Global Thief

From university funding to computer hacking: How China steals Western innovation
By James Cook

China is seeking to "steal its way up the economic ladder" at the expense of Western innovation

China is seeking to "steal its way up the economic ladder" at the expense of Western innovation.
Those were the damning words of FBI Director Christopher Wray who last week said that China poses a "multi-layered" threat to US interests.
His comments were made as Washington's campaign to ban Chinese telecoms firm Huawei intensified.
"China has pioneered a societal approach to stealing innovation in any way it can from a wide array of businesses, universities and organisations," he said.
"They're doing it through Chinese intelligence services, through state-owned enterprises, through ostensibly private companies, through graduate students and researchers, through a variety of actors all working on behalf of China."
It's something known only too well by businesses desperate to crack China's lucrative market of 1.3bn people.
Among them is Apple, who saw Chinese electronics business Xiaomi spend years replicating its iPhone designs.
Its chief executive even modelled himself on Apple founder Steve Jobs, wearing similar clothing and copying his presentations.
For Apple design chief Jony Ive, the constant replication was a source of frustration.
“You spend seven or eight years working on something, and then it’s copied. I have to be honest, the first thing I can think, all those weekends that I could have at home with my family but didn’t. I think it’s theft, and it’s lazy,” he said in 2014.
While Xiaomi was a brazen example of a Chinese business copying Western designs, there are far more advanced ways which Chinese businesses have used to copy Western innovation.
Huawei has been at the centre of a political row over concerns that its closeness to the Chinese government could introduce espionage risks if its hardware is used in the development of 5G networks around the world. 
Many countries, including the US, have taken a firm stance against Huawei’s involvement in the new networks, but other nations including the UK have taken a softer approach.
The political row around Huawei often overlooks the company’s historic practice of stealing Western innovation, however.
Over 15 years ago, Huawei took part in a costly legal battle with US technology firm Cisco over allegations that Huawei copied Cisco’s software for its routers.
Huawei eventually admitted that it had cloned the software and pledged to remove it from its products.
Huawei had been systematically reverse-engineering Cisco’s routers, a practice which would have allowed the Chinese telecoms company to peer into the inner workings of Cisco’s software and cherry pick sections to use in its own products.
Cisco sued Huawei for patent infringement in 2003, only settling the case after Huawei admitted to using Cisco’s source code.
The US government has also accused Huawei employees of attempting to copy “Tappy,” a smartphone-testing robot built by US network T-Mobile.
Huawei employees with access to the robot took photographs of Tappy and one employee has been accused of removing one of its arms. 
Concern around Chinese replication of technology doesn't end with reverse-engineering.
As businesses like Huawei have become more successful and expanded around the world, they have begun investing in academic research.
Huawei has spent millions of pounds in the UK alone funding research into technologies such as mobile phone networks. 
But experts have warned that these donations risk handing British innovations to China.
“China is using broad research relationships with universities and other entities to try and fill in any technological gaps,” said Michael Wessel, a commissioner on the US-China Economic and Security Review Commission.
Companies are trying to “advance Chinese standards so that Huawei and other Chinese-produced equipment will be the equipment of choice as networks get built out,” he said.
The issue of Huawei funding university research has been particularly sensitive in Canada, which has seen a political debate over the hundreds of patents Huawei has been granted thanks to Canadian research it has funded.
A similar debate has not yet taken place in the UK, although Oxford University suspended all research grants and donations from Huawei following a Telegraph report into the financial backing published last year.
Apart from the continued practice of university funding, other Chinese businesses have for years been systematically cloning Western software and hardware for sale in the Chinese market.
Earlier this month, it was reported that a cloned version of popular Nintendo smartphone game Fire Emblem Heroes had been approved by the government and was available for download on iPhones and Android phones.
The app had been reverse-engineered, with the only substantive change being the translation of the game’s text into Simplified Chinese.
Chinese businesses have also grown adept at copying hardware manufactured in Chinese factories.
These factories are given the blueprints for technology hardware, as well as prototype devices that can help to create cloned devices.
Quartz reported in 2016 that an entrepreneur who invented a smartphone case that folds out into a selfie stick was shocked to find a copy of his product on sale through Chinese websites at a cheaper price.
It’s an extremely common issue seen in Chinese factories, which are used to produce counterfeit products that have been designed to be as similar as possible to the original products. 
Often, the cloned products are sold online for a cheaper price.
The nature of China’s laws around foreign businesses are key to helping transfer technology from Western companies to China.
A report to the US Congress by the Department of Justice published in 2018 said that “China uses foreign ownership restrictions, such as joint venture requirements and foreign equity limitations, and various administrative review and licensing processes, to require or pressure technology transfer from US companies.”
Forcing the creation of joint ventures has meant that businesses wishing to operate in China have to transfer information to Chinese businesses, raising concerns that the products may be copied.
The report to Congress also described widespread hacking of computer networks in order to gain access to confidential information that would be extremely useful to Chinese businesses.
In 2014, the US government indicted five members of the Chinese military over charges that they hacked into the networks of large US power and steel companies in order to steal trade secrets.
These hacking attacks are a far cry from the more prosaic copying of devices like crowdfunded selfie sticks, but the ongoing hacks show a continued effort to promote Chinese businesses by handing them closely guarded trade secrets.
The promise of a new law that could grant businesses “fair treatment” inside China is seen as a step in the right direction, but Western businesses don’t anticipate an immediate end to the copying, cloning and hacking which has gone on for years.

President Trump Is Right: China Should Stop Robbing the U.S.

The Chinese theft and forced transfer of technology and intellectual property should be punished

By Noah Smith

No deal with thieves. 

Suppose a Chinese electric carmaker wants to win market share by selling cars with the best cutting-edge battery technology. 

How does it get that technology? 

It can hire some engineers, build a lab and try to develop it in house. 

It can partner with a university research lab to create it. 

Or alternatively, it can buy an American company that already has the technology.
The latter move might be profitable for both the acquirer and the target, but it can stifle a whole ecosystem from developing around that company in the U.S. 

The Chinese company will likely take the battery technology back to China with it, producing the batteries in China and sourcing the parts in China. 

Had the company not been acquired, it might have spawned a network of American suppliers and customers. 

Some of its employees would have left and gone to work for those suppliers and customers, or for competitors, or spun off their own businesses. 

They would have taken their knowledge of the first company’s technologies with them, where those ideas -- whether protected by nondisclosure agreements or not -- would combine with those of others, potentially creating whole new innovations. 

Instead, since a Chinese company now takes the tech back with it, that virtuous cycle will now happen in China instead, and the U.S. economy as a whole will lose out.
That scenario might be prevented by timely action by the Committee on Foreign Investment in the U.S. 

CFIUS, as it is known, is officially supposed to deal with risks to national security -- for example, if foreign powers use acquisitions to erode the U.S.’s edge in military technology. 

In practice, national security concerns can almost never be separated from economic considerations like the scenario described above, because technological dominance has both military and economic implications. 

When CFIUS successfully persuaded President Donald Trump to block the takeover of American telecommunications-equipment maker Qualcomm Inc. by rival Broadcom Inc., it did so out of fear that the move would lead to cuts in research spending and weaken American dominance in that area of technology, giving a competitive edge to Chinese rival Huawei Technologies Co.
CFIUS has been around since the 1970s, but China’s rise as an economic, technological and military rival and Trump’s pugnacious approach to trade have generated a burst of deal cancellations in the last two years:
This may only be the beginning, as CFIUS may soon be beefed up considerably. 

President Trump and his Treasury secretary, Steve Mnuchin, are considering using emergency powers to block Chinese investment in U.S. tech companies, and CFIUS may administer the restrictions. 

In addition, there has been a bipartisan legislative effort to strengthen CFIUS, and broaden its oversight to include many minority investments by Chinese companies.
Why minority investments? 

If a Chinese company buys only a minority stake in a U.S. company, it can’t carry out the scenario described above. 

What it might do is to send its employees to work with the U.S. company, allowing them to copy, learn or steal designs, ideas and process knowledge, and transfer these to Chinese companies. 

A stronger CFIUS might prevent that.
This is probably a good idea. 

Depriving U.S. companies of Chinese capital isn’t a big danger. 

Thanks to investors like Softbank’s Vision Fund and deep-pocketed U.S. venture capitalists, with tech company valuations soaring, and with interest rates low, companies are hardly starved for capital. 

The drawbacks of forcing China to go slow on its flood of acquisitions and investments -- at least in the technology industry -- seem minimal.
But China won’t be easily deterred. 

The country’s leaders are determined to move the country up the value chain. 

In order to move to the more profitable parts of the so-called smile curve -- component manufacturing and design -- China needs to upgrade its technology level. 

This is the essence of the “Made in China 2025” plan, which seeks to establish Chinese technological leadership in a number of cutting-edge industries over the next few years.
This is all the more urgent because despite record levels of research spending, China’s productivity growth has been slowing in recent years:


China’s government can therefore be expected to take drastic measures to escape the dreaded middle-income trap -- and that means acquiring foreign technology by hook or by crook.
One method China will still try to use to grab U.S. technology is joint ventures. 

China generally demands that multinational companies establish joint ventures with Chinese companies in order to gain access to its immense domestic market. 

But it’s very hard for an American company to operate in China without letting its technological secrets leak out. 

The Chinese partner can grab the U.S. company’s tech and transfer it to other Chinese companies or to the government, which then outcompete the U.S. company and drive it out of the Chinese market. 

These joint ventures won’t be covered by CFIUS under the latest draft of the new legislation, so if President Trump intends to plug this particular leak he will have to use other means.
A final way that China can obtain American technology is by hiring Americans, who will naturally bring ideas and techniques that they learned at previous employers or universities in the U.S. 

It might specifically target Chinese-Americans, who have the requisite language skills. 

Since Chinese-Americans often suffer job discrimination in hiring and promotion in the U.S., a career in China, even with its air pollution and government repression, might seem attractive.
If the U.S. wants to get serious about preventing technology transfer, it will have to do more than block Chinese investment. 

It will have to find some way to limit the risk of forced or surreptitious tech transfer through joint ventures. 

And it will have to work to make the U.S. a more attractive place for the American tech workers who might otherwise jump ship to China.

Chinese Peril

U.S. weighs restricting Chinese investment in artificial intelligence
By Phil Stewart | WASHINGTON

An MQ-9 Reaper remotely piloted drone aircraft performs aerial maneuvers over Creech Air Force Base, Nevada, U.S., June 25, 2015. 

U.S. Defense Secretary James Mattis testifies before the Senate Armed Services Committee on Capitol Hill in Washington, D.C., U.S., June 13, 2017.

The United States appears poised to heighten scrutiny of Chinese investment in Silicon Valley to better shield sensitive technologies seen as vital to U.S. national security, current and former U.S. officials tell Reuters.
Of particular concern is China's interest in fields such as artificial intelligence and machine learning, which have increasingly attracted Chinese capital in recent years. 

The worry is that cutting-edge technologies developed in the United States could be used by China to bolster its military capabilities and push it ahead in strategic industries.
The U.S. government is now looking to strengthen the role of the Committee on Foreign Investment in the United States (CFIUS), the inter-agency committee that reviews foreign acquisitions of U.S. companies on national security grounds.
An unreleased Pentagon report, viewed by Reuters, warns that China is skirting U.S. oversight and gaining access to sensitive technology through transactions that currently don't trigger CFIUS review. 

Such deals include joint ventures, minority stakes and early-stage investments in start-ups.
"We're examining CFIUS to look at the long-term health and security of the U.S. economy, given China's predatory practices" in technology, said a Trump administration official, who was not authorized to speak publicly.
Defense Secretary Jim Mattis weighed into the debate on Tuesday, calling CFIUS "outdated" and telling a Senate hearing: "It needs to be updated to deal with today's situation."
CFIUS is headed by the Treasury Department and includes nine permanent members including representatives from the departments of Defense, Justice, Homeland Security, Commerce, State and Energy. 

The CFIUS panel is so secretive it normally does not comment after it makes a decision on a deal.
Under former President Barack Obama, CFIUS stopped a series of attempted Chinese acquisitions of high-end chip makers.
Senator John Cornyn, the No. 2 Republican in the Senate, is now drafting legislation that would give CFIUS far more power to block some technology investments, a Cornyn aide said.
"Artificial intelligence is one of many leading-edge technologies that China seeks and that has potential military applications," said the Cornyn aide, who declined to be identified.
"These technologies are so new that our export control system has not yet figured out how to cover them, which is part of the reason they are slipping through the gaps in the existing safeguards," the aide said.
The legislation would require CFIUS to heighten scrutiny of buyers hailing from nations identified as potential threats to national security. 

CFIUS would maintain the list, the aide said, without specifying who would create it.
Cornyn's legislation would not single out specific technologies that would be subject to CFIUS scrutiny. 

But it would provide a mechanism for the Pentagon to lead that identification effort, with input from the U.S. technology sector, the Commerce Department, and the Energy Department, the aide said.
James Lewis, an expert on military technology at the Center for Security and International Studies, said the U.S. government is playing catch-up.
"The Chinese have found a way around our protections, our safeguards, on technology transfer in foreign investment. And they're using it to pull ahead of us, both economically and militarily," Lewis said.

"I think that's a big deal."

China made the United States the top destination for its foreign direct investment in 2016, with $45.6 billion in completed acquisitions and greenfield investments, according to the Rhodium Group, a research firm. 

Investment from January to May 2017 totaled $22 billion, which represented a 100 percent increase against the same period last year, it said.

AI'S ROLE IN DRONE WARFARE
Concerns about Chinese inroads into advanced technology come as the U.S. military looks to incorporate elements of artificial intelligence and machine learning into its drone program.
Project Maven, as the effort is known, aims to provide some relief to military analysts who are part of the war against Islamic State.
These analysts currently spend long hours staring at big screens reviewing video feeds from drones as part of the hunt for insurgents in places like Iraq and Afghanistan.
The Pentagon is trying to develop algorithms that would sort through the material and alert analysts to important finds, according to Air Force Lieutenant General John N.T. "Jack" Shanahan, director for defense intelligence for warfighting support.
"A lot of times these things are flying around (and)... there's nothing in the scene that's of interest," he told Reuters.
Shanahan said his team is currently trying to teach the system to recognize objects such as trucks and buildings, identify people and, eventually, detect changes in patterns of daily life that could signal significant developments.
"We'll start small, show some wins," he said.
A Pentagon official said the U.S. government is requesting to spend around $30 million on the effort in 2018.
Similar image recognition technology is being developed commercially by firms in Silicon Valley, which could be adapted by adversaries for military reasons.
Shanahan said he was not surprised Chinese firms were making investments there.
"They know what they're targeting," he said.
Research firm CB Insights says it has tracked 29 investors from mainland China investing in U.S. artificial intelligence companies since the start of 2012.
The risks extend beyond technology transfer.
"When the Chinese make an investment in an early stage company developing advanced technology, there is an opportunity cost to the U.S., since that company is potentially off-limits for purposes of working with (the Department of Defense)," the report said.

CHINESE INVESTMENT
China has made no secret of its ambition to become a major player in artificial intelligence, including through foreign acquisitions.
Chinese search engine giant Baidu Inc launched an AI lab in March with China's state planner, the National Development and Reform Commission. 

In just one recent example, Baidu Inc agreed in April to acquire U.S. computer vision firm xPerception, which makes vision perception software and hardware with applications in robotics and virtual reality.
"China is investing massively in this space," said Peter Singer, an expert on robotic warfare at the New America Foundation.
The draft Pentagon report cautioned that one of the factors hindering U.S. government regulation was that many Chinese investments fall short of outright acquisitions that can trigger a CFIUS review. Export controls were not designed to govern early-stage technology.
It recommended that the Pentagon develop a critical technologies list and restrict Chinese investments on that list. 

It also proposed enhancing counterintelligence efforts.
The report also signaled the need for measures beyond the scope of the U.S. military, such as changing immigration policy to allow Chinese graduate students to stay in the United States after completing their studies, instead of returning home.
Venky Ganesan, managing director at Menlo Futures, concurred about the need to keep the best and brightest in the United States.
"The single biggest thing we can do is staple a green card to their diploma so that they stay here and build the technologies here – not go back to their countries and compete against us," Ganesan said.