Technology Leadership, Economic Power and National Security: The China Factor

 Remarks at the Heritage Foundation - October 23, 2008

by John Tkacik

Let me begin with a parable. There was once a kindly old gentleman who ran a little 5&10 cent store. The little children liked coming to his store because he gave them penny candies, sometimes he would just let them take a handful from a jar he had on the check out counter. More and more children came to his store, and he gave out more and more candy. But he noticed that his retail candy bar inventory had depleted very fast, and he began to suspect that shoplifters were at work. He discovered that a few children had begun to shoplift the chocolate bars and other things, but when he caught them, he only blamed himself, and didn’t call the police or their parents.

But his business began to suffer seriously from shoplifting, and he soon discovered that a number of the teenagers he had hired to clean the shop and tidy the shelves had begun to steal his inventory and sell it to their parents who ran other shops in the town. The kindly old man did not want to offend the other shop owners, nor did he want to be thought of as discriminatory or biased. And he didn’t want to injure the self-esteem of his little workers. He didn’t install cameras or RFID tags, he didn’t frisk the children as they left his shop. He ignored the losses.

And although he was once the most beloved shopkeeper in the town, he was getting deeper and deeper in debt as his theft losses mounted. Other shops offered cheaper prices than he did because they were selling goods stolen from him. . . . . and you know how this story ends.

One day, the bank foreclosed on his mortgage, denied him short-term credit, and he was forced out of business. And he died and his family starved.

So – now you know how I feel about China’s rampant technology theft in the United States. In the single year from March 27 2007 to March 24, 2008, America’s newspapers reported at least 14 different espionage cases involving Chinese. They involved clandestine transfer of naval engineering technology to the Chinese military, Delta IV Rocket designs, digital telecommunications amplifiers, cruise missile stealth designs, PGM munitions accelerometers, special integrated circuits, to name a few.

And this is just a small cross section of what’s actually going on. I mean, I love and respect the FBI and the Justice Department, but they don’t get even one percent of it – I’ll wager.

And the Department of Commerce is like the kindly old man who hands out free candy to the kiddies and then wonders why they feel free to loot his shop wholesale. Our technology export controls are a joke. Commerce Department’s Bureau of Industry and Security will approve licenses to export anything to China, or at least you couldn’t prove that they don’t because they don’t release their adjudication statistics. Oh, well, sure, there are some things they approve only on condition of an approved end-user, and end-use follow up inspections. But I would be surprised, shocked, go into cardiac arrest if they actually inspected one-four percent of their cases in China – because their China inspections officers number exactly One . . . and she can only do about two or three site visits a month. They said they were going to double their inspectors – to two. But I don’t believe it’s happened yet.

BIS’s export control system is paralyzed with dysfunction. BIS not only has no intention of doing it’s job, it couldn’t do it if it wanted to. But who cares? I mean, what’s REALLY the big deal? Don’t we want free trade, and all that?
I love free trade . . . but I hate being taken for a sucker and a moron. And that’s what’s happening because the United States is not taking technology theft – and in that I also include scientific theft, academic theft – seriously.

Let me share with you the results of a study from Georgia Tech that came out at the beginning of this year.

“Since World War II, the United States has been the main driver of the global economy. Now we have a situation in which technology products are going to be appearing in the marketplace that were not developed or commercialized here. We won’t have had any involvement with them and may not even know they are coming.”

Nils Newman, author of a Georgia Institute of Technology study of Technology competitiveness published about three and a half weeks ago.

That study tabulated indicators that predict China will soon pass the United States in the critical ability to develop basic science and technology and the equally critical capacity to turn that science into marketable products and services. In fact, the study indicates that China and the United States are already at about the same level:

The Paper's 2007 statistics show China with a technological standing of 82.8, compared to 76.1 for the United States, 66.8 for Germany and 66.0 for Japan. Just 11 years ago, China’s score was only 22.5. The United States peaked in 1999 with a score of 95.4. Now, I don't point to this study as definitive, but I do believe it reflects an underlying reality -- that China's R&D base is expanding and improving.

One might also point to new GDP figures that show China's economy as roughly the same size as Germany's – maybe a bit bigger at current exchange rates, while China's industrial and manufacturing sector could actually be the second largest in the world behind the United States -- and ahead of Japan and Germany -- at current exchange rates. I caution that the way China calculates its industrial output (in terms of output value) is different from the way most of the OECD calculates it -- in terms of consumption, but the point is that China's industrial sector is already up in the magnitude of $1.96 trillion in annual output value (if you believe their statistics just published this past Monday) -- compared to $3.912 trillion for the United States' industrial and manufacturing sector ; but significantly ahead of Japan's at $1.19 trillion , and Germany at about $985.5 billion. One respected firm, Global Insights, says that this year – 2008 – manufacturers based in the US will account for 16.9 per cent of global value-added factory output for the whole of 2008, with China just behind with 15 per cent. China’s manufacturing sector will outproduce the United States next year. China’s industrial-manufacturing sector in the first three quarters of 2008 alone grew at the astonishing pace of 10.5 percent. While America’s has been stagnant. A comparable figure for first half industrial-manufacturing growth would be about 0.5 percent growth, with durable goods manufacturing actually in negative growth – and does anyone care to predict what our third quarter growth will look like? Or fourth quarter?

I also noticed another interesting phenomenon. Do you all remember when China's published GDP figures broke the trillion dollar mark? In 2003, according to the Chinese Statistical Bureau pegged GDP at $1.4 trillion -- with industrial output accounting for nearly two-thirds of economy growth. For 2004, China reported GDP at $1.6 trillion. And three years later, China reported GDP at $3.4 trillion -- double the 2004 level. Double -- in three years! Now, of course, there was a change in how China calculated its GDP which gave more weight to the service sector -- and of course, the U.S. dollar has depreciated significantly. But still, from an American's point of view, China's economy has doubled in magnitude in a very, very short time.

These two perspectives -- first that the United States is losing its technology leadership to China, and second, that China's economy is growing extremely rapidly, not just vis-à-vis the United States, but in the global context -- must make us wonder.

Wonder if this is a bad thing; and if it is, whether there is anything we can do to reverse the trend. Is America's relative decline in technology and industry reflective of a systemic problem -- that will manifest itself in an absolute decline? Or is China simply growing fast, and the U.S. is growing -- but not as fast? Or is there a deeper problem that perhaps Chinese commercial -- and military -- interests are saving vast amounts of resources and time by appropriating American scientific and technological progress.

There is no question in my mind, that this latter problem is a major factor in the overall equation of technology leadership, economic power and national security. And, according to the Justice Department's assistant attorney general for national security, there appears to be strong evidence that commercial espionage is not simply the province of the Chinese state, but also a standard business practice among Chinese commercial firms and academic institutions.

Which brings us to the matter of technology theft.

Let me tell you another little story.

Last year, in January 2007, China launched an anti-satellite weapon from a ballistic missile which rendezvoused with an orbiting weather satellite nearly 600 miles above the earth. When the rendezvous was completed, the missile's warhead fired a kinetic round at the satellite and destroyed it.

Coincidentally, Dr. Michael Pillsbury had completed a lengthy report on China's Antisatellite capabilities. To demonstrate that China had been long in developing an antisatellite, kinetic kill vehicle (KKV) capability, Dr. Pillsbury cited a number of Chinese academic papers. One, by a scientist at the Harbin Institute of Technology (Harbin Gongye Daxue) astronautics faculty, a Ms. Yu Xiaohong, was entitled “Error Analysis of Orbit Transferring Velocity Increment on KKV in Space.”

Also coincidentally, Ms. Yu Xiaohong was at the time at the University of Michigan engaged, in the words of the University of Michigan "engage[d] in the abstract study of rendezvous and transfer orbits" with a noted University of Michigan professor. The professor had visited China six months earlier in July 2006, to give three lectures at the Harbin Institute of Technology on asteroidal rendezvous problems -- or the problems of mating orbits of two separate bodies. The Federation of American Scientists, which monitors the arms race and weapons of mass destruction, describes the Harbin Institute as ‘the key university in the Chinese missile and space industry.’ A DoD study says that Harbin is aggressively involved in cruise missile research for the People’s Liberation Army.

At my daughter’s graduation from the University of Virginia last May 18, I happened to notice that 27 out of 87 Doctorates in Engineering awarded by UVa for the 2008 year were to scholars from the top PRC Universities. I dare say that figure may be quite a bit higher at other universities. And those numbers are counted by the statisticians as U.S. engineering degrees conferred . . . when comparing the number of engineering graduates with , for example, China.

Countries that pose national security concerns to the United States are upgrading their military forces with U.S. civilian technologies.

Within a decade, perhaps less, China will be America’s only global peer competitor for military and strategic influence. Director of National Intelligence, Michael McConnell told the Senate on February 27, 2007, that the Chinese are" building their military, in my view, to reach some state of parity with the United States," adding " they're a threat today, they would become an increasing threat over time."

Last October, Applied Materials China, a subsidiary of Applied Materials, the maker of advanced semiconductor fabrication equipment in the world; National Semiconductor Corporation of Japan which has wholly-owned factories in China: and the "Semiconductor Manufacturing International Corporation," based in Shanghai, were all named “validated end-users” for advanced semiconductor technology.

Applied Materials, however is now suing four of its former top officers of Applied Materials China for "misappropriating trade secrets". It seems that the four Chinese-American engineers, all with over ten years residence in the U.S. and long employment with Applied Materials, left Applied Materials China in 2004 to start a new company called Advanced Micro-Fabrication Equipment (AMEC) in Shanghai, and the four men used trade secrets from their old employer to build etching and CVD (Chemical vapor deposition) tools -- used in making microcircuits -- in China. They now compete directly with Applied . . . Now, how does a conscientious legislator on Capitol Hill draft a statute that could prevent this? Perhaps we already have sufficient laws on the books to punish offenders via IPR piracy and patent laws and commercial secrets laws. But what happens if no one enforces those laws? And what happens if violators suffer no consequences? Worse, still: what happens if the victimized U.S. corporation simply accepts its fate?

I don’t know about Japan’s National Semiconductor Fabs in China, but I do know that SMIC is completely controlled by the Chinese military via SMIC’s behind-the-scenes creditors. So what?

Let me tell you another story. Last August 2007, Chinese buyers wanted to acquire Seagate, a U.S. company that makes large volume data storage hard drives. Seagate rebuffed the offer, but within a month Seagate discovered that its shrink-wrapped hard-drives, assembled in Thailand, were being shipped to customers with viruses already installed – apparently in Chinese-made semiconductors which were used as components of those hard drives. The Trojan horse viruses were password-username recorders that then programmed whatever machine it was on to upload the data to a Chinese URL. The Chinese are very good at this technology. A Chinese firm makes ATM card readers for a European manufacturer, and it so happens that some of them have in them a sophisticated device designed to read the cards, store all the information and the pin-numbers, and relay that information once an evening apparently via a cell-phone signal to a computer server in Lahore, Pakistan. Some people suspect the Pakistanis of implanting a “bug” on the Chinese motherboard. I think it more likely to be Chinese planning the bug on the Chinese motherboard.

Finally, there’s much concern about “Kill-switches” embedded in U.S. military weaponry. These are circuits burned into a microchip’s firmware that can either disable the chip upon command, or give a clandestine hacker a “backdoor” into the system via that chip. Supposedly, “kill switches” hidden in Syrian radar processors (built by a French company) enabled the Israeli Air Force to penetrate Syrian airspace at will last September 2007 on their mission to destroy a joint Syrian-North Korean nuclear reactor under construction in Syria. Upon seeing this report, I immediately queried a colleague of mine in the IC, who said, and I quote, “This is a HUGE issue and one whose solution is far, far away.”

This month, BusinessWeek reported that the Pentagon has identified these “kill switches” in DoD weapons systems, traced to counterfeit semiconductors manufactured in - surprise! - China.

notes

“Recent Espionage Cases Involving China,” The Washington Post, April 3, 2008, p. A-10, at
http://www.washingtonpost.com/wp-dyn/content/article/2008/04/02/AR200804....
http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp407a.pdf. See also Peter Marsh, “China to overtake US as largest manufacturer,” Financial Times, August 10, 2008, p. 1, at http://www.ft.com/cms/s/0/2aa7a12e-6709-11dd-808f-0000779fd18c.html. and Peter Marsh, “US unmoved by imminent loss of industry top slot,” Financial Times, August 11 2008, p. 4, at http://www.ft.com/cms/s/0/4abc85f2-673a-11dd-808f-0000779fd18c.html.
http://www.esri.cao.go.jp/jp/sna/qe074/kjissuu.pdf
http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Co...
VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Tabellen/Content75/BWSnachBereichen,templateId=renderPrint.psml (19.94 billion euros for Agriculture; 563.12 for industry (including energy) and 88.24 billion for construction. - 672.30 billion euros - at an exchange rate of 1.4.
See Report on the Work of the Government - " China's GDP in 2004 reached 13.65 trillion yuan, an increase of 9.5% over the previous year." (Delivered at the Third Session of the Tenth National People's Congress on March 5, 2005), Wen Jiabao, Premier of the State Council, at http://www.gov.cn/english/official/2005-07/29/content_18351.htm.
Ariana Eunjung Cha, "Even Spies Embrace China's Free Market, U.S. Says Some Tech Thieves Are Entrepreneurs, Not Government Agents," The Washington Post, February 15, 2008, p. D01, at
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/14/AR200802..., (February 20, 2008).
Michael P. Pillsbury, "An Assessment of China’s Anti-Satellite and Space Warfare Programs, Policies and Doctrines," Prepared for the U.S.-China Economic and Security Review Commission, 19 January 2007, p. 42 at http://www.uscc.gov/researchpapers/2007/FINAL_REPORT_1-19-2007_REVISED_B... (February 14, 2008). Keith Crane, Roger Cliff, Evan Medeiros, James Mulvenon, William Overholt, Modernizing China’s Military Opportunities and Constraints," The RAND Corporation, Arlington, 2005, p. 170. http://www.rand.org/pubs/monographs/2005/RAND_MG260-1.pdf. China's Commission on Science and Technology for the National Defense (COSTIND) directly administers seven universities and colleges engaged in defense research and development. Harbin Institute of Technology is one.
http://www.fas.org/nuke/guide/china/contractor/hit.htm.
It is evident that American leaders already see China as an emerging “superpower”. Secretary of State Condoleezza Rice, not one to use the term “superpower” lightly, observed as long ago as June 2005 that China is becoming a “military superpower,” Neil King, Jr., “Rice Wants U.S. to Help China Be Positive Force,” The Wall Street Journal, June 29, 2005, p. A13. Director of National Intelligence John Negroponte testified that “China is a rapidly rising power with steadily expanding global reach that may become a peer competitor to the United States at some point.” Bill Gertz, “China’s Emergence as Military Power Splits Strategists on Threat to U.S.” The Washington Times, February 7, 2006, p. A3. Since 1998, the Central Intelligence Agency’s World Factbook has listed China as second largest national economy behind the United States in “purchasing power parity” terms (a quantitative measure of equivalent goods and services rather than nominal dollar values at official exchange rates). Data for 2006 indicate that, in nominal dollar terms, China now has the world’s fourth largest economy (after the U.S., Japan, and Germany) if new revised figures for China’s service sector and Hong Kong’s GDP are included. Joe McDonald, “China Says Economy Much Bigger Than Thought,” Associated Press, December 20, 2005.
Bill Gertz, “China expands sub fleet,” The Washington Time, March 2, 2007 page A1, at http://www.washingtontimes.com/national/20070302-012440-4462r.htm.
JOHN MARKOFF, “Chinese Seek to Buy a U.S. Maker of Disk Drives,” The New York Times, August 25, 2007, at http://www.nytimes.com/2007/08/25/business/worldbusiness/25drive.html.
Lin Ching-lin, “Chinese subcontractors blamed for trojan horses”, Taipei Times, November 12, 2007, p. 2, at http://www.taipeitimes.com/News/taiwan/archives/2007/11/12/2003387447. Yang Kuo-wen, Lin Ching-chuan and Rich Chang, “Bureau warns on tainted discs,” Taipei Times, Nov 11, 2007, Page 2 at, http://www.taipeitimes.com/News/taiwan/archives/2007/11/11/2003387202.
Sally Adee, “The Hunt for the Kill Switch,” ieee Spectrum, May 2008, at http://spectrum.ieee.org/print/6171.
Brian Grow, Chi-Chu Tschang, Cliff Edwards and Brian Burnsed, “Dangerous Fakes; How counterfeit, defective computer components from China are getting into U.S. warplanes and ships,” BusinessWeek, October 2, 2008, at http://www.businessweek.com/magazine/content/08_41/b4103034193886.htm