WHITE PAPER THEFT NATION: HOW IP THEFT DRIVES THE CHINESE NATIONAL BUSINESS MODEL, AND ITS EFFECT UPON THE GLOBAL ECONOMY
by Evan R. Anderson
Foreward by Mark R. Anderson
INVNT/IP NOFORN/PROPRIETARY
07/05/15
A Publication of the INVNT/IP Consortium, A Global Initiative Sponsored by the Strategic News Service
1 On Intellectual Property Theft
“There are two kinds of big companies in the United States. There are those who’ve been hacked by the Chinese and there are those who don’t know they’ve been hacked by the Chinese.”1—James Comey, Director, FBI
“The ongoing cyber-thefts from the networks of public and private organizations, including Fortune 500 companies, represent the greatest transfer of wealth in human history.”2 —Gen. Keith Alexander, Former Director, US Cyber Command and the National Security Agency
“Nation-states like China are stealing intellectual property at a breathtaking pace, taking it back, repurposing and then using it to compete against those very same companies around the world, at a huge disadvantage to the company they just stole it from.” —Mike Rogers, Former House Intelligence Committee Chairman
“From the US Congress, to the Department of Defense, to the private sector, we have never, ever not found Chinese malware embedded in a system so that they can extract it.”3—Vice Admiral Mike McConnell, Senior Executive Advisor, Booz Allen Hamilton; Former Director, National Security Agency
“Cyber threats pose one of the most serious economic and national security challenges to the United States, and my Administration is pursuing a comprehensive strategy to confront them.”—President Barack Obama, in his April 1, 2015, press conference announcing a new sanctions regime via presidential directive
“[China is] trying to hack into everything that doesn’t move in America. Stealing commercial secrets ... from defense contractors, stealing huge amounts of government information, all looking for an advantage.” – Hillary Clinton, 2016 US Presidential Candidate
“China’s economic cyber espionage ... has grown exponentially in terms of volume and damage done to our nation’s economic future. The Chinese intelligence services that conduct these attacks have little to fear because we have no practical deterrents to that theft. This problem is not going away until that changes.” — Mike Rogers, Former House Intelligence Committee Chairman
“All of our nation’s IP is being stolen as we sleep. Literally. And not by some 2-bit hacker, but by countries that say they are our friend…but are paying hackers in their country to steel our best IP and hand it to their companies to gain a competitive edge. We had better wake up and act right now. It truly is grand theft USA, and it scares the hell out of me.”—Kevin Surace, CEO, Appvance
2 On the INVNT/IP Consortium
“The best non-classified briefing on China I’ve ever heard.”—Sir Richard Dearlove, KCMG OBE; Former Head of the British Secret Intelligence Service; Master, Pembroke College
“You are addressing a rich problem of strategic proportions – and it will take all the executive bandwidth in the USA to prevent nation-sponsored theft of IP.”—Vice Admiral Mike McConnell, Senior Executive Advisor, Booz Allen Hamilton; Former Director, National Security Agency
“I’ll do everything I can to help INVNT/IP.”—Kevin Mandia, SVP and COO, FireEye; Founder and Former CEO, Mandiant
“INVNT/IP is doing God’s work.”—Scott Taylor, Executive Vice President, General Counsel, and Corporate Secretary, Symantec
“I have talked with everyone involved with this problem. No one knows more about China’s IP theft practices than [INVNT/IP CEO] Mark Anderson.”—Kevin Swailes, Executive Leader, Global Intellectual Property Protection Center of Excellence, General Electric
“INVNT/IP was the first to bring this critical problem to Washington’s attention....”—Richard Marshall, CEO, XSES; Former Director, Global Cyber Security Management, National Cyber Security Division, Department of Homeland Security (DHS), by special arrangement between the director, National Security Agency (DIRNSA) and the Secretary of DHS
3 Critical Acclaim for Theft Nation:
“Brilliant work.”—Richard Marshall, CEO, XSES; Former Director, Global Cyber Security Management, National Cyber Security Division, Department of Homeland Security (DHS), by special arrangement between the director, National Security Agency (DIRNSA) and the Secretary of DHS
“China’s economic model is laid out better in this paper than in any other place I’ve ever seen, with all of the moving parts – an incredible accomplishment.” – Larry Smarr, Founding Director, Calit2 (a UCSD / UCI partnership)
“The issues that Theft Nation deals with will shape not just the business environment of today and tomorrow, but literally geopolitics itself. They cut across everything from the competitiveness of individual firms to the future of both China and the US. It is a core matter that the Consortium has taken on. Well done!”—P.W. Singer, author of Ghost Fleet: A Novel of the Next World War and Cybersecurity and Cyberwar: What Everyone Needs to Know
“You do a strong job of marshaling relevant information to make the case that the Chinese national program is new and different in its scale, scope, aggressiveness and – above all – in the degree of state orchestration.”— Bill Janeway, Author, Doing Capitalism in the Innovation Economy; and Managing Director, Technology, Media and Communications, Warburg Pincus
“This is great work.”—David Cox, CEO, MiMTiD
“The best overview of a big problem I have seen in years. This paper is a sure wake-up call to those still asleep.”—Kevin Surace, CEO, Appvance
“The pirates of the planet – and this includes some nation states – are using economic espionage to alter the balance of power among nations and undermine the competitiveness of US businesses. INVNT/IP has researched this dangerous trend and started a dialogue that is seriously overdue if we are to protect US national and economic security interests.” – Jody Westby, Founder and CEO, GlobalCyberRisk.com; and Columnist, Forbes.
4 Table of Contents
OVERVIEW
foreword 7
INTRODUCTION 10 EXECUTIVE SUMMARY 11
THE VALUE OF INTELLECTUAL PROPERTY 12 technology and the global economy 12 understanding wealth 12 national business models: a new age 14 cheap labor: the sole driver of growth? 15
MEASURING INTELLECTUAL PROPERTY 19 patents and pretense: substantive or junk? 19 going further: ip’s deeper role 21 defining value 22
CHINA UNVEILED 24 the chinese economy: the inception of global infomercantilism 24 indigenous innovation: a lasting policy 25 bogus banking: an artificial financial system 26 currency manipulation: “pegging” and china’s central bank 31 subsidies over substance 32 who needs profits? operating at a loss for long-term gain 35 legally blind: outlawing foreign competition 38 “the deadly deal”: western greed, chinese need, and how to be played for a fool 40
CASE STUDY: HUAWEI’S RISE 44 innovating theft 44 banking on support 50 low wages, low imports, low prices 51 exports away 51 market domination: sitting pretty 52 describing the loss: “tell me when it hurts” 56
A BROAD APPLICATION WITH BROAD IMPLICATIONS 60 the tip of the iceberg: publicly declared losses from chinese ip theft to date 61 numbers to remember 68
Appendices: 69 appendix a: the 402 sectors of the 12th mlp 69 appendix b: the invnt/ip attack database 79 appendix c: 7 memes to ignore 82 appendix d: methodology 85
citations 87 5
6 Foreword
In the post-Information Age, technology drives every sector of the global economy. Today, nations can best be described not by their politics, but by their business models, and so fall into two distinct groups: those that have chosen invention for increasing productivity and positive economic outcomes, and those that have based their national business model on stealing those inventions.
Unfortunately for Inventing Nations, and, in the long term, for the global economy, China has chosen the latter, which we have labeled “InfoMercantilism.” This paper describes, for the first time, how all of the major parts of this Chinese model are integrated into a single economic engine, what part Intellectual Property (IP) theft and forced IP disclosure play in making it work, and how these thefts are converted into global domination of targeted industries.
Although illegal in almost every sense, there is no doubt that the InfoMercantilist model works. It is not surprising that, when there are no police to call, bank robbers make out “like bandits.” And today, enforcement is the exception, which is the reason for this white paper.
The world needs to learn about China’s national business model, how it works, and what will happen to Inventing Nations if it continues unchecked. It is not enough to say “China steals,” or “China’s banks are not banks,” or other similar complaints, just as it is not enough for individual Cabinet-level officials – or even country leaders – to attack these individual transgressions through their own departments and countries.
Nothing that has been done to date, no matter how well-intentioned, has slowed China’s use of the InfoMercantilist model; in fact, China continues to ramp these practices while doing everything possible to keep its economic victims – its trading partners – quiet and at bay.
Legislators interested in solving this problem always (justifiably) ask for numbers. Having reviewed the best numbers available to Congress and the UK Parliament, we find the supporting research generally well-intended, but insufficiently informed of the connection between technology and economics, and of the focused negative results stemming from large-scale “InfoMerc” practices. The government-sponsored UK paper most often cited completely ignores the valuing of stolen crown jewel intellectual property (the most valuable type of IP), because this work is “too difficult.” And the most-cited US study applies a 6% across-the-board figure for damages, a practice subsequently (and properly) ridiculed in Congressional committee.
In this work, we take a different approach, one which matches that of China itself: we look at how China works, and then we examine, in detail, the economic effects to date of its efforts, specifically in the targeted economic sectors of telecom equipment, solar energy, and defense. In this way, decision-makers are offered a true understanding of what happens in every sector under attack, and the only question becomes: “Which sectors are next?”
Even more important, legislators and policymakers will have the opportunity to change their perspective on how to assess damage. Rather than looking at misguided, under-calculated annual averages, they can 7 look directly at total damage and damage per sector – which often reaches 100%. Total destruction per sector has an unending forward cost per year. In addition, this means that, with virtually every sector targeted and many sectors slated for action per year, Inventing Nations can count on a growing number of whole industries vanishing from their shores every year.
Here are a few helpful figures from the paper’s research:
ՖՖ 1.8 Million: Global jobs permanently lost in the telecom equipment sector alone resulting from Chinese InfoMerc practices
ՖՖ $3.5 Trillion: Global losses in just 3 sectors (telecom equipment, solar energy, and defense), 2003-2013
ՖՖ $2.27 Trillion: US losses in income revenues in just 3 sectors, 2003-2013
ՖՖ $8.5 Billion: Perpetual, annualized US losses in personal income and payroll tax revenues for two companies in one (telecom equipment) sector
What is missing, then, from current damage assessments stemming from state-sponsored theft of crown jewel IP is:
ՖՖ The often-complete destruction of sector leaders;
ՖՖ Terminal damage to second-tier leaders, resulting in sale or merger;
ՖՖ Subsequent global domination of the sector by Chinese “champions”;
ՖՖ And the massive economic damage, per sector, suffered by inventing companies and nations as a result.
When China’s politburo targets and moves against an economic sector, it is often destroyed – with a state-owned or state-sponsored Chinese company ending as a monopolist winner. So far, the Standing Committee of the Politburo has targeted 402 global economic sectors, and it is moving against them aggressively (see Appendices).
There is a solution to this challenge, one that is simple to understand but difficult to achieve: first, the cost of these thefts and practices must be made larger than the revenues they generate. This is a simple calculation that Japan was forced to make earlier, with good success. And second, this cost escalation for theft can only be achieved through cooperation: between departments, between parties, between companies and governments, and between countries.
If this paper seems strong in its approach or language, we would demur and say, if we are correct, then it is not strong enough. Nothing less than the global economy, and the innovation that drives it, is at stake. The world’s largest nation has chosen IP theft as its prime economic driver, and the damage is already massive and obvious.
8 We have briefed and consulted with the following agencies and groups on this material, and appreciate the time and comments they have made in informing this research:
United States:
The White House The NSA The CIA The State Department The Department of Justice The Department of Homeland Security The Office of US Trade The FBI Other groups and individuals
United Kingdom:
The Cabinet Minister’s Office The Secret Intelligence Service (MI6) MI5 BIS GCHQ House of Lords Other groups and individuals
Australia:
Ministers of Broadband and Commerce Prime Ministers
Corporations
INVNT/IP consists of both government networks and corporate members. All of our corporate members, among them many of the world’s top technology companies, are “black” so as to avoid direct retribution by China.
We want to state clearly that the ideas shared in this paper are ours, and ours alone, and do not in any way represent the thoughts or beliefs of those we have briefed or consulted with, or others who have contributed to our research and findings. We are solely responsible for this work and its content.
Mark Anderson, CEO, INVNT/IP Friday Harbor, Washington, 2015
9 Introduction
Since the inception of the Industrial Revolution, technology has played a widening and well-documented role in the global economy. Due to the continuing relevance of Moore’s law, human innovation and ingenuity have led to advances in science and technology previously unimaginable. One of the natural results of such an advance in knowledge is a concurrent increase in economic output, leading to the enrichment of those nations that excel in fields of innovation.
With the onset of the latest millennium, the era of interconnection associated with computing and the Internet is in full swing. If the door of innovation leads to economic prosperity, it is hinged on the knowledge mentioned above. The linchpin of that knowledge is the control and ownership of information about technology in the form of crown jewel intellectual property (IP).
Today, the global economy is dependent on technology, and crown jewel IP is its asset. International market competition has changed. More than at any other time in history, intellectual property is what determines success, be it that of individuals, regions, or nation states.
While most nations understand this concept well, a few have been quicker to understand with clarity the repercussions of this shift. Those that see that crown jewel intellectual property is tantamount to economic success – and have subsequently created their own – have developed the most innovative technologies known to man. Others have seen this truth as clearly, but for a range of reasons have been unable to develop their own knowledge. A select few have developed a new form of national business model to address this intellectual property gap – a national business model that SNS refers to as InfoMercantilism.
The government of the People’s Republic of China (PRC) has made a major shift from economic Communism to InfoMercantilism. As with mercantilism, InfoMerc seeks advantageous imbalances in trade and production. It does so, however, with the pivotal addition of a new and dynamic strategy: stealing IP to fuel its own national economy. In China’s case in particular, innovation occurs in the guise of so-called “digestion” (theft) of intellectual property that is actually stolen and/or extorted from competing nations. At a time when technology has moved into the position of driving every sector of the global economy, the largest country in the world has adopted a national business model based on stealing technology.
This system threatens the national economies of every inventing nation, company, and individual, as well as the system of rewards to creativity that allows for the further realization of potential.
10 Executive Summary
This paper offers an exploration of three factors:
1. Economic success is based on information in the form of crown jewel intellectual property (IP).
2. A strategic economic model designed to steal IP and achieve competitive success in every market represents a critical threat to the global economy.
3. InfoMercantilism is currently affecting the economy of every inventing nation through loss of market share, return on investment (ROI), GDP, and employment, particularly due to the actions of the People’s Republic of China.
The contents of this publication follow the pneumonic SAD, which succinctly describes the InfoMerc agenda:
ՖՖ Steal: InfoMercantilism is fueled by the theft of crown jewel IP as the initial strategy for accruing value. ՖՖ Amplify: Through a system of top-down economic manipulations and protections, the value of stolen IP is incorporated into “national champion” firms with unlimited government support. ՖՖ Dominate: These firms proceed to sell internationally at below-market prices with illegal trade practices, eventually dominating the chosen global market.
The repercussions of these factors are extreme. The economic cost of competition with such a model has to date been measured improperly as an addition problem: an attempt to find thousands of small losses over years and calculate their sum. However, what is being stolen is not measurable by the countless individual bodies of intellectual property lost, but rather by the loss of the combined potential prosperity that property represents. Loss of market share can occur naturally in competitive environments; total loss of market share occurs through an economic trade war. The former results in the regular economic highs and lows of participating in global competition. The latter is capable of causing the economic collapse of entire nations.
The health of the global economy is at stake, and those who invent are under attack. The battlegrounds can be surveyed through the fates of firms and their innovative potential: as IP casualties increase, firms, or “battles,” are lost.
The scope of the conflict, however, is much broader. Innovative national business models are at risk, and a theft-based totalitarian system is on the rise. The damage assessments in the work presented here show that the effect of Chinese InfoMercantilism on the United States economy to date is USD 2.27 trillion in losses in just a few sectors. Globally, our selected estimates sit at USD 3.5 trillion in the last 10 years; the full figure is far larger. The re-allocation of USD 75 trillion in global economic prosperity is being decided, and to date the rewards are increasingly going to one actor playing a zero-sum game.
11 The Value of Intellectual Property
Technology and the Global Economy
It has long been speculated that technology is a deciding factor in the global economy. While technology and innovation have played a major role in economic success since the beginning of the Industrial Revolution, it wasn’t until the 1950s that technology’s pivotal role was highlighted by Nobel Prize– winning economist Robert Solow’s work with growth models.
Solow was the first to show that technical advances represented the largest factor in economic growth. His decisive work showed that 80% of the increases in productivity that occurred between 1909 and 1949 were attributable to technical advances.4 Today there is no doubt that technology now drives the global economy. In the words of Robert Hormats, former under secretary of state for Economic Growth, Energy, and the Environment:
The trend continues today. Modern economies are built on innovation. According to a recent Department of Commerce study, America’s knowledge-based industries accounted for 35 percent of US GDP and 61 percent of total merchandise exports in 2010.5
While 35% of US GDP is no small number, to be sure, it can be only the most conservative of estimates of technology’s sway. Indeed, imagine any good or service sold today, and it is clear that not one is delivered without the crucial influence of innovative technologies. From computerized lumber mills to fish-finding radars, from advanced mining equipment to handheld pagers used by hotel room-service staff, no sector of the modern economy exists outside the world of technology.
In short, the global economy and technological innovation are now irrevocably intertwined; productivity depends upon the intellectual property that innovation demands.
Understanding Wealth
While the massive role of technology in the global economy is beyond doubt, the degree to which innovation directly leads to wealth in the world is slightly more nuanced. “Technological innovation,” after all, is not simple to measure.
For one, a proper metric must be agreed upon when measuring “innovation.” Patents are frequently cited as a leading indicator of innovation – indeed, they correspond roughly with productive nations – but they are not a sole indicator*. Establishing proper metrics is an ongoing endeavor, and one that should be pursued further to establish more accurate best practices in the field.
Given the above constraints, the World Economic Forum (WEF) produces one of the most comprehensive reports on national innovation and future potential in its annual Global Competitiveness
* Flaws in using patents as a metric alone are discussed in the section titled “Patents and Pretense: Substantive or Junk?” 12 Index (GCI). Assembling voluminous economic and social data, the GCI describes an innovation ranking system designed to show which nations are the most successful innovators.6 The top 25 rated nations reveal an impressive concentration of wealth: as of 2012, those 25 produced roughly 42% of global GDP, or USD39.4 trillion at purchasing power parity (PPP)7 – all with a collective population of roughly 858 million at the time of the last census.8
Of course, numerous social factors are at play in calculating the “wealth” of a nation. “Wealth” can certainly be confounded by internal inequality. Without diving into the issue, it is not hard to see that while the factor of inequality is essential, the nations listed as top innovators hold a relatively high standard of living across the board.
Data Courtesy of the World Economic Forum, World Bank
GDP calculated at PPP per capita is useful in accounting for relative populations. After all, a massive economy in an equally massive population can obscure just how poor a nation really is. With the exception of two major outliers (Portugal and Malaysia, at 39th and 40th, respectively), the top 22 nations fall within the top 30 wealthiest when assessed by PPP per capita, with Israel close at 31st.9
Accounting for a few outlier data, it is therefore clear that the top innovating nations are also the world’s wealthiest.
The biggest confounding variable in this assessment is resource extraction. It is critical to note that the wealthiest nations not labeled as top innovators are highly resource-rich, primarily with oil reserves. The oil and gas industry in particular falls into the realm of technology dependence mentioned earlier in this paper. Indeed, as noted by former OPEC Secretary General HE Abdalla Salem El-Badri, technology is “at 13 the heart of all the great achievements in the oil and gas industries.”10
National Business Models: A New Age
For centuries, different national business models have competed for domination in the global political sphere. The most recent Cold War period of history may be readily defined as a period of intense antagonism between communist and capitalist economic models. While free-market capitalism seems to have emerged dominant, this is not necessarily the case.
The fall of communist models is too easily mistaken for a universal shift toward liberalization and free- market capitalism in former communist countries. While this may be the case in many nations with diminutive economies, a far larger and more important change has occurred. In one of the world’s largest communist economies – that of China – one competitive model has simply been replaced with another: InfoMercantilism.
Rather than adopt the liberal Western free-market policies that communism had failed to outproduce, the PRC’s late-1990s leadership searched for an adaptive happy medium. Following the success stories of East Asian nations such as Japan, South Korea, and Taiwan, the PRC adopted an InfoMerc national business model. While much has been said about neomercantilism in the academic world, this term fails to take into account the paramount role of information in this new approach.
Similar to the mercantilist national models common in the colonial era, InfoMerc is a new take on the concept of extracting resources from competing nations, but with a key novel component: in an InfoMercantilist system, these resources consist of intellectual property.
Nations using such a system use a web of policies to extract both tangible and intellectual inputs from their competitors. Once this effort is completed, companies are incubated in a domestic atmosphere of protectionism, unfair trade practices, abuse of international property laws, and massive subsidization. The result is the creation of locally grown companies ready to outcompete their foes on the international market. The end goal is global market sector domination.
In the early cases of Japan and South Korea, the effects of these policies were sizeable at the time, though they now seem relatively small. Japan used this InfoMerc model to create what is commonly referred to as “Japan Inc.,” beginning in the 1970s. The result was the transfer of at least six key industries to Japan directly from the West. With stolen intellectual property and business models, the steel, television, video recording and playback, DRAM, and automotive industries quickly shifted to Japanese shores, leaving Western competitors with high sunken costs, stripped of the benefits of years of research and development (R&D) investment.
Ironically, Japan’s economy suffered when South Korea followed a similar path, dragging the same industries across the Sea of Japan. Continuing the pattern, the role of victim has been passed to South Korea, which is now seeing losses in the telecom industry due to a far larger rising InfoMercantilist: China. 14 Here lies the key difference between InfoMercantilism yesterday and today. Whereas in the past, post- feudal nations were using InfoMerc to snap up a small number of key markets – with plenty of additional infighting between InfoMercantilists– today there is one key player. China is now pursuing dominance in not just a few, but all, markets. Increasingly, it possesses the ability to achieve such dominance.
The global economy is now defined by a new ideological and political conflict. Nations are fighting for shares of the global economy just as before, but the fray now falls along the lines of innovative free- market economies facing InfoMercantilist ones. Unfortunately, the InfoMercantilists are winning.
Many have questioned whether this circumstance is actually unfortunate. While it has led to the major enrichment of much of the world’s impoverished population, there are a number of reasons that this is not a neutral contingency, nor does it exist for the greater good:
1. InfoMercantilism still operates in service of the minority in control of exporting firms. As a system, it is no safer from exploitation and inequality than capitalism; indeed, InfoMercantilism thrives just as much or more in totalitarian political regimes.
2. InfoMercantilism delivers marginal benefits to the elite of practicing nations at the expense of all others. It is therefore the epitome of a zero-sum game, while liberal capitalist trade may lead to positive-sum conclusions.
3. InfoMercantilism focuses on the creation of corporations with no need for profit to the end of achieving market domination. These corporations then become inefficient global players that are able to undersell competitors. Valid competitors are left without recourse, and efficiency of production is sacrificed.
4. InfoMercantilism focuses on the theft and forced disclosure of intellectual property,thus removing the rewards system that drives innovation. While advocates of open-source IP solutions may be justified in arguing that sharing can lead to greater productivity, innovation is highly dependent on investment capital and intellectual exertion. Theft removes all possible benefits to innovation and prevents an innovation-rich global environment, as well as opportunities for positive, productive sharing.
Cheap Labor: The Sole Driver of Growth?
Understanding InfoMercantilism requires a clear picture of the modern global economy. This picture is defined by three key focal points:
1. The importance of innovation as the driver of wealth in the economy, along with the obvious importance of intellectual property in innovation;
2. The existence of a new global economic conflict between liberal, inventing economies and InfoMercantilist economies;
15 3. The nature of InfoMercantilism as a system of the theft and forced disclosure of intellectual property belonging to international competitors for use in export-oriented industries.
These focal points weave a clear picture of an attempted shift in IP ownership (which translates to wealth) from Inventing economies to InfoMerc economies. One common counterargument is that economies are not practicing InfoMercantilism, but rather are graced with such an abundance of cheap labor that they experience rapid growth. The correlation between cheap labor and growth in secure (e.g., safe for successful investment) economies is real and tangible. The difference between cheap labor and InfoMerc growth trends, however, is equally apparent.
In the last 40 years, both Japan and South Korea experienced economic growth that far outstripped their surrounding competitors, rapidly building high-wage, advanced national economies. Cheap labor disappeared as theft was augmented by the incremental improvement of stolen technologies. China today is on a similar trajectory as Japan in the 1970s and South Korea in the 1980s.
An examination of GDP growth by year shows a clear economic acceleration relative to cheap labor economies. Larger, contiguous developing nations are distilled from the International Monetary Fund’s (IMF) emerging and developing nations aggregate.† Availability of cheap labor, while a driver of growth, is not the InfoMerc story.
† The International Monetary Fund uses “Emerging and Developing Asia” as a category to analyze growth in the region. Taken as a group, the category is broadly representative, but includes a number of nations (Tuvalu, Nepal, etc.) that cannot be accurately compared with China. Taking the largest emerging economies in a roughly similar stage of development, the average percentage growth rate of Bangladesh, Cambodia, India, Indonesia, Lao, the Philippines, Malaysia, Thailand, and Vietnam for the past 21 years is 7.83% annual GDP growth. 16 While GDP growth rates can be instructive in exposing “the gap,” a deeper analysis reveals the extreme and dubious nature of China’s growth trajectory relative to its developing peers. Measuring real growth in Gross National Income (GNI) by the World Bank’s Atlas standard, which shows income growth in US dollars, a breakdown of growth by percentage between China and the strongest Asian developing nations shows the trajectory differences with ease.
17 That same GNI data, broken into a five-year period analysis beginning in 1983, shows the extreme differences in conglomerated periods:
Figure 2 Data Courtesy of the World Bank
Going further, a ten-year period breakdown shows the periodic differences between the groups during the last three decades:
Figure 3 Data Courtesy of the World Bank
If China’s InfoMercantilist system accounts for this massive gap in growth rates, what drives that system?
The key driver, on which all others hinge, is the ability to enter new markets in order to leverage InfoMerc advantages. This ability – an understanding of a product new to domestic production – is intrinsically the same as the key to wealth generation: intellectual property.
18 Measuring Intellectual Property
The difficulty of measuring the scale of intellectual property, its value, and the cost of its loss has been called out in an increasing number of works on the subject. Accounting for such complex economic factors can be challenging when approached from an angle of the painstaking summation of thousands of bits of data. Thankfully, this approach is unnecessary for understanding the scope of the problem. In addition, before the question of measurements or metrics is tackled in full, it is helpful to examine the groundwork of what makes IP.
Patents and Pretense: Substantive or Junk?
As mentioned above, InfoMerc nations experience growth not through invention and innovation, but rather through the utilization of the intellectual property of others. They are often rightfully challenged for failing to produce their own IP. China in particular has received much criticism for its lack of innovation and its regular theft of foreign IP.
The government of the PRC regularly responds to such accusations with citations of a burgeoning presence in the international patent community. But patents alone provide an insufficient understanding of innovation. Global patent data does, however, remain instructive in breaking down this defense and showing the true nature of InfoMercantilism.
While China does indeed hold many patents, sheer numbers are meaningless in the patent world.
It is helpful to know that patents fall into three categories: substantive, industrial design, and utility model. As simple as this may sound, the differences among these categories, and their degree of presence in an economy, are vital.
Substantive Patents: Substantive patents are those which patent a new invention; they relate to real inventions, previously unheard-of, which create new value by offering a truly novel product. These patents are difficult to obtain and require stringent examination by a patent office. They are what might be called the “meat and potatoes” of patenting, and are the most useful patent factor in illustrating a nation’s ability to innovate.
Industrial Design Patents: Industrial design patents are described by the World Intellectual Property Organization (WIPO) as “compositions of lines or colors or any three-dimensional forms which give a special appearance to a product or handicraft.”11 They often require little examination, but must be novel. As such, they are not an invention per se, excepting the invention of an aesthetic “look.” While they may be important to some industries, they remain extraneous to technological innovation.
Utility Model Patents: Utility model patents pertain to new uses for existing inventions. The patenting of a “new use” might sound counter-intuitive to what we think we know about patents. Indeed, this type of patent is not recognized in many inventing nations. It is, however, in China, and forms a critical part of the PRC’s judicial branch support of InfoMercantilism. Utility model patents require little to no examination and 19 are usually granted without fail.12 They are commonly referred to as “junk” patents and do not necessarily rely on any innovation.
China’s claim to large numbers of patents is accurate, but only by a definition so broad as to be useless. The topography of this patent group, however, is both disturbing and instructive, demonstratingin the relative lack of innovation in an InfoMerc economy the perverse usefulness of a junk patent system in achieving its ends.
WIPO 2013 Data
While China’s large number of patents in force by volume is noteworthy, taking into account the PRC’s massive population shows that inventing nations are producing massive numbers of substantive patents, and that the US produces almost five times as many such patents, with one-fifth China’s population. To paraphrase: The healthiest inventing nation is roughly 25 times more innovative per capita than China when grants of substantive invention patents are examined.
In stark contrast, China applies for approximately 90% of the world’s utility model patents, or “junk” patents. This statistic is more indicative of theft than of innovation. According to a 2010 report on Chinese patents by the US International Trade Commission (USITC):
Chinese inventors particularly focus on utility model and design patents, while US and other foreign inventors almost completely ignore such patents. Utility model and design patents are inexpensive and easy to obtain, as they are not substantively examined by patent examiners. Once a Chinese company has received such a patent, it can bring suit against foreign companies that manufacture similar goods in China or export them to China, or use the patent to defend against
20 infringement allegations. Some utility model patents obtained by Chinese firms are alleged to be opportunistic and predatory.13
“Alleged” implies uncertainty regarding the aggressiveness of this use of patents, but in reality there is little doubt. While the PRC only selectively releases information on its court proceedings, complaints of unfair treatment are rampant.
Going Further: IP’s Deeper Role
Though the importance of patents may seem relatively clear in terms of their effect on protection of intellectual property, the value of the IP of a company or a nation cannot be limited to patents alone. IP’s role in the global economy is more complex.
Intellectual property is defined by WIPOas “creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.”14 What this definition fails to include is IP’s remarkably dynamic nature. There are myriad forms of IP not frequently examined which nevertheless provide companies and countries with the ability to successfully produce, market, and sell goods in order to create and collect wealth.
As an example, imagine the quantities of dollars in wages, time, and direct funding involved in developing a successful business model; and imagine the other places to which that money could have been devoted – in economic theory what is referred to as the opportunity cost – and all of the possibilities therein. When an entity applies resources to create profitable knowledge, that knowledge becomes an integral part of the value of the products it sells and supports.
Companies pay heavily for R&D, market understanding, development of strategy, sales methods, and countless other knowledge-based intangibles that become part of the greater value of that business. That intellectual property sometimes requires years of sunken costs and expensive failures to develop. The integrated nature of such knowledge renders it impossible to sum in bits and pieces; its greater value is in its primary role in a company’s overall success.
Intellectual property is composed of patented inventions, but also much more. The obvious underlying lesson is that those who invest resources in pursuing better practices will outcompete those who do not. The global economy has operated on that principle since time immemorial. Unfortunately, it is now easier than ever to steal that investment and negate the rewards.
IP plays a central role in every advantageous behavior a company undertakes. Combined with a company’s physical and human capital, IP is the indispensable “third leg” to the stool of a successful business. Theft of IP on the scale that China is now perpetrating therefore does far more than pick the wallets of enterprises; it removes a major part of the national economy.
21 Defining Value
To date, intellectual property loss has been measured like other forms of theft: as a sum of the bits and pieces that make up individual cases. Numbers are cautiously assembled which show “tolerable costs” and lowball guesses which imply that IP theft does not offer 100% of the value of the associated product.15 This concept is dangerous, in that the value of IP does not lend itself to static measurement. Analogies have regularly been drawn with drug trafficking, piracy, and car accidents16 – comparisons that serve only to muddy the issue. IP remains a unique concern, and the qualities that make it so are readily apparent.
Intellectual property can hold the key to success in production, sales, pricing, business management – literally any aspect of a successful business qualifies. The factors that can be added up to account for the cost of theft run a broad gamut. Listed below are the largest of such factors.
It is important to remember that because of IP’s omnipresence in business operations, the damage is likely always higher than estimated, not lower.
ՖՖ Immediate value: The value of stolen intellectual property is often estimated by its owners: firms that admit to compromises. It is difficult to estimate the solid cost of lost IP, but the market price for the information taken is a reasonable starting point. Self-reporting, however, renders these figures unreliable, as there is a clear conflict of interest for CEOs who must minimize shareholder anxiety over losses.
ՖՖ R&D: Stolen IP is by nature the loss of investment in research and development (R&D). The difficulty of measuring R&D is defined by the fact that the R&D behind crown jewel IP is nearly all-encompassing. The Huawei case study below will help to illustrate this fact.
In short, if a company succeeds at competing in a market, the reasons are multiple. Typically, resources have been invested in the development of products, strategies, and understandings that all work together to make a great firm. When that information is stolen, the R&D spending that is invalidated can trace the entire history of the firm, reflecting myriad types of learning that preceded the theft. For instance, the value of a phone design is more than that of a current design iteration. It is the result of the developments in every iteration, as well as the customer service interactions that guided modifications, market research, advertising, and so forth. The entire firm is compromised by that loss, and with itall of the company’s R&D budget.
ՖՖ Jobs: A key factor in IP theft is the loss of jobs that occurs when a firm loses market share. While lost competitive advantage leads to direct job loss in a firm, it is also important to take into account the factor of job multiplication. When jobs are lost in one sector, a proportion of other jobs related to the industry disappear too, based on the “multiplier” of that job type. What is more, the decline of a single firm leads not only to lost jobs, but also to lost potential job growth, which serves as a job-loss multiplier in its own right.
ՖՖ Wages: Another important factor in summing losses from theft is wages. Like jobs, wages have a multiplying effect in the national economy. Higher-wage jobs per capita serve the economy to a greater degree; therefore, the measure of loss when it comes to intellectual property needs to take into account
22 the average wage of jobs lost.
All of these factors have been clearly underestimated in reports of IP theft losses to date. The embedded multipliers that make this problem so monumental are too often ignored, leaving estimates that establish a sense of overall wellbeing in the face of the literal stripping of inventing economies. An example of a more honest accounting for losses is given in the Huawei case study included in this paper. However, there is another way to examine the issue of measurement.
The difference between InfoMercantilism and inventing economies has been explained above. It is important to remember that this dichotomy is not meant to express the only economic activities taking place in the world today, but rather the most important trends affecting the global economy: its defining characteristics. In turn, the relationship itself has its own defining characteristic: pursuit of market domination.
InfoMercantilism presents a direct challenge to the concept of a competitive market. The alternative it offers is a dangerous one: government-selected firms are made to succeed above all others. The application of this principle to the global economy leads to the success of InfoMercantilist firms (and economies) over innovating firms (and economies). The principle therefore challenges market participation of any business not selected by a totalitarian government to succeed. In short, the existence of competitive firms is being threatened.
When measuring the effects of IP theft, it is therefore naïve to measure single acts. The goal of InfoMercantilism is readily apparent, so the milestones along the way are less important than the expected result. This is infinitely more so in the awkward circumstance of loss in a competitive market, wherein firms consistently conceal damage done. Under such conditions, information will always be obscure, and so understanding the broader trends is both essential and all the more difficult.
In summary, InfoMercantilism poses a challenge to the entire innovation-based economic world order. Far from hyperbole, this phenomenon can be observed daily in the news cycle. The direct translation of this is a challenge to market participation, as well as to future innovative behavior. The result is ongoing measurable losses to the national GDP of all inventing nations.
This may seem hard to believe; indeed, InfoMerc nations such as China appear to depend upon the difficulty many individuals have in believing a nation would pursue such an aggressive and subversive policy. It is easy to dispel public outcry in inventing nations when the prevailing view is that foreign national goals, surely, could not be so extreme. The consequences of ignoring a threat of this magnitude, however, make critical the need to bring the issue into the public eye.
23 China Unveiled
“The trouble is that China has never genuinely accepted the basic rules governing the world economy.” – Robert J. Samuelson, Columnist, The Washington Post17
China is on the move. The massive growth of the Chinese economy over the past few decades makes the nation stand out as a would-be role model, a rising star that has disproven the necessity of Western models in development. This image, while based without doubt insome factual foundation, is a distortion.
The Chinese Economy: The Inception of Global InfoMercantilism
While the government of the People’s Republic of China has shown immense initiative as an economic actor, the reasons for China’s success fall remarkably well into the definition of InfoMercantilism presented above. Bucking standards both domestic and international, the PRC has risen in a cloud of controversy, perpetrating thousands of directly attributed data thefts (though they are rarely disclosed in detail by security firms or victims) and playing a forceful and aggressive political hand to match.
As already stated, the origins of the InfoMerc model lie in Japan’s 1980s development strategy, which became known at the time as Japan Inc. Currency manipulation, IP theft, and illegal dumping led Japan to the forefront of the consumer electronics and auto industries. South Korea and Taiwan quickly followed suit, and soon all three were at the forefront of the world economy in the consumer electronics, auto, telecommunications, and computing markets.
Many have argued that this precedent shows the lack of a threat exhibited by China today. But not all economies are created equal. Japan and South Korea more or less destroyed market participation by innovating nations in many parts of the consumer electronics and auto markets, while Taiwan put serious dents in US dominance in the superconductor industry. None of these nations, however, targeted every industry, if for no other reason than that none of them had the capacity to do so.
The result of these behaviors by Japan, South Korea, and Taiwan was that all three sank industry participation in innovating countries, cost thousands of jobs, and eventually moved successfully into the high-value-added economic world. Ironically, these nations are now also suffering from the withering barrage of InfoMerc theft coming from the PRC. The damage their policies did was not easy for innovating nations to bear; nevertheless, it was not enough to threaten the global economy.
China, however, holds that power today. The nation’s size, totalitarianism, and unapologetic (indeed, state-sanctioned) attitude toward theft renders it a far larger problem than InfoMerc nations have ever posed before. Previous InfoMercantilists were smaller threats to individual markets; China as it stands today is a permanent threat to all markets.
24 There is a compelling difference between a healthy new player on the international economic scene and a destructive kleptocracy. The rise of alternative economic models should be celebrated according to the merit of their effects. The rise of InfoMercantilism, however, should be recognized as a process of aggression.
What makes such a Goliath tick? As a master of the art of InfoMercantilism, the government of the PRC has crafted new and ingenious ways of maintaining the balance of an unstable, high-growth economy on the fuel of others’ IP. With stolen know-how, new companies can move toward market domination using a ladder of amplifiers set up by the Chinese Communist Party’s (CCP) Standing Committee to facilitate and protect domestic growth.
These amplifiers are as elegant as they are dangerous:
Indigenous Innovation: A Lasting Policy
While earlier InfoMercantilists made great efforts to hide their behavior, the PRC has walked a fine line between discretion and flagrancy. Many behaviors are hidden, while others are polished to a patina of legitimacy that nevertheless fails to obscure an underlying intent to steal. China’s practice of “Indigenous Innovation” is of the latter category – the term itself coined at the plenum meeting that laid out China’s 12th Medium- to Long-Term Plan, or MLP.
That meeting announced the new policy as a strategy to “establish a coordination mechanism for introducing, digesting, absorbing, and re-innovating technology.”18 Such language takes a curiously biological tone, but does nothing to hide the fact that it describes a national business model designed to make use of the technology of others.
Indigenous Innovation is a complex, multifaceted policy doctrine. While the subject itself deserves – and has received – a large degree of wariness and careful attention in the media and governments of the free world, a few paraphrases explain the danger of this system for the purposes of this paper. According to the USITC:
China uses the web of Indigenous Innovation policies described above to create a legal envi- ronment “that enables it to intervene in the market for IP, help its own companies to reinnovate competing IP as a substitute to American and other foreign technologies, and potentially misap- propriate IP from US and other foreign companies as components of its industrial policies and internal market regulations.”19
The worrying language surrounding “re-innovation” only scratches the surface of the new vocabulary used by the government of the PRC to soften the true threat of IP theft. Other misnomers include “assimilation,” “co-innovation,” “cooperation,” and “exchanges” – all part of a national plan which states clearly that “foreign technology and know-how will play a key role in jump-starting Indigenous Innovation, and that the government must pursue national industrial policies designed to obtain and exploit this foreign information.”20
25 Businesses in China follow a few different routes to gather IP for this Indigenous Innovation program. First, and likely foremost, foreign firms are regularly forced through any of a variety of means to disclose their most valued trade secrets, “voluntarily.” Second, cyber theft allows Chinese hackers to steal unprecedented quantities of intellectual property without leaving China. (Many of these hackers have now been revealed by security firms, including Mandiant21 and CrowdStrike22, to be working directly for the People’s Liberation Army.) Third, the Chinese government has built a monumental, nuanced, and well-documented espionage system, referred to as the “thousand grains of sand model,” designed to use Chinese tourists, employees, and students abroad to directly steal IP in the name of national allegiance.23
Various aspects of the Indigenous Innovation “web” are categorized further below, but the gist of the policy is clear: Indigenous Innovation is InfoMercantilism in a policy bundle.
In the words of James McGregor, Senior Counselor at APCO Worldwide, the Medium- to Long-Term Plan’s Indigenous Innovation policy provides a “blueprint for technology theft on a scale the world has never seen before.”24
Bogus Banking: An Artificial Financial System
An economic system that builds businesses on stolen intellectual property requires large quantities of liquid capital. Kick-starting thousands of corporations in a formerly communist system, the transitioning PRC required money it simply did not have. Some of the necessary cash came from eager foreigners in the form of foreign direct investment (FDI), but the scale of development far outpaced FDI rates.
The Chinese banking system has a unique characteristic: it is controlled almost entirely by the state and manipulated for InfoMercantilist purposes. While there may not originally have been much investment capital in the country, centralized control of the banking system allowed party leaders to call for the creation of capital to meet the state’s needs. Even China’s initial public offerings follow this pattern. According to the 2013 US-China Economic Security Review Commission Report, the government “literally sets the prices of new shares based on how much funding it needs to raise, then directs other government-controlled entities to invest.”25
A particularly damning account, that same report notes that:
In China, banks provide over 75 percent of the nation’s capital…. By contrast, in most developed economies, banks are a source of less than 20 percent of capital, and in other emerging econo- mies, banks typically provide about 50 percent of total capital…. The five big, state-controlled commercial banks comprise the heart of the banking system, collectively accounting for about 50 percent of all deposits and loans.26
Furthermore, many of the other commercial banks in China are state-owned, though discreetly so. With utter control of the banking system, investment capital is easy to find. Any project that receives the blessing of the CCP can expect to enjoy a high flow of cash with almost no strings attached (excepting
26 state influence). The system is set up so that:
The incestuous relationship between the government; the large, state-owned policy banks; and their state-owned commercial cousins provides borrowers a considerable benefit: artificially low interest rates.27
Data Courtesy of Subsidies to Chinese Industry, George and Usha Haley, 2013. P. 6.
Bad loans being bad for business, the PRC at some point realized that no one would be interested in investing in a financial system built on fake value, and in 1998 began hiding these loans off the books in what are called Asset Management Companies, or AMCs. These AMCs serve one purpose: to conceal and “restructure” the immense degree of bad debt.
According to Ann Stevenson-Yang, co-founder of J Capital Research, these AMCs “seem to be virtual holding tanks where the debt doesn’t stay and doesn’t depart either.” It has been noted that they may be insolvent. While AMCs hide bad loans, financing “vehicles” help government banks create more. This has led to an alarming situation wherein by 2012 “outstanding loans to local government financing vehicles reached an estimated RMB 9.2 trillion ($1.4 trillion).”28 These “vehicles,” often known as Wealth Management Products, are simply a shadow banking rollover system for government- mandated bad debt.
27 Much of this takes place alongside a very clever, very dangerous system of other rollovers, which allow for loans to generate even more excess capital. By reducing required reserve ratios (RRRs), the government has found another highly effective way to produce something out of almost nothing. This practice, rampant in China, allows the consistent over-leveraging of banks, providing twice the available capital and a maximum of instability by comparison to Western banking systems – systems notably flawed in their risk management to begin with.
28 29 In short, China’s banking system is corrupt to its core. The government uses the system to create the investment capital it requires to fund national champion companies in need of cash. These companies can therefore move into production in a condensed period of time with a potent combination of massive, low-interest government loans and stolen IP.
This kind of support alone would change the international market, but the list of InfoMercantilist policies is far longer.
30 Currency Manipulation: “Pegging” and China’s Central Bank
“The PRC is notorious for its currency manipulation. And finally, it is well documented that the PRC government has developed cyber warfare capabilities and promoted cyber attacks against western companies, infrastructures, and government entities.The PRC is not an inherently trustworthy government.” –Sue Myrick, Former US Representative (R-NC)29
Another major tool of China’s InfoMercantilist model is currency manipulation. While some with high hopes or hidden agendas claim that manipulation does not occur, or is “improving,” such assertions are unsubstantiated. China “pegs” the Yuan (CNY) to the US dollar. Each day the People’s Bank of China (PBOC), China’s central bank, sets the exchange rate at a chosen rate with a band of 1%.30 While the scope of this band caused much excitement upon its first announcement, and later doubled, it stands in obvious, stark relief to a free market currency policy.‡
‡ While the diplomatic implications of accusing China of currency manipulation are serious, this paper is not concerned with political tactics of avoidance. The very definition of the PRC’s currency policy is manipulation. In the words of ITIF president Robert Atkinson, “many in the Washington trade and foreign policy establishment will assert that any efforts to roll Chinese mercantilism will lead to a destructive trade war. But the trade war is already more than a decade old, and China has fired virtually all of the shots and done almost all of the damage. Working to roll back Chinese mercantilism is not protectionism, it is a defense of the global, free market economy.” ( Enough Is Enough: Confronting Chinese Innovation Mercantilism, p. 14).
31 As the exchange rate stands today, the CNY is pegged to the US dollar at a ratio of roughly 6:1. The facile argument has been made that while devaluation of the CNY hurts the firms of innovating nations, it benefits their consumers. The abundant problems with the assertion that an influx of cheap goods offers a net benefit to a population that is concurrently losing its employment are so glaring as to hardly merit discussion within the confines of this paper.
As illustration, the process is essentially the reverse of the classic English proverb “If you give a man a fish he is hungry again in an hour. If you teach him to fish you do him a good turn.” The proposition of exchanging the ability to create products for the privilege of having them at a low price is a dangerous one. Reversing the anecdote serves well to highlight for the inventing world that the success of InfoMercantilism would mean regular, abiding hunger.
This “Walmart enrichment” explanation aside, the issue of the net effect of currency manipulation remains to be accurately described. According to the US-China Economic Security Review, “China continues to manipulate the value of its currency, the RMB, to achieve a competitive advantage with the United States. China also continues to follow mercantilist policies to foster a trade surplus with the United States.”31
This competitive advantage is multifaceted. First, it adds to the sum of capital being hedged by the PRC to back its firms on the international market; the undervaluing of the currency can be directly calculated in estimates of below market pricing, as the exchange rate makes Chinese products less expensive per transaction.
In short, the artificial undervaluation of the CNY acts as a direct subsidy to domestic Chinese firms looking to undercut international pricing. The emphasis on exporting firms occurs at the expense of a population with lower relative wages and less access to imported goods. In the words of Robert Atkinson, president of the Information Technology and Innovation Foundation (ITIF), “China’s competitive undervaluation is a de facto subsidy to all exports and tariff on all imports and it lowers global economic welfare.”32 Many estimate that the Yuan is undervalued by as much as 40%33, while domestic price and wage effects are difficult to track in detail.
Subsidies Over Substance
“The ‘export base’ program provides export subsidies such as cash grants for exporting, grants for research and development, subsidies to pay interest on loans, and preferential tax treatment. WTO rules consider export subsidies so trade distorting that they are prohibited outright.” – Office of the United States Trade Representative34
A third major contributor to China’s InfoMercantilist success is subsidization. Although China has acceded to the World Trade Organization (WTO) and is breaking trade law through its high degree of export subsidization35, there have so far been few major consequences for this behavior in a WTO litigation system that is slow to respond and weak in its potential applications. As with currency manipulation, these export subsidies create a massive advantage for Chinese firms on the international
32 market. As is also the case with currency manipulation, subsidization hurts foreign firms and threatens jobs in innovating economies.
While some subsidies, such as the current Chinese subsidies for steel36, may be defended as a way to maintain core industries in times of economic downturn, there is surely more to the story. Subsidies of this nature also allow China to maintain its system of international market domination through subsidized overproduction, which leads to dumping on international markets and aggressive removal of competition from market participation. Indeed, in its 2014 indictment of Chinese hackers, the US Justice Department noted that even the steel industry in the PRC “received unfair subsidies from China and ‘dumped’ billions of dollars’ worth of steel into US markets at prices below fair value,” to which the Department of Commerce responded with countervailing and anti-dumping duties.37 This kind of trade war creates a veritable “race to the bottom.” Competing firms would have to follow suit with production and pricing in order to survive, leading to massive inefficiencies in global production and the necessity for producers across the board to adopt similar InfoMerc policies; such a contingency would harm the global economy, and with it, the global population.
This is normally where the WTO would step in. While the US filed trade cases against China in 200738 regarding auto industry subsidies, China continues to subsidize countless industries in which the government of the PRC desires to dominate the global marketplace. In the 2007 WTO agreement that followed the disputes, the end result became a cut for subsidies to foreign, but not to domestic, companies operating in China.39
By turns “outsmarting” and avoiding those who would influence domestic policy from abroad, the government of the PRC has maintained its programs on an accelerated basis. Subsidies are currently in place that promote a range of industries as broad as paper40, automakers41, agriculture42, pharmaceuticals, fuel, food companies, and building supplies43, among many others. Subsidization occurs in a number of forms beyond simple financial support, including greatly underpriced inputs for production.44 Far from decreasing, industrial subsidies are growing in size, up at least 23% in 2013.45
33 §
The scale of subsidies in China is increasingly disconcerting given the effect these measures have on global trade. Simply stated, despite WTO accession, the government of the PRC continues to increase subsidies annually. The sweeping nature of these subsidies is entirely unique to the PRC. To again quote Atkinson, “According to Caing statistics, over 90 percent of listed companies in 2010 were granted government subsidies.”46
Ongoing subsidization – paired with the Chinese banking system’s de facto subsidies through apparently unlimited, no-consequence financing – threatens the survival of firms competing in the global economy based on the merit of their products and services.
§ Much of the subsidization labeled in light blue as “Innovation & Technology” here goes to projects ordained by organizations such as the National Development and Reform Commission (NDRC), the China Academy of Sciences (CAS), the Chinese Academy of Engineering (CAE), the Ministry of Industry and Information Technology (MIIT), the Ministry of Agriculture (MOA), the Ministry of Personnel (MOP), the Ministry of Education (MOE), and the State IP Office (SIPO), all described by Mulvenon et al. as involved in “identification, recruitment, and exploitation of foreign science and technology across a wide range of inter- agency coordination groups, ministries, and industrial policy commissions” (pp.59-61). To paraphrase, these organizations are often subsidized to categorically pursue theft of foreign IP. 34 Who Needs Profits? Operating at a Loss for Long-Term Gain
The subsidies and supports that so rigorously hold up Chinese firms have far-ranging impacts on the pricing of goods on the international market. The most notable of these impacts is the lack of a need for profits among those who benefit from such programs. In an innovating economy, a firm must generate a profit in order to stay afloat. While many theorists have rightfully criticized the short-sighted drive for consistently high profit margins in Western economies, this phenomenon is distinct from the need to “break out of the red.”
Put simply, achieving a profit represents a confirmation of a business model. A firm, when profitable, is a sustainable one. The stability represented by profitability includes the assurance that the firm can continue to pay employees, provide jobs, and supplement the national economy. Competition with a firm that has little or no requirement to profit is, again, a race to the bottom.
It is clear now that Chinese firms have little or no profit requirement. In fact, many firms literally list their subsidies as profits; these subsidies can account for more than 100% of a firm’s total profits.47 The outcome is an economic chokehold. Below-market pricing turns the global marketplace into a killing floor for viable businesses. High firm mortality will continue as long as this support continues, with predictably dire consequences.
In the Chinese solar industry (embroiled in controversy around blatant IP theft48), massive financing by domestic banks and the issuance of bonds for sale to government entities – the Chinese brand of the bond market – led to the continuing existence of companies selling far below market price.49 As innovative companies around the world have declared bankruptcy over the past decade, many in China’s solar industry have continued to “succeed,” bolstered by government support. Eventually, the European Union and the United States placed anti-dumping tariffs on photovoltaic cell imports from China,50 but not before countless companies had shut their doors.51
It is undeniable that this loss of companies was in part mirrored in China, and due in the West to startup attrition when the sector’s venture-capital bubble burst. It is also undeniable that China’s venture capital comes almost entirely from government sources, and that countless companies received doubled-down support in the face of repeated quarterly losses.52 These companies continue to sell solar panels at below- market prices.
While the EU seemed to be on track to follow the lead of the US in tariffs on Chinese panels, it is now clear that the agreements signed between the EU and China were a complete rout. EU officials seem to have signed a deal allowing China to continue the process at a slightly higher price with guaranteed European market access, and even these strictures (which “punish” unfair trade practices by allowing guaranteed market participation in subsidy conditions) are set to expire in late 2015.53
While the EU continues to experience the regular loss of green tech firms, the list of industries beset by similar conditions goes on and on. An in-depth explanation of the below-market pricing takeover occurring in the global telecommunications equipment sector is outlined in the “Case Study: Huawei’s 35 Rise” section below. What is important to note, however, is the breadth of these occurrences. Those interested in whether these InfoMerc policies and pricing affect their own sector may refer to Appendix A.
Allowing firms to operate indefinitely without any need to generate profits is a foolproof way to achieve the market domination that InfoMercantilism seeks. The difficulty of sustaining this continuous sacrifice of capital is outweighed by the potential long-term profitability of monopolizing entire industries: the financial benefits of IP theft.
IP THEFT EXAMPLE 1: SolarWorld AG
VICTIM/PERPETRATOR INDUSTRY METHOD LOSS
SolarWorld AG/ PLA Photovoltaic Cells (Solar) Cybertheft Unknown
In 2014 the US Justice Department indicted 5 hackers working for the China’s People’s Liberation Army (PLA). The military officers had stolen countless documents at the behest of the State, including a large number that were focused on economic espionage. Included in the case was Wen Xinyu’s theft of SolarWorld AG intellectual property. Wen hacked into SolarWorld’s servers, downloaded thousands of emails and files from the firm’s executive staff, and stole large amounts of American IP, including PVC designs and information that would allow the Chinese to Courtesy of the Federal Bureau of Investigation anticipate American regulatory action.54
Citing overwhelming subsidies and below-market pricing, the United States and Europe have sought to apply anti-dumping tariffs on Chinese photovoltaic products in ongoing trade disputes.55 5657 The difficulty of competing with such low prices for panels coming out of China is highlighted by the fact that much of the technology is, as it turns out, stolen.
36 Creating Market Dominance
Figure 4 Data Courtesy of Renewable Energy World
Figure 5 Data Courtesy of Statista
37 Legally Blind: Outlawing Foreign Competition
All of the behaviors described above serve to support Chinese firms at home and promote international market domination. The firms that benefit from these policies have started, however, in domestic markets. While currency manipulation ensures that international markets are advantageous for businesses, massive loans offer an advantageous position to hand-picked “national champion” firms. Domestic firms that would normally struggle to gain even local market share in the face of foreign expertise are pushed along with stolen IP and other government assistance. Even so, creating internationally dominant firms from nothing requires one more major factor in the Chinese model: judicial protection.
While foreign firms are encouraged to do business in China for purposes of the forced disclosure of IP, competition from foreign firms might unhinge the InfoMerc model. The government of the PRC prevents this contingency through a legal system designed to maintain close control over the degree of success foreign firms can achieve. This system works through a twofold policy of supporting forced disclosure practices and legalization of IP theft through convoluted patent laws.
Forced Disclosure
Foreign firms operating in China have long complained of the heavy-handed strictures that mandate that they work closely with “local partner” Chinese firms and their employees, many with ill intent. Furthermore, technology transfer programs legally require that foreign firms hand over intellectual property in order to do business in China. This policy was explicit before China’s accession to the WTO and remains discreetly in place, counter to WTO regulations.58
The result of this policy is the regular loss of IP by companies that wish to operate in China. Further, “local partners” mandated by law in China frequently make off with the foreign firm’s IP, leaving them high and dry in competition with what was formerly a branch of their own business. This was the proven case with arrangements between companies such as Siemens, Alstom SA, Kawasaki Heavy Industries Ltd., and Bombardier Inc. in their collective dealings with China National Railroad59, one of the largest among countless circumstances of forced disclosure. In the words of Linda Dempsey, VP of International Economic Affairs at the National Association of Manufacturers:
Chinese rules often require companies to submit technical and functional features of their prod- uct as a condition of access to the Chinese market. However, the information furnished is not protected from further disclosure. In fact, in many circumstances, local agencies will provide the information to anyone who asks. This requirement and practice puts companies’ technical secrets at great risk of leaking to the public domain.
Manufacturers find it extremely difficult to bring action to enforce their trade secrets in China. Under Chinese law, it is not clear whether cyber-attacks constitute misappropriation. It can be difficult to bring action against former employees or others who misappropriate trade secrets
38 without actually conducting a business. In criminal cases, theft is determined not by conduct but by the consequences of the loss. The trade secret owner must show a loss or illegal profit of at least ¥500,000 (~$75,000 USD) – often an impossible hurdle.
But even if a trade secret misappropriation is actionable, proving it is extremely difficult. There is no discovery available and oral testimony carries little to no weight. Original written evidence is critical but difficult to obtain. Often the best way to secure evidence is through criminal prosecu- tion, though trade secret owners have little to no sway in the decision to pursue a criminal case. In addition to proving the misappropriation itself, many courts require the trade secret owner to prove that the trade secret was not in the public domain.60
To reiterate: foreign companies working in China must disclose their trade secrets on the basis of trust alone. When that IP is predictably stolen, those who enter court cases must disclose their IP anyway, thus making it subject to public domain. Plaintiffs are required to prove that thieves have made a certain profit margin to win the case (a difficult proposition when thieves can operate without profit indefinitely), and testimonies are disregarded. In the words of Gary Shapiro, president and CEO of the Consumer Electronics Association: “You can’t do business there without a local partner, and eventually they’ll figure out what you do and take it from you.”61
Legalized Theft
The other side to the legal framework of Chinese InfoMercantilism is actually an enabler of illegal activities. The patent phenomenon outlined earlier in this work often has more devious implications. China’s high emphasis on “junk patents” allows local firms to patent the intellectual property of foreign businesses. While the foreign entity was the first to patent the material both at home and internationally, these are ignored by the government, and the first patent in China is often held by a domestic firm.
This allows the domestic firm to press charges. It is therefore possible as a Chinese company to steal foreign IP, patent it in China, and file suit for the originator’s violation of your patent should they attempt to do business in the country. Such is the case in a number of suits against Apple Inc. in China, where the company has been forced to pay damages for a broad range of “IP,” including its own trademarks, which had been bought up in China and Taiwan separately62, as well as the Goophone patent trolling incident.63
Patent trolling and predatory patenting seem to be widespread in China, although data is constantly obscured. Those activities aside, true copycat companies can find solace in the legal framework of the PRC. ITIF’s Robert Atkinson splits no hairs on the issue when he explains: “The global patent system means that companies that file inventions first have protection from copying. The Chinese patent system is designed to get around this restriction.”64 This is perhaps unsurprising in a judicial system with a 99.9% criminal conviction rate65; the judicial branch is less a system for justice than an arm of the CCP.
39 “The Deadly Deal”: Western Greed and Chinese Need, or How to Be Played for a Fool
All of these factors boil down to what might be called “The Deadly Deal,” in which foreign executives sacrifice IP (and possibly the future success of their firms) for often temporary market access in China. Some executives from innovating economies are unaware of the theft and disadvantage they’ll face by doing business in the PRC. Many others, however, know full well what is in store and yet regularly open plants, hire employees, enter joint ventures, and proceed to find themselves stripped of their crown jewel I P.
There are many reasons for this behavior, but the underlying theme is the same: “In exchange for surrendering your IP, you will have access to the Chinese market.” Such is “The Deal.” The sheer size and opportunity of operating in China blinds companies to the fact that in so doing they will be robbed so effectively that while they may have a chance to generate a profit in the short term, they will lose money and their chosen market in the end. As this paper strives to show, there is overwhelming folly in allowing a firm’s intellectual property to be taken at a whim.
And yet the pattern continues. Speaking to a group of foreign businesspeople worried about market irregularities in 2009, former Vice Premier Wang Qishan stated, “I know you have complaints… but the charm of the Chinese market is irresistible.”66 Succumbing to alluring “charms” is a far cry from entering a healthy business relationship; “the Deal” is an exceedingly bad one for foreigners.
40 IP THEFT EXAMPLE 2: Siemens’ Shanghai Nightmare
VICTIM/PERPETRATOR INDUSTRY METHOD LOSS
Siemens & Thiessenkrupp/CNR Rail Systems Classic Espionage Unknown
In a series of joint-venture deals with China South Locomotive and Rolling Stock Industry (CSR), foreign firms Kawasaki Heavy Industries (KHI), Alstom SA, Siemens AG, and Bombardier Inc. allowed Chinese partners access to their crown jewel intellectual property.67 Expecting high returns during China’s rail buildout, these companies contracted Chinese firms to produce domestically for joint- venture projects and domestic Chinese sales. They now find themselves in competition with CSR globally, and fast losing. Courtesy of Transrapid International
In the case of Kawasaki Heavy Industries, “[u]nder the licensing agreements with KHI, China’s use of the expertise and blueprints to develop high-speed railway cars was to be limited to domestic application ….”68 In the words of KHI employee Harada Takuma, who was part of the joint venture, “We didn’t think it was not risky. But we took on the project because terms and conditions under the tech transfer should have been binding. We had a legal agreement; we felt safe.”69
IP theft also played a major supporting role in China’s sudden jump into the magnetic levitation train sector. In 2004, Chinese engineers broke into the maintenance room of the magnetic levitation Transrapid system in Shanghai and took measurements of the train. The venture was originally a German-Chinese joint project involving German IP that had taken decades to develop; the Germans were left suspicious and unwilling to agree to technology
41 transfers with Chinese firms. Shortly thereafter, China became a producer of its own Maglev trains, with German interests pulling out.70
While Chinese officials argue that the trains are adaptations, the designs are far from original. The new Chinese patents, “remarkably similar” to those of their former Japanese and German partners, have been acknowledged by some Chinese engineers as “just standing on the shoulders of giants.” 71 While such language is vague, one Kawasaki executive clarified the issue, stating:
“Claiming most of the recently developed bullet trains as China’s own may be good for national pride… but it’s nothing but deceitful propaganda…. How are you supposed to fight rivals when they have your technology, and their cost base is so much lower.…”72
42 Creating Market Dominance
Figure 6 Annual Financial Reports, Morningstar
Figure 7 Annual Financial Reports, Morningstar
43 Case Study: Huawei’s Rise
“Strategic sectors are those considered as core to the national and security interests of the state. In these sectors, the CCP ensures that ‘national champions’ dominate through a combination of market protectionism, cheap loans, tax and subsidy programs, and diplomatic support in the case of offshore markets. Indeed, it is not possible to thrive in one of Chinese strategic sectors without regime largesse and approval […] Every large company operating in these strategic sectors is required to receive and implement political directives from the relevant ministries (in the case of telecommunications, the two most prominent would be the ministries of state security and commerce.)”73 – Dr. John Lee, Michael Hintze Fellow for Energy Security and an Adjunct Associate Professor, University of Sydney
When it comes to big Chinese businesses, one in particular has had a remarkable rise through the domestic and global ranks. Huawei has come to represent one of China’s greatest success stories. From its founding in 1987, Huawei has shifted from being a small-time switching company to one of the world’s largest providers of telecommunications equipment and, more recently, cellphones. Not coincidentally, the company also perfectly exemplifies the nature of China’s national business model.
Innovating Theft
With the exception of the PLA, Huawei stands out as holding what is possibly the most well publicized record of blatant, informed, and deliberate theft by a Chinese interest. The specifics of cases brought against Huawei stand on their own as eloquent examples of an individual firm using IP theft to accelerate growth.
Nortel: One of the most earth-shattering shifts in the telecom industry in the past 25 years was the strangely rapid early-millennium disappearance of Nortel, at the time Canada’s most successful technology firm. While many cited mismanagement as a key concern for the company, Nortel staff provided a different explanation for the company’s abrupt cessation of business.
Former Nortel chief of security Brian Shields blames a sudden onset of rampant cyber security threats from Chinese actors. The attacks perpetrated against Nortel led to a large number of breaches into the firm’s files for nine years, and large but unknown quantities of lost data, including the personal correspondence of its executives. Shields explained his theory that it was “on behalf of Huawei and ZTE and other Chinese companies that could have used this information to compete against us in the marketplace. It gave them a strategic advantage.”74
It has been noted that it was clear to many that Huawei was copying Nortel’s telecom hardware, and even its instruction manuals.75 While much of the Nortel story goes uncorroborated, it certainly follows the pattern Huawei has established. Whether the theft occurred at the hands of Huawei specifically or on behalf of the entire Chinese telecom sector, Chinese actors were the culprits, and Nortel – once one of the industry’s largest firms – is now a ghost; much of its R&D and business strategy now resides in mainland 44 China.
Motorola: In 2009, Motorola entered a lawsuit with Huawei via Lemko, a fledgling US telecom company that had recently been established by former Motorola employees. These employees not only began forming Lemko while under contract at Motorola, but they were also accused of using Motorola intellectual property to essentially create a carbon copy of Motorola advanced technology76. In total, the suit was filled with egregious violations of IP law which ran the gamut from knowingly stealing patented technology while under contract to building Lemko on that foundation and redistributing the technology via Lemko to Huawei, including in direct emails to Huawei founder Ren Zhengfei brazenly labeled “Motorola Confidential Proprietary.”77
That Huawei would be involved in opening a new R&D facility across the street from a company in order to hire its former (or current) employees and attempt to benefit from disclosure of proprietary information is actually par for the course. Huawei’s first overseas R&D center was opened in Stockholm, Sweden, just down the road from Ericsson offices, where it began hiring workers with “10 years of experience or more.”78
In 2011, Huawei countersued Motorola in the middle of the latter’s disintegration, halting the impending purchase of Motorola Mobility by Nokia Siemens Networks. Motorola was therefore forced to trade settlements out of court with Huawei. After suffering major IP theft at the hands of the Chinese firm, the coup de grace was complete; Motorola couldn’t finish falling apart without Huawei’s consent.
Cisco: At around the same time as the Motorola theft allegedly took place, router giant Cisco found itself “producing” routers under Huawei’s name. The case was so blatant as to serve as a dramatic illustration of IP theft: Huawei was selling copied Cisco routers and instruction manuals that still had the Cisco logo on them, and even contained the same typos.79 Furthermore, after settling and paying damages, Huawei later denied that any theft had occurred, promptingCisco senior VP, general counsel and secretary, and chief compliance officer Mark Chandler to write a fiery corporate press release outlining the facts of the case.80
T-Mobile: While the Cisco theft is hard to top in its blatancy, T-Mobile’s recent case may have done just that. Huawei was, until recently, a supplier of handsets to T-Mobile. As such, Huawei was granted limited access to T-Mobile’s Bellevue, Washington, lab for advanced product testing using “Tappy,” a touch- screen testing robot designed by the US firm. Use of the robot apparently did not satisfy, however; Huawei proceeded to go to great lengths in order to steal the technology.
These measures included, but were not limited to: forging access passes to the secured T-Mobile lab for additional employees; bringing spies from China and granting them access to the lab against the direct commands of T-Mobile staff; stealing parts from the robot; denying the theft; documenting and measuring the parts and showing them in a teleconference with fellow Huawei employees (and later returning them to the lab); and more. The degree of arrogance, lack of ethics, and brazen, devil-may-care behavior displayed by Huawei in this case is astounding.
45 From the case files:
Huawei abused its relationship as a phone handset supplier for T-Mobile to obtain access to T-Mobile’s robot and, in violation of several confidentiality and nondisclosure agreements, cop- ied the robot’s specifications and stole parts, software, and other trade secrets…. Huawei accom- plished this by obtaining access to T-Mobile’s labs without permission, by stealing parts of the robot, by recording and copying confidential specifications, by copying operating software, and by violating its confidentiality and trade secret agreements with T-Mobile.
These activities may have been easier to deny had Huawei employees not been caught on video surreptitiously stuffing parts of a proprietary T-Mobile robot into their briefcases.
The value of the products stolen by Huawei is difficult to assess, particularly given that the cases were settled out of court, but the results are notable. The story of Huawei is also the story of its competitors, and their story is now one of loss. Nortel and Motorola have ceased to exist – in the former case entirely (the firm remains in Chapter 11 bankruptcy proceedings), and in the latter in any recognizable, profitable form as a telecom equipment provider. Cisco’s legendary growth has stalled with the firm pushed from its chosen markets, and countless other telecommunications firms are now beginning to feel the pinch.
46 IP THEFT EXAMPLE 3: The AMSC Disaster
VICTIM/PERPETRATOR INDUSTRY METHOD LOSS
AMSC/Sinovel Wind Power Classic Espionage USD 4.8 B
In June of 2011, AMSC employees servicing a wind turbine in China noticed something odd: the Chinese turbine had AMSC software installed which the company had not licensed to its local partner, Sinovel. AMSC began an investigation, hiring private firms to search company correspondence and find the leak.81
As AMSC investigated, the details
of the flagrant theft began to Courtesy of Windpower Monthly come to light. One of AMSC’s own employees, Dejan Karabasevic, was directly recruited by Sinovel representatives Su Liying and Zhao Haichun to steal AMSC crown jewel IP over a period of years. Karabasevic took $1.7 million in payoffs, as well as an apartment in Beijing and, apparently, “access to women” in return for passing Sinovel AMSC source code and trade secrets. In a lawsuit filed in September 2011, the defendants were charged with using Karabasevic’s access to bypass encryptions placed on AMSC software in China, and then downloading the IP from a Wisconsin server via a German computer. 82 In Skype conversations from the case obtained by NBC News, Karabasevic says in conversation, “All girls need money. I need girls. Sinovel needs me.” 83 In 2013, the stolen IP was valued in court at USD 4.8 billion in outright losses alone. 84
No longer in need of AMSC’s products, Sinovel reneged on $700 million in contracts and $100 million in payments for goods delivered in 2011.85 Adding insult to injury, AMSC soon found its own products being sold in the United States at far lower prices.86 As AMSC’s CEO put it, the Chinese firm had paid Karabasevic to “kill my company.”87
While AMSC remains alive and struggling, the theft caused a monumental crisis at the American company. As Bloomberg notes: “Investors fled, erasing 40 percent of AMSC’s value in a single day and 84 percent of it by September. The company’s stock chart looks like the electrocardiogram of a person rushing toward white light.”88 AMSC revenues took a USD 210 million dive between 2010 and 2011, a 73% decrease, and have yet to recover.89
47 Figure 8 Data Courtesy of Yahoo Finance
48 Creating Market Dominance
Figure 9 Data courtesy of BTM Consulting, International Wind Energy Development World Market Update 2003, March 2004.
Figure 10 Data Courtesy of Energy Digital
49 Banking on Support
Like any Chinese firm of note, Huawei enjoys a healthy complement of government benefits. The PRC’s exporter-oriented financial system has kept the company afloat through hard times since the beginning. According to the company biography, Huawei’s founder, Ren Zhengfei (who has given only a single interview to the international press), retired from the military, tried his hand in other business, and “decided to establish Huawei with a capital of CNY21000 [roughly USD 5,642 at the time] in 1987.”90
As it turns out, however, Huawei is not a case of rags-to-riches success in the classic Western sense. In fact, the company has had a characteristically Chinese rise, filled with government and military support. According to the Far Eastern Economic Review, Huawei was founded with “a loan of 70 million renminbi ($8.5 million) from a state bank.”91
More particularly, Ren’s former role as a military communications officer likely had something to do with his selection to run a national champion business in that sector. As noted by Evan Medeiros, senior director for Asian affairs on the National Security Council, Ren was
A former director of PLA General Staff Department’s Information Engineering Academy, which is responsible for telecom research for the Chinese military. Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner. 92
Further, financial support has been forthcoming since Huawei’s founding:
In 1996, Beijing established an explicit national champion policy for the telecomm equipment industry to forestall future foreign domination, and it gave a direct nod to Huawei, symbolized by a personal visit and endorsement from then–vice premier Zhu Rongji. This opened the way for increased state support from entities such as the Chinese Construction Bank and later the Chi- nese Development Bank. Further, after promoting joint ventures in the area in the early 1990s, the PRC reversed course after 1997, not only terminating government loans for the importation of digital switching equipment but also levying tariffs on imported communications equipment. Within several years, aided by crucial contracts with the national railway systems and a number of provinces, Huawei had overtaken and passed Shanghai Bell, the joint-venture company that had initially dominated the Chinese telecom manufacturing market and was the source of key technology transfers.93
Predictably, Huawei may not have been able to become China’s top telecommunications equipment company, and then the world’s, without serious help from the CCP. Military ties most definitely led to the winning of large contracts throughout the company’s history. There are allegations that Sun Yafang, a former state intelligence agent, “used her connections at MSS to help Huawei through ‘financial difficulties’ when the company was founded in 1987.”94
The list goes on. It seems that Huawei has received a number of subsidies and government favors,
50 including “the Beijing government [having] paid Huawei $228.2 million for research and development during the past three years.”95 The company’s access to small amounts of capital as rewards and contracts, however, pales in comparison to the export financing afforded it by the China Development Bank. It has been pointed out that part of the advantage that Huawei holds in its bidding process is a mind-boggling USD 30 billion credit line from the bank (ZTE holds a credit line at USD 15 billion), allowing it to offer clients extremely low–interest-rate financing, as well as a two-year grace period before payments need even begin.96
Low Wages, Low Imports, Low Prices
The effects of currency manipulation on an internationally competitive firm have in part been discussed in the earlier section on the subject. However, Huawei benefits specifically in ways that deserve closer examination.
Currency manipulation provides what amounts to direct export subsidy for any Chinese firm. The low value of the CNY, particularly combined with export financing, allows Huawei to undercut prices further and win bids, in tandem with other policies that promote this objective. Low costs of inputs to production, including labor, land, and countless other subsidized inputs, help to round out prices far below the international market rate.
Huawei has also clearly benefited throughout its history from the protectionism that accompanies currency manipulation. Just as these policies emphasize export advantages, they make it difficult to import competing goods into China. This has reduced competition for small Chinese firms like Huawei in its past, allowing them to grow faster by shielding them from the reality of global markets.
In short, Huawei was able to grow in an environment protected by currency manipulation processes. This amplifying effect was compounded by the above policy benefits, allowing the firm to grow extremely quickly in the domestic market and prepare for a massive shift to exports. By the time Huawei was ready to enter the global marketplace, it was already set up to win.
Exports Away
With the right amount of government financial handholding, preferential contracts, and policy targeting domestic competition, Huawei was able to rise to the task of becoming China’s “national champion” telecommunications company. Primed with stolen intellectual property, the firm was able to devote would-be R&D money to further theft and leverage government funds and political support, creating an unstoppable exporting machine. All that was left to do in this InfoMercantilist success story was to break into the international market and rake in the winnings.
In the case of the United States, it has been specifically noted that China combines direct currency manipulation with reserve purchases of US dollars, and that “these reserve purchases act as a de
51 facto subsidy for Chinese exports into the US market.”97 While Huawei’s operations are restricted in the United States due to security concerns, they remain sizeable:
Since gaining a US presence in 2011, Huawei has reportedly partnered with 280 US technology providers, with total procurement contracts exceeding $30 billion, covering such items as soft- ware, components, chipsets, and services. In February 2012, Huawei announced procurement contracts with US firms worth $6 billion.98
These are domestic contracts with an opportunity cost to those firms that cannot compete with Huawei’s advantaged position. The expenses of a company like Huawei are across the board far lower than those in a free-market, innovating economy. Huawei’s dealings in the United States are restricted due to national security concerns. In other parts of the world, however, Huawei operates freely and with abandon, and the effect on bids and domestic economies is even larger.
Huawei’s exports were, of course, stimulated by the vast scale of export financing offered to the firm. The massive financing, combined with low prices from stolen IP, along with the factors listed below, allowed Huawei to bid internationally without genuinely competing for any contract. Undercutting competition by millions of dollars and years of free operation without payment, Huawei has won contracts for national network projects in Mexico, Brazil,99 France100, the UK101, and many others, operating from branches in at least 72 countries worldwide.102 This staggering underpricing of bids will be discussed in detail in the below section on market domination.
In short, by the time Huawei gained a foothold in the global marketplace, it was able to handily outcompete other developing world firms and, with the combination of the other advantages described above, even the leading global telecommunications equipment firms. The net result was the immediate winning of bids around the globe. The story of Huawei’s rise is now complete; the result so far is exactly what Huawei’s founding InfoMercantilist nation desires.
Market Domination: Sitting Pretty
Huawei’s movements in the past 20 years have been meteoric. It has shifted from being a small Chinese switching company to becoming a global distributor with over $40 billion in annual revenues: the result of InfoMerc strategies that eliminate the ability of competition to come close to Huawei bids. This has destroyed several leading innovating telecommunications equipment firms and damaged the rest.
Since Huawei’s entry in the international market, diversification has rapidly faded. Nortel and Motorola have ceased to be players at all. Nokia’s and Siemens’ shares have dropped, and the companies have merged their equipment sectors in an attempt to band together for survival. Alcatel and Lucent Technologies have done the same, becoming Alcatel-Lucent in 2006. Ericsson and Cisco have continued to grow, but both companies now face faltering growth, while Huawei and ZTE have stepped in as Top 5 competitors.
The below graphs show the harmful effects on diversity of an InfoMercantilist entry like Huawei’s. The
52 companies shown are those which reflect the damage done by the national champion firm. Cisco is not shown, being a still-healthy competitor. The company’s 2014 annual report, however, shows that Cisco has lost revenues of USD 4.08 billion since 2013 in its router, switching, and wireless segments. As a result, Cisco is now leaving the router market.103
Source: INVNT/IP Private Research
Source: INVNT/IP Private Research
The pattern is easy to see: Chinese InfoMercantilism has brought small, inefficient companies to the fore 53 using strong protectionist politics and myriad illegal methods. Innovative companies, some of which helped invent the sector, are failing, losing ground to the steady march of China’s national champions.
Looking at the chart above, it would be easy to conclude that Ericsson is doing well. However, like Cisco, the company is merely large and diverse enough to best resist an aggressive takeover. As Cisco has begun abandoning the equipment sector for higher-value cloud services strategies, Ericsson’s legendary growth has stalled. The fact that the companies were (at times literally) selling the same routers, but Huawei at a much lower price, renders the data here unsurprising.
IP THEFT EXAMPLE 4: DuPont Under Attack
VICTIM/PERPETRATOR INDUSTRY METHOD LOSS
Titanium Dioxide DuPont/Pangang Group Co. Classic Espionage Unknown Production
In 2012, former DuPont engineer Robert Maegerle and consultant Walter Liew, along with Liew’s wife, Christina, were charged with passing crown jewel DuPont IP to Chengdu-based Pangang Group Co. Pangang and its relevant employees were also charged, but documents could not be served due to lack of cooperation in China.
After receiving the go-ahead from the Chinese government in the ‘90s, Liew created USA Performance Technology Inc. for the purpose of stealing US intellectual property regarding patented chloride-route Defendant Robert Maegerle titanium dioxide production. This technology enables arriving at court. Photo courtesy of the Associated Press. more-efficient production of various TiO2 products, which can be used for a plethora of purposes, including aerospace technology104, and comprises a USD 13 billion global market. 105 Hiring a slew of former DuPont employees, Liew acquired a large quantity of patented DuPont intellectual property, for which he received more than USD 28 million in payments from Chinese government-owned Pangang Group Co.106
Pangang Group Co. net sales increased from USD 69 million when DuPont’s secrets were stolen in 2003 to USD 2.5 billion in 2013, a 2800% increase in 10 years (including mergers and acquisitions of other state-owned groups).107108109 Strangely, reported revenues for Pangang dropped 69% in 2012, when the legal case was brought.110 This behavior was mimicked in the solar market where, after dumping litigation began, “[s]everal Chinese solar manufacturers subsequently reported in SEC filings that … their sales revenues had decreased from 2011, and their net income and profit margins had dropped to five-year
54 lows.”111
DuPont, meanwhile, is spinning off its titanium dioxide venture as the result of pressure from Wall Street due to consistently lower (and more volatile) prices.112 Chinese prices of the substance have dropped drastically in recent years113.
Creating Market Dominance
The titanium dioxide sector remains dominated today mostly by large Western firms, particularly DuPont. Pangang’s reported USD 2.5 billion net sales in 2013 place it far ahead of other previously dominant competitors such as Huntsman, Kronos Worldwide, and Tronox, with revenues of 1.22, 1.73 and 1.92 billion, respectively.114115116 At first glance this appears to be a reasonably slow, predictable market shift. Pricing data, however, reveals the tumultuous effect of underpriced Chinese product hitting the world market.
According to Chinese industry analysts, “rutile TiO2 prices had fallen to RMB 13,000/mt by the end of 2013, down by RMB 3,000/mt or 18.8% compared with RMB 16,000/mt in early 2013, decreasing by RMB 8,800/mt or 40% from the climax of 2011.”117
Furthermore, these low prices are for higher-quality product than China has traditionally produced. Thus, lower pricing is more likely to affect global purchasing patterns and, therefore, global prices. According to Ramakanth V Akula, former president of the Indian Paints Association: “Over the last 3-4 years, even the large paint manufacturers in India are increasingly using TiO2 imported from China. While pricing has got to do a lot with this new trend, a marked improvement in the quality of Chinese TiO2 has made the case for it more compelling.”118
Meanwhile, world TiO2 prices experienced a sharp rise, as foreign producers backed down production and China increased capacity and production in turn, collecting the market share.
55
Figure 11 Courtesy of PRNewswire
Furthermore, while Chinese prices have increased again modestly since 2013, Chinese firms are seeing growth far beyond simple price correlation. From 2014, Chinese exports grew by 48.62%, with Henan Billions growing at a rate of 636.62%. Most of this growth is in sulphate process production (over 98% of the whole in China), but moving forward, “China will develop toward large scale and chlorination process.”119 Chlorination process production involves the IP stolen from DuPont, in the industry that DuPont is now strategically exiting.
Describing the Loss: “Tell Me When It Hurts”
While an attempt to measure the effect of InfoMercantilism on the global economy through a summation of damages would be futile, Huawei provides a unique opportunity to make a rough estimate of damages that can show a more realistic view. The factors surrounding its rise are so clearly an example of well-executed InfoMercantilism that the resulting market domination and loss of participation are readily attributed to unfair competition. What is more, narrowing our focus to one sector allows a less convoluted perspective of the kind of transition other sectors can expect. With this in mind, the following summation of telecommunications sector damages was compiled.
56 Telecommunications Equipment Sector Losses Since Huawei’s Entry
LOSS FACTOR QUANTITY
Lost Jobs 1,823,478 (607,826 professional)
Lost Wages USD 97.25 billion annually
Lost Revenues USD 80.13 billion annually
Total Annual Losses: USD 177.38 billion
Ten-Year Total: USD 1.77 Trillion
The Numbers:
These numbers are an estimate based on assessments of likely value. The intention is to provide an idea of the scale of losses in the industry, combining a number of oft-overlooked factors, such as multipliers and their wages. Numbers are based on the performance of firms Nortel, Motorola, Ericsson, Nokia Siemens Networks, Cisco, and Alcatel-Lucent from their peak numbers in the 2000s to 2013. Examining the rough losses, it should be clear that if the telecommunications equipment sector alone can see this much loss in a short period of time, the greater shift is indeed immense.
Lost Jobs:
This estimate is based on two factors, the first being the sum of jobs lost in the telecommunications companies in question between their peak employment in the 2000s and 2013 numbers. This shows the loss of jobs in the telecom sector since Huawei’s entry. Second, a multiplier of 5 is applied to this number, following UC Berkeley economist Enrico Moretti’s assessment of IT sector employment and multipliers. Moretti notes that:
With only a fraction of the jobs, the innovation sector generates a disproportionate number of additional local jobs and therefore profoundly shapes the local economy. A healthy traded sec- tor benefits the local economy directly, as it generates well-paid jobs, and indirectly as it creates additional jobs in the non-traded sector. What is truly remarkable is that this indirect effect on the local economy is much larger than the direct effect. My research, based on an analysis of 11 million American workers in 320 metropolitan areas, shows that for each new high-tech job in a metropolitan area, five additional local jobs are created outside of high tech in the long run.
[And] it gets even more interesting. These five jobs benefit a diverse set of workers. Two of the jobs created by the multiplier effect are professional jobs — doctors and lawyers — while the oth- er three benefit workers in nonprofessional occupations — waiters and store clerks. Take Apple, for example. It employs 12,000 workers in Cupertino. Through the multiplier effect, however, the company generates more than 60,000 additional service jobs in the entire metropolitan area, of 57 which 36,000 are unskilled and 24,000 are skilled. Incredibly, this means that the main effect of Apple on the region’s employment is on jobs outside of high tech.120
Lost Wages:
An aspect of job loss is, of course, associated lost wages. What is notable about China’s current InfoMerc trajectory is the shift toward high–value-added technology sectors. This calculation assumed an average USD 80k/year salary for lost jobs at the firms included, $60k/year for other professional jobs, and $40k/ year for non-professional jobs. The difficulty of assessing the value of lost unknown professional and non- professional jobs in varying geographic locations is high, so these figures represent an estimate.
58 Value-Added Increases in China’s Export Volume, by Percentage
Source: China’s Electronics Industry Yearbook; Statistical Yearbook of China Electronics Information Industry
This change from manufacturing to high-tech, coupled with InfoMercantilism, brings with it new dangers. The jobs being lost now have not only a high multiplier, but also high wages. Those wages themselves have high turnover value, as they can be spent in more places and have large reverberations throughout the economy.
This estimate therefore contains the average wages of lost multiplier jobs. However, providing some 59 assessment of this huge loss is necessary in an attentive summation of damages.
Lost Revenues:
The numbers here reflect the net change in revenues in competing firms and their telecommunications equipment divisions. These are run from the firms’ peak revenues to today’s numbers. In macroeconomic style, all of these estimates intend to examine the health of the industry since the entry of below-market pricing from an InfoMerc national champion.
Much like employment, a firm’s revenues have widespread effects for other companies in an economy. With a large firm, those revenues provide crucial contracts for hundreds or even thousands of other firms in their supply chain. If Motorola is the largest client of a paper company, a food services firm, and a plastics manufacturer, and Motorola fails, all of those companies lose revenue in turn as the destruction makes its way down the supply chain.
It is important to remember that participants in a value chain are at all levels of production, from resource extraction to materials production to assembly. An InfoMercantilist model therefore threatens countless firms and individuals around the globe, as large, free-market, innovative firms tend to employ other firms worldwide. It is notable that the protectionism inherent in InfoMerc policy also renders the newly dominant firm far less of a net gain for foreign firms in the value chain.
While an innovative firm may employ innumerable firms worldwide, Huawei’s world is protectionist: its production occurs domestically and benefits mainly Chinese firms. Further, at every level on the value chain these Chinese firms are following the same practices, homogenizing global production and transitioning from the diversity of an innovative, free-market global economy to a Chinese one.
A Broad Application with Broad Implications
The work summarized in this paper seeks to show the overall effects of the rise of InfoMercantilism. This new form of national business model has forever changed the nature of global trade and diplomacy. It has found its soulmate in the People’s Republic of China, a Communist country with much use for a centralized, politically controlled form of wealth acquisition. While it has been argued for decades that China’s cheap labor has led to its rapid growth, today there is little doubt that much more complex and damaging patterns are largely responsible.
One of these emergent patterns is the central role played by theft of intellectual property. Beginning with classic espionage and forced disclosure, this behavior has now become intertwined with the convenience and accessibility afforded by the permeation of all economic sectors by the Internet. With everything from data centers to toasters now logged in and turned on, the modern world is, so far, highly connected and barely protected.
This has led to what General Keith Alexander has described as “the greatest transfer of wealth in h i s t or y.” 121 Yet still the innovating world remains reticent, teetering on the edge of understanding the
60 issue. To reiterate: the purpose of this publication is to demonstrate that not only is intellectual-property theft the largest economic issue facing the world today, but it is also the fuel for a Chinese national business model designed to obtain wealth from the innovating world.
In this light, it is clear why China is responsible for 96% of global intellectual-property cyber theft.122 The national economy of the PRC, and the political survival of its leaders, depends on it. Referring to the “transfer” of technology from the United States to China, AMD senior engineer Jack Peng noted:
I think if we quit America and went entirely back to China, China’s development would halt. Even if it didn’t halt, it would certainly have limitations. For us, America is the base that will allow Chi- na to develop. If we stay here, or at least some of us do, we can always be chasing after the latest high tech that advances day by day at a dazzling pace.123
The Tip of the Iceberg: Publicly Declared Losses from Chinese IP Theft to Date
This paper has focused on the Chinese national business model, InfoMercantilism, and the illegal harm it causes to businesses and nations around the world. The individual case studies (particularly that of Huawei) help to show the way in which InfoMercantilism damages and destroys innovating companies. Many individuals and organizations have attempted to measure the annual losses that crown jewel IP theft create for victims;unfortunately, this issue does not lend itself to simple annual estimates.
Some losses are one-time occurrences: a design is stolen, and the cost of creating it is permanently and immeasurably lost. Damages caused to revenues may be annual, but losses of IP that have yet to be capitalized on by thieves are hidden, waiting in the wings as stored data or growing Chinese companies that will only eventually push their victims out of business. The Huawei case study in this work serves to show that lowball annual loss estimates in the low hundreds of billions of US dollars are inaccurate: the cost of Huawei’s operations to US companies Motorola and Cisco alone is roughly USD 54 billion per year, all in a single subsector of a massive economy.
Given that the data on crown jewel intellectual property theft does not lend itself to accurate annual estimates, the below tables present collected public data on IP loss in the last 10 years. These numbers are not final calculations, nor are they representative of the entirety of the damage done. In fact, according to Richard Bejtlich, chief security officer of Mandiant, “over 90% of firms penetrated by hackers were unaware of the fact.”124 What is more, according to Kevin Mandia, “The majority of victims, well over 90% of the victims we have responded to, really don’t disclose that these attacks occur.”125
61 62 Some Publicly Declared Losses:
A 10-Year Estimate
Global
SECTOR DAMAGES
INVNT/IP Database* 305.1 B
US Department of Defense* 1.4 T
US Solar 22.1 B
Telecommunications 1.774 T
Total: 3.5 T
United States
SECTOR DAMAGES
INVNT/IP Database* 305 B
US Department of Defense* 1.4 T
US Solar 22.1 B
Telecommunications 540 B
Total 2.27 T
*Direct theft calculations with unknown value chain and employment damage.
The numbers for the last 10 years show both the magnitude and difficulty of measurement that assessments of IP theft entail. The solar industry, for instance, was a young sector in the United States when Chinese panels drove the price down 75% in the late 2000s.126 Large numbers of startups were lost, but in the United States, to date the larger companies survive. This is unlikely to be the case in the next few years as the pattern continues.
63 Public loss estimates, a small fraction of actual losses, average at roughly USD 227 billion per year. The real losses are orders of magnitude larger, and future losses more enormous yet. Examine the 402 targeted sectors in Appendix A to explore segments of the US – and global– economy currently in the crosshairs of the Chinese national business model: this is InfoMercantilism.
Intellectual-property theft is a symptom of the broader trend of InfoMercantilism. This national business model runs on the innovations of others and cannot easily produce its own. When this becomes clear, the question of losses becomes dramatic. Seen through this lens, the potential loss suddenly stands in stark relief: at stake is nothing less than the ability of innovators to compete. Leaders in innovating nations should take a hard look at which sectors they’re currently being pushed from, which they will lose in the future, and how the spread of InfoMerc business will destroy their firms’ share of the $75 trillion global economy. More than any single company, any single bit of data, or any single product, it is the ability to do business at all that is under threat.
64 The Path Forward:
The conclusion that a nation-state is purposefully and aggressively stealing the intellectual property that makes inventing nations viable demands action. While North America and Europe innovate tirelessly, many nations across the globe have accelerated their own efforts in the difficult and exciting work of encouraging real discovery and invention. Behind these shared efforts is a shared belief that those who create new knowledge for the advancement of humanity ought to be justly rewarded for their work.
From the burgeoning startup economy in Brazil to India’s booming technology industry, South Africa’s growing business platform to Israel’s expanding tech successes, individuals, firms, and nations worldwide are all threatened by the rise of national economic systems based on stealing. If global innovators continue to be preyed upon by a national business model specifically designed to cheat them of the benefits of their efforts, they will continue to lose jobs and income. In the long term, the whole world – from inventors to thieves – will lose, as a global economic system driven by technology, and the productivity increases it provides, suffers from reduced returns.
To remedy this ongoing destruction, hardline approaches should be taken. The purpose of these proposed policies is not to vilify China, but to place economic consequences in the path of the Chinese Communist Party and its leadership. A nation of 1.3 billion hardworking individuals does not need to harm innovators in order to succeed, nor can it be allowed to do so. These policies will help to show the Chinese politburo that stealing will not be rewarded and that there are cooperative ways to reach full potential.
Domestic Proposals:
Corporate and Government members of INVNT/IP came to an early consensus that economic solutions are required in facing this economic problem. Recently, our acquaintances at the White House have worked to promote President Obama’s Executive Order 13692 on April 1st of 2015.
This order is highly commendable in that it allows the suspension of travel and seizure of assets for any individuals perpetrating or having “materially assisted, sponsored, or provided financial material”127 to perpetrators of IP theft. The ability to seize the assets of firms sponsoring theft, as well as to stop their sales in the United States, is key. Thus, the remaining goals should be actively pursued within the United States:
ՖՖ The US Treasury, Attorney General, and Secretary of State should actively enforce Executive Order 13692 in order to follow up on this momentous commitment to creating real consequences for IP theft.
ՖՖ The US Congress should pass bipartisan legislation that supports the Executive Branch’s efforts curtail IP theft. In particular, Congress should prevent any company convicted of stealing crown jewel IP from an inventing firm from doing further business in the United States and its territories. A system should be established which puts firms on temporary suspension of US business activities should they be involved in an established critical mass of ongoing legal cases regarding CJIP theft.
ՖՖ Such legislation should include a detailed and regular accounting of both classified and non-classified
65 CJIP thefts, the latter transparently reported, so that legislative remedies and regulatory actions can be taken in a timely fashion.
ՖՖ The United States Trade Representative should immediately place the People’s Republic of China on its list of Priority Foreign Countries, as the nation’s position on the “Watch List” alone is insufficient, given the overwhelming evidence of theft. In this new system, the USTR should have an active role in monitoring foreign firms’ illegal behavior and making formal recommendations for actions to be brought against perpetrators of IP theft.
ՖՖ Such formal recommendations should place involved firms in immediate suspension of activities in the United States and place these cases at the top of the priority list for prosecution. The result of all such legislation, including WTO suits and domestic import tariffs, should be unified and clear, with the goal of making theft of CJIP more expensive than its benefits. Acting in silos has been ineffective at best, playing out against a rising tide of nation-sponsored thefts.
International Proposals:
ՖՖ The IMF should immediately suspend any consideration of the Chinese yuan as a reserve currency. Given the above information regarding the CNY’s lack of accurate value and blatant manipulation, its use as a reserve currency without an open market establishes a dangerous precedent, opening a global system to single-nation manipulation and likely bringing countless unwanted consequences and immense volatility to the global financial system.
ՖՖ Allowing China to accede to the WTO without meeting the organization’s conditions has been an error based on optimism rather than performance. From this day forward, nations should meet conditions for accession before being allowed to join, as per original WTO stipulations.
ՖՖ The WTO should expedite prosecution of cases related to nations with an established critical mass of outstanding accusations of the same illegal trade activity.
ՖՖ The WTO should put nations that fit the above description on suspension, preventing them from forming new trade deals and arrangements until they clearly and transparently meet conditions for accession and cease behaviors that restrict equitable trading patterns, specifically:
ՔՔ Known currency manipulation
ՔՔ Opaque banking policies with a national majority of government control
ՔՔ Export subsidization that surpasses WTO statutes
ՔՔ Domestic firm subsidization that surpasses WTO statutes
ՔՔ Ongoing trade and financial activities by banks known to be insolvent
ՔՔ Fraudulent variations of any of the above behaviors, or designed to obscure them
ՖՖ Failure to align China’s trade behavior with WTO requirements should result in the ejection of China from the WTO, unless, within a specific and reasonably short cure period, the country ceases its constant, 66 institutionalized violations of WTO standards and regulations.
The inability of the WTO to effect change on a nation so large but so clearly in violation of many of its statutes is disconcerting and worthy of note. In lieu of WTO actions to enforce its own policies:
ՖՖ An international cooperative body of nations should be established, specifically focused on counteracting IP theft. These nations should work in concert, following the above policy recommendations, to prevent any perpetrating firm from doing business inall of the participating nations. As with any effort to counteract destructive international forces, cooperation is key if inventing nations are to protect themselves from the threat of InfoMercantilism. The prisoner’s dilemma of CJIP theft leaves inventing nations vulnerable if solidarity and mutual support are not given priority over short-term price advantages.
ՖՖ International trade agreements based upon prevention of IP theft, and protection of crown jewel IP, should be recognized for the value they bring in this essential search for long-term global economic growth. Both the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) should be ratified for this reason, understanding that protecting crown jewel IP from theft is the only path to long-term global economic prosperity.
The world has entered a new era of global economic challenges. The advent of large-scale InfoMercantilism in China brings new threats to global prosperity and technological progress. Without concrete changes to the current system, InfoMercantilism has the ability to harm any and all inventing individuals, firms, and nations. This is the path we are on today, and it is one that no one can afford to continue to follow. Acting now can counterbalance this unprecedented challenge, leading the world, and China, to a more hopeful and economically responsible future, with benefits forall nations.
Not acting now poses the added risk of additional nations adopting this destructive national business model, adding to the downward pressure on global growth, and the growth of inventing nations.
Acting as single countries alone may not be enough to achieve a reduction in state-sponsored IP theft. But acting in concert is virtually assured of success, as large-scale market deprivation is the one challenge innovation theft, and the InfoMercantilist model, cannot overcome.
67 Numbers to Remember
ՖՖ 1.8 Million: Global jobs permanently lost in the telecom equipment sector alone resulting from Chinese InfoMerc practices
ՖՖ $3.5 Trillion: Global losses in just 3 sectors (telecom equipment, solar energy, and defense), 2003-2013
ՖՖ $2.27 Trillion: US losses in income revenues in just 3 sectors, 2003-2013
ՖՖ $8.5 Billion: Perpetual, annualized US losses in personal income and payroll tax revenues for two companies in one (telecom equipment) sector
ՖՖ 402: Number of economic sectors targeted for IP theft by the Chinese politburo in its current Medium- and Long-Term Plan (MLP)
ՖՖ 90%: Percentage of publicly traded Chinese companies that receive government subsidies
ՖՖ $30 Billion: Amount of customer financing made available for a single Chinese firm (Huawei) by the Chinese Development Bank
ՖՖ 90%: Percentage of the world’s “junk” (copycat) patents applied for annually by China
ՖՖ 96%: Percentage of global intellectual property theft attributed to China by Verizon security
ՖՖ 63%: Fraction of Chinese banks known to be fully state-controlled
ՖՖ 4: Number of Top Ten Chinese banks the government admits to owning
ՖՖ 10: Number of Top Ten Chinese banks directly or indirectly owned by the government
ՖՖ $1.4 Trillion: Outstanding loans to Chinese local government financing vehicles (2012)
ՖՖ 25-40%: Global average price advantage for Chinese products in all markets as the result of Chinese currency manipulation
ՖՖ $2 Trillion: Amount of money in direct loans by the Chinese Development Bank to infrastructure projects
ՖՖ When 7 < 1: The combined Export Financing for the entire G7 is less than China alone
68 APPENDIX A:
TARGETED TECHNOLOGIES LISTED IN CHINA’S GUIDELINES FOR THE IMPLEMENTATION OF THE NATIONAL MEDIUM- AND LONG-TERM PROGRAM FOR SCIENCE AND TECHNOLOGY DEVELOPMENT (2006-2020)
The 402 Sectors of the 12th MLP Chosen for Indigenous Innovation in China Courtesy of Robert Atkinson, President, ITIF
*Sectors emphasized in bold red italics are either directly included or potentially related to security- sensitive items on the United States Commerce Control List128 as export-controlled goods.
1. Industrial energy-efficiency equipment 2. Long–life-cycle LED products 3. Clean coal development and utilization, coal liquefaction, and gasification-based co-generation 4. Oil and gas prospecting, development, and utilization under complex geological conditions 5. Wind energy 6. Batteries 7. Solar-based power 8. Biomass 9. Geothermal energy 10. Super large electricity transmission and distribution networks 11. Seawater desalination 12. Deep-mine evaluation 13. Development and utilization of coal-bed methane and marine minerals 14. High-precision prospecting and drilling equipment 15. Large mining machinery 16. Marine development platforms 17. Artificial rain enhancement 18. Water saving in irrigation, dry land farming, and biological water efficiency 19. Precision irrigation technology and intelligent farm water management 20. Desalination 21. Airborne geophysical survey techniques 22. 3-D high-resolution earthquake scanning 23. High-precision geomagnetism and geochemistry 24. Deep and complex mining 25. Wasteless mining 26. Automated ore preparation and smelting 27. Utilization of low-grade and complex mineral resources 28. Technologies for offshore oil-gas deposits 29. Comprehensive recovery technologies for thick-oil oilfields 69 30. Technologies for utilization of marine biological resources 31. Technologies for exploitation of seawater chemicals 32. Urban atmospheric pollution control systems 33. Technologies for nonconventional pollutants 34. Technologies for turning wastes into useful resources 35. Technologies for clean production in heavily polluting sectors 36. Marine ecological and environmental monitoring 37. Sea emergency response and handling 38. High-precision digital technologies for marine dynamic environment prediction 39. Biological carbon fixation and carbon-fixation engineering 40. Biotechnology for crop breeding and production 41. Biotechnology for animal and aquatic breeding and production 42. Biotechnology for animal diseases control 43. Processing of agricultural produce and post-production loss reduction 44. Food processing and food safety monitoring 45. Environment-friendly fertilizers and pesticides 46. Precision farming operations 47. New farming industries 48. Factory-like agriculture 49. Efficient crop cultivation with super high yield 50. Modern farm machinery with multiple functions 51. Agriculture-related information technology 52. Fine agricultural crop, tree, pasture, and aquatic species 53. Molecular evaluation of germplasm, animal and plant molecular breeding 54. Targeted hybrid breeding, scale seed breeding, reproduction, and comprehensive processing 55. Safe and high-quality feedstuffs and facilities for scale-healthy breeding 56. Vaccines and safe veterinary drugs and instruments 57. Technologies for monitoring, diagnosing, preventing, treating, and eradicating epidemic diseases affecting both humans and animals 58. Offshore and freshwater aquaculture 59. Ocean-going fishery and storage and processing 60. Processing of agricultural produce and specialty agricultural and forestry products 61. Conversion of agricultural and forestry biomass 62. Biomass energy production, including methane, fixed and liquid fuels, and new biomaterials 63. Resource-oriented utilization of rural garbage and contaminated water 64. Methane-based power generation 65. Biomaterial equipment 66. Technologies for combating biological invasion and ecological and meteorological disasters 67. Composite materials made of bamboo or wood 68. Environment-friendly fertilizers and pesticides 69. Slow-release fertilizers 70. Prevention and control of hazardous organisms 71. Intelligent agriculture and forestry machinery 72. Technologies and equipment for healthy breeding 73. Farming machinery and technologies with protection functions 70 74. Greenhouse facilities and support equipment 75. Digital technologies for collecting animal-plant growth and ecological environment-related information 76. Real-time monitoring of soil elements, including moisture, fertilizer, light, and temperature 77. Precision operation and management and digital technology dedicated to remote rural areas 78. Viewable information service, agriculture and forestry ecosystem monitoring 79. Virtual farm technology 80. Fast breeding of high-quality stud bulls 81. Industrialized production of dairy cow fetuses 82. Cow feeds 83. Cultivation and effective utilization of pasture 84. Animal diseases prevention and control 85. Scale breeding 86. Parts and components and associated design, manufacturing, and mass production 87. Advanced molding and processing technologies for large and special parts and components 88. Technologies for generic parts and components 89. Precision test instruments 90. Digital design, manufacturing, and integration technologies 91. Network-based digital and intelligent design approaches 92. Computer-aided engineering analysis and process-design and integration technologies 93. Environment-friendly processes and manufacturing technologies 94. Techniques, processes, and equipment for efficient utilization of resources 95. Technologies for process scale-up 96. Ecological industry concept-based system integration and automation 97. Sensors and intelligent testing and control technologies, equipment, and control systems needed by process industries 98. Large cracking furnace technology 99. Large steam ethylene cracking technology and set equipment 100. Energy-efficient chemical fertilizer process and equipment 101. Cyclic utilization of secondary resources from steel productions 102. Cogeneration technology for metallurgical processes 103. Gradient utilization technology for low thermal value steam 104. Efficient and low-cost clean steel production 105. Non-adhesive coking, integration design, manufacturing, and system coupling technologies for large continuous plate casters and continuous rollers 106. Large-scale marine engineering technologies and equipment 107. High-performance composite materials 108. Super large compound components 109. High-performance engineering plastics 110. Light high-intensity metals 111. Inorganic non-metal structural materials 112. High-purity materials 113. Rare-earth materials 114. Petrochemicals 115. Precision chemicals 71 116. Catalysts 117. Separating materials 118. Light textile materials and associated applications 119. Environment-friendly green and healthy materials 120. Next-generation information functional materials and components 121. Key accessory materials and engineering processes for the defense industry 122. Technologies for traffic information system and intelligent process 123. High-speed transport systems 124. Traffic information sharing 125. Traffic operation management 126. Integrated transport system 127. Energy savings in transportation 128. Cross-bay routes 129. Offshore deep-water harbors 130. Large airports 131. Large bridges and tunnels 132. Integrated 3-D traffic hubs 133. Deep-sea oil-gas pipelines 134. Other sophisticated transportation infrastructure 135. High-speed rail control and speed regulation systems 136. High-speed rail locomotive building 137. Rail line construction and system integration 138. Rail operation control 139. Hybrid, alternative fuel, and fuel-cell automobiles 140. Power system integration and control technologies for autos 141. Automobile computation platform technologies 142. High-efficiency internal combustion engines 143. Fuel-cell engines 144. Accumulator batteries 145. Driving motors and other critical components for electric cars 146. Infrastructure for automobiles using new energy 147. Heavy-duty passenger cars 148. Large power locomotives 149. Special heavy-duty vehicles 150. Urban rail transit systems 151. Large high-tech ships 152. Large ocean-going fishing boats 153. Scientific expedition ships 154. Novel shipping tools, including lower-altitude multipurpose aircrafts 155. High-viscosity crude oil and multiphase flow pipeline transport systems 156. Traffic information platforms 157. Modern logistic systems 158. Urban traffic-control systems 159. Intelligent automobiles 160. New-generation air traffic-control systems 72 161. Traffic accident prevention and pre-warning 162. Emergency handling and active / passive safety for transport tools 163. Traffic accident reconstruction 164. Fast-traffic emergency-response systems 165. Quick search-and-rescue missions 166. Integrated circuits and key components 167. Major software 168. High-performance computers 169. Broadband mobile telecommunication 170. Next-generation Internet 171. Integrated innovation in information technology products 172. Design and manufacturing capability of IT products 173. Highly credible networks 174. Network information security 175. Technical support systems for information security 176. Handling information security emergencies 177. Online software platforms 178. Enabling application software 179. Medium ware 180. Built-in software 181. Grid computation platforms and infrastructure 182. Software system integration 183. Finance 184. Logistics software 185. Online education 186. Media software 187. Healthcare IT 188. Tourism IT 189. E-government 190. E-commerce 191. High-performance core network equipment 192. Telecommunication transmission equipment 193. Telecommunication connecting equipment 194. Network scalability, security, mobility, service quality, and operation management 195. Network management systems 196. Intelligent terminals 197. Household network equipment 198. Broadband-related new businesses 199. Multimedia 200. Network computation 201. Super trustworthy computer with at least a thousand trillion floating-point operations per second 202. Next-generation server systems 203. Innovative system structures 204. Mass data storage 73 205. Data fault tolerance 206. Advanced automatic barcode identification 207. Radio frequency tags 208. Multiple sensor information-based intelligent information processing 209. Low-cost sensor networks 210. Real-time information processing systems 211. More powerful information service platforms and environment 212. Digital media content processing 213. Comprehensive media information content platforms featuring easy accessibility, interaction, copyright protection, and effective management 214. Flat-panel and projection display technologies, including high-definition large flat-panel display products, organic electroluminescent display, field emission display, and laser display 215. Flat-panel display materials and components 216. National infrastructure information network systems 217. Coding technologies for network survival under complex large systems, active real-time protection 218. Safe data storage 219. Information network virus control, prevention of vicious attacks on web pages 220. Network credit systems 221. Reproductive health drugs and instruments 222. Disease prevention and early diagnosis 223. Innovation in Traditional Chinese Medicine 224. Major new drugs and advanced medical equipment 225. Medicinal materials 226. Drug-release systems 227. Safe and effective contraception 228. Drugs for the prevention of sexually transmitted diseases 229. Screening, test, and diagnosis of birth defects and for biological treatment of inherited diseases 230. Early warning and diagnosis of major diseases, including cardiovascular and cerebrovascular diseases and tumors 231. Technologies for standardized, individualized, and integrated treatment 232. Compact mobile medical service equipment and distance diagnosis and technical service systems 233. Novel therapeutic equipment 234. Conventional diagnostic and therapeutic equipment 235. Digital medical technologies 236. Individualized medical engineering technologies and equipment 237. Nanotechnology-based biological drug-release systems 238. Tissue engineering 239. Bio-medicinal materials such as proxy human tissues and organs 240. Urban energy efficiency 241. Long-durability, green construction materials 242. Integrated digital urban management technology 243. Green building structures 244. Hazardless handling and recycling of urban sewages and garbage 245. Urban traffic systems 74 246. Intelligent urban public transit management 247. Urban utility infrastructures 248. Urban underground development and utilization 249. Green architecture design technologies 250. Architecture energy-saving technology and equipment 251. Precision construction technologies and equipment 252. Energy efficiency and green construction materials 253. Indoor pollutants monitoring and cleanup 254. Monitoring, warning, and preventing coal mine and other production-related accidents, social emergency events, natural disasters, nuclear safety, and biosecurity 255. Rescue technologies for coal-mine disasters, major fires, major natural disasters, leakage of hazardous chemicals, and mass poisoning 256. Production safety, food safety, biosecurity and public safety, and associated protection products 257. Multi-scale dynamic information analysis and handling, and decision making 258. Integration technology for a national public-security-emergency command platform and an integrated emergency decision-making platform featuring early monitoring, quick advance warning, and efficient handling 259. Pre-warning and control technologies for mine gas, water bursting, power failures, and major industrial accidents 260. Food safety 261. Entry-exit quarantine-related risk assessment 262. Biological characteristic identification, evidence gathering, quick screening, ratification, and simulation prediction 263. Technologies for distance positioning and tracking, real-time monitoring, evidence identification, and quick handling 264. Fire-fighting in high-rise buildings and underground structures 265. Distance probe of explosives, illegal drugs, and nuclear and biological sources of terrorism, and on-site handling and protection 266. Detection of in-body toxic chemicals 267. Advanced disinfectors 268. Hazardous medium identification and control 269. Biological invasion prevention and control, and vaccines 270. Immunoadjuvant, antitoxin, and other drugs 271. Technologies for monitoring, warning, and emergency handling of earthquakes, typhoons, torrential rains, floods, and geological disasters 272. Core electronic devices 273. High-end generic chips and basic software 274. Super large-scale integrated circuit manufacturing technology 275. Next-generation broadband mobile telecommunication 276. High-end numerically controlled machine tools and basic manufacturing technology 277. Large, advanced pressurized water reactors 278. High-temperature gas-coolant reactor nuclear-power stations 279. Water-body contamination control and treatment 280. Major new drugs, prevention, and treatment of major infectious diseases such as HIV / AIDS and viral hepatitis, large passenger aircrafts 75 281. High-resolution Earth observation systems 282. Manned space flights 283. Moon probe 284. Genome sequencing and genetic structure analysis 285. Functional genome, proteomics, stem cells, and therapeutic cloning, tissue engineering, biocatalysis, and conversion technologies 286. Scale identification of key genetic functions and their regulatory networks in the physiological and pathological process 287. Identification of functions of disease-causing genes, expression manipulation, target screening, and verification 288. Drug manufacturing from “gene to drug” 289. Protein and dynamic cellular process and associated bioinformatic analysis, consolidation, and simulation 290. Virtual plant-animal species and drug design technology 291. Simulation technology for plant-animal species growth and pharmaceutical metabolism engineering 292. Computer-aided composite bank design, synthesizing, and screening 293. Gene manipulation technology 294. Protein engineering 295. Highly effective protein expression and regulation 296. Chromosome structuring and positioning 297. Coded protein gene design and transformation technology 298. Protein peptide chain decoration and restructuring technology 299. Protein structure analyzing technology 300. Scale protein isolation and purification technology 301. Therapeutic cloning technology 302. In-vitro stem-cells construction and directional induction technology 303. In-vitro human tissue construction and associated scale production technology 304. Multiple human-cell-based sophisticated tissue construction and dysfunction repairing technology 305. Biomanufacturing technology 306. Screening technology for functional biotech strains 307. Directional biocatalyst upgrading technology 308. Biocatalysis technology system for scale industrial production 309. Clean transformation media manufacturing technology, and associated industrialized transformation process 310. Low-cost, pervasive computation, and intelligent process 311. Integration of nanotechnology, biotechnology, and cognitive science 312. Low-cost ad hoc networks 313. Individualized intelligent robots and human-machine interactive systems 314. High-flexibility attack-free data networks 315. Advanced information security systems 316. Intelligent information processing and control technologies based on biological characteristics 317. Image and natural language comprehension 318. Developing processing systems for Chinese language information 76 319. Systematic technologies involving biological characteristics identification 320. Intelligent traffic systems 321. Ad hoc mobile networks 322. Ad hoc computing networks 323. Ad hoc storage networks 324. Ad hoc sensor networks 325. Low-cost real-time information processing systems 326. Multi-sensor information integration 327. Individualized interactive interface 328. Attack-free data networks 329. Advanced information security systems 330. Ad hoc intelligent systems 331. Intelligent personal systems 332. Virtual reality technology for integrating different disciplines, including electronics, psychology, cybernetics, computer graphics, database design, real-time distribution systems, and multimedia technology 333. Virtual reality technologies and associated systems for related fields, including medicine, entertainment, arts, education, military affairs, and industrial manufacturing management 334. Breakthroughs in material design, assessing, and characterizing 335. Advanced manufacturing and processing technologies for materials 336. Nanomaterials and nanocomponents 337. Special functional materials such as superconductor materials 338. Intelligent materials 339. Energy materials 340. Super structural materials 341. New-generation optoelectronic information materials 342. Intelligent structural systems that integrate sensors, control, and drive functions 343. Intelligent material manufacturing and processing 344. Intelligent structure design and manufacturing 345. Key equipment monitoring 346. Failure control 347. High-temperature superconducting materials and associated manufacturing technology 348. Superconducting cables 349. Superconducting motors 350. Superconducting electric devices 351. Superconducting biomedical elements 352. High-temperature superconducting filters 353. High-temperature superconducting injury-free detectors 354. Scanning magnetic microscopes 355. Critical technologies for solar-cell-related materials and associated key technologies 356. Fuel-cell materials 357. High-volume hydrogen storage material technology 358. Efficient rechargeable-cell materials and associated key technologies 359. Key super-capacitor materials and associated manufacturing technology 360. Efficient energy conversion and storage material systems 77 361. Intelligent manufacturing and application technology 362. Set equipment and system design and verification technology 363. High-reliability-based large sophisticated systems and equipment design technology 364. Design, manufacturing, and test technologies for micro and nanometer electro-mechanic systems 365. Technologies for micro and nanometer manufacturing 366. Super precision manufacturing 367. Giant system manufacturing 368. Intense field manufacturing 369. Intelligent service robots 370. Service life prediction technology for major products and facilities 371. Onsite manufacturing process test and evaluation technology 372. Fourth-generation nuclear-energy system, advanced nuclear fuel cycle, and fusion energy 373. Hydrogen technology 374. Fuel-cell and distributive energy supply technology 375. Fuel-cell components, thermopile integration, fuel-cell applications to power generation, and automobile propulsion systems 376. Mini gas turbines 377. Thermal cycle, energy storage, and triple-generation technology 378. Fast neutron nuclear reactors 379. Large superconducting magnets 380. Microwave heating and driving 381. Neutral beam injection heating and blanketing 382. Large real-time tritium isolation and purification, diverters, numerical modeling, plasma control, and diagnosis 383. Non-Tokamak approaches for energy 384. Natural gas hydrates exploitation 385. Sea-floor metal and mineral resources gathering and transport 386. On-site mining extraction 387. Large marine engineering projects 388. Remote marine sensing technology 389. Acoustic probe technology 390. Buoy technology 391. Shore-based long-range radar technology 392. Marine information processing and application technology 393. Sea-floor geophysics, geochemistry, and biochemicals, capable of transmitting information and data on a real-time basis 394. Natural gas hydrate deep sea-floor extraction 395. Deep-ocean operation technology 396. Life-maintaining system technology 397. High-power dynamic device technology 398. High-fidelity sample collection and distance information transmission technology 399. Deep-sea operational equipment manufacturing technology 400. Deep-sea space-station technology 401. Lasers 402. Aerospace 78 APPENDIX B: State-Sponsored IP Thefts
SELECTED INCIDENTS FROM THE INVNT/IP CONSORTIUM IP THEFT DATABASE
Data as of November 2014
Attacks by Chinese actors are marked in bold red.
DATE PERPETRATOR VICTIM
8/27/07 PLA (Beijing Group) German Government Agencies, Chanc. Merkel 8/11/08 Russian Actors Georgian Government 7/16/09 Dongfan Chung Boeing 1/12/10 Chinese Government Google 1/7/10 S. Du, Y. Chin (Chery) General Motors 8/9/10 Noshir Gowadia (Chinese Northrup Grumman Corp. Government) 9/1/10 David Yen Lee Valspar 10/1/10 Russian Government Nasdaq 2/4/11 Chinese Government Foreign Office 2/16/11 Chinese Actors Altria Group 4/2/11 PLA (Beijing Group) RSA 5/28/11 PLA ASIO 6/1/11 Chinese Actors Google (Gmail) 7/5/11 PLA ITC 8/2/11 PLA (Shady RAT) French Finance Ministry 8/2/11 PLA (Shady RAT) Canadian Finance Ministry 8/2/11 PLA (Shady RAT) US Government Agencies 8/2/11 PLA (Shady RAT) Japanese Government Agencies 8/2/11 PLA (Shady RAT) South Korean Government Agencies 8/2/11 PLA (Shady RAT) Vietnamese Government Agencies 8/2/11 PLA (Shady RAT) World Anti-Doping Agency 8/2/11 PLA (Shady RAT) The United Nations 8/2/11 PLA (Shady RAT) ASEAN 8/3/11 PLA (Shady RAT) International Olympic Committee 8/3/11 PLA (Shady RAT) Taiwan Government 9/28/11 PLA ManTech 9/28/11 PLA CACI International 12/4/11 Chinese Actors iBahn 12/21/11 Kexue Huang (Hunan University) Dow Chemical, Cargill 12/21/11 PLA US Chamber of Commerce 79 1/13/12 Chinese Actors US Department of Defense 2/3/12 Chinese Actors NASA 2/15/12 Chinese Actors Nortel 3/18/12 Wuyi Tiandi Motion Apparatus SylvanSport 4/24/12 Wen Chyu Liou Dow Chemical 7/26/12 PLA European Union Officials 8/29/12 Hanjuan Jin Motorola Sep-12 Chunlai Yang (Tongmei Futures) CME Group 9/14/12 Sixing Liu L3 Communications 9/27/12 PLA Telvent 10/4/12 PLA US White House Staff 10/4/12 PLA US Think Tanks 10/16/12 TCL AU Optronics 10/23/12 Iranian Government Saudi Aramco 10/24/12 Iranian Government Ras Gas 10/25/12 Chinese National Dyson 11/19/12 Palestinian Activists Israeli Government 11/27/12 Chinese Government Solid Oak Software Inc. Dec-12 HaoHua via Wyko Goodyear Tire and Rubber Co. 1/8/13 Xiang Li Various US Software Companies 1/20/13 PLA The New York Times 1/31/13 Chinese Government The Wall Street Journal 2/1/13 Chinese Government The Washington Post 2/8/13 PLA Bit9 2/19/13 PLA Coca Cola Co. 5/14/13 PLA QinetiQ 5/20/13 Chinese Nationals New York University Medical School 6/2/13 Huajun Zhao University of Wisconsin Medical School 6/27/13 Sinovel AMSC 8/8/13 Jiangsu Hengrui Medical Co. Ltd. Eli Lilly 9/11/13 North Korean Government South Korean Government Agencies 11/18/13 PLA US Defense Contractors 12/10/13 PLA G20 Summit 12/10/13 Chinese Actors Foreign Ministry 12/10/13 Chinese Actors Foreign Ministry 12/10/13 Chinese Actors Foreign Ministry 12/10/13 Chinese Actors Foreign Ministry 12/10/13 Chinese Actors Foreign Ministry Feb-14 PLA www.vfw.org 2/4/14 PLA Chemical and Defense Companies 2/4/14 PLA Chemical and Defense Companies 2/4/14 PLA Chemical and Defense Companies
80 2/4/14 Beijing Dabeinong Technology Group DuPont 2/7/14 Huawei BNSL 2/18/14 Iranian Actors US Navy 3/11/14 Walter Liew, Pangang Group DuPont 3/11/14 Kang Gao Two Sigma Investments LLC 3/12/14 PLA US Entertainment Conglomerate 3/14/14 PLA Boeing, Lockheed Martin, Raytheon, Northrup Grumman 3/15/14 Chinese Government US Office of Personnel Management 3/24/14 Chinese Government Indian Defense Ministry 4/7/14 Chinese Actors Major Oil Company 4/10/14 PLA Agency for Defense Development 4/24/14 Chinese Government NIWA 5/19/14 PLA US Steel 5/19/14 PLA Toshiba 5/19/14 PLA SolarWorld 5/19/14 PLA Allegheny Technologies Inc. 5/19/14 PLA Alcoa Inc. 5/27/14 PLA US Department of Defense 5/29/14 Iranian Actors 2,000 Specific US Personal Computers 6/9/14 Unit 61486 (PLA) US Aerospace and Satellite Companies 6/13/14 Ugly Gorilla (PLA) US Utilities 7/9/14 Deep Panda D.C. Think Tanks 7/11/14 Su Bin Boeing, Lockheed-Martin 7/12/14 Lanxiang Vocational School Shipping Companies 7/14/14 Chinese Actors Algenol 7/15/14 Chinese National INVISTA 8/24/14 Chinese Government Dell, Nintendo 8/25/14 Chinese Government US Healthcare Industry-Juniper Networks 8/26/14 Jianyu Huang US Government 9/7/14 Huawei T-Mobile 9/8/14 Jun Xie General Electric 9/29/14 German Actors Austrian Government, Banks, and Companies 9/29/14 German Actors German Government, Banks, and Companies 9/29/14 German Actors Swiss Government, Banks, and Companies 10/1/14 PLA (Beijing Group) 5 Videoconferencing Companies
81 APPENDIX C: 7 Memes to Ignore
The PRC operates a broad campaign of disinformation to attempt to obscure the nature of its national business model. In the rhetoric used by PRC leadership to defend its practices, there are a few memes that emerge which can be easily disproven and are therefore best ignored. For an impressive, comprehensive list of PRC counter-arguments deconstructed and disproven, refer to Robert Atkinson’s well-composed report Enough Is Enough: Confronting Chinese Innovation Mercantilism, published by ITIF.
1. China is shifting from an export-driven to a consumer-driven economy. The assertion that the PRC’s economy is shifting toward consumption-based activities is anything but certain. Many have been confused by the rise in consumption in China that is the result of a growing middle class.129130131 While the PRC claims to be making a shift toward consumption and service-sector growth, real proportional growth continues to come from exports.
According to PRC leadership in 2013, China was at that time already beginning a shift toward consumption to correct for “growing conflict between downward pressure on economic growth and excess production capacity.”132 Correction of this contingency, however, is not dependent solely on a shift toward consumption. Indeed, while there is little data suggesting that the overall makeup of China’s economy has relatively increased emphasis on imported goods (there has simply been a rise in consumption; and exports, too, are rising), there has instead been a shift in the form of manufacturing being emphasized.
As China moves clearly from low-input, cheap labor manufacturing, the empty economic space is increasingly occupied by high-end goods.133 No vast proportion of the economy has been fully shifted to consumption. Rather, a number of high-value industries – industries that rely on crown jewel intellectual property – are now occupying the top manufacturing positions in China.
TOP 5 EXPORTS TOP 5 IMPORTS
1. Computers 1. Crude Petroleum
2. Broadcasting Equipment 2. Integrated Circuits
3.Telephones 3. Iron Ore
Data courtesy of MIT’s Observatory of Economic Complexity134
2. China is shifting from state to private ownership. The assertion by PRC leaders that the nation is moving toward privatization is anything but proven. As noted in this work and many others, the copious claims of increased privatization are belied by the PRC’s own structures. The financial system is majority government-controlled, as are a majority of the companies to which it lends. Any truly private companies in China remain under the watchful eye of a government that tolerates little disagreement with its stated goals. State ownership remains the rule for 82 most of the economy, and state control shows no signs of abating.
3. China is increasing legal structures that protect IP. While some new legislation has been passed, and a few court cases won, there is no indication that laws passed in the name of IP protection have had the effect of limiting the rampant theft in and by China. In fact, theft is on the increase despite such moves.
New laws pushing inventing companies out of domestic Chinese markets and demanding the release of source code135 have helped shed light on the PRC’s vested lack of interest in true IP protection. In such cases, legal structures are actively working to assist in the theft of IP, with the government of the PRC demanding that crown jewels be handed over by foreign firms on a trust basis.
4. As invention in China increases, the government will increase IP protection The struggle for innovation in China is ongoing. As the patent data early in this work show, China fails to promote true innovation through core policy, and instead directs government resources to “indigenous innovation” policy that actively works to promote theft of CJIP.
Meaningful and verifiable innovation itself has mostly failed to manifest in the organizations of China’s leading universities and firms. As with the case of the Hanxin Sandpaper chip scandal136 and, more recently, with Baidu’s attempt to steal first place in Stanford University’s ILSVRC137 (hardly the company’s first offense¶), supposed PRC innovation success stories are regularly revealed to be cases of theft, fraud, or both.
Given the lack of progress in real domestic innovation and the concurrent, ongoing explosion of IP theft by and for the government, a more accurate statement would be: “As indigenous innovation attempts lead to more successful thefts, the government will increase protection of domestic firms.”
5. Innovation is increasing over theft as a cultural value. The idea that innovation is becoming a stronger cultural value in the PRC is similarly unsubstantiated. While assertions that China is shifting toward innovation imply that the subsidization of junk patents represents some sort of accent on invention138, “Shan Zhai” [copycat company] culture, IP theft, “borrowed ideas,” and fake products remain at-scale problems in China, and copycat culture continues to present a major threat to China’s continued development”139. The massive increase in intellectual property theft originating in China in recent years demonstrates that neither cultural values nor official practices in the country are moving away from theft as primary economic driver.
6. China is shifting from a command economy to a market economy. The level of influence exerted over various parts of the Chinese economy by the CCP and its affiliates has been made clear here and elsewhere. While officials in the West have long had hopes that China was on the path to a market economy140, there is a clear trend toward the use of some market techniques to strengthen, rather than shift away from, a top-down, command-and-control, InfoMercantilist approach. ¶ For more on Baidu’s history of fraud, examine the company’s 2006 Click Fraud case and the 2011 Keyword-advertising fraud case, among others. 83 The World Bank’s hopes that China would commercialise“ banks and allow interest rates to be set by the financial market, develop its private sector, protect farmers’ rights and cut local governments’ dependence on land revenues”141 have to date been the opposite of the PRC leadership’s own goals. Since 2012, policies have increasingly manipulated the banking system, stifled the private sector, ignored the rights of poor landowners, and increased local government dependence on LGFVs in order to fraudulently inflate local investment capital while avoiding debt crises. The PRC’s transition to a market economy remains a Western pipe dream.
In general, it is fair to say that Western hopes for the Chinese to use newfound wealth, trading relations, education, and communications (i.e., the Internet) has not only failed to result in free trade and IP protection, but it has also hastened their use for achieving the opposing goals described in this paper.
7. The practices of IP theft are not the work of the government of the PRC. PRC leadership has categorically denied claims that crown jewel intellectual property theft occurs at their hands. Recently, Chinese Foreign Ministry spokesman Hong Lei made light of US worries regarding cyber espionage campaigns to build a database on US citizens, saying: “We wish the United States would not be full of suspicions, catching wind and shadows, but rather have a larger measure of trust and cooperation.”142
Poetic denials have long been the mainstay of PRC spokespeople, but do nothing to hide the overwhelming quantity of attacks that have been identified and tied to the PLA and the Chinese government in recent years by private security firms and the US government. Denials without proof are often the only response to accusations of government-sponsored theft. The world is now fully aware of the names, faces, and even work addresses and PLA divisions (e.g., 61398) of the publicly exposed teams used by the PRC to commit CJIP theft.
84 APPENDIX D: Methodology
A defining aspect of the InfoMercantilist phenomenon is the difficulty that victim, or inventing, nations and firms have in measuring their own losses. By assessing the outright destruction in detail in a few well-documented sectors and then looking at the macro damage caused in a larger, detailed, and documented group of sectors, this paper is intended to provide a deeper and broader view of the costs of state-sponsored theft of crown jewel IP.
This appendix describes some of the methods used and offers suggestions for future work processes in the difficult field of IP loss assessment.
Reporting Issues and Suggestions:
The first damage to be felt by a firm when CJIP is stolen is the immediate loss of competitive advantage upon utilization of crown jewel information by competitors. Unfortunately, these figures are determined by firms reluctant (for good reason) to admit the degree of damage done. A more informed public understanding of these losses is needed to bring the danger of InfoMerc IP theft to light. To that end:
ՖՖ A trusted industry body should be created in order to receive realistic estimates regarding the cost of lost CJIP. ՖՖ These estimates should account for research and development funds rendered valueless by lost IP in the form of the value for which such IP would have been sold, as well as the number of annual customer orders estimated lost by the originator when operating at peak performance. ՖՖ Estimates should be made public, while maintaining the anonymity of the originator for the necessary market protection of those who provide information. ՖՖ Finally, this reporting process should be mandatory. The well-being of all populations in inventing nations is at risk. No company should have the ability to harm national security interests by obscuring nation-state attacks on its IP. Equally critical is the protection of companies as they report.
Following such a program would protect inventing firms and their home nations, as well as the employees who help create the IP that makes a national economy productive.
Estimating Job Loss:
This work measured jobs lost by taking victim companies’ peak employment and comparing it with their current status. In the case of large, established corporations, this makes sense. Future works should measure losses in employment on a national scale according to the size of the firm in question. The losses of medium-size companies would be better measured by the standard of growth achieved before the attack. If theft of IP changes a firm’s trajectory from adding 300 jobs annually to losing jobs, the original trajectory is best assumed to be part of aggregate losses. At least 300 annual jobs may be summed with losses of current employees.
85 The most difficult evaluation of loss is the case of startup firms with few employees and revenues to speak of. Such a firm might lose priceless IP at exactly the wrong moment, thus taking a future Fortune 500 firm and executing it at its inception. The loss of startups that may have succeeded leaves no trace. It would be wise to average the success rate and employment of companies in the field, and at least provide some accounting for firms lost before breakthrough stages of growth.
Most studies seek to provide actionable, annualized figures, but in so doing suffer the mutual failures of: a) undervaluing IP damage by measuring it before the damage is complete; and b) not recognizing actual economic destruction (as of whole companies or sectors), with the lasting – sometimes permanent – damage done, year after year, to economies.
The cost to Canada in losing Nortel, or to the US in losing Motorola, is unending in terms of jobs, money, future inventions, supply-chain benefits, and future growth.
Wages:
This work has estimated wages using a straightforward metric of national averages. Thus the average wage of a telecommunications equipment sector employee has been pegged based on a conservative view of industry standards, multiplied by the number of employees lost. In the case of multipliers, national averages for professional and non-professional wages have been used to avoid controversy.
A larger, well-funded team of analysts could easily create industry-based statistical algorithms that more definitively account for factors such as average wage for specific positions cross-referenced with wages in a geographical region, and any number of other useful factors, such as age, title, previous education, and so forth. The current era is one of burgeoning availability of big-data analysis tools. Such methods would be well applied in macroeconomic damage assessments in the field.
Statistically, this research has sought to provide an approximation closer to reality than that offered decision-makers to date. Legislators, Cabinet members, corporate executives, and defense personnel cannot be expected to properly form responsive strategies without reasonably accurate information.
Applying the methods above, though they are less than exact, would put all parties in inventing nations further along the path to an informed assessment of the problems. Current methods are misleading at best, and at worst present a serious threat to personal, corporate, and national security.
In an age when technology drives virtually every sector of the global economy, it is obvious that, for the first time in history, all sectors are at risk.
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