Fake, Substandard Parts in American Airliners?

It seems not so long ago that the great Chinese ascent into modernity was the world’s greatest hope for economic recovery and perhaps even a new golden age of prosperity.

Today, however, that prospect is eroding.

Last month, we got to see firsthand what happens when mere hints of Chinese instability filter down to the mainstream media and onto the masses (and specifically retail investors).

If the market were a human body, the response to evidence that the Chinese economy isn’t the mighty giant we once thought and that growth projections are exaggerated is nothing short of catastrophic arrhythmia — severe enough to cause cardiac arrest unless immediate measures are taken.

But that’s not news to anybody anymore. The markets took that hit and restabilized as the headlines once again shifted back to our own hemisphere with talk of interest rate hikes and a flurry of hypothetical proposals on what to do with taxation come next year’s election cycle.

The real problem with China isn’t shadow banking or even the Communist party’s strict regulation of economic news.

It goes deeper than that, right into the heart of the culture.

To Copy is Divine

It’s been said that the only thing real in China are the counterfeiters (my colleague, Jimmy Mengel, loves this particular quote).

And while that may sound like a cliché or even a joke, as somebody who’s spent a good amount of time there, I can attest that it is anything but.

Yes, you can get a $20 Rolex at just about any corner or alley of any major Chinese city.

Yes, it will be cheap and will maybe outlast the first battery.

The act of copying, whether it’s a product or a skill, is ingrained in Chinese tradition.

Traditional Confucian education — still a cornerstone of modern Chinese culture — puts a heavy emphasis on recitation, imitation, and copying.

Even before the modern era of mass production, the creation of an accurate imitation or knock-off was considered an honorable skill — a stark departure from how imitations are viewed in Western culture.

However, modern times have put a frightening spin on the tradition.

Last year, while drinking coffee in the outdoor seating area of a Starbucks in the Southeastern Chinese City of Zhuhai, I noticed an interesting noise emanating from the general direction of a six-lane bridge crossing over the Xi River.

It sounded like a flock of birds singing an especially high-pitched, abrasive song with no discernible pattern.

The next day, sitting at the same Starbucks — only several hours earlier — that irritating sound was gone.

However, as I walked past that same area later on in the afternoon, as the rush hour was peaking, the sound was back.

“What the hell is that?” I finally asked one of the people I was travelling with — a man who owned some condos in a nearby building.

“What do you mean? It’s the bridge. It’s squeaking.”

A squeaking six-lane freeway? Seriously? Apparently the weight of the rush-hour traffic was enough to turn this massive structure into a wobbly, screeching mess.

Later that day, walking through the underground parking garage of the condo where I was staying, in a large, modern high-rise no more than three or four years old, I began to notice more details falling into the general pattern.

Steel I-beams so rusted they looked like they’d come off the titanic… cracks in the cinderblock foundation that ran from floor to ceiling, hastily patched with some sort of caulk… fob-operated electronic doors and gates that didn’t work…

Everything, it seemed, that looked bright and shiny from the outside was nothing but a corroded mess on the inside.

A microcosm of the nation as a whole.

The First Thing to Go is Quality

And that was all in the first two days I was there. The rest of the trip just repeatedly reinforced the idea that this emerging economic superpower was nothing but the world’s biggest smoke-and-mirrors trick.

Want some more examples of things the Chinese faked?

Well, how about dinosaur fossils? They’ve been doing it since the 1970s, when a few real ones appeared and caused demand to spike among foreign tourists.

How did the Chinese address this demand? Simple. They made more of them.

They’ve done the same thing to insects permanently sealed in prehistoric tree sap turned to amber. You could get such a trinket for less than a dollar at any roadside shop.

A real one would be a priceless paleontological find. A fake one… well, it was worth its weight in fake tree sap.

They’ve even done it with their own historical artifacts.

The legendary Terracotta Army, discovered in the city of Xian by a Chinese farmer in the 1970s, is about 90% fake.

How do I know? My Chinese tour guide said so, without an ounce of shame.

You can even buy your own life-sized terracotta warrior to take home with you for about $200.

And it gets worse…

Where is Your Next Ball Bearing Coming From?

American military hardware, as well as spare parts… You guessed it, that’s also out there, and both have penetrated the market to a truly terrifying degree.

In 2012, for example, the Canadian military confirmed that it had found counterfeit, low-quality computer chips in its recently delivered batch of C-130J Hercules transport aircraft.

That’s a 155,000-lb. airplane with an average unit cost of $120 million.

And all of that can literally come crashing down with the failure of just one electronic component. In fact, three C-130Js have crashed since 2012, making that particular model of the otherwise proven airframe one of the more dangerous aircraft currently fielded by NATO.

And even that was just the tip of the iceberg.

In 2012, the BBC reported that a year-long probe conducted by a Senate committee had resulted in the identification of 1,800 cases of fake parts in U.S. military aircraft — particularly manufactured by the world’s second-largest aircraft producer, Boeing.

If you think that problem will stay isolated to military aircraft, think again. According to the L.A. Times, three of the company’s most popular models — the 737, 747, and 757 — have all fallen prey to counterfeit ball bearings, a major stress-bearing component whose failure could easily result in engine or control surface failure.

Here’s a direct quote from Jerry Presba, retired technical support chief of the Federal Aviation Administration and regional service difficulty coordinator for the FAA’s Western region:

Could a plane crash because of this? You bet. It’s quite conceivable loss of control would result from bearing failure, which would mean the ultimate destruction of the airplane.

We’re only now starting to dispel the myth of a Chinese economic empire enveloping the globe… so what are we to do now? Start fearing for our personal safety?

Well, given that airline safety has improved markedly over the last two decades, I think panicking over planes falling apart in midair might be a bit premature.

In fact, based on numbers of crashes, the dangers associated with mass air transit has fallen by 50% over the last two decades… so you’re statistically safer than ever.

The Industry of Junk

The real concern here isn’t the cheap parts flooding the market — it’s the total lack of substance and sustainability that we’re getting from Chinese manufacturing as a whole.

When the U.S. dominated the manufactured goods markets in the post-World War II era, some of the key characteristics our exports were known for were quality, longevity, and solid, reliable engineering.

The culture of quality workmanship, however, has given way to efficiency of production.

Unfortunately, cheap rarely equals good, and when it comes to anything more sophisticated or sensitive than a Pez dispenser, the Chinese have proven their unmatched talent at doing cheap and fast what requires skill and care.

And now that the world’s fastest mass exodus from the countryside to city centers in full swing, you’d better bet that cutting costs and corners will only extend to more and more consumer products as well as corporate and civil construction projects.

One look at how Shanghai has changed between 1987 and 2013 only hints at the potential defects created by the “hurry at all cost” philosophy.

And this is only the beginning. China hopes to urbanize another billion or so people, which will require hundreds of new cities — many of them created in the same “shake-and-bake” fashion that leads to things like cracking skyscrapers and screeching bridges.

Progress cannot take place that rapidly without major miscalculations — miscalculations the Chinese government has no problem hiding or simply absorbing.

Is this really the nation on which the hopes of the 21st century global economy rested?

The last time an economically and socially backward “superpower” attempted to modernize in a hurry was during the Cold War.

Back then, the Soviets were also in a race with the West, but only as far as producing weapons and consolidating power.

That rush to catch up promptly bankrupted that empire.

China’s Urbanization Mirrors Soviet Arms/Space Race

Today, the Chinese are doing the exact same thing, only on a much larger scale and within both private and public spheres.

The end result is only too predictable.

Which means the Chinese, as a long-term partner in the quest for bi-hemispheric economic expansion, isn’t our best choice.

Not by a long shot.

Today, however, a new contender is emerging as heir apparent to the title of world superpower — and it’s a nation whose population is set to overtake China in the next 20 years.

I’m talking, of course, about India… a nation just as eager to modernize both its physical landscape and its largely rural populace.

Instead of taking the hyper-fast urbanization route, however, India is doing things a little bit differently…

It’s choosing to modernize from the grassroots level, starting with the people themselves.

A New Hope?

Right now, one of the most promising and forward-looking developments coming out of India involves a tiny consumer tech company with an idea so big that it could potentially change the fabric of that society.

Its goal is to bring the some 800 million Indians currently without Internet access online by providing the world’s cheapest wireless Internet service, along with the world’s cheapest wireless device: a tablet costing less than $40.

It’s an idea whose time is here, as wireless Internet currently covers more than 90% of the world’s surface and yet only reaches the wealthiest 40%.

It’s also an idea whose prospect for growth is among the biggest ever in consumer technology, with a potential user base bigger than today’s total online population.

In a world where investment sentiment changes suddenly, even on a macro level, this is one with a clear path into the future.

I recently published a groundbreaking report that looks deeper into the problem of Internet access in emerging markets and the magnitude of the opportunity presented by the solution to this problem.

Check it out right now by clicking here.

Fortune favors the bold,

Alex Koyfman

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His flagship service, Microcap Insider, provides market-beating insights into some of the fastest moving, highest profit-potential companies available for public trading on the U.S. and Canadian exchanges. With more than 5 years of track record to back it up, Microcap Insider is the choice for the growth-minded investor. Alex contributes his thoughts and insights regularly to Energy and Capital. To learn more about Alex, click here.