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.
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.