(Bloomberg) -- It bore hallmarks of a normal incentive program: Employees nominated outstanding work and managers doled out bonuses.
But this bounty program at Huawei Technologies Co. used encrypted email and it paid workers for secrets stolen from other companies, U.S. prosecutors alleged last month. Their indictment accuses the company of stealing technology from T-Mobile US Inc., a case that got under way Thursday in federal court in Seattle as Huawei pleaded not guilty to trade-secret theft.
American companies for decades have complained about Chinese firms stealing intellectual property -- or IP -- by theft or by demanding its disclosure in order to do business in the country. U.S. President Donald Trump has made protection of IP a focus of trade talks now underway.
“The U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection,” Trump said in a tweet on Feb. 24 as he announced the delay of higher tariffs for an unspecified period.
The Chinese government dismisses the complaints. But the U.S. economy loses at least $225 billion annually from counterfeit goods, pirated software, and theft of trade secrets, according to a 2017 report by the Commission on the Theft of American Intellectual Property, or IP Commission. The IP Commission called China “the world’s principal IP infringer” that is “deeply committed to industrial policies that include maximizing the acquisition of foreign technology and information.”
U.S. Trade Representative Robert Lighthizer told Congress on Wednesday that the U.S. is seeking commitments against cyber-theft and physical theft in the ongoing talks.
“I agree with those who see our large and growing trade deficit and their unfair trade practices, including technology transfer issues, failure to protect intellectual property, large subsidies, cyber-theft of commercial secrets and other problems, as major threats to our economy,” Lighthizer said.
Chinese President Xi Jinping and former U.S. President Barack Obama in 2015 reached an agreement to stop the theft of corporate secrets. But the U.S. in November 2018 accused China of continuing a state-backed campaign of intellectual property and technology theft.
China has long denied pilfering technology, attributing the U.S. accusations to hearsay.
“China’s achievements in innovation have been made by the wisdom and hard work of the Chinese people,” Foreign Ministry spokesman Hua Chunying said in response to complaints made by Vice President Mike Pence last summer.
“It is typical unilateralism and zero-sum thinking to launch trade wars for domestic political considerations and for one’s own interests,” Hua said, according to the Xinhua state news agency.
In December, two Chinese nationals, said by U.S. prosecutors to have coordinated with the Chinese government, were indicted and accused of a decade-long espionage campaign that yielded secrets from U.S. companies and government agencies. Deputy Attorney General Rod Rosenstein said the charges were “an important step in revealing to the world China’s continued practice of stealing commercial data.”
“IP theft has been part of the opening with China from the start,” James Lewis, director of the technology policy program at the Center for Strategic & International Studies in Washington, said in an interview. “It has been a constant theme.”
Accusations run the gamut, including stealing nuclear-power know-how, software to run wind turbines, industrial fabric-cutting machines -- and, in Huawei’s case, parts of a phone-testing robot.
In 2011, the Shenzen-based company was just entering the U.S. market with its phones, and its handsets were failing too often. It saw a path to catching up with competitors’ quality: a testing robot like the one developed by its partner, T-Mobile.
T-Mobile protected the robot with patents, security cameras, a guard and confidentiality agreements. Huawei engineers in China allegedly pressed their U.S.-based colleagues for details on how the device worked, according to court filings. Tensions rose. “We CAN’T ask TMO any questions about the robot. TMO is VERY angry the questions that we asked,” a Huawei employee in the U.S. allegedly said in an e-mail.
In May 2013, a Huawei engineer allegedly placed a robot piece into his laptop bag, left with it and, along with a colleague, took measurements and photos and sent them back to China, according to the indictment.
Huawei last month issued a statement saying it had done nothing wrong. “The company denies that it or its subsidiary or affiliate have committed any of the asserted violations of U.S. law set forth in each of the indictments,” Huawei said.
Earlier, it blamed the incident on rogue employees. At Thursday’s hearing in Seattle, U.S. District Judge Ricardo Martinez set trial for March 2, 2020.
China’s foreign ministry reacted to the charges against Huawei by accusing the U.S. of manipulation. It called on the Trump administration to stop its “unreasonable crackdown” on Chinese companies.
The case already has been the subject of a civil suit. In 2017 a jury awarded T-Mobile $4.8 million in damages from Huawei for breach of contract but rejected allegations of misappropriation of trade secrets. The parties later agreed to drop the case after settlement talks.
Accusations of theft go back years. In the early 1990s, Chinese-made fabric cutters began appearing on the market. Robert Stevenson, chief executive officer of Buffalo, New York-based Eastman Machine Co., a closely held maker of machines for cutting cloth that dates to the 19th century, said the new machines were clones of those made by his company.
Sales of the genuine machines plummeted, and Eastman went from having 150 union workers and selling 20,000 machines annually worldwide, to 58 workers and selling fewer than 8,000, Stevenson testified to Congress in 2005.
The company survived - but is smaller, he says, as a result of Chinese copying.
“These thefts in China not only have cost me 50 jobs, they probably have cost millions of jobs,” Stevenson said in an interview. “Right now in this discussion with China, with the Trump administration, hopefully they’re doing something about it.”
Most countries steal less as their economy matures, but China shows a different pattern, said Derek Scissors, an economist at the American Enterprise Institute.
“As China has become more advanced, they’ve been able to benefit more from IP theft,” Scissors said in an interview.
“Cyber makes it possible to steal a lot more than previously” because rather than sneak into a factory, “you just break into the network,” Scissors said. “It’s crucial to China and intractable in the trade talks.”
At times cyber-theft can have a dramatic effect on a victim’s fortunes.
American Superconductor Corp., based in Ayer, Massachusetts, cut almost 700 jobs and lost more than $1 billion in shareholder equity after Sinovel Wind Group Co. allegedly stole software used to regulate power flowing from wind turbines, according to prosecutors.
Sinovel was found guilty last year in a federal court in Wisconsin of orchestrating the 2011 theft, conducted via an Austrian employee paid to become an insider spy. Sinovel agreed to pay $57.5 million in restitution, according to a court filing.
“It’s a Pyrrhic legal victory,” Michael Brown, a former chief executive officer of cybersecurity firm Symantec Corp., told Congress in July.
American Superconductor is “now competing in a global market for wind turbines against its former customer using stolen technology,” Brown said. The company didn’t respond to a request for comment.
More recently, China General Nuclear Power Company turned to a Taiwan-born U.S. citizen and nuclear engineer trained at U.S. universities for help procuring components for its reactors, according to the Justice Department.
The engineer, in turn, allegedly enlisted employees at Florida Power & Light Co. and the Tennessee Valley Authority, to provide technical reports. The engineer pleaded guilty to conspiracy in 2017.
China’s nuclear industry once relied on imported technology. But the newest reactors are more than 90 percent domestic.
“The playbook is simple: rob, replicate and replace,” John Demers, assistant U.S. attorney general for national security, testified at a Senate hearing in December. “Rob the American company of its intellectual property, replicate that technology and replace the American company in the Chinese market, and one day, in the global market.”
(Updates with Huawei’s plea in seceond paragraph.)
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