By William Tucker
Columnist, In Homeland Security
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This is part two of William’s series on U.S.-China trade and economic issues. Read part one here.
In the first part of this series, we looked at China’s unsavory trade practices and intimidation against its Asian trade partners and the growing trade war with the United States. Now, we turn to China’s attempts to infiltrate American companies to steal their proprietary technology.
In January 2019, the U.S. government filed two indictments against Chinese telecom giant Huawei: “Chinese Telecommunications Conglomerate Huawei and Huawei CFO Wanzhou Meng Charged With Financial Fraud” and “United States of America v. Huawei Device Co., Ltd., and Huawei Device USA, Inc.” Both indictments contain multiple charges.
Huawei’s chief financial officer, Meng Wanzhou, was personally named in the first indictment, charged with personally directing the company to engage in conspiracy, wire fraud, bank fraud, and violating U.S. sanctions on Iran.
At Washington’s request, Meng was arrested while in Canada, but she is still awaiting extradition to the U.S.
US Says Huawei Will Use Its Equipment as an Intelligence Collection Platform
The political fallout from her arrest was palpable, but the indictment also supported Washington’s claim that Huawei does not conduct business in accordance with international norms. Furthermore, the U.S. has banned Huawei 5G equipment from use domestically due to national security concerns.
Washington claims that Huawei will use its equipment as an intelligence collection platform. In support of the U.S. claim that Huawei will support Chinese espionage, the second indictment details trade-secret theft from a U.S. company. This is an accusation that China is notoriously guilty of.
Accusations of Chinese espionage are many. The number of successful prosecutions in the U.S. demonstrates Beijing’s aggressive attempts to acquire any information that has commercial or military value.
The second indictment unsealed in January accuses Huawei of trade-secret theft from U.S. mobile carrier T-Mobile. Cell phones have high failure rates that cost the manufacturer and carrier a significant amount of money. To combat this issue, T-Mobile manufactured a robot that can test cell phones and identify problems before the devices go to market. The robot was such a success that it saved money for T-Mobile and several phone manufacturers and also improved the reliability of the consumer device.
When Huawei entered the U.S. market with its cellphones, the Chinese company suffered from an inordinately high failure rate due to poor quality. T-Mobile gave Huawei engineers access to its testing robot only to have the visitors question how the robot worked. T-Mobile would not disclose that information. Huawei employees’ unending stream of questions and odd behavior frustrated T-Mobile to the point that the company began restricting the Chinese engineers’ access.
Huawei would not let up on its attempt to acquire the information from T-Mobile because the Chinese company was constructing its own robot. However, Huawei was suffering from the same poor quality and precision issues that plagued much of Huawei’s product line.
Huawei eventually sent an engineer from China to observe the T-Mobile robot. According to the indictment, this engineer managed to smuggle an arm of T-Mobile’s robot out of the facility and study it in his hotel room. This case demonstrates that Huawei was willing to use any means possible to secure what it wanted.
Furthermore, Huawei created an internal program that would reward its employees with promotions or bonuses for stealing technology from competitors, just as they did with T-Mobile. This behavior is hardly benign, or normal, but is consistent with the way many Chinese companies operate. Now, despite its troubling history, Huawei is attempting to place its 5G technology products at every level of global communications.
A Pattern of Collection Behavior
Huawei’s bonus program is not unique. China often prioritizes collection of proprietary information based on need, although Huawei appears to take advantage of any situation where proprietary information collection is possible. Two examples of this collection behavior that became federal cases demonstrate how the Chinese government directs businesses to fill a need for the state.
In 2013, Chinese citizens Ji Li Huang and Xiao Guang Qi pleaded guilty in federal court to participating in a conspiracy to steal trade secrets. Huang was the CEO of a small manufacturing company tasked with stealing Pittsburgh Corning’s formula and manufacturing process for building insulation. The Corning insulation, FOAMGLAS, has fire resistant properties and China desperately needed the insulation after a series of building fires. China provided loans to Huang to build a large manufacturing facility to produce the insulation once he managed to secure the trade secrets from Corning.
The other example comes from the more recent Sinovel case. In January 2018, a federal jury convicted Sinovel Wind Group of conspiracy, wire fraud and trade-secret theft after the Chinese company stole information relating to semiconductors from AMSC. Massachusetts-based AMSC lost $800 million and cost 700 employees their jobs following the theft.
The Chinese government made the decision that China needed to dominate the semiconductor market, but first it had to build its own domestic semiconductor industry. The best way to accomplish that was to steal the necessary information from foreign companies. The Sinovel case is but one example of Chinese espionage targeting a semiconductor company.
Reviewing the Huawei problem, we see a familiar pattern emerge with the telecom company’s behavior. Allowing Huawei to dominate the communications market by supplying 5G equipment is a disaster in the making. So it is no surprise that the U.S. has blacklisted the company from domestic sales and is pressuring its allies to do the same. Although Huawei is a Chinese company, it has a Western-style corporate structure in that it is beholden to the interests of the Chinese state, in effect its stockholders.
Given how prolific and costly Chinese espionage has been to the U.S., it was only a matter of time before the U.S. government took drastic measures to punish China beyond the federal courtroom. The tariffs levied by the Trump administration may not be popular. But the Huawei/5G issue is happening during President Trump’s term and required a swift response. This is not a defense of Trump’s actions; rather, it is recognition that the issues of Chinese espionage and trade would eventually become critical.
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The U.S.-China trade relationship became useful, at least for a short period, as global consumption increased in the post-Cold War era. China recognized that this market access would allow China to modernize and increase its global political clout. Although China acted cautiously, its attempt to attain great-power status forced it into competition with the very nation that made its modernization possible.
U.S. and Chinese interests are no longer aligned. Washington is going to push back against China’s activities as forcefully as possible by exploiting Beijing’s numerous weaknesses without straying into an armed conflict.
Of course, the United States is not immune to China’s retaliatory measures, but the U.S. is in a better position overall. However, China is not the only target of the Trump administration’s punitive economic measures.
We’ll examine that aspect of U.S.-China relations in the next installment.