Will President Trump's tariffs stop massive Chinese espionage?

By Lucy Hooker

US company AMSC had its wind turbine software stolen by its one-time Chinese partner Sinovel Windpower

Dan McGahn says it was a case of attempted murder.
The victim was his business American Superconductor (AMSC), and the perpetrator was a Chinese company called Sinovel Windpower.
The two firms had been partners, but Sinovel bribed an insider to steal AMSC's key wind turbine technology.
As a result Massachusetts-based AMSC saw its sales collapse, its market value plummet by $1bn (£770m), and it had to lay off hundreds of employees.
"It was attempted corporate homicide," says Mr McGahn.
This act of industrial espionage was uncovered back in 2011, and after a seven-year legal fight, a US judge last month fined Sinovel just $1.5m, the maximum currently possible.
While Sinovel is also continuing to pay AMSC an agreed settlement of $57.5m, the US firm is getting back just a fraction of the losses it endured.

Dan McGahn, boss of AMSC, urges US firms to be cautious when doing business in China.

The case of AMSC is perhaps exactly what President Trump has in mind when he rages against Chinese industrial espionage.
At the start of last month the US government introduced tariffs on $34bn worth of Chinese exports, saying they were a result of China's "unfair trade practices", which included stealing US intellectual property.
A few days later the White House warned that the tariffs could be extended to $200bn worth of Chinese products. 

Then three weeks ago Trump threatened to put tariffs on all $500bn worth of annual Chinese exports to the US.
Will such a blanket tactic get Chinese firms to stop carrying out acts of industrial espionage, or should the US switch to a more targeted approach?
Firstly though, exactly how did Sinovel bribe an AMSC worker?
When AMSC's wind power division first went into partnership with Sinovel back in 2007, it was applauded for its global ambition and business nous at a time when countries around the world were rushing to build more and more wind farms.
AMSC knew that tying up with a Chinese firm came with risks, so it used all kinds of strategies to limit this, such as encrypting the software codes or "brains" that operated its turbines,
Yet without warning, in 2011 Sinovel said it didn't need any more shipments of the turbine technology it had been buying from AMSC.
Despite the American firm's best efforts to defend its secrets, Sinovel had bribed an AMSC employee, a Serbian national employed at its office in Austria, to hand over the key software.
The man in question -- Dejan Karabasevic -- had been offered money, a job, an apartment, a whole new life in China. 

He was found guilty by a court in Austria in 2011.President Trump has been vocal in his attacks on Chinese business and trading practices.

AMSC's case is far from unique, and US firms in sectors from metals to microchips, and telecoms and transport have complained about Chinese rivals stealing their technology. 

Even US biscuit stable Oreo cookies faced a Chinese copycat.
The situation is said to be so bad that the Commission on the Theft of American Intellectual Property, an independent US body including representatives from the public and private sectors, estimates that $600bn worth of US intellectual property is stolen every year by China.
Mr McGahn points out that the rules on foreign investment in China -- such as the need to partner with a Chinese company -- make it difficult for even the most careful overseas companies to protect their trade secrets. 

He says the whole system for investing in China is set up for local firms to win.
Just a few months into Mr Trump's presidency, experts convened at the White House -- technical specialists, policy wonks, cabinet members and academics -- to discuss how to tackle the problem.
Following a seven-month investigation a White House report accused Beijing of "state-led, market-distorting forced technology transfers".

The wind turbine sector has seen business soar over the past decade as countries around the world have rushed to build wind farms

The Chinese government always says it is doing its best to prevent infringement of intellectual property, and in 2015 it pledged to clean up those firms not playing by the rules.
But Derek Scissors, China expert at the American Enterprise Institute think tank, says China has long been a "technology leech".
Beijing stands squarely behind the Chinese firms committing the thefts.
"The idea that these firms are engaging in mass industrial espionage without the blessing of the Chinese government is not the slightest bit believable," says Mr Scissors, who was one of the experts who advised the White House on the issue. 

"The Chinese monitor everything."

An increasing amount of industrial espionage is said to be done by remote hacking of computers.

Prosecuting spies who are caught red-handed is no longer enough. 

It is the equivalent of arresting drug-mules, rather than the masterminds, when tackling the illegal drug trade, Ms Hvistendahl says.
Moreover, espionage is increasingly taking place in cyberspace, allowing perpetrators to remain thousands of miles beyond the reach of law enforcers. 

Skilful hackers may not even leave a trace of their break in.
The other obstacle to successful legal prosecutions is a lack of plaintiffs willing to face the exposure, points out Professor Mark Button, director of the Centre for Counter Fraud Studies at Portsmouth University in the UK.
"Imagine a big pharma company has a wonder drug; if that information is lost to a competitor that can have big financial implications," he says. 

"It can be embarrassing and it can have implications for the share price."
For that reason Prof Button speculates that the lack of high profile cases in Europe in recent years, probably disguises a hidden iceberg of incidents below the surface.
The only really effective counterespionage strategy may be better defence at the company-level, he suggests. 

But Prof Button has some sympathy with Mr Trump's massive tariffs approach in confronting China over their practices, in precipitating "a showdown" over the problem.

Derek Scissors is much more sceptical: "The solution we've come up with is completely misguided." He says blanket tariffs fail to distinguish between firms that have benefited from espionage and those that have not.
"You have to punish the guilty or you don't get a change of behaviour," he says.
Instead he'd like to see sanctions targeted against specific firms -- ones that are clearly reproducing American technology that they haven't developed themselves. 

He believes that would be more effective than "the quick fix" chosen by the administration.
But targeting and punishing individual companies is a tough road to travel as AMSC's experience shows.
While AMSC continues to rebuild its business, Sinovel is continuing to thrive.

Nation of Thieves

It Was A Company With A Lot Of Promise. Then A Chinese Customer Stole Its Technology
By JIM ZARROLI

Pigeons fly past the company logo of Sinovel Wind Co., Ltd. outside its head office in Beijing, in 2011. In January 2018, Sinovel was convicted in the U.S. of stealing trade secrets from American Superconductor.

Massachusetts-based American Superconductor seemed to be riding high in early 2011, reaping strong sales and even praise from the White House for successfully cracking the Asian import markets.
Then, one day that April, employees were called to a meeting where they heard some very disturbing news.
Their largest customer, Beijing-based Sinovel, which provided three-quarters of the company's revenue, had refused to accept a shipment of electronic components for its wind turbines — and wouldn't pay millions of dollars it owed for them. 

The reasons it gave were ambiguous.
"People were shocked," says Tron Melzl, a product manager in one of the company's Wisconsin offices. 

"We were adding additional staff to the company due to growth in the business. We actually had some people who had been on the job for just a couple of days when this announcement happened."
It was the start of a long, painful ordeal for the company, one that would temporarily leave it in perilous financial shape and written off for dead by Wall Street.
As the Trump administration prepares to do battle over intellectual property theft by China, what happened to American Superconductor underscores the risks that foreign firms face when they do business in that country.
Within weeks, the company concluded that Sinovel had somehow obtained the source code for its electronic components and was installing a pirated version in the wind turbines it sold.
"American Superconductor provided sort of the brains of the turbines, so if Sinovel could do it themselves, using cheaper components, yeah, they could produce these turbines more cheaply," says Assistant U.S. Attorney Timothy O'Shea, who would later prosecute Sinovel in federal court.
American Superconductor's CEO, Daniel McGahn, says what happened didn't come as a complete surprise — he knew that intellectual property theft was always a big risk when doing business in China. 

But the components sold by American Superconductor featured sophisticated encryption technology, and the company was pretty sure that no one at Sinovel could have cracked its source code.
Instead, someone at American Superconductor had to have illegally leaked its technology.
"We looked inward and said, 'Who would have access, motive and capability to do this?' And then we looked at the travel to China and being present and all that, and it really came down to one person," McGahn says.
A 2013 indictment alleged that an engineer at the company's Austrian subsidiary, Dejan Karabasevic, was given a multi-year contract worth $1.7 million by Sinovel to steal his employer's trade secrets. 

The money essentially doubled his salary, the indictment said.
"If you look at what the executives of the Chinese company made, they're offering him more money than they make themselves. And they're not doing that because they want him to be a consultant. They want him to steal," McGahn says.
Text messages sent over Skype by Karabasevic were presented in court, suggesting he was angry about his treatment by the company and wanted revenge.
"I feel like someone who failed a lot, like a loser, but I know it is temporary and all of the people who laugh now will stop laughing later when I leave," he wrote in the months before quitting, according to a Skype message presented as evidence.
Sinovel did not respond to a request for comment. 

But the company argued in federal court that it had severed its relationship with American Superconductor because it had failed to live up to its contract.
Sinovel also said that no evidence existed that Karabasevic had taken the source code without authorization, and that the Massachusetts company had failed to take adequate steps to protect its source code.
Still, a federal jury in Wisconsin found Sinovel guilty of stealing trade secrets on Jan. 24. 

The Chinese company will be sentenced in June and is likely to face a hefty fine.
Even as American Superconductor was pursuing Sinovel in court, the theft led to a dramatic downturn at the company.
With Sinovel no longer honoring its contracts, revenue plummeted from more than $100 million in the first three months of 2011 to just $9 million the next.
The company's share price plunged, and Wall Street analysts predicted its days were numbered. 

Like a lot of startups, American Superconductor had lured employees by offering stock options, which were now worthless.
Over the next few years, the company would be forced to shut down a Wisconsin facility and move to a much smaller headquarters building in Massachusetts. 

It also would lay off hundreds of employees, dropping from a workforce of nearly 1,000 to fewer than 300.
"It really did shake the company up. It seemed like every month there was another layoff," says Jack McCall, director of superconductor cable systems, who had worked at the company since 2007 but eventually left to take another job. 

"There was just an awful lot of concern, anger. Nobody was sure their job was going to be there."
Even as it struggled to survive, American Superconductor was fighting back against Sinovel, taking its complaints about the theft to the Chinese government, part-owner of Sinovel. 

Nothing happened, McGahn says.

The company also complained to the Obama administration and Congress.
Today, American Superconductor remains a smaller company than it was in 2011, but has survived, having successfully broken into some important new markets. 

It does very little business in China.
McGahn is sometimes asked by other executives about the Chinese market. 

He tells them China is a trap.
"The rules are set up in a way that the local brands will win," he says. 

"Participation in the Chinese market is for Chinese companies only. Your participation as a Western company is a mirage. They're there to bring you in, be able to figure a way to harvest whatever they can from you, and then spit you out when you're no longer useful."
McGahn applauds the Trump administration's efforts to get tough on China over trade issues.
"Bush and Obama — they had very strong words with China about intellectual property theft," he says. 

"This is the first time there are consequences ascribed to the Chinese behavior."
"I do understand that a lot of people think this is a trade war," McGahn adds. 

"This isn't the beginning of a trade war — this is the next battle in a trade war that's more than a decade old."