit computer components (microprocessors and related items) to the U.S. Navy. The counterfeit items were manufactured in China. This is not the first time such counterfeits have ended up in American military equipment. The fraud here is largely in the paperwork, where convincing looking counterfeit chips are 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 down time.) Failure in military grade parts can get people killed.
One reason China tolerates the widespread manufacture of counterfeit products is because some of them have some military benefit for China's Cyber War effort. Last year, for example, the FBI arrested two Americans for running a computer parts company that was selling counterfeit computer parts (especially Cisco router components), manufactured in China. The phony parts had counterfeit labels, and were delivered in counterfeit boxes. The two brothers had a contract to sell these parts to the Department of Defense and other government agencies. It was feared that the Chinese government could have some of these counterfeit chips equipped with a semi-magical "backdoor" that would enable an evil genius (or government bureaucrat) back in China to take control over equipment using the counterfeit part, and hooked up to the Internet. Or something like that.
Actually, the Chinese got lucky with this one. Normally these counterfeit parts are sold by transitory operations. Eventually, the user has reason to contact the manufacturer of the shoddy part. At that point, the buyer discovers that, say, Cisco, has no router component with the serial number the scammed buyer is reading over the phone. It is then that the buyer realizes they have been screwed.
Counterfeit computer parts can be made to very low standards. They will work for a while, but not for the long periods of time that justify the high price of the authentic parts. The Chinese manufacturer sells the counterfeit parts at, say, 20 percent of what a real part would cost, to a foreign distributor. This guy then peddles the counterfeit parts to dealers who may, or may not, know they are getting cheap, but fake, parts at a deep discount. The dealer can then sell the counterfeits at a discount. Discerning buyers can check serial numbers on these high price components (some have a list price of thousands of dollars), but others are more trusting, and get burned.
Counterfeit high-tech items are a growing business, and a growing danger. In addition to computer gear, auto and aircraft components are also being faked. Some aircraft and auto accidents have been traced to the fakes, which makes it a public safety issue. But with the Department of Defense installing counterfeit computer components, it becomes a national security issue. There's also the fear that the Chinese, or some other hostile nation, might get their hands on real computer components, and replace some of the chips with modified ones that will make government networks easier to hack. Yes, it just gets worse.