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There is one word that seems to be popular with all politicians — from the right or left — that word is innovation. Everybody likes the idea of innovation and agrees that it is key to American competitiveness, if not the future.

China and other Asian countries already make most of our high-volume commodity products, so America must compete by inventing new products, new technologies and new industries. President Obama, in his State of the Union speech, summed up our competitive challenge when he said, “The only durable strength we have — the only one that can withstand these gale winds — is innovation.”

America has always led the world in innovation, new products and new technologies. In fact, inventing new technologies is as American as jazz music, western movies and the Rocky Mountains. Everyone knows that new inventions and technologies can keep America in the manufacturing game. This includes the Chinese, who are committed to acquiring our technologies any way they can. This is a much bigger threat than most people know because it not only threatens American manufacturing, but it is also beginning to threaten our national security. Getting our U.S. technologies is a state-led effort that is a multi-level strategy, including the following:

1.) Espionage

The FBI ranks China as one of the greatest potential espionage threats over the next decade. The FBI has done four investigations into suspected Chinese espionage over the past 20 years — only one of which was prosecuted successfully — revealing the complexities of such cases. According to Nicholas Eftimiades, author of the book Chinese Intelligence Operations, Chinese espionage is focused on the theft of American technology.

A 1999 report to the congressional committee on U.S. National Security and Military Concerns warned that the People’s Republic of China (PRC) has stolen classified information on every thermo nuclear warhead in the ICBM arsenal. The U.S. Army War College says that China has gathered a lot of secret information on stealth technology, naval propulsion systems, electronic warfare systems and nuclear weapons through espionage

An analysis of the U.S. Justice Department records by the Associated Press reveals that “there have been at least 58 defendants charged in Federal Court related to Chinese espionage since 2008.”:

  1. A former B-2 bomber engineer, Nosher Gowadia, was found guilty of selling cruise missile technology to China.
  2. Mr. Kexue Huang pleaded guilty on espionage charges that he sold biotech trade secrets from Dow Chemical and Cargill Inc. to China.
  3. An employee name Sixing Liu pleaded guilty to exporting defense department data to China from a New Jersey technology company.
  4. Larry Wu-Tai Chin worked for the U.S. Intelligence community for 35 years. Chin sold highly classified National Intelligence estimates pertaining to intelligence agencies and their activities to China.
  5. The FBI recruited Katrina Leung to work in Chinese counter espionage. Leung had a two-decade affair with special agent James Smith and became a double agent for China. She was able to copy documents on our nuclear and military issues carried by Agent Smith.
  6. Chi Mak, a Chinese-born engineer who worked for L-3 Communications in California, was convicted of passing secrets on the Navy quiet-drive propulsion technology through a courier to China
  7. Peter Lee, a Chinese-born physicist for the Los Alamos nuclear weapons lab, pleaded guilty to passing classified weapons technology and microwave submarine detection secrets to China for their nuclear development program.
  8. Ko-Sen “Bill” Moo was convicted in 2006 of being a covert agent of the PRC. He was arrested for trying to buy an F-16 jet engine, an AGM cruise missile, Black Hawk helicopter engines and AIM 120 air-to-air missiles to send to China.

2.) Forced Technology Transfer

For the U.S. manufacturers that have invested in building plants in China, there is continuous pressure and a policy by the PRC to force technology transfer in violation of international trade agreements. They do this by requiring the creation of joint venture companies as a condition to getting access to Chinese markets. American companies complain all of the time about forced technology transfer, but most of them give in because China has many ways of putting pressure on them.

3.) Counterfeit Parts

In the early 1990s, most of the parts purchased by the Defense Department were made in the U.S., Philippines, Hong Kong and Singapore. But then we made the mistake of allowing vendors to purchase commercial off-the-shelf parts (COTS) that met function and fit standards instead of mil spec standards. This led to many parts being made in China and the purposeful production of counterfeit parts. The August issue of Industry Week said that "in 2010, government agents seized fake goods totaling $188.1 million, which, if genuine, would have been worth $1.4 billion. Goods from China accounted for 66 percent of the counterfeit goods."

 This is a real problem in microprocessors and other electronic parts that go into military systems because they could cause catastrophic failures in missile systems, helicopters and aircraft. The Senate Armed Services Committee in November 2011 found that 1,800 cases of suspected counterfeit electronic parts have been investigated since 2009 and 70 percent of the parts came from China. This is now a national security issue.

4.) Cyber Spying

Cyberspace refers to the transfer of information via compact discs or email. It makes it possible to transfer enormous amounts of information instantaneously anywhere in the world. Examples abound of cyber espionage:

  1. David Yenb, an employee of Valspar, downloaded proprietary paint formulas valued at $20 million with the intent to sell them to China.
  2. Meng Dong, a DuPont Corp. research chemist, downloaded proprietary information on organic light-emitting diodes with the intent of sending them to a Chinese university.
  3. Yu Xiang Dong, a product engineer with Ford Motors, copied 4,000 Ford documents onto an external hard drive with the intent of transferring the data to an auto company in China.
  4. McAffe Company attributed an intrusion attempt by a company with a Chinese IP address to steal data from a computer system of a petro-chemical company.
  5. U.S. Intelligence agencies reported to Congress in November 2011 that both Russia and China steal technology information over the Internet as a matter of national policy. The report says that cyber espionage has focused on communications technology, scarce natural resources, clean energy, health care systems, pharmaceuticals, military data (especially maritime systems), and air and space technologies. This report is the collective assessment of 14 different agencies.

5.) Chinese Investments

There is evidence that the Chinese want to invest in building plants in America because it is another way of getting our technology. The Chinese technology giant Huawai tried to buy a small computer company, 3 leaf, for that very reason. Fortunately, the Committee on Foreign Investment of the U.S. screened the purchase and rejected the proposal on the grounds it was neither fair nor transparent.

6.) Tariffs, Regulations & Subsidies

Solar panels were invented in American in the 1950s, and many American companies have invested to take advantage of the need for alternative energy here and around the world. But, China also sees the demand and its central government wants to take over the U.S. market. The tactic is to offer its producers huge subsidies, exporting all of its production and dumping at low prices to gain market share

It is the same with wind towers. China has recognized that this is growing market all over the world, and they have decided to engage in predatory pricing and subsidies to capture it. A complaint by a group of American wind tower manufacturers lists 40 subsidy and assistance programs, ranging from cash grants and subsidized steel to tax breaks. The U.S. companies are asking for countervailing duties of up to 64 percent on their imported towers.

Recently, the Chinese decided that America’s sports utility vehicles were being dumped on the Chinese market and they imposed a 22 percent tariff on all imported SUVS. The fact is that we sell very few SUVS in China. The Obama administration has formally complained about the tariff, but China’s Commerce Minister said it was a legal tariff, and if “the U.S. thinks otherwise, it should sue.”

The response from our U.S. trade representative was: “They want to talk to Congress and industry officials on how best to respond.” It is these weak responses from whatever administration is in the White House that I think makes the Chinese thumb their noses at us, because they know there won’t be penalties.

7.) National Security

The U.S. Office of the National Counterintelligence Executive issued a report that reads, “China is driven by its long-standing policy of catching up fast and surpassing western powers. In terms of military technology, China is focused on two areas: marine systems designed to jump-start the development of blue water navy and aerospace systems that will allow China’s air force air supremacy.”

In 2009, senior government officials said that Chinese spies infiltrated the electrical grid and left behind software that could be used for disruptions of the system.

A study by Michael Weber of the University of Texas shows 13 of 16 manufacturing sectors that support America’s military arsenal suffered erosion because of off-shoring products like armor plate steel, integrated circuits and night-vision goggles, which are now obtained overseas. The dependence on foreign suppliers makes the nation vulnerable to shortages in emergencies. There is also the “danger that an overseas manufacturer could place a Trojan horse component with a virus or hard-to-detect flaw into critical equipment.”

If innovation is the key to America’s future and the only durable strength we have to compete, I wonder why more people aren’t worried. There are two fundamental problems with innovation and technology. First, there are many signs that our once commanding lead is slipping. Recent reports (based on hard data, such as research and development [R&D] spending, new patents and venture funding) from the Boston Consulting Group show that the U.S. has slipped from its number one position to number eight in the world.

But an even more ominous scenario is the fact that we are losing some of the technologies we have already developed because of espionage, counterfeiting and outright theft. It doesn’t make very much sense to continue to invest in education, training, and R&D by filling the gas tank from the top, while the technology and innovation is leaking out of a man-made hole in the bottom.

It is hard to say if China is still the red menace from the Cold War, or if they have morphed into a new form of winner-take-all amoral capitalism. Regardless of how you define their system or policies, China does have a clear framework on how they view the U.S., and they are very focused and unified in their policies towards us. Make no mistake about it. China’s efforts to get our technology are a state-sponsored effort, and it is succeeding.

On the other hand, the United States can’t seem to get beyond our political bickering and we have not formulated a coherent policy on our trade problems with China. I think China views us as a weak nation that can’t get its political act together and is ripe for the taking. Why shouldn’t they continue to take advantage of us with the same policies that have led to strong economic growth, as long as they are allowed?

I think it is becoming more obvious that we are indeed in a trade war with China and we are losing. Innovation and technology are our only real advantage in this world-wide struggle to stay on top as the leading economy. We have to find ways to capitalize on what we do best, and better ways to protect our inventions from countries that will try and get them any way they can. I think it is time to send a signal to China that we won’t be bullied and draw a line in the sand.

A good first step is to test China’s future intentions by appealing to the World Trade Organization for sanctions because of currency manipulation, and then to add surcharges to their imports. This might have enough leverage to get them to at least negotiate on their espionage activities.


Michael P. Collins is the author of the book Saving American Manufacturing. You can find more related articles on his website via www.mpcmgt.com.

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