Chinese Industrial Espionage

This new book is the first full account, inside or outside government, of China’s efforts to acquire foreign technology.

Based on primary sources and meticulously researched, the book lays bare China’s efforts to prosper technologically through others’ achievements. For decades, China has operated an elaborate system to spot foreign technologies, acquire them by all conceivable means, and convert them into weapons and competitive goods – without compensating the owners. The director of the US National Security Agency recently called it “the greatest transfer of wealth in history.”

Written by two of America’s leading government analysts and an expert on Chinese cyber networks, this book describes these transfer processes comprehensively and in detail, providing the breadth and depth missing in other works. Drawing upon previously unexploited Chinese language sources, the authors begin by placing the new research within historical context, before examining the People’s Republic of China’s policy support for economic espionage, clandestine technology transfers, theft through cyberspace and its impact on the future of the US.

This book will be of much interest to students of Chinese politics, Asian security studies, US defense, US foreign policy and IR in general.

William C. Hannas has an MA from the University of Chicago in Chinese and a PhD from the University of Pennsylvania in Asian languages. He served with the US Navy and Joint Special Operations Command, taught at Georgetown University, and holds a senior executive position in a component of the US federal government. Hannas is author of Asia’s Orthographic Dilemma (1997) and The Writing on the Wall: How Asian Orthography Curbs Creativity (2003).

James Mulvenon is Vice-President of Defense Group, Inc.’s Intelligence Division and Director of DGI’s Center for Intelligence Research and Analysis. Trained as a Chinese linguist, he is a leading expert on Chinese cyber issues, and has published widely on Chinese military affairs, partyarmy relations, C4ISR, and nuclear weapons doctrine and organizations. He has a PhD in political science from the University of California, Los Angeles, and is author of Soldiers of Fortune (2000).

Anna B. Puglisi has MA and MS degrees in public affairs and

environmental science, has worked in research and technical infrastructure, and now holds a senior analyst position in a component of the US federal government. Ms. Puglisi studied at the Princeton in Beijing Chinese language school and was a visiting scholar in Nankai University’s Department of Economics, where she studied China’s S&T policies, infrastructure development, and university reforms. 

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Chinese Industrial Espionage

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William C. Hannas, James Mulvenon and Anna B. Puglisi

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Chinese Industrial Espionage

Technology acquisition and military modernization

William C. Hannas, James Mulvenon and Anna B. Puglisi

 

First published 2013

by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

Simultaneously published in the USA and Canada by Routledge

711 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business © 2013 William C. Hannas, James Mulvenon and Anna B. Puglisi

The right of William C. Hannas, James Mulvenon and Anna B. Puglisi to be identified as author of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging-in-Publication Data

Hannas, Wm. C., 1946—

Chinese industrial espionage: technology acquisition and military modernisation / William C. Hannas, James Mulvenon, and Anna B. Puglisi. p. cm.—(Asian security studies)

Includes bibliographical references and index.

ISBN 978—0—415—82141—4 (hardback)—

ISBN 978—0—415—82142—1 (pbk.)—

ISBN 978—0—203—63017—4 (e-book)

1. Business intelligence—China. 2. Business intelligence—United States.

3. Technology transfer—China. 4. Technology transfer—United States. I. Mulvenon,James C., 1970- II. Puglisi, Anna B. III. Title. 

HD38.7.H363 2013

338.6—dc23

2012044273

ISBN13: 978–0–415–82141–4 (hbk)

ISBN13: 978–0–415–82142–1 (pbk)

ISBN13: 978–0–203–63017–4 (ebk)

Typeset in Baskerville

by Swales & Willis Ltd, Exeter, Devon

Contents

List of Illustrations

List of Abbreviations

Acknowledgments

Introduction

1 China's History of Relying on Western Technology

2 China's Use of Open Sources

3 Trade for Technology

4 PRC-based Technology Transfer Organizations

5 US-based Technology Transfer Organizations

6 China's Foreign Students in the United States

7 Bringing Technology “Back” to China

8 Traditional Chinese Espionage

9 Chinese Cyber Espionage

10 Chinese Industrial Espionage in Context

Conclusion

Appendix 1 Case Histories of Chinese Industrial Espionage

Appendix 2 Protecting against the China Cyber Threat

Bibliography

Index

Illustrations

Figure

2.1 China's Foreign S&T OSINT Organizations

Tables

1.1 Accomplishments of Students who Participated in the China Educational Mission or Boxer Indemnity Program

2.1 Combined Holdings of Chinese S&F Information Institutes

6.1 Chinese Students Abroad and Rates of Return, 2001-2011

6.2 Number of CSSA Branches, by State, 2011

6.3 Numbers and Percentages of Chinese Students Staying in the United States After Graduation, 2002-2008

8.1 Technology Espionage Cases Involving China, 2007-2011

10.1 Pioneers by Nation and Region 

Abbreviations

Acronym Term

2PLA PLA's Military Intelligence Department (Second Department)

211 Program 国家 211 工程项目(National Project 211 Program)

3PLA PLA's SIGINT organization (Third Department)

863 Program 国家高技术研究发展计划(National High-Tech

Development Plan)

973 Program 划家重点基础研究发展规划(National Basic Research

Program of China)

985 Program 国家985 重点建设项目 (National Development Program of

Key Disciplines)

ACP Association of Chinese Professionals

ACSE Association of Chinese Scientists and Engineers

ACSEJ Association of Chinese Scientists and Engineers in Japan

AD Reports Armed Services Technical Information Agency Document

BDS Beijing Document Service

CAE Chinese Academy of Engineering

CAEP Chinese Academy of Engineering Physics

CAIEP China Association for the International Exchange of Personnel

CALIS China Academic Library and Information System

CANS CAST Network Society

CAPST Chinese Association of Professionals in Science and Technology

CAS Chinese Academy of Sciences

CAS-TAF Chinese American Science and Technology Advancement Foundation

CASB Chinese Association for Science and Business

CASEJ Chinese Association of Scientists and Engineers in Japan

CASPA Chinese American Semiconductor Professional Association

CAST China Association for Science and Fechnology

CCP Chinese Communist Party

CDSTIC China Defense Science and Fechnology Information Center

CETIN China Engineering and Fechnology Information Network

CFIUS (US) Committee on Foreign Investment in the United States

CIE Chinese Institute of Engineers

CNA Computer Network Attack

CNE Computer Network Exploitation

CNIS China National Institute of Standardization

CNO Computer Network Operations

COEA China Overseas Exchange Association

CONUS Continental United States

COSSP China Overseas Students and Scholars Pioneer

COSTIND Commission on Science and Fechnology Industry for National Defense

CSA Chinese Scholars Association

CSIS Canadian Security Intelligence Service

CSPA Chinese Student Protection Act

CSSA Chinese Students and Scholars Association

CSSTI China Society for Scientific and Fechnical Information

CYBERCOM (US) Cyber Command (USCYBERCOM)

DHS (US) Department of Homeland Security

DOD (US) Department of Defense

DOE (US) Department of Energy

ECM Electronic Countermeasures

FACPSU Federation of Associations of Chinese Professionals in Southern USA

FBI (US) Federal Bureau of Investigation

FDI Foreign Direct Investment

GAO (US) Government Accountability Office

GDP Gross Domestic Product

GIG (US) Global Information Grid

HUMINT Human Intelligence

HYSTA Hua Yuan Science and Fechnology Association

IAPCM Institute of Applied Physics and Computational Mathematics

ICBM Intercontinental Ballistic Missile

IEC International Electrotechnical Commission

IFCSS Independent Federation of Chinese Students and Scholars

IO Information Operations

IOSS Interagency OPSEC Support Staff

IP Intellectual Property

IPR Intellectual Property Rights

ISO International Organization for Standardization

ISP Internet Service Provider

ISTIC Institute of Science and Technical Information of China

ITER Tokamak Consortium

MII Ministry of Information Industry

MIIT Ministry of Industry and Information Technology

MLP Medium and Long Term Plan for S&T Development

MNC Multinational Company

MNE Multinational Enterprise

MOA Ministry of Agriculture

MOC Ministry of Commerce

MOE Ministry of Education

MOF Ministry of Finance

MOFTEC Ministry of Foreign Trade and Economic Cooperation

MOP Ministry of Personnel

MOST Ministry of Science and Technology

MSS Ministry of State Security

NACAST North America Chinese Association of Science and

Technology

NACSA Northern America Chinese Clean-tech and Semiconductor Association

NAIEC North American Chinese Scholars International Exchange Center

NASA National Aeronautics and Space Administration

NCIX (US) Office of the National Counterintelligence Executive

NDRC National Development and Reform Commission

NETL National Engineering and Technology Library

NGO Non-Governmental Organization

NIM National Institute of Metrology

NIPRNET Unclassified but Sensitive Internet Protocol (IP) Router Network

NISS National Internet-based Science and Technology Information Service System

NLS National Library of Standards

NNSF National Natural Science Foundation

NSA (US) National Security Agency

NSF (US) National Science Foundation

NSFC Natural Science Foundation of China

NSL National Science Library

NSTL National Science and Technology Library

NTIS (US) National Technical Information Service

NTTC National Technology Transfer Centers

NUAA Nanjing University of Aeronautics and Astronautics

OCAO Overseas Chinese Affairs Office

OCEPA Overseas Chinese Entrepreneurs and Professionals Association

OCPAN Overseas Chinese Professional Association Cooperation Network

OCS Overseas Chinese Scholars

OECD Organization for Economic Co-operation and Development

OIG (US) Office of the Inspector General

OPSEC Operations Security

OSINT Open Source Intelligence

PACOM (US) Pacific Command

PGP Pretty Good Privacy

PLA People's Liberation Army

PRC People's Republic of China

PRO Public Research Organizations

PRS Permanent Resident Status

R&D Research and Development

RAND Research And Development Corporation

RMB Renminbi

S&ED Strategic and Economic Dialogue

S&T Science and Technology

SAC Standardization Administration of China

SAFEA State Administration of Foreign Experts Affairs

SAPA Sino-American Pharmaceutical Professionals Association

SATEC Sino-American Technology and Engineering Conference

SCEA Silicon Valley Chinese Engineers Association

SCIC Society of Competitive Intelligence of China

SCOBA Silicon Valley Overseas Chinese Business Association

SEVIS Student and Exchange Visitor Information System

SIGINT Signals Intelligence

SIPO State Intellectual Property Office

SOF Special Operations Forces

SSD Strategic Security Dialouge

SSTC State Science and Technology Commission

STAN Structure Analysis Statistics

SVCACA Silicon Valley Chinese American Computer Association

SVSTA Silicon Valley Science and Technology Association

UCAPO Union of Chinese American Professional Organization

UCTID Center for US-China Technology Innovation and Development

USSR Union of Soviet Socialist Republics

US United States

WOFE Wholly Owned Foreign Enterprise

WTO World Trade Organization 

Acknowledgments

No one can undertake a project such as this without the support and inspiration of others. We wish to personally thank the following people for their contributions to our knowledge and for their help in creating this book.

To our many Chinese friends who over the years shared their culture, lives, and language with us, and opened a world of understanding not available through other means. For their courage and generosity in opening up to foreigners – may they one day enjoy the same freedoms that we do.

To our mentors Bob S, whose counsel was indispensible; Victor M, who taught scholarship and integrity; and Janice H, who encouraged new ways to think about things. It is through their teaching, encouragement, and support that we have grown professionally.

To Peter M and Matt B, for sharing materials and intense discussions that formed some core arguments of this book; to friends in the FBI on the front lines of this fight, especially Pete M, Charles L, Tom B, Sean K, Ben E, Dave B, Elic C, Mike D, Ted E, Christine G, Laura D, and Mike M; and to current and former practitioners elsewhere – Mike D, Peggy C, Randy B, John S, Steve H, Roger U, Nigel I, Ben B, Fred N, and many others who cannot be named because they are still in close quarters combat.

Most importantly to our spouses, Jennifer, Mary, and Don for their patience and love during the years of work and travel that fed into the book. And finally to our daughters, Tiffany, Kate, Ellie, and Siena, this book is our small attempt to provide you with a more secure future.

Introduction

This book is about how a third world country used the technology of the world’s greatest power to dominate it economically and – perhaps – strategically as well.

Suppose someone told you in 1970 – when China was torn apart by civil war, the Soviet Union was furiously building nuclear weapons, and the United States had the strongest economy on earth – that within four decades there would be no Soviet Union, that America would be mired in debt and endless recession, and that China would be the world’s economic superpower.

Suppose that person also claimed China would:

have a $30 billion trade surplus with the US hold more than $1 trillion of our treasury debt build a million cars more than the US in a year outpace the US in domestic computer sales.

In addition, Chinese exports to America would be manufactured goods of increasing technical sophistication, while the top US export to China would be, literally, scrap and rubbish.

Suppose he then told you that China would achieve this role reversal with minimal investment in basic science, through a technology transfer apparatus that worked – mostly off the books – to suck in foreign proprietary achievements, while the world stood by and did nothing.

If this story were a novel it could not be marketed, even as science fiction.

One decade ago we would not have believed it ourselves. Like most Americans, we were aware of China’s economic progress and of complaints that this progress relied in part on prior Western art. So what? This is the globalized twenty-first century. We patent products, they build them and pay royalties, the world moves on. Let the music industry worry about pirated CDs.

The point is that China was not – and is not – paying, and the “piracy” issue barely scratches the surface. Indeed, one could argue that our obsession with counterfeiting distracts us from the real threat from China, namely its ability to latch onto high technology created abroad, and apply it to real products – without compensating its owners.

This brings us to the heart of the matter. While giving due credit to the Chinese people for their ability to produce, China could not have engineered this transformation, nor sustained its progress today, without cheap and unrestricted access to other countries’ technology.

By this we do not mean “business competitive intelligence” or the habits of other nations that supplement their own research with informal technology acquisitions. We are talking here of an elaborate, comprehensive system for spotting foreign technologies, acquiring them by every means imaginable, and converting them into weapons and competitive goods. There is nothing like it anywhere else in the world.1 The system is enormous, befitting a nation of 1.3 billion, and operates on a scale that dwarfs China’s own legitimate S&T enterprise. Very little of it is secret. The projects are laid out in policy documents, discussed in the media, and implemented through venues whose general features are open to inspection. While traditional espionage plays a role, it is relatively minor.

This is little appreciated outside China. While China’s rise is chronicled everywhere, studies linking this rise to China’s appropriation of foreign technology and talent are few – a curious fact given the attention paid in the West to tracking China’s growth, and the resources China lavishes on the practices we describe. We trust the reader will see the logic of our argument as it unfolds.

The book begins with a review of China’s early technology acquisition efforts, from its nineteenth-century attempt to “import what is useful and keep China’s essence”   to post-1949 Soviet collaboration. Chapter 2 describes China’s large and mostly unknown open-source collection network – ironically one of the country’s few examples of genuine innovation. In Chapter 3 we discuss the phenomenon of foreign R&D in China, especially the rise of the now-ubiquitous multinational R&D laboratory.

Chapter 4 on PRC technology outreach organizations and Chapter 5 on Sino-American advocacy groups are complementary, depicting two halves of a well-managed whole. The latter will be the book’s least favored chapter as it strikes close to home for many, but we present the facts as they are, as described by those involved. Chapter 6 focuses on Chinese students in the United States, particularly their critical role in postgraduate hard science programs, and assesses the potential implications for deemed exports and counter-intelligence.

In Chapter 7 we dissect the original Chinese policy documents governing the establishment and evolution of these transfer mechanisms and let the official record speak for itself. There is a thin line between stealing secrets and informal technology transfer, and China pursues the latter to the limit. In Chapters 8 and 9 we show where China exceeds that limit by clandestine procurement and through cyberspace.

Chapter 10 discusses transfer mechanisms not explored in the book’s main body and suggests reasons why China chose this back door approach to development. In the Conclusion we propose steps which the United States and other countries can take to shield themselves.

The authors claim no expertise in counter-intelligence. Our backgrounds are science, private sector research, and academia with a common focus on foreign S&T. We were led down this path by the nature of Chinese science itself. If we add anything novel, it stems from our ability to read Chinese sources in the vernacular, not from privileged access that we have deliberately eschewed.

That said, we do not live in a vacuum. The authors are acutely aware that professionals in law enforcement, defense, intelligence, and commerce are frustrated by a lack of resources to protect our intellectual property, because the threat is not appreciated at all levels of government, and because government alone cannot deal with it. Hence the book has two purposes:

1. To alert decision-makers to the gravity of the China technology transfer problem so that means are provided to address it.

2. To raise awareness of the threat nationally, since no amount of formal intervention will matter if the owners of technology do not act on their own to protect it.

One caveat: we have no stake in embellishing the magnitude of this problem. Our bias is to downplay the matter to maintain credibility and avoid alienating responsible people. The truth is that China’s program to relieve the world of its high technology is so excessive, and the evidence for it so overwhelming, that portraying it fully would convey the same paranoia which China exhibits.

A word of caution: indignation seldom leads to solutions. Railing at China for “stealing” is unlikely to have much effect. By the same token, we have read many statements in PRC media that point to a “responsibility”   for Chinese the world over to transfer foreign technology by any means possible to atone for injustices. We prefer that people on both sides adopt cooler approaches.

Given our topic and the emotions that it generates, we are obliged to disclaim any connection between this book and persons or organizations with which we are or have been associated. The study was an independent labor of love and does not necessarily reflect the attitudes or equities of our employers past and present.

Note

1 Since 2000, when the US National Counterintelligence Executive (NCIX) started naming foreign countries in its unclassified annual report to Congress, China has ranked at the top and is the only country to have received its own dedicated issue. It is so skewed that the NCIX has considered publishing two annual reports: one for China, another for the rest of the world. National Counterintelligence Executive, Foreign Economic and Industrial Espionage, www.ncix.gov/publications/reports.