“Despite these latest warnings from the FBI and MI5, and years of experience and knowledge within the industry, executives will continue to do business in China in ways that recklessly exposes intellectual property to future competitors.”
“The nine most terrifying words in the English language are: I’m from the Government, and I’m here to help,” said President Ronald Reagan during a press conference on August 12, 1986. This is one of President Reagan’s most often quoted quips, and for a reason. The Government can certainly help people in times of need, but it can also be a scary bureaucracy, particularly when it shows up unannounced and uninvited.
Fast forward 31 years and the 12 most terrifying words in the English language for any business should be: “I’m from China, and my company would like to partner with yours.”
It’s Not Just Hacking
On Wednesday, July 6, FBI Director Christopher Wray and MI5 Director General Ken McCallum held a joint press conference in London, urging business executives not to underestimate the threat posed by China’s efforts to steal intellectual property. A threat that is too often minimized, or completely ignored, because of the enormous size of the Chinese market; a marketplace that is nearly 1.5 billion people.
“The Chinese government is set on stealing your technology—whatever it is that makes your industry tick—and using it to undercut your business and dominate your market,” Wray said at the press conference. “They’re set on using every tool at their disposal to do it.”
In an interview earlier this year, Wray explained: “The scale of [the Chinese] hacking program, and the amount of personal and corporate data that their hackers have stolen, is greater than every other country combined.”
While certainly an important issue, let’s put Chinese hacking aside, because there are other ways that China accesses sensitive information without doing anything illegal, or ever engaging in espionage.
For years, China has successfully managed to obtain trade secrets, for example, by simply requiring foreign companies to hand them over to Chinese companies in exchange for access to the Chinese market. Surprisingly, foreign corporations have been all too willing to hand over these crown jewels—everything that makes their technology special—to gain access to the Chinese market. Ultimately, once their Chinese partners learn everything they need to know and no longer need the foreign company (i.e., original innovator), the Chinese “partner” simply competes against the original innovator in the worldwide marketplace. According to the New York Times, “[c]ompanies are loath to accuse Chinese partners of theft for fear of getting punished.”
“Maintaining a technological edge may do more to increase a company’s value than would partnering with a Chinese company to sell into that huge Chinese market, only to find the Chinese government and your partner stealing and copying your innovation,” Wray said on Wednesday.
Beware the Chinese Joint Venture
Perhaps the easiest way, or at least one common way, for foreign entities to do business in China is by setting up a joint venture. This requires a Chinese partner. In theory, this makes all the sense in the world because the foreign entity is entering a marketplace they do not know and likely does not understand, and the Chinese partner already has marketing channels, manufacturing capabilities, and ties to the community and political infrastructure. As a prerequisite, however, the intellectual property of the foreign entity must be turned over to the Chinese partner. And, as the New York Times reported, often this includes precious trade secrets based on the rationale that understanding the trade secrets are necessary to assess consumer safety, for example.
In theory, on the surface, there is nothing irrational or illogical about the sharing of intellectual property, even trade secrets, with a partner. It is in practice that doing business in China for any company with valuable intellectual property makes no sense. Catch me once, shame on you. Catch me twice, shame on me. Catch me for the millionth time, well, there is no justification for the business decisions that are being made by high-tech companies doing business in China.
The Warnings Go Unheeded
Unfortunately, the lure of 1.5 billion people seems too much. Despite these latest warnings from the FBI and MI5, and years of experience and knowledge within the industry, executives will continue to do business in China in ways that recklessly exposes intellectual property to future competitors. Penny wise and pound foolish if you ask me. You simply cannot keep ahead of the innovation curve when your “partners” are stealing your innovation out from under you and competing against you with your own technology on the worldwide market. Sadly, these are like warnings to a teenager who knows everything about everything—on paper, doing business with China just makes too much sense.
It has never made sense to me to do business in a place where everyone know you must have a separate, China-only cell phone because your data will be instantly stolen the moment you power your phone on at the airport. Either the Chinese government lacks basic control, the Chinese government is complicit (or at least tolerant), or the Chinese government is directing everything. Whatever the case may be, I’ve never understood how executives justify doing business in a country where everyone knows all communications are compromised and you know your partners are working against you. Even before you consider the geopolitics and supply chain disruptions, this is simply not a good business climate, and it puts your intellectual property at significant risk.
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Join the Discussion
32 comments so far.
AnonJuly 15, 2022 12:18 pm
In my pre-law days we had a subsidiary in China, and we did not have any issues with our (albeit admittedly) fairly modest cash flows back out for China from our manufacturing there to our US Corporate body.
Granted, the lion’s share stayed in China, but this too was a function of building the plant and monies for operations there (including ‘ahem’ Government funds).
xtianJuly 15, 2022 11:01 am
I would also like to see more comments on how to get the money a company earned in China out of China. I have heard anecdotal accounts that the US/Cn company partnerships worked well for the US company in that the US company made money in CN. But, that same US company could not transfer its rightfully earned CN money out of CN an into its US subsidiary.
Is there anyone on this board that can speak to this?
AnonJuly 15, 2022 09:55 am
Introducing a non-falsiable position as some type of justification is a logical fallacy.
Shame on Greg.
Comparisons of China to Mexico (as if Mexico had a KNOWN ‘Conquer the World’ plan are also beyond ludicrous.
This type of denial of the obvious impugns Greg’s “selling” attempts. The question to bear in mind is WHY is Greg pushing so hard to deny the plain evidence? Is his buying in of the One World Order that prevalent?
Greg DeLassusJuly 13, 2022 12:45 pm
I think the 2019 trade deal has seen to it.
What “2019 trade deal”? It suited Pres. Trump’s convenience to pretend that he had struck a “deal” with Pres. Xi, and it suited Pres. Xi’s convenience to humor Pres. Trump. Nothing actually happened as a result of that “deal,” however, and nothing ever will. It was all a charade.
Greg DeLassusJuly 13, 2022 11:22 am
[A]dmitting China to the WTO was a huge mistake. The idea that was… that if we let China into the WTO that they would reform their culture and become a market economy with democracy and human rights. That has not happened.
I definitely agree that this is how Pres. Clinton sold CN’s accession to the WTO, and I definitely agree that reality has not played out according to that sales pitch. It is harder to say whether it was a “mistake” to admit CN to the WTO.
First, CN’s subsequent economic growth has lifted literally hundred of millions of human beings out of really severe poverty. CN’s GDP/capita in 1999 was $873.29. By comparison, Nicaragua—the poorest country on the North American continent—had a GDP/capita that same year of $972.89. In other words, since 1999, CN has gone from being poorer than the poorest country on our own continent to being only slightly poorer than Mexico. This is a great thing for human welfare, and we should all be glad of it.
Second, while we know that the CCP trajectory under Xi has been bad, it could always be worse. We can never know the counterfactual of how things might have gone if we had worked to humiliate CN by keeping them out of international institutions in the 1990s/2000s. Maybe we would be in a stronger position now, or maybe not. We have kept North Korea isolated, for example, and they have only grown into an ever more nettlesome thorn in our sides. Perhaps by drawing CN into international structures, we have succeeded in keeping them better behaved than they might otherwise have been, even if not quite well>/I> behaved. Hard to say.
Greg DeLassusJuly 13, 2022 11:04 am
Can you expect a country to open its market for nothing?
I can definitely expect as much, if the country has wise leaders. Only mercantilist fools imagine that there is a net benefit from maintaining a closed economy.
[T]rying to contain the development of China… is a mission impossible.
The fact that China is so publicly annoyed with our efforts in this direction rather proves that containment is not impossible. The CCP would not be nearly so flustered if we were engaged in futile gestures.
PingJuly 13, 2022 06:04 am
>>It is an unbelievable outrage that the US is allowing tech companies to aid China in its march as the most despotic country in world history. And believe me. I wish it weren’t so. There would be nothing better than China becoming a democracy with full human rights.
For your first point, I think the 2019 trade deal has seen to it.
For your second point, US and world economy have benefited a lot by admitting China into WTO. It is just the political expectation that did not happen. Myself was pro-democracy years ago, but after I lived in the ‘free world’ for a couple of years and was able to see things myself, I began to see positive things of China’s system. The Chinese system is efficient in many ways, at least it works well in terms of economy development and improving people’s lives. If the systems works well so far, what is the point of changing it?
And I do not see why the ‘free world’ should fear China in any way as if China is going to take away your freedom (or, why calling for restricting China in the name of the whole ‘free world’?). Does anyone of you would ever vote to take the system of China? There is no one in China who intends to promote the system of China to any other country. Myself still admire the freedom enjoyed by the ‘free world’ and sometimes hate CN government’s way of doing things. The only challenge seems to be how to make sure the supreme leader will always be a reasonable and sober one, because if he is not, there is no check.
While China did not take the political route as US has expected, at least China has taken good care of its domestic problems without troubling the international community, can you imagine how catastrophic it would be if the world has another North Korea, Syria, or Middle East at China’s population scale?
US would benefit a lot more working with China rather than trying to contain the development of China, which is a mission impossible.
Night WriterJuly 13, 2022 04:52 am
Ping >>You can say that it has come to the point that the dealing term is obsolete, but you cannot claim the old deal was unfair and call it ‘stealing’ or ‘exploitation’ .
First, things have changed. And the past is the past and can’t be changed. But now Chinese companies should not be getting a better deal and the US is in the position where the US can demand a level playing field. Additionally, China and the US are starting to square off militarily so the US should rein in the technologies.
Second, many in the US, me included, think that admitting China to the WTO was a huge mistake. The idea that was advocated by the ignominious President Clinton was that if we let China into the WTO that they would reform their culture and become a market economy with democracy and human rights. That has not happened. In fact, technology has enabled China to become a totalitarian nightmare–a dystopia that not even George Orwell could have imagined. China continues on a path of complete and total control of their people who are without rights.
The free people of the world should do everything possible to restrict China. And China and the Marxists/far left in the USA do everything possible to play to the ignorant Americans but anyone that reads knows what China is becoming and has become. China monitors their citizens at level unheard of in human history and controls them at a level unheard of in human history. This is going to continue to become more and more of a problem as technology enables China to track every person in China in everything they do and then punish or reward the person in accordance with how well their behavior conforms to what China wants.
In short, China is the greatest enemy to humanity that has ever existed in the world and it is only getting worse. What shocks people like me is that Americans don’t get it. They are so ignorant of what is going on in China that they don’t understand the dystopian future we have unleased.
We are still free people and we want freedom for all people. If the Chinese government reformed and permitted freedoms and stopped their totalitarian control of the population, then we would all love to have China as a partner. Some of the Australians get what is happening. I watch Australian news. Some of them get it. Others are afraid of China. In fact, the most prevalent emotion related to China outside the USA is fear.
It is an unbelievable outrage that the US is allowing tech companies to aid China in its march as the most despotic country in world history. And believe me. I wish it weren’t so. There would be nothing better than China becoming a democracy with full human rights.
PingJuly 12, 2022 09:34 pm
>>Right. But the problem is that the USA needs to protect its companies from being exploited by China. So, framed without your open contract framework, the issue is why should Chinese companies get a better deal to operate in the USA, then USA companies get to operate in China?
The USA needs to protect its companies from exploitation and protect its people from allowing company executes from giving away the assets of the USA in exchange for their short-term gains.
It is unfair to judge the CN policy in today’s context, back in the days when China was opening up, people there can hardly feed themselves. They have no fund nor technology, market access was the only bargain, that is why such policy was introduced. What can you expect? Can you expect a country to open its market for nothing? At least those foreign companies traded their technology for something, something really biiiiig: if US companies did not take the offer, EU or JP will take the offer and gain the upper hand over US companies in the international playground. Before condemning China for such practice, how about US paying the copyright fees owned to UK during the 19th century? Such allegation arise only because CN companies has caught up and began to compete with US companies. You can say that it has come to the point that the dealing term is obsolete, but you cannot claim the old deal was unfair and call it ‘stealing’ or ‘exploitation’ .
Night WriterJuly 12, 2022 02:07 pm
Here is how much we should trust Biden.
Greg DeLassusJuly 12, 2022 02:06 pm
“It is not becoming like China to use our leverage to prevent China from demanding that our companies share their IP with China.”
Fair enough, although once again, you are not now describing “another way.” “Using our leverage” is just another way of describing scenario #1, where we hope that China adjusts its norms to become more like our own.
I am all in favor of using whatever “leverage” we have to encourage China down that road. It would be good for both China and the U.S.A. if China were to take such a path. We have, however, been “using our leverage” in this direction for many decades now, and the results have been underwhelming. We should not delude ourselves about how much “leverage” we have in this respect. Whatever we have, however, we should use as effectively as we are able.
Night WriterJuly 12, 2022 01:56 pm
Greg, please. It is not becoming like China to use our leverage to prevent China from demanding that our companies share their IP with China.
That fits into the level playing field of free trade model. That is very American and very much the type of thing the USA has done for 200 years.
What you are writing is just nonsense.
Greg DeLassusJuly 12, 2022 01:42 pm
“You always amaze me Greg where you like the far left see the USA as some pie that just magically appeared–not from the culture and hard work of the American people.”
I definitely agree that the society that we presently enjoy in the USA is the product of the work of the American people, and a function of our culture. We have long had a culture of welcoming immigrants, of favoring free trade over protectionism and mercantilism, of preferring to leave business decisions to business instead of trying to set them through central planning. I endorse these cultural choices.
It is precisely because of this reverence for our traditional American culture that I am not enthused about protectionism or immigration restrictions. These plans seem like a wide scale application of the Peter Arnett’s line about destroying the town in order to save it.
Greg DeLassusJuly 12, 2022 01:35 pm
“Another way is that the USA can demand more freedom for US companies like Tesla or impose constraints that within the US framework on Chinese companies making it harder for them to do business in the USA.”
That is not “another way.” That is option #2–try to combat China by becoming more like it. That is the road to penury. We gain nothing by making ourselves more like China. If we choose to ape China’s command model for the economy, we can expect to become as poor as China.
Night WriterJuly 12, 2022 01:23 pm
Another way is that the USA can demand more freedom for US companies like Tesla or impose constraints that within the US framework on Chinese companies making it harder for them to do business in the USA.
The USA has enormous leverage with China and can with a real president (not one that takes 10’s of millions of dollars from China for personal use) can ensure that US companies are treated fairly.
Plus, the arms industry pretty much encompasses most of all the high-tech industry. For example, the overlap of self-driving cars with drones is enormous.
Stop the nonsense. The USA has the strength to demand fair treatment for our companies. Probably not happening because Biden is probably taking another 100 million to serve the communist party in China which he would like to import into the USA. And not that is not an understatement.
celloistJuly 12, 2022 12:48 pm
Its been going on 15 yrs at least in some industries. It is a decision of the business, whether it wants access to the Chinese or other markets badly enough to divulge its IP jewels. Sometimes the answer can be no, so you find other markets more preferable. Or, divulge lower-quality IP, and/or sardine rouge.
Greg DeLassusJuly 12, 2022 12:26 pm
Setting aside the inanity of talking about “American” companies (which ones are those?), there are two ways that the playing field can be made “level” between the U.S. and China: (1) China can adapt its norms to be more like ours; or (2) we can adapt our norms to become more like China’s.
#1 is out of our hands. It would be much better for both China and the U.S. if China were to more to a more free market approach, but they have to choose to do so. They are a sovereign nation. We here in the U.S. have very little power to move them in the free market direction, other than through the sort of soft-power urgings that we have been deploying (to admittedly little effect) for the past three decades.
#2, however, is the road to penury. If we start compelling trade secret disclosures in the manner that China does, that just makes us more like China. We really do not want to be more like China. Life is better here. Why make it worse?
Mr. Quinn proposes a third-way in the original post, but it is not clear to me that it is actually all that viable. Mr. Quinn suggests that companies should simply choose not to do business in China so long as China insists that businesses partner with a local state-owned enterprise. This sounds fine in theory, but I am skeptical that any company trying to do business at a global level can afford to write off the Chinese market. If industry participant A refuses to do business in China, while industry participant B does business in China, how long will it take before the profits from its Chinese dealings allow B to acquire A in a merger (even a hostile merger)?
The U.S. government should (and does) prevent armament manufacturers from setting up shop in China. The same goes for other technologies with sensitive defense industry implications (cryptography, etc). Beyond that, however, our government should leave the individual decisions about how much business to do with China to individual firms. Some of those firms will behave cannily, others less so, and may the devil take the hindmost.
Night WriterJuly 12, 2022 12:12 pm
What you wrote Greg is independent of the USA ensuring a level playing field for US companies.
Greg DeLassusJuly 12, 2022 11:28 am
China is able to compel foreign companies to form joint partnerships with CN state-owned enterprises (and the forced disclosure of trade secrets that goes along with these joint partnerships) because CN runs a command economy. We do not run a command economy, because command economies are much less effective and efficient than free market economies.
Measured in PPP terms, US GDP/capita was about $69300 in 2021, while China’s was about $19300. For comparison’s sake, Mexico‘s PPP GDP/capita in 2021 was about $20000. In other words, China is actually poorer than Mexico, and Mexico is hardly my idea of a rich country.
We do not want to imitate China’s command and control economic model. That is the road to becoming even poorer than Mexico. We need to keep to the courage of our convictions that free market principles are ultimately superior to command economic principles. Our economic model will win out eventually, but not if scare ourselves into following China down the road to poverty.
AnonJuly 12, 2022 11:16 am
The Alfred E. Neuman award goes to:
Night WriterJuly 12, 2022 11:08 am
>>Governments exist to protect everyone (individual consumers, domestic industries, foreign corporations, etc) from force and fraud.
No the US government does not exist to protect China. The US government exists to protect the citizens of the US.
The exchange that is going on is that the US permitting Chinese companies to do business in the US without having to divulge their IP whereas China is forcing US companies to either not do business in China or to divulge their IP.
This creates an imbalance for the US companies where their Chinese counterparts are being given more opportunity than they are.
The US needs to put US companies on an equal footing with Chinese companies.
You always amaze me Greg where you like the far left see the USA as some pie that just magically appeared–not from the culture and hard work of the American people.
Plus, it just can’t go without being mentioned that Biden is without question compromised. Biden cannot be trusted to represent the USA’s interests.
Greg DeLassusJuly 12, 2022 10:37 am
Governments exist to protect everyone (individual consumers, domestic industries, foreign corporations, etc) from force and fraud. Once that degree of protection is in place, no further protection is either necessary or desirable. If a company cannot compete in a market free of force and fraud, that company deserves to die. There is no upside to coddling companies* that cannot compete on their own merit.
* Possible exception for armaments industry.
Greg DeLassusJuly 12, 2022 10:29 am
“[T]he USA needs to protect its companies from being exploited by China.”
Which companies are those? How many companies does “the USA” own?
Night WriterJuly 12, 2022 10:23 am
>>I am confused, wasn’t it an offer in the first place? Did the CN government force those companies to take the offer?
Right. But the problem is that the USA needs to protect its companies from being exploited by China. So, framed without your open contract framework, the issue is why should Chinese companies get a better deal to operate in the USA, then USA companies get to operate in China?
The USA needs to protect its companies from exploitation and protect its people from allowing company executes from giving away the assets of the USA in exchange for their short-term gains.
Night WriterJuly 12, 2022 08:54 am
“[H]ow could that be called as ‘stealing’?”
Maybe coercion is a better word. The US company faces competitive problems if it is not generating the revenue from China and the US government is not protecting the US company from being exploited by the Chinese government.
Another way to think of this is that it provides short-term gains for executives of American corporations at the expense of long-term health. It enables the executes to sell out the assets of the companies in exchange for the millions in their short-term stock increases.
The problem is the time frame is beyond the length that the stock market is good at discounting for.
PingJuly 12, 2022 05:35 am
I am confused, wasn’t it an offer in the first place? Did the CN government force those companies to take the offer?
Greg DeLassusJuly 11, 2022 07:43 pm
“[H]ow could that be called as ‘stealing’?”
Night WriterJuly 11, 2022 05:01 pm
IMHO, all of this is happening because of corruption in the USA. The root cause of this is Clinton where the plan was to admit China into the WTO and that would reform them into a democracy. That was the plan. Didn’t work. Clinton and Biden have made 10’s if not 100’s of millions of dollars from China. Trump’s family as well.
The core problem is that or politicians are not representing US citizens either due to corruption or due to woke culture where someone the USA just became rich and those riches are for the woke to distribute around the world.
Anyway, the reality is that the only way to deal with issues like this is at the very top of the US government.
XavierJuly 11, 2022 03:44 pm
I am confused. If a company made an informed decision to share a trade secret with another company to gain access to a market, how could that be called as “stealing”?
John KJuly 11, 2022 12:51 pm
Great article Gene! You’re basically the only one with the courage to call it and say it like it is. Thank you!
Greg DeLassusJuly 11, 2022 12:29 pm
It has never made sense to me to do business in a place where everyone know you must have a separate, China-only cell phone because your data will be instantly stolen the moment you power your phone on at the airport.
I agree with this sentiment, but I am not sure that it is even possible to avoid these pitfalls. Depending on how one measures, CN is either the world’s largest economy, or an exceedingly close second after US.
How can a company afford not to do business in a market that large? If you choose not to do business in that market while your competitors do, pretty soon the competitors will grow so large off the extra business that they will be able to buy you out. At that point, your trade secrets end up in CN anyway.
The forced tech transfer may well be inevitable. The only choice may be whether you profit from the process along the way. The market is a harsh master, and it does not care overmuch about the fairness of its outcomes.
Pro SayJuly 11, 2022 10:53 am
Yet more terrifying words:
“We’re from the CAFC, and we’re here to decide whether or not your claims are 101 eligible for patent protection.”