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SNS: "Theft Nation" Update - July-31-2019
 
 
SNS Subscriber Edition • Volume 24, Issue 24 • Week of July 29, 2019

 THE STRATEGIC NEWS SERVICE ©
GLOBAL REPORT ON
TECHNOLOGY AND
THE ECONOMY

"Theft Nation"
Update

 


 
 
 
 
 

SNS: "Theft Nation" Update

 

In This Issue
Week of 7/29/2019 Vol. 24 Issue 24

_______

FiRe 2019 Speaker Spotlight

https://www.stratnews.com/images/members/shalev-lifshitz.jpgCanadian Shalev Lifshitz is only 16 years old, but he hasn't let that get in the way of his efforts to develop next-generation approaches to human-level artificial intelligence. The Toronto-based AI researcher has created a computer vision system to expedite diagnostic and drug discovery processes through his work at SickKids Hospital and is working with St. Joseph's Health Centre to create a remote system to assist stay-at-home patients and caregivers and gather metrics to improve care.

Shalev is also a research assistant at the University of Waterloo, where he works with Prof. Hamid R. Tizhoosh to design and implement a new artificial neural network architecture and a new, non-gradient-based learning algorithm without the use of machine learning libraries. His ultimate goal? To create a new artificial neural network that behaves more like the human brain.

We're delighted to welcome Shalev to the stage at Future in Review 2019 for a conversation about how humans and artificial intelligence are co-evolving.

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Publisher's Note: When Evan Anderson's "Theft Nation: How IP Theft Drives the Chinese National Business Model, and Its Effect Upon the Global Economy" was first published four years ago this month, it was available only to global leaders in intelligence, trade, and politics among the inventing nations of the world. Then we sold it to invited readers for $5,000 per copy for a few years. In today's issue of SNS, because it's time that everyone become aware of China's practices, we are offering it to all SNS members worldwide, free of charge - and we invite you to share the link with others.

"Theft Nation" is the only book I've worked on that I can clearly say changed the world. When we first published it, its comprehensive description of the Chinese national business model - and that model's effects on Inventing Nations - was as yet unknown. Because we chose to keep this on a restricted list at the beginning, available only to heads of state or one layer down, we called it a "cabinet-level briefing book." 

Using this publication, I was able to personally brief two Australian prime ministers, the head of the US NSA, the CTO of the CIA, the heads of US Trade and the FBI, and the White House National Security Council, as well as top officers at Commerce and State. In the UK, I used the book to brief the heads of MI6, GCHQ, the Cabinet Minister's Office, and BIS, as well as intel heads in Germany and France. In every case, these experts were, at the time, unaware of the discoveries shared in the book about China's secret and illicit economic programs for dominating its partners and, ultimately, a growing list of global markets.

During the last US election cycle, Evan and I worked to get copies into the hands of both presidential campaigns. We were rebuffed by the Hillary Clinton campaign, more than one of whose aides told us that she was not in listening mode, even among her team. On the other hand, we were able to get five copies into the Trump team's hands prior to the election, and they seemed to welcome the input. When you read it, you'll recognize the remarkable similarity to today's US national policy toward China.

For this preview of the upcoming, updated edition of "Theft Nation," the author has been kind enough to add a new preface, published below. While the current administration has done a textbook job of finally confronting China over its illegal economic tactics, there remains a growing need for citizens worldwide to gain a deeper understanding of China's strategies, tactics, and ultimate goals, before it is too late.

I hope you will agree that this remains the most important book on world trade, the global economy, and the threat Chinese practices pose to Inventing Nations and world peace. - mra

 

 

"Theft Nation" Update

      by Evan Anderson


Since the original publication of the "Theft Nation" report, much has been achieved. From the critical strengthening of the powers of the Committee on Foreign Investment in the United States' (CFIUS) and the passing of the Foreign Investment Risk Review and Modernization Act (FIRRMA) to the (albeit short-lived) sanctioning of People's Republic of China (PRC) telecommunications firm ZTE, followed by Huawei, a new era of consequences for rampant state-sponsored intellectual property theft and unfair trade practices has begun. This process is complicated and, at times, costly, but as the original "Theft Nation" detailed some years ago, it is necessary.

Much, however, remains to be done. In this addendum, we will examine key industries targeted by the Chinese national business model and the illegal activity therein. While the United States and its allies are getting closer to a place of strength when dealing with this model, they remain collectively vulnerable. The predatory system we first described so many years ago in the SNS Global Report continues to harvest intellectual property, offer WTO-illegal subsidies to domestic firms, and rapidly dominate global markets in critical sectors.

Meanwhile, the PRC government itself has become less, not more, friendly to global norms and values. At the time of this writing, a period of power consolidation in the PRC has led the country to a point of dictatorial unity unseen since the era of Mao Zedong. Rather than the liberalization hoped for by governments the world over, the People's Republic of China has fallen into an era of more totalitarian leadership and worse violations of human rights (and in greater numbers), and stronger information warfare, international political interference, and foreign debt-trap expansionism through the One Belt One Road (OBOR) program.

This rising China, then, is an increasingly unfriendly power not just to its stated enemies in the West, but also to its own citizens, and to those countries that choose to align themselves with its expansionism. The use of modern technology to murder countless Uighurs and intern millions more in camps, and the ongoing oppression of dissidents and other minorities (many of whom are executed, their organs harvested for sale) should serve to remind the world that the PRC government's pursuit of economic prosperity allows the further funding of such activities.

Cooperative countries such as Pakistan, Sri Lanka, and many African nations have also begun to recognize the negative consequences and vassal-state treatment they receive at the hands of the PRC government. From the sinking of Philippine fishing boats whose crews were left to drown, to the co-opting of local government through full-scale corruption, the PRC government hides its activities against its vassals under a thin guise of not-quite-plausible deniability. This new international aggression goes unchallenged because of, and in fact is enabled by, the system of theft, amplification, and market domination described in "Theft Nation."

Yet there is much to celebrate. Some smaller nations, including Malaysia, Thailand, and Indonesia, have begun to resist the deeply mercantilist aspects of the PRC's infomercantilist model. Australia and Japan have begun a new period of increasing wariness regarding the Politburo's methods and intentions. The United States has moved aggressively to counter the infomerc exfiltration of key technologies by the PRC's state-sponsored hackers and espionage agents. US universities and research facilities are, at long last, beginning to wake up to the threat posed by the "thousand grains of sand" approach to the gathering of human intelligence from academic institutions.

Many of the approaches used today need refinement. Many more policies should be enacted, and Japan, the European Union, and the Five Eyes (Australia, Canada, New Zealand, the United Kingdom, and the United States) all must work together more closely to close the gap. Nevertheless, these goals are achievable, and global understanding of the issue has improved greatly. This is not, therefore, an update characterized by dismay, but by mixed results and a call for more work to be done.

The following pages, using case studies of industries targeted by the PRC government that are key to the global economy, help to outline that scope of work. In each of these cases, predatory PRC campaigns have led to increased mainland Chinese domination of critical sectors. Some of the policies to counter these moves already exist; others must be created anew. None of these issues, however, are intractable.

This addendum concludes with a list of policy responses that should be collaboratively applied by the above-named allies. Working together and utilizing longstanding and trusted relationships, these nations can collectively stem the tide of intellectual property theft perpetrated by PRC President Xi Jinping's increasingly aggressive and totalitarian regime and protect the economies that fuel the defense of liberal values (democracy, sovereignty, human rights) that the United States and its allies have defended for so long, however, at times, imperfectly.

Telecommunications Equipment

Huawei has continued to see serious growth in its global market share, despite all of the work done by INVNT/IP and other groups to outline the dangers of telecommunications buildouts using equipment manufactured by firms closely aligned with the PRC government and intelligence groups.

Since 2013, Huawei's share of the entire telecommunications equipment market has increased by 8%, to 29% of the global total.[1] Dell'Oro has noted that the firm's market share continued to expand at 2% annually, clearly at the expense of the remaining competition, despite many setbacks due to security concerns.[2]

Huawei's growth, then, is a slow and steady march, pulling share from its competitors. To better understand why this is a problem (in short: stolen IP, WTO illegal subsidization, and deep ties to PRC military and intelligence), it's worth reviewing the Huawei section in the original "Theft Nation" report.

Smartphones

In smartphones, specifically, the shift of global markets is heading in one direction. In 2009, the top smartphone market shareholders were Apple, RIM, and Nokia, with Samsung and HTC coming in at a single-digit tier. Today, Nokia, HTC, and RIM have been completely knocked out of the running (for various reasons, to be sure, but not to exclude pressure in their chosen markets by subsidized PRC firms).

Notably, Apple's market share fell to 11.7% in Q4 2018, while Samsung grew to 23.1% of the global market. And the other major players? All Chinese: Huawei, Xiaomi, OPPO, and Vivo. Huawei has specifically targeted Apple for years, and is now leading it in market share. (See this more recent report for the latest on that subject.) Xiaomi is notorious for copying Apple's every move[3], including the fact that not only is it difficult for experts to discern that the phones haven't been fully reverse-engineered from the iPhone, but CEO Lei Jun seems to have also copied  Steve Jobs' style of dress, down to the black turtleneck.[4]

Original interactive chart available at <https://www.statista.com/statistics/271496/global-market-share-held-by-smartphone-vendors-since-4th-quarter-2009/>

This should give both businesspeople and security personnel pause as they contemplate the fact that subsidized knockoff iPhones from the PRC replaced devices from all of the world's largest providers a decade ago. It should be even more unsettling in the context of newer PRC data laws, which require disclosure of data from domestic firms at the behest of the PRC security apparatus.

From the Hunton Privacy blog:

Obligation to Submit Data to Governmental Authority

The Measures require network operators to provide data under their control upon request (relating to national security, social governance or economic regulation) from a competent governmental authority.

The definition of "social governance" and "economic regulation"? That would depend on the Politburo's latest priorities.

Finance

Finally, the expansion of PRC government and government-affiliated financing has posed an across-the-board threat of IP exfiltration in key industries, specifically those selected for targeting in the Made in China 2025 program. The Council on Foreign Relations document notes that "Washington argues that the policy relies on discriminatory treatment of foreign investment, forced technology transfers, intellectual property theft, and cyber espionage."[5]

In finance, the PRC government has proved adept at funneling its money through shell companies and into Silicon Valley. These investments tend to follow Made in China 2025 priority areas, specifically concerning areas such as artificial intelligence, surveillance, and security technology currently being used to intern some 2 million Uighurs in "reeducation camps."

The United States Special 301 report, authorized by Congress, provides regular updates on this financial incursion and its effects, including US concerns. From the 2018 report:

On its website, 6 Dimensions Capital states that it "specializes in the investment of innovative life science companies with business focuses on those strategic life science and technology areas promoted by the Chinese government for growth and development" and aims to "find and invest in global innovation in the US and build healthcare industry leaders in China."

3. Illustrative Examples of Chinese Venture Capital Investments

Available evidence indicates that the Chinese government has created and supported a web of entities that have established a presence in Silicon Valley and other U.S. technology centers to invest in high-technology U.S. startups and engage in a variety of VC investment related activities, to further the industrial policy goals of the Chinese government. VC firms invest in dozens, and sometimes hundreds, of startup companies, creating a diverse set of portfolio companies. VC firms then engage with their portfolio companies and to varying degrees have access to information, technology, and the ability to influence and potentially coerce management. The following cases exemplify this pattern of activity.

a) Digital Horizon Capital (Formerly "Danhua Capital")

As discussed in Section IV.C.3 of the Section 301 Report, Zhongguancun Development Group (ZDG), an SOE established by the Beijing municipal government, established an investment arm in Silicon Valley in October 2014 - ZGC Capital Corporation. ZGC Capital Corporation subsequently founded the ZGC Innovation Center @ Silicon Valley in May 2016. The Section 301 Report also noted that ZGC Capital has partnered with Stanford University, engaged in talent recruitment, made VC investments - including Meta, Everstring, and Optimizely - and invested in other VC funds - including Plug & Play, KiloAngel, and Danhua.

ZDG continues to support VC investments in Silicon Valley and elsewhere. In total, it has backed at least 59 investment funds, including Danhua Capital.

In May 2013, Beijing's Mayor, Wang Anshu, attended the Danhua Capital signing ceremony in Silicon Valley. In a press release posted on the ZDG website, ZDG stated that Danhua Capital would focus on supporting original and disruptive technologies developed at Stanford and nearby universities to work with the ZGC Group Silicon Valley Incubator Center and guide those projects back to Zhongguancun (in Beijing) to commercialize, thereby advancing the strategy whereby "Zhongguancun capital goes out and foreign advanced technology and human capital is brought in...."

In total, Danhua lists 113 U.S. companies in its portfolio, and most of those companies fall within emerging sectors and technologies (such as biotechnology and AI) that the Chinese government has identified as strategic priorities. Subsequently, at least one of those companies has reportedly decided to reduce operations in Silicon Valley and open operations in China. Notable investments include Meta, a Silicon Valley company that makes augmented reality products, and Cohesity, a California-based data storage company.

The full report, well worth reading for any technologist concerned with IP protection, is located here.

Given the universal access that minority stakeholders are often afforded, and the above aggressive language about IP exfiltration, these financial inroads are perhaps the most worrying potential threats to IP protection. Here, however, we have very good news.

In the process of gaining an understanding of the nature of PRC government operations in IP, the United States government began to more seriously consider the intrusion of PRC government funds into the US startup ecosystem. Today, the Committee on Foreign Investment in the United States has expanded powers under FIRRMA,  signed in 2018. According to Lawfare:

FIRRMA identifies several factors that Congress wants CFIUS to take into account when considering the national security risks posed by foreign investments. These include:

  • Whether a transaction involves a country of special concern that has a strategic goal of acquiring technologies that would affect U.S. technological leadership in that area;
  • The national security effects of cumulative market share control by foreign persons;
  • Whether a foreign person involved in a transaction has a history of complying with U.S. law;
  • How the control of U.S. industries and commercial activity affects the capability and capacity of the United States to meet the requirements of national security, including the reduction in employment of United States persons whose skills are critical to national security and the continued U.S. production of items necessary for national security;
  • The extent to which a transaction is likely to expose sensitive data of U.S. citizens to exploitation by foreign persons and governments; and
  • Whether a transaction exacerbates cybersecurity vulnerabilities or allows a foreign government to gain new capabilities to engage in malicious cyber activities against the U.S., including activities designed to affect the outcome of any federal election.

This additional legislation is a sensible, balanced response to foreign government attempts to abruptly purchase innovative US firms, often with national security implications, and exfiltrate them to Beijing, Shenzhen, and the like. It would be wise for the EU and the entire Five Eyes alliance to enact similar foreign investment regulations. As a group, a block focused on these principles could actively encourage positive foreign investment while avoiding the predatory PRC government approach.

Where to Go from Here

Over the past decade, the world has shifted from a lack of understanding of the PRC national business model originally described in "Theft Nation" to a position of disorganization regarding how to respond. There have been many market and individual technology losses to the predatory models of the PRC in that time. Time is slipping by, and with it critical technologies, companies, and jobs.

Positive stories have emerged, however. Particularly in recent CFIUS reform, the US has found bipartisan, common-sense legislation that helps enable the committee to do its job, protecting American (and allied) interests while allowing for the free and open financial system upon which the free world is built. More of the same kinds of legislation, both here and abroad, is called for. There is hope that we can actively respond to the systemic threats originally outlined in "Theft Nation."

The next necessary steps are myriad, but the most critical are as follows:

  1. The United States must maintain close cooperation with its allies in the rolling-out of mutual policies of protection that disable PRC government programs intended to exfiltrate critical IP through theft, cyberespionage, and financial infiltration.
  2. The United States and its allies must pursue sensible sanctions against any PRC firm confirmed to be selling stolen US or allied intellectual property. There is no reason that stolen IP from any firm in the United States or abroad that is produced below cost by the PRC government should be allowed to be sold in the United States or abroad. This predatory model for global market domination would fail if the world stood united against it.
  3. The United States and its allies should actively work to counter the information warfare campaigns that foment daily confused domestic dialogues on these issues.

If we follow these policies, we will stop living in a haunting replay of the world in 1938, and rather move forward to a time when we can be hopeful about the global economy again.

Evan Anderson
CEO, INVNT/IP
Seattle, Washington, July 2019

 


Copyright 2019 Strategic News Service. Redistribution prohibited without written permission.

 

About Evan Anderson

photo-Evan Anderson-2016-0428-sla
Sally Anderson 2017

Evan Anderson is the CEO of INVNT/IP, a Strategic News Service (SNS) initiative. INVNT/IP is a private consortium of global companies actively fighting nation-sponsored intellectual property theft through a combination of political advocacy, private briefings, and public education. Evan is the author of the seminal cabinet-level INVNT/IP briefing book "Theft Nation," featured on 60 Minutes in 2016 in its best-watched investigative segment ever.

Evan was formerly the director of Research at INVNT/IP and director of Marketing at SNS. He holds a BA in Cultural Anthropology from the University of British Columbia. Since 2011, he has worked closely, both in the field and at home, with Ti Kay Haiti, an organization dedicated to delivering DOTS-plus TB and HIV care to underprivileged communities in Port-au-Prince.

 

 

Your comments are always welcome.


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Mark R. Anderson

CEO

Strategic News Service LLC
P.O. Box 1969
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Other Critical Markets Targeted
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