China & Industrial Espionage: When Will It End?

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I know this is extremely familiar territory for this blog, so I’ll try not to simply repeat what I’ve already said countless times about China’s industrial policy, forced technology transfer, and so on. I bring up the topic again today because of two items in the news: the ongoing paranoid fantasy at Renault about Chinese espionage, and what appears to be a very real case of IP theft from American defense contractor L-3.

My point here is not to evaluate whether the Chinese government and Chinese companies engage in industrial espionage — of course they do — or even to what extent this occurs in certain industries, but rather to move beyond that and take a slightly longer-term look at the issue. Why is this going on and what’s the end game for China?

First, what’s the story at Renault? Strange case:

The auto world is chuckling that this may be one of the few times China was accused of lifting a competitor’s trade secrets when the country didn’t actually do it.

Renault in January fired three executives, claiming they had sold corporate secrets about the company’s key electric-car development program. Renault quickly went public, saying an anonymous informer had helped it unearth an espionage conspiracy. Allusions were made in various circles to possible “Chinese” buyers of the secrets.

Since that time, the executives have sued Renault for defamation, the case is being chewed over by the authorities, and it’s looking like the company may have jumped the gun with their accusations. It’s possible that China wasn’t the culprit here, and that Renault was basing their actions on unreliable statements of an informer.

This sums up the case nicely:

“This seems to be the classic case of ‘fire, ready, aim,’ more worthy of Clouseau than Clausewitz,” says Andrew Brimmer, a partner at Joele Frank, a crisis-management firm in New York[.]

Despite this result, much ink has already spilled on the Renault dispute, and of course lots of folks have been eager to point the finger at China. Within the narrow scope of this case, such accusations are unfair I suppose, but this tendency to blame China first naturally follows the large number of espionage cases that have cropped up over the years.

I don’t have quantitative evidence to back up this claim, but it certainly seems like the number of industrial espionage cases involving China/Chinese nationals has been growing steadily in recent years. I come across these on a regular basis, and I’m not even trying.

Here’s the latest:

FBI agents arrested a Chinese national working for a US technology company Tuesday for exporting information about sensitive military know-how to China, officials said.

Liu Sixing, also know as Steve Liu, was arrested at his home in Deerfield, Illinois and charged with one count of exporting defense-related technical data without a license, the Justice Department said in a statement.

Liu, a Chinese national with permanent residency in the United States, worked for the New Jersey-based company from March 2009 until November 2010 as a senior engineer on a team developing precision navigation devices.

Court documents say he boarded a flight from Newark last November to China, but upon returning from Shanghai, he was found to have a non-work issued computer containing hundreds of documents about the company’s projects.

There were also images of a presentation Liu made to a technology conference organized by the Chinese government, the statement said.

Well, it looks like Steve is in a tough spot. Secret documents from a defense contractor being used at a government-organized conference. Whoopsie! If nothing else, the “optics” certainly look bad for this fellow.

But back to the big picture. Ironically the Renault case is interesting to me not because it is evidence of Chinese corporate espionage, but for what the incident says about our prejudices. Let’s face it, the reason why it was easy for Renault to point the finger at China is that the number of industrial espionage cases has been on the rise, not to mention the related problem of IP infringement. China’s aggressive industrial policy, either directly or indirectly, includes this sort of information gathering and has negatively influenced the attitudes of folks in the West.

Let me stipulate to the usual disclaimers. First, I don’t know whether this pattern is indicative of a direct policy by the Central Government or not. Second, even if a pattern of industrial espionage is evident, this does not mean it goes on across a wide array of industrial sectors; I still believe it is limited to a few “key” areas. Third, it is impossible to tell the difference between actions of private enterprises and government actors, particularly when the former are State-owned Enterprises (SOEs).

Taking all of this anecdotal evidence into account over the last few years, though, I think it would be naive to say that industrial espionage isn’t occurring. It may be more or less prevalent than we think, but it is indeed going on. We can spend endless hours discussing the numbers and making accusations (I have done this myself), but at some point you have to say “OK, that’s enough. Let’s move on to a more useful conversation.”

When I usually discuss this topic, I avoid asking a couple of important questions whose answers appear to be either too obvious (e.g. “why?”) or too difficult (e.g. “how long?”). But these are important questions, perhaps even more so than the endless debate over whether China is engaging in these activities in the first place.

As to why, think back to similar accusations made against Japan in the 1980s. Back then, lots of CEOs slept with the lights on at night, just in case there was a ninja hiding behind the dresser or bookcase, waiting for darkness before pouncing on the IP-rich gaijin. A lot of fear and paranoia to be sure, but again, perhaps also a kernel of truth with respect to industrial espionage.

Japan was still developing its technology sector, and some of its companies engaged in industrial espionage to get ahead of their competitors. Like general IP theft, that’s one of the things that developing countries do. Chinese companies are doing this for the same reason — it’s faster and cheaper than developing that technology yourself.

So the “why?” is fairly obvious. What about the “how long?” then; when might this type of thing taper off?

It stands to reason that when developing nations, like Japan and Korea, reach a certain level of technology, the gains made from industrial espionage lessen. Moreover, as firms grow and develop valuable brands (not to mention the “brand” of the nation itself), one would assume that they stand to lose a lot more if accused of such activities.

However, there is one wrench to throw into the works of this argument. If all of this was confined to private sector technology (autos, IT, clean tech), then yes, China should follow in the footsteps of Japan et al when it comes to such dirty tricks.

But there’s a lot more going on here. If you keep track of these cases, you’ll see that many involve military technology. This guy in New Jersey at L-3, for example, worked for a defense contractor.

So here’s the worry. Developed nations like Japan that do not maintain significant defense capabilities (for the moment), were not motivated back in the day to pursue aggressive, broad-based information-gathering strategies in the military tech sphere, unless there were private sector applications for the technology. Once these nations had home-grown high tech, the spying tapered off.

But even if we assume that at some point in the future China’s indigenous innovation program kicks in and private-sector corporate espionage no longer becomes attractive, the perceived military competition between the US and China may continue fueling espionage activities that concern technology — on both sides.

Therefore the answer to “how long?” is a tough one. If you’re Renault head honcho Carlos Ghosn, and you’re worried about PLA spies hiding in your refrigerator, the answer is probably “medium term.” If, on the other hand, you are a US military contractor, you may want to invest in some long-term counter-espionage strategies.

7 responses on “China & Industrial Espionage: When Will It End?

  1. Sam

    So the next time a corporate executive appears to be too tough to deal with, the Chinese can get rid of her by sending in an anonymous informer. Neat.

    1. Stan Post author

      Sure, a quick reply (point-by-point would be too time consuming, I fear). Seems to me that you are trying very hard to manufacture some China bashing here where there isn’t any. Funny thing, but in the 8 years I have been blogging, I think you guys are the only ones who have suggested that I’m doing so, or engaging in an anti-China Western mindset. Most of the negative comments I have received over the years call me a China apologist!

      The few declarative statements I do make (e.g. that China is engaged in some level of corporate espionage — pretty obvious) you don’t disagree with. However, you don’t like the way I talk about it.

      As to the latter, I find you reading into my “mindset” way too much. One example:

      As Abrams suggests early on in the article, China’s trade policy is to acquire technology. Very true. Absolutely nothing wrong with that as a policy. But I have a problem with how he puts it:

      “I know this is extremely familiar territory for this blog, so I’ll try not to simply repeat what I’ve already said countless times about China’s industrial policy, forced technology transfer, and so on.”

      Emphasis above is mine. Why must China’s trade with her partners on technology be a “forced transfer?” This is a typical sick mindset I frequently see as if China is automatically doing something unfairly. No, China’s partners can simply say no if they do not want to sell technology to China. End of story. China cannot force a technology transfer.

      See, the problem here is that the sentence you quoted merely says that in the past, I have written about the topic of “forced technology transfer.” Doesn’t say anything about my stance on the issue. The sentence is a true statement of fact – I have indeed written about those topics in the past. This is not something you can disagree with.

      All the rest of your comments on tech transfer are therefore irrelevant with respect to this post, and in fact, I don’t even disagree with you on a lot of the substance! The point is, you are putting a whole lot of words into my mouth for me, creating a huge straw man to knock down later on.

      Similarly, I never said that the West does not engage in espionage activities — of course it does. Indeed, if you are a reader of my blog, you know that I have called out the hypocrites on issues like this early and often. This particular post wasn’t about comparative spying, though, so I didn’t talk about it (just like it wasn’t about forced tech transfer). I already included some disclaimers in my post, but I can’t list everything. Be fair!

      With respect to substance, I would stand behind my feeling that cases of corporate espionage in the West (or at least in the US) involving Chinese nationals is on the rise in the last couple of years. Whether that is the result of stepped-up enforcement, more spies, a systematic conspiracy by the FBI to frame a lot of overseas Chinese — I have no idea. For what it’s worth, the FBI has recently sent over agents to Beijing who are specifically tasked with with stuff. I am not imagining this.

      As to your comments on IP and developing nations, that’s a very big topic, and a fun one too. Some other time, perhaps. :)

  2. deldallas

    In thinking about the future technological innovation in China… let me throw an argument out there…

    – If you look at the ~30 ‘golden years’ of modern Japan from about 1960-1990, I think (and I just don’t have the energy to try and make a list) you can point at a pretty large number of Japanese innovations that the rest of the world came to adopt.

    – If you look at the ~30+ ‘golden years’ of modern Mainland China (benefitting from the collective efforts of a population roughly 10x Japan) from ~1980-2010+, what modern Mainland Chinese innovations can you point to that the rest of the world has come to adopt? I don’t know what the exact number is, but I’m confident the number is a LOT lower than the number we saw come out of Japan.

    – If you accept that Mainland China hasn’t produced a share of innovations in its last 30 ‘golden years’ years rivaling Japan during its 30 ‘golden years’… why is that?

    – There are certainly a number of factors, but, I would postulate that systems and culture that evolved out of the communist system have and, continue to be, one of the most relevant factors inhibiting innovation and encouraging brain drain. And that as long as these same systems and culture are in place, Mainland China’s innovation will be significantly impacted and espionage efforts will continue on all fronts.

    Anyone can poke a lot of little holes in this argument, but overall, is there something to this or not?