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Copycat crimes

As China steals U.S. technology, American firms fear speaking up and losing access to a massive market

Copycat crimes

Clockwise from top left: Sinovel wind turbines near Nantong; Pedestrians walk past a Coach store in Chongqing; a J-20 stealth fighter at an airshow in Zhuhai; a high-speed bullet train in Beijing. (ImagineChina via AP)

Wind turbine company American Superconductor saw a huge opportunity to tap into the coveted Chinese marketplace after the Chinese government passed a renewable energy law in 2005. Partnering with the Chinese company Sinovel, American Superconductor provided the advanced computer software used to run the turbine, while Sinovel manufactured the turbine exterior.

The U.S. company made sure that the machine’s codes, which the company had spent years and millions of dollars to develop, were safe: Only a few employees had access to the codes, and the company kept them under layers of security. Yet in 2011, engineers were testing a new-generation software on Sinovel’s turbine when they noticed the blades didn’t stop spinning after the test. Looking into the turbine, the engineers found that Sinovel was running a version of the software that they had not yet released.

After an investigation of who leaked the codes, American Superconductor found the culprit: Austrian employee Dejan Karabasevic. The Chinese company had given him women, a nice apartment, and a $1.7 million contract in exchange for the codes. Karabasevic ended up confessing in Austrian court and spending a year in jail.

American Superconductor filed a lawsuit against Sinovel in China for $1.2 billion in damages, and the case is still tied up in Chinese court. CEO Daniel McGahn told CBS’ 60 Minutes that because of the stolen intellectual property (IP), he’s had to fire 600 of his 900 employees and lost $1 billion. Now American Superconductor is working in India, yet Sinovel is undercutting the company as it exports its copied turbines overseas: McGahn said on 60 Minutes the state of Massachusetts purchased a Sinovel wind turbine with federal stimulus money.

U.S. companies working in China have long complained in general terms about IP theft and unfair business practices in China: Counterfeit goods, pirated software, and theft of trade secrets worldwide cost the United States up to $600 billion each year, according to the Commission on the Theft of American Intellectual Property. Even more concerning, hacked designs of military weapons is a national security threat, allowing China to develop a high-tech military quickly. At the 19th party congress in October, President Xi Jinping stated China would have a world-class military by 2050.

In August, President Donald Trump called on U.S. Trade Representative Robert Lighthizer to investigate China’s IP practices and forced technology transfers, a move that could lead to sanctions on China. Experts believe the investigation is too little, too late, as China is already breaking new ground on the shoulders of U.S. tech. Plus, in order to make a strong case against China, Lighthizer will need the testimonies of U.S. companies in China, and most companies are unwilling to jeopardize their access to the Chinese market by speaking out. As of November, only six companies had spoken out, and most were smaller businesses describing already known incidents, the BBC reported.

IP THEFT IN CHINA comes in different forms, from the stores at Beijing’s Silk Market selling fake Coach purses to China’s J-20 stealth fighter jet, which shares a striking resemblance to the U.S. F-22, to China’s high-speed rail system, which was originally a partnership with Japanese and German companies and is now claimed by China as one of its “four great new inventions.”

Sometimes companies are hacked by China’s army of cyberattackers; sometimes technology transfer is a requirement for entry into the Chinese market; sometimes ideas and brands are flat-out copied and sold in China. Other times entrepreneurial Chinese businessmen squat on the Chinese names of well-known brands, awaiting their arrival into China. Chinese courts tend to side with Chinese nationals.

In 2014, a U.S. federal grand jury indicted five People’s Liberation Army officers of Unit 61398 for hacking 115 U.S. companies in industries such as aerospace, satellite and telecommunications, and information technology between 2006 and 2014. Housed in a nondescript building in Shanghai, the unit uses more than 1,000 servers and could employ thousands of staffers, according to internet security firm Mandiant.

In the case of the J-20 fighter jet, Su Bin, a Chinese national, helped hack into U.S. defense companies, including Boeing and Lockheed Martin, the maker of the F-22. Su worked with two Chinese military officers who would install malware on the computers of employees. Su would point out which files were useful, translate them into Chinese, then sell the information to Chinese-owned companies.

The U.S. government caught and sentenced Su to nearly four years in prison in 2016: His indictment noted Su stole data relating to the F-22 and F-35 fighter jets and C-17 transport aircraft. As a result, the Chinese-made J-20 fighter jet unveiled in 2017 has technology that would have taken decades for the country to figure out for itself.

Former President Barack Obama and President Xi Jinping agreed to stop commercial cyberespionage in 2015, and according to cybersecurity firm FireEye, the number of attacks from China-based groups dropped by 90 percent from 2014 to 2016. But the dip in attacks doesn’t tell the whole story: Remaining attacks are more focused, selectively grabbing important files rather than whole masses of data, FireEye noted. Other analysts believe military personnel had hacked U.S. corporations to make extra cash selling trade secrets to Chinese companies, and the number of attacks fell because Xi’s anti-corruption campaign scared them away from moonlighting.

ANOTHER COMPLAINT by U.S. companies is the forced transfer of new technology from U.S. to Chinese companies as a price of doing business in China. Chinese law requires foreign companies in industries such as energy, telecommunications, and automobile manufacturing to form joint ventures with Chinese partners, which leads to tech transfers.

China’s new cybersecurity law requires foreign companies operating in China to disclose information about their network equipment and software to the Chinese government. (Beijing claims the purpose is to fight hackers and keep data safe.) The law also requires companies to store data locally: In July, Apple announced it was building its first data center in Guizhou, partnering with the government-backed Guizhou-Cloud Big Data Industry.

John Frisbie, president of the US-China Business Council, in a statement called the transfer of technology “an acute concern of American companies in key sectors, who often must make difficult choices about managing the trade-off of technology sharing and access to the world’s second-largest economy.”

Meanwhile, the advent of e-commerce has caused the number of counterfeits and fakes to grow exponentially in online marketplaces like Taobao and social media platforms. It’s well-known that clothes purchased from a China-based seller online often won’t turn out looking like the advertised photos, and counterfeiters run free, tricking buyers around the world.

Joe Simone, an IP lawyer who has worked in China for 30 years, said this is a largely unregulated space, as governments don’t police online marketplaces effectively and most brand owners lack the resources to track down all the counterfeiters online.

The Chinese government has only recently started introducing e-commerce reforms, including the creation of a blacklist of IP offenders. “It’s a long time coming, and many wonder if it will be too little, too late,” Simone said. A new draft e-commerce law includes provisions that would create a “big hole in protection,” he said, by allowing vendors of fakes to fill out some paperwork and then continue selling their products until their case goes to court. And with the large number of violations appearing online in China, “almost nobody goes to court.”

WHAT DO YOU DO ABOUT A COUNTRY LIKE CHINA that refuses to obey international standards? Some in industry hope that as China starts to create its own IP, it will get stricter by itself, and in some cases that is happening. Others, including the Chinese government, believe the United States should use World Trade Organization mechanisms to resolve disputes before resorting to an investigation based on U.S. law. Yet U.S. Secretary of Commerce Wilbur Ross criticized the WTO for not being tough enough on China.

Steven Mosher, head of Population Research Institute and author of Bully of Asia, believes the investigation is a good idea but 15 years too late: “I’m glad we finally got serious about trying to stop the intellectual property theft from China that has resulted in the largest transfer of wealth in human history.” For too long, Mosher said, China has played the developing nation card in order to get favorable trade deals, but then they “violate the deal before the ink is dry on the paper.”

Others fear that the investigation can do little unless U.S. companies speak up. Business associations have spoken up to complain in general terms, but few companies are willing to risk their relationship with the Chinese government and their access to China’s 1.2 billion consumers. Without companies speaking up, the United States can’t take more targeted actions against China.

Instead, tech corporations like Google, Facebook, and Apple are ingratiating themselves to the Chinese government: Apple CEO Tim Cook gushed about working with China at the World Internet Conference, a summit the Chinese government uses to promote its censored internet.

AFP/Getty Images

Apple CEO Tim Cook speaks during the opening ceremony of the 4th World Internet Conference in Wuzhen, China. (AFP/Getty Images)

Many companies see losing their IP as a price of entry into China and calculate that it’s worthwhile. In many cases, “companies aren’t forced to give [IP] up, they were willing to take the risk either because they’re naïve or feel like it’s financially worth it to get into China’s mammoth marketplace,” wrote Seattle-based lawyer Dan Harris on China Law Blog. Harris specializes in helping U.S. companies working in China.

In his experience, foreign companies are so eager to tap into the China market they are willing to sign almost any agreement and are often tricked. He spells out the typical strategy a Chinese partner uses: negotiate a weak license, withhold payments until it gets the technology, then when it gets enough tech, stop the payments. In some cases, the U.S. company will sign an agreement with the Chinese partner in both English and Chinese, yet the Chinese portion includes a line that the IP belongs to the Chinese company—a line that is missing in English. The Chinese wording is what stands in a Chinese court.

When Harris brings up these potential problems with the companies, they claim they are certain they won’t be tricked because they have a close relationship with the Chinese company. Yet in China, relationships are just part of business.

Recently there have been some positive changes in China’s approach to IP, perhaps as a result of domestic companies maturing and demanding greater IP protection for themselves. In one case, China is getting a taste of its own medicine: As China stole IP from Japanese and German high-speed rail makers, now other countries are reportedly stealing China’s IP as Chinese companies export their rails to less-developed countries.

In September, a month after the U.S. investigation began, China launched a four-month campaign to protect the IP rights of foreign businesses, with 13 government ministries working to crack down on the theft of trade secrets, trademark infringement, patent violation, and online property rights. In November, the General Administration of Customs said it found more than 1,560 cases of intellectual property infringement on goods exported to the United States during two joint U.S.-China crackdowns in 2017.

Furthermore, in the past two years, Chinese civil courts have increasingly sided with U.S. companies charging Chinese companies for copying their trademark. In 2016 a Chinese court sided with Michael Jordan’s Nike-produced brand, after a four-year legal battle with the Chinese company Qiaodan, which used the Chinese transliteration of his name and a similar logo.

Three days after the Trump administration announced its investigation, athletic shoe company New Balance won $1.5 million in damages from Xin Bai Lun, New Boom, and New Bunren, three companies that had used the company’s iconic slanted “N” symbol.

It was the largest amount awarded to a U.S. company, and China observers will watch for whether it marks the beginning of a trend toward greater IP protection.

Copying the church

One area where the Chinese ability to copy and emulate the West could be beneficial is in the church. Christianity took hold in China under Mao’s reign, with persecution fueling the spread of the church. Yet in this large group of new believers, few had ever attended a proper church service, understood church leadership, or had accountability structures in place.

As China’s doors opened to the rest of the world, pastors traveled to Hong Kong, Taiwan, and the West to learn how to run churches, conduct services, and even print bulletins. They brought back what they saw and replicated it in their own settings, which allowed churches to mature as they learned from the practices and experience of the overseas church.

They’re also able to copy conferences, mission agencies, and denominations, often with the help of foreign missionaries. One Taiwanese missionary said he first spoke with churches in Wenzhou about cross-cultural missions in 2014. At a missions conference this year, church leaders were able to present the purpose of missions, how to engage in missions, and where to get resources, all based on information he and other international groups had provided earlier.

Chinese websites, video platforms, and social media are full of translated sermons—both transcripts and videos—of leading pastors from all over the world, usually without the knowledge of the speaker. This means false teachings are spreading further and faster—but so is the gospel message and solid Bible exposition.

In 2016, Desiring God CEO Scott Anderson asked for advice on how to disseminate John Piper’s online resources in China. I did a quick search on the Chinese search engine Baidu and found more than 76,000 hits under Piper’s Chinese name, including more than 200 video clips of his sermons on topics like God’s sovereignty, the dangers of the prosperity gospel, and not wasting one’s life. The ministry didn’t need to worry about dissemination and translation—the Chinese people had already done it. —J.C.

June Cheng

June Cheng

June is the East Asia correspondent for WORLD Magazine. Follow June on Twitter @JuneCheng_World.

Comments

  • TXfamily
    Posted: Mon, 01/08/2018 05:45 pm

    Wait, so Su Bin only got four years in prison for stealing US Military secrets?  I'm pretty that earlier in this century, he would have been executed.

  • Brendan Bossard's picture
    Brendan Bossard
    Posted: Tue, 01/09/2018 08:55 pm

    The Church will be the key to reform in China, as in all other places.  The Chinese are thirsty for spiritual truth.  My father helped to run a website that provided free access to a lot of Christian literature.  Metrics showed that China was one of the largest download destinations.  So we can fight business malfeasance all we want, but the Church is key.