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Trade Secrets for Sale

To catch a criminal, you have to think like a criminal. That's what Sherlock Holmes and other super sleuths espouse as a sure-fire method for outthinking perps and anticipating their next move. It works against counterfeiters, thieves, hackers, pirates, and other criminal types.

Intellectual property theft accounts for billions of dollars of lost revenue and often involves critical compromises in highly sensitive technologies. And a Mandiant report released last month calls China the biggest IP crime boss in history.

Here in America, we understand its methodologies because we have the same skillsets and computer gear. The National Security Agency (NSA) has “listening post” technology available for connection to every cellphone and computer.

Wary Eye

'Beijing is waging a massive trade war on us all,' Rep. Mike Rogers (R-MI) said at a 2011 hearing, 'and we should band together to pressure them to stop.'

“Beijing is waging a massive trade war on us all,” Rep. Mike Rogers (R-MI) said at a 2011 hearing, “and we should band together to pressure them to stop.”

Spying on the spies
I am not implying that the NSA is responsible for any IP theft here in the US, but it has access to virtually every digit whizzing through the wired and wireless cloud. Can it decrypt every encrypted signal? Maybe not on the fly, but it does have access, along with codebreaking equipment and personnel.

If you really want to get an appreciation of our cybersecurity knowhow, you should take the time to read the Mandiant report in full. Let's look at it a little closer.

Since 2004, Mandiant has investigated computer breaches at hundreds of organizations around the world. The majority of these breaches are attributed to actors that the company calls the Advanced Persistent Threat (APT).

The report includes a quote from an October 2011 hearing from House Intelligence Committee Chairman Mike Rogers (R-MI):

China's economic espionage has reached an intolerable level and I believe that the United States and our allies in Europe and Asia have an obligation to confront Beijing and demand that they put a stop to this piracy. Beijing is waging a massive trade war on us all, and we should band together to pressure them to stop. Combined, the United States and our allies in Europe and Asia have significant diplomatic and economic leverage over China, and we should use this to our advantage to put an end to this scourge.

China's Ministry of Defense responded to the Mandiant report on Feb. 20: “The report, in only relying on linking IP [Internet protocol] address to reach a conclusion the hacking attacks originated from China, lacks technical proof” of state involvement.

I just had to retrieve the Mandiant report to see what China is using as the basis of its claim of no proof. After reading the report, I had to wonder if the Chinese spokesman had even read the report, or if he was just following explicit instructions from the Propaganda Ministry.

IP theft ROI
This massive amount of ongoing IP theft is heavily impacting the supply chain. Ask yourself, “Why buy something if I can make it myself at a lower cost?” China has stolen so many trade secrets and technologies that not only does it get a huge benefit in reduced R&D spending, but it also can funnel that savings into espionage technologies.

Here are just four examples from a White House report released in February.

Theft of Ford Motor Company Trade Secrets
In April 2011, Yu Xiang Dong was sentenced to 70 months in federal prison for theft of trade secrets and economic espionage. Yu was a former Ford Motor Company employee who resigned to work at Beijing Automotive Company. He copied 4,000 Ford documents onto an external hard drive, which he took to China. Ford valued the loss of the trade secrets at $50 million… Theft of DuPont Trade Secrets
Hong Meng was a research chemist for DuPont. He was involved in researching Organic Light Emitting Diodes (OLED). DuPont's OLED research efforts resulted in the development of a breakthrough and proprietary chemical process for OLED displays. Mr. Meng stole trade secret compounds and passed them to a Chinese university. He was caught by the FBI and prosecuted by the U.S. Attorney's Office for the District of Delaware and was sentenced to 14 months in federal prison. DuPont valued the loss of the trade secrets at $400 million… Theft of General Motors Trade Secrets
On November 30, 2012, a Federal jury in Detroit found Shanshan Du, a former General Motors (GM) engineer, and her husband, Yu Qin… guilty of stealing GM trade secrets related to hybrid vehicle technology worth $40 million. Du and Qin tried to pass the trade secrets to Chinese automaker Chery Automobile Company… Theft of Cargill and Dow Chemical Trade Secrets
In October 2011, Kexue Huang, a former employee of both Cargill and Dow Chemical passed trade secret information to a Chinese university that was developing organic pesticides on behalf of China's government. Financial losses to both companies from his criminal acts exceed $7 million. In December 2011, after many months of hard work by FBI agents, CCIPS prosecutors and the U.S. Attorneys' Offices in Indiana and Minnesota, Huang was sentenced to 87 months in prison — the strongest sentence possible.

These are just four examples. Please read the Mandiant report and see the greater damages it notes.

The cookies are gone, and China has been caught time and time again with its hands in our cookie jar. Even if we put the jar on a higher shelf, the recipe has already been stolen. The next time you buy these cookies, you should take note of the fortune — not the fortune that tells you about your future, but the fortune we have lost in trade secrets.

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10 comments on “Trade Secrets for Sale

  1. SunitaT
    March 10, 2013

    China has stolen so many trade secrets and technologies that not only does it get a huge benefit in reduced R&D spending, but it also can funnel that savings into espionage technologies.

    @Douglas, thanks for the post. By indulgingin IP theft China has not only reduced its R&D spending but it has also impacted the revenue of the companies which is holding that IP. I think international community should come together to fight China on this issue, so that interest of companies involved in R&D can be protected.

  2. dalexander
    March 10, 2013

    @Tirlapur, I think you are right about other nations needing to join the outcry. I regularly read a Linked-In blog mostly contributed to by Henry Livingston. He keeps us all posted on the latest legislation and counterfeiting incidences around the globe. We are getting a bunch of lip-service from Chinese government, and I have not read anything about a deliberate effort on their behalf to curb the counterfeiting and pirating operations. I also subscribe to China Daily which is so well written and has just the right amount, allowable would be another word, of articles covering government shortcomings, that I can almost believe they are planning to do something in response to comply with US and China agreements to help fight IP theft and counterfeiters.  If I lived in China and read this paper, I would think the goverment really has reformed. But, if I walked out my front door and saw the easy visibility of counterfeiting operations, I would know otherwise. The counterfeiters are not hiding and until they feel compelled to hide their illicit operations, I don't think the government is beginning to do the job of stopping them. When we hear of massive arrests and illicit factory closures on a daily basis, then we can have some respect for the words of the government. Right now the word is “corruption”, not “anti-counterfeiting.”

  3. FLYINGSCOT
    March 11, 2013

    I wonder what sentences China would dole out to foreign workers if the roles were reversed.  Jail time measured in months for $400M loss does not seem overly punitive so I wonder what type of deterrent it is.

  4. dalexander
    March 11, 2013

    @Flyingscot, lets say that the $400 million IP could be sold for 5 million USD. About 12 years of US style jail time is a salary of about $400,000.00 plus per year. Say average engineering salary might be 100k/yr. so by slipping out of the country with 5million IP theft payoff, that works out to 50 years of legitimate pay. Or, effectively a lifetime of work in exchange for a hard drive's worth of IP. I think there needs to be a much stronger deterrent than simple jail time with activities, a library resource, TV, and three square meals a day. Hard labor worth of a 4X payback equivalent, seems it might do the trick. Some of our prisons compared to overseas prisons are like luxury hotels. In fact, in my travels overseas, the prisons I saw were like dig kennels. They were cages where a prisoner could not stand up and there was no food unless a family member provided. The prisoners were washed down with hoses through the cage bars and there need not be any trial for up to two years of confinement. “Humane” was not a term associated with prisoners. It was really a medieval experience.

  5. itguyphil
    March 11, 2013

    I'm pretty sure they would make an overly strict punishment for foreigners to make an example to deter the next guy from doing the same.

  6. dalexander
    March 11, 2013

    @pocharlie,  Until they come up with a lot harsher penalties, crime does pay. By definition, a deterrent should not have any element of reward in it. For some third-world folks, a prison sentence with three meals a day would be a step up in quality of life.

  7. _hm
    March 11, 2013

    Is this applicable to China only? It should also be applicable to other countries e.g. Korea and others. Also, if it is true, why so many fortune 500 organazation are moving to China for Research and Design? They should fear outsourcing of advance design work.

  8. dalexander
    March 11, 2013

    _hm, I agree. I think if I had a unique design that was the bread and butter of my company, I would not outsource to China. If Korea is a proven site for industrial espionage, I would cross Korea of my list too. Maybe no business will prove we mean business when it comes to protecting our trade secrets.

  9. Eldredge
    March 13, 2013

    Doug,

        Good point – when we outsource manufacturing, we also outsource technology. In many cases it may be in small increments, but it all adds up.

  10. itguyphil
    March 20, 2013

    Good point. This reminds me of all of the recent major lawsuits where the big wigs only have to pay minimal fines. Sure, it's a fine but when it's only 1/2000th of your net income, who cares right…

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