Gree Electric Appliances: Defense Department Scrutinizing Visit by Chinese Company’S Representatives to U.S

Vol. 7 No. 112 April 10, 2019

Gree Electric Appliances: Defense Department Scrutinizing Visit by Chinese Company’s Representatives to U.S. Chipmaker

A visit to a Florida industrial park last year by executives of Chinese-owned Gree Electric Appliances (SHE: 000651) has triggered espionage concerns at the Defense Department and one of its contractors, highlighting the growing strains Chinese companies face in seeking to expand in the U.S.

During the visit, Andrew Lo, Gree American’s commercial air conditioning agent, made an unannounced stop in the lobby of a building that houses computer chipmaker Bridg. The drop-in, which occurred as the Chinese executives were on a tour of a high-tech park project led by Osceola County, Florida Commissioner Peggy Choudhry, alarmed Bridg CEO Chester Kennedy. Bridg, which specializes in microelectronics, optics and photonics, had recently struck its first contract with DOD.

Now, DOD is “working with the appropriate government agencies” to look into the November 26, 2018 visit by officials of Zhuhai-based Gree, said department spokesperson Lt. Col. Mike Andrews, declining to name the other agencies.

Bridg is also a business partner of Harris Corporation, the Melbourne, Florida-based defense contractor that makes night vision goggles and tactical radios. Gree, China’s largest manufacturer of home air conditioners, launched a smartphone business in 2016 and a chip design subsidiary in August 2018. Led by Dong Mingzhu, known as the “Iron Lady” of Chinese business for her meteoric rise from saleswoman to executive, the company is valued at $42 billion on the Shenzhen Stock Exchange and generates $29 billion in annual revenue, according to data compiled by Bloomberg.

Growing worries about espionage. The vigilance over the Osceola County incident—which also drew the attention of Florida Republican Senator Marco Rubio, a leading critic of China—reflects mounting concern at all levels of government and business over Chinese intelligence-gathering.

It also illustrates how that wariness affects many Chinese companies in the U.S. less notable than Huawei, where suspicions that its network equipment allows spying quashed a partnership with U.S. carrier AT&T and severed ties to American universities such as MIT. The Committee on Foreign Investment in the United States (CFIUS) has also blocked Chinese deals in recent years, from the Chinese Ant Financial’s planned takeover of the American transfer company Moneygram to Lattice Semiconductor’s proposed acquisition by Chinese-backed Canyon Bridge Capital Partners.

Between trade tensions and the current atmosphere around spying, Chinese investment in the U.S. has cooled. Chinese foreign direct investment in the U.S. plummeted from $45 billion in 2016 to just $5 billion in 2018, according to a January report from the law firm Baker McKenzie.

Tightened review of transactions. Further constriction could result from a law President Donald Trump signed last August, the Foreign Investment Risk Review Act.

The act expanded the powers of CFIUS by requiring mandatory review of transactions involving such critical industries as aircraft manufacturing, batteries, optical instruments and nanotechnology. The law also affirms that real estate sales are covered transactions if their proximity to U.S. ports, military installations and other government facilities could pose a threat to national security. While the Treasury Department says no country is singled out by the legislation, the lawmakers who crafted it made clear it was aimed largely at China.

Bridg CEO Kennedy told The Capitol Forum that the Gree visit caught him off guard. He said that when he heard its representatives were in the lobby, he instructed employees not to disclose any technical information and to make sure the visitors didn’t stray into other parts of the building, which is in an industrial park called NeoCity.

“That’s not unique to Gree,” he said. “That’s the same message that I would give to other foreign interests that would be potentially transiting to the area as part of either the county showcasing NeoCity or a state person or a commercial business broker. We’re delaying any interactions with foreign entities from that region until we understand what our relationship with DOD is evolving into.”

Aside from a Belgian nanotechnology company housed in a trailer, Bridg is the sole operating business in NeoCity. Osceola County and the University of Central Florida, a leader in the field of photonics and optics research, have made significant investments in the hope that NeoCity will help refashion the Orlando area into a technology hub, expanding its economic base beyond theme parks.

Lisa Nason, a spokesperson for Osceola County, said Susan Wong of Orlando’s Dragon Realty introduced Commissioner Choudhry to the Gree representatives and asked if they could tour NeoCity. Wong, who is listed as Susana Wong on the Dragon Realty website, said in a text she merely acted as a translator on the tour. Dragon Realty is one of several businesses registered to a Tsun Wong at the same Orlando address.

Gree didn’t respond to repeated requests for comment on the situation.

Defense industry play. Bridg, a nonprofit supported by the University of Central Florida and Osceola County, welcomes companies to use its microelectronics fabrication facility to make small batches of experimental products. But the company is also making a play for the U.S. defense industry by signing a research contract with the Defense Microelectronics Activity, which handles the Pentagon’s effort to find secure manufacturers of high-tech integrated circuits.

The company is a cleared facility under the National Industrial Security Program, a partnership between the federal government and business to guard classified information, and subject to oversight by a Pentagon security unit.

Gree hasn’t expressed further interest in buying or leasing land in the industrial park, according to Osceola County.

While DOD wouldn’t identify the other agencies investigating the incident, several sources pointed to the Federal Bureau of Investigation’s Counterintelligence Division as a unit that would seek to thwart industrial espionage.

The bureau won’t confirm whether particular investigations are underway, FBI spokesperson Kelsey Pietranton said.

Enemies or paranoia? Willy Shih, a professor at Harvard Business School and expert in manufacturing and product development, said concerns about Gree’s foray into chipmaking are probably overblown since it’s unlikely an air conditioner company will manage to make sophisticated chips.

“Be careful about reading too much into this,” he said. “That’s like seeing ghosts everywhere.”

The Chinese are known, however, for aggressive human and cyber-enabled espionage, a national security expert and former senior Trump transition official told The Capitol Forum.

“The scope and volume are extraordinary,” said the former official, who asked to remain anonymous. “It’s unique. Even the Russians don’t do this, where the government directs private individuals to essentially act as spies.” The FBI has gotten better at spotting the spying earlier and then acting on it, he said.

With the intent behind Gree’s visit unclear, the DOD’s monitoring could mark peak paranoia regarding Chinese businesses. On the other hand, “even paranoids have enemies,” said William Reinsch, a senior adviser at the Center for Strategic and International Studies and former undersecretary of commerce for export administration.

“If they come back or there’s other Chinese activity at the same tech campus, then alarm bells go off,” Reinsch said. “One thing I will say for the Chinese: They are patient.”