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This has been known for a long time. What’s news is we aren’t doing anything about it.

What can we do? Seriously?

Semi-conductor equipment that used to costs tens/hundreds of millions soon becomes obsolete. It's still functional, just obsolete - so it get sold. Someone in China buys it - say from someone in Singapore. They then find an old processor, and de-process it (it's easier than you would think) and from the de-processing steps, re-create a "mask" to they can effectively counterfeit this chip.

Because they probably use no error-correcting analysis on their stolen design - they have a product with mediocure yield, and poor reliability. But, selling a 3 inch wafer that has virtually zero R&D costs, is made with obsolete components, and once that die is cut - is virtually untraceable ... what can you do?

The packaging house that sticks the die in a package doesn't necessarily know what part they are sticking in a ceramic package. They really don't care. Did the die get delivered as promised? Did the check clear? Ok, .. here are your chips.

Now, you label them with a counterfeit stamp, part number, lot number and sell them to a re-seller. Money in your pocket; and the re-seller is getting them so cheap, he doesn't care if 10% of them come back. Think of buying parts for $0.10 and selling them for $2.50 into a market where these part typically go for $5. They get gobbled up quickly.

Ever wonder why Apple iPods last seemingly forever, yet those cheap knock-offs you buy at Walmart fail after a year or two? Now you know why.

Here are some of the problems that were found: (from KXLY.com)

The investigators dug through the supply chain for three types of suspected counterfeit parts on U.S. military aircraft:

—The SH-60B is a Navy helicopter that hunts for enemy submarines and assists with surface warfare. The investigation found that a part that compromised the copter’s night-vision system contained counterfeit parts that investigators traced back to China.

—The probe found counterfeit parts in the systems that tell pilots of the C-130 and C-27 cargo planes about the aircraft’s performances. The part could have caused those systems to go blank. Again the part in question was traced back to China.

—The P8-A is a Navy version of the Boeing 737 used for anti-submarine warfare and other duties. The Navy is testing the aircraft now and intends to buy more than 100 of them. But the test planes contained a reworked part that never should have been on the airplane. The part was used but made to look new. The part, investigators found, originally came from China.

But the committee didn’t reserve all its blame for China; some of it was directed right at the Pentagon itself.

The report said in each of the three cases that the committee investigated in depth, the Department of Defense was unaware that counterfeit electronic parts had been installed on certain defense systems until the committee’s investigation.

Even though the report just came out, the committee has already taken action to deal with the problem. Levin and McCain offered an amendment to the 2012 National Defense Authorization Act to address weaknesses in the defense supply chain and to promote the adoption of aggressive counterfeit avoidance practices by DOD and the defense industry.

The amendment was adopted in the final bill signed by President Barack Obama on December 31, 2011.

Part of that law will mean that when a contractor finds bad parts on a weapons system, the contractor or the parts supplier will pay to fix the problem. In the past, those costs were often borne by the DOD.