Test Case

A defense contractor is fined

"As an airplane or missile becomes more complicated," warned James Fallows in his 1981 book National Defense, "the probability that all its parts will be working at the same time goes down." Indeed, the reliability and firepower of modern U.S. military hardware depend heavily on increasingly complex electronic circuits. This worrisome vulnerability prompted Pentagon officials more than two years ago to launch an extensive probe of microchip suppliers in order to spot any lax manufacturing practices. Last week the inquiry produced an indictment against a major electronics company.

A federal court in San Francisco levied stiff penalties against National Semiconductor of Santa Clara, Calif. (1983 sales: $1.2 billion). The firm pleaded guilty to 40 charges of defrauding the Government by failing to test electronic products properly, and agreed to pay nearly $1.8 million in civil and criminal fines. The Defense Department is investigating 14 other military suppliers, including Fairchild Camera & Instrument, a Silicon Valley firm.

The case against National Semiconductor began when the Defense Department received a 1981 tip that the company was cutting corners in testing certain microchips. The accusation seemed ominous, since the military uses the circuits in equipment ranging from walkie-talkies to battleships. Among tests for durability, the Government specifies that the chips must be heated to 257DEG F for at least 160 hours. But the resulting inquiry found that between 1978 and 1981, National Semiconductor devoted only about one-fourth that much time to the testing of as many as 26 million chips.

At the Government's urging, the company later rechecked a sampling and found the chips to be reliable. But that failed to soothe prosecutors. Says U.S. Attorney Joseph Russoniello: "The testing is as important as the quality of the product itself. The Government cannot suffer the inconvenience and expense of having to shake down its equipment in order to verify the reliability of components."

Moreover, since many chips go into materiel that is used only once, like missiles and bomb fuses, their dependability remains uncertain until they are tested in action. But the Pentagon insists that the National Semiconductor chips pose no threat to U.S. security.

National Semiconductor executives greeted the court action with relief. Rumors of sweeping criminal indictments against company officials had been circulating for months, but the Government said last week it had found no evidence that management had authorized the faulty procedures. Said Daniel Klesken, an analyst with San Francisco's Montgomery Securities, of the resolution of the case: "It removes a big black cloud hanging over National. For investors the uncertainty is much reduced."

The Government's crackdown seems to be getting results. National, at least, has reformed its testing procedures. Though it was temporarily suspended as a military supplier in 1982, the firm this year expects to sell the Pentagon $75 million worth of weapons parts, or about 8% of total sales. Said National President Charles Sporck: "We now follow every dot and every dash of every military specification." The Pentagon hopes its prosecution of National will persuade other contractors to be no less careful.