On this episode of China Uncensored,
sure, the Chinese Communist Party is trying to steal
American innovation at every turn.
But that doesn’t mean we can’t take their money, right?
Hi, welcome to China Uncensored,
I’m your host Chris Chappell.
Made in China.
A symbol of quality workmanship and cutting-edge technology.
At least, that’s what Chinese leader Xi Jinping
wants you to think.
In 2015, Xi Jinping announced a new economic model
called Made in China, 2025.
It’s focused on “The task of upgrading
and accelerating technological development.”
On this show, we’ve talked about several ways the Communist Party has,
uh, “accelerated technological development” in the past.
Like by hacking and stealing US intellectual property,
then reverse engineering it at Chinese Technology Transfer Centers.
So much faster and easier than starting from scratch.
China has also weaponized trade,
according to Republican Senate Majority Whip John Cornyn.
“In many instances China has simply used trade as a weapon,
coercing US companies into entering joint ventures
and other business agreements that require the company
to hand over key technology and know how,
the so-called secret sauce.”
And I always thought secret sauce was mayonnaise
plus high fructose corn syrup,
left out in the sun for three days.
Today, we’ll be talking about a third way the Chinese Communist Party
acquires American tech.
They simply buy the American tech companies!
Part of Xi Jinping’s Made in China 2025 plan
is encouraging Chinese companies
to invest in foreign tech companies.
In particular—high tech industries like artificial intelligence,
robotics and space travel.
You know, your basic Isaac Asimov novel.
I guess Xi must be a fan.
The amount of money China has pumped into US tech
skyrocketed after Made in China 2025 was announced.
Deals with Chinese investors jumped from 66 in 2013 to 165 in 2017.
Chinese companies have invested in everything from Uber, to Airbnb,
to even Grindr!
I think the Chinese government might be getting
a little more data than they bargained for with Grindr.
Ok, Grindr jokes aside, in some cases,
Chinese companies are investing in tech companies
that are developing technology critical to national defense or infrastructure,
or that possess a lot of data on Americans.
The Pentagon considers all this investment—not just Grindr—
a serious risk for the United States.
This report from last year warns that the Chinese Communist Party
is stealing the Crown Jewels of U.S. Innovation.
Yes, those are the jewels everyone on Grindr is suddenly worried about.
China’s venture capital investment is at an all time high.
And, according to the Pentagon’s report,
the US government isn’t doing enough to address the risk.
The threat is so serious that both President Obama
and President Trump agree on it.
And I thought they didn’t agree on anything.
In December 2016,
Obama stopped a Chinese takeover of the US subsidiary
of a German semiconductor manufacturer.
The semiconductors industry makes the microchips
that are the core of any advanced technology
the Chinese Communist Party would like to get their hands on.
Obama blocking that takeover helped curb
the amount of Chinese money going to into US tech.
But Chinese companies potentially buying sensitive US technology
was still a problem.
In September 2017,
Trump blocked a Chinese purchase of Lattice,
another US semiconductor maker.
And earlier this year,
Trump blocked the sale of yet another US chipmaker
because of Chinese security issues.
Obama and Trump weren’t doing this on their own, though.
Although they blocked these deals using executive orders,
they did it on the recommendation of
the Committee on Foreign Investment in the United States,
or CFIUS.
CFIUS is a committee that involves several
top-level US government agencies,
and it’s chaired by the Treasury Secretary.
It was founded in 1975 to oversee purchases
of critical US industries by foreign countries.
But the CFIUS committee hardly ever met.
Until after 9/11.
Then Congress passed new legislation
that increased the role of CFIUS.
And according to Politico,
CFIUS did not have the resources to keep pace.
One official described 80-hour work weeks with no time off.
CFIUS carries so much weight that just their recommendation
against a deal is often enough to make it fall apart,
without even getting the president involved.
At the beginning of this year,
CFIUS rejected a planned Chinese takeover of Moneygram
because of national security concerns.
A month later, CFIUS rejected a state-backed Chinese company’s
acquisition of another US chip maker.
But, an overworked CFIUS can’t catch everything.
Here’s an example.
Last year, a semiconductor maker, ATop Tech,
filed for bankruptcy.
But, it had a market share of 1 billion dollars,
because of a ground-breaking product:
“an automated designer capable of making microchips
that could power anything from smartphones
to high-tech weapons systems.”
So a company called Avatar Integrated Systems
swooped in and bought it.
Now no one in the semiconductor industry had ever heard of them.
Turns out,
it belonged to a big shot in China’s steel industry,
and it looked like he set up Avatar
for the sole purpose of buying ATop Tech.
At the time,
others in the semiconductor industry
and even a Pentagon official had warned the bankruptcy court
that letting Avatar buy ATop Tech was a bad idea.
But the deal went through anyway,
because the whole thing flew under the radar of CFIUS.
Last year,
Defense Secretary Jim Mattis warned that
“CFIUS is both outdated and overburdened”
...and needed to be updated.
The Trump Administration said,
“modernizing CFIUS would strengthen our ability
to protect national security and enhance confidence
in our longstanding open investment policy.”
There are two bipartisan bills going through Congress
that aim to strengthen CFIUS.
They want to do things like expand the types of transactions
CFIUS would look at,
including bankruptcy cases like ATop Tech.
But there are some serious challenges to CFIUS
even if one of the bills passes.
See, it’s not as simple as just blocking a Chinese state-owned enterprise
from purchasing, say, American Secret Sauce Inc.
What about a Chinese national,
who becomes a New Zealand citizen,
but gets his money from the Communist Party,
and wants to buy an American business?
What about a Mexican company whose stock
is partly owned by a Chinese conglomerate,
and that Mexican company wants to buy an American business?
What about a local Chinese businessman in the United States,
who’s a US citizen,
but the Communist Party is funneling money to him through a relative?
Things start to get very murky,
and you have deal with some unpleasant things
that the Chinese Communist Party would love to exploit.
Like, the idea that stopping Chinese investment is motivated by racism.
Then there’s the counter argument by those who want to
see more Chinese investment.
An IBM policy executive said in a January Congressional hearing
that the new bill “could constitute the most economically harmful imposition
of unilateral trade restrictions by the United States in many decades.”
I mean sure, China is run by an authoritarian regime
with a national plan to systematically steal Western technology.
But they’ve got a lot of money,
and we want it!
Why be a negative nancy?!
And it’s that kind of broad-minded policy vision
that led IBM to sell punch-card technology to the Nazis,
enabling them to “calculate exactly how many Jews
should be emptied out of the ghettos each day”
and onto trains to you-know-where.
A similar argument is made overall in Silicon Valley—
that Chinese investment money is a good thing and fuels innovation.
I get it.
It seems like,
it’s a free country,
why not take the money!
It doesn’t matter who it comes from.
And that fits in just fine with the Chinese Communist Party’s
plan for Made in China 2025.
So what do you think about Chinese investment in US tech?
Leave your comments below.
And before you go,
it’s that time when we answer a question
from a supporter of the show,
a member of our China Uncensored 50-Cent Army.
This question comes from...
Jonathan Swanberg
“Hi Chris,”
Hi Jonathan.
“What is the real cost of stolen Intellectual Property (IP)
from the US to China?”
Great question.
The answer depends on who you ask.
The Intellectual Property Commission says IP
theft costs the US economy $600 billion dollars a year,
largely from China.
But it might be much bigger than that.
Casey Fleming—
whose company BLACKOPS Partners Corporation
consults for Fortune 500 companies—
he says the actual cost is closer to $5 trillion dollars a year.
And that’s because
(a) You have to factor in the total future value.
Not just products sold,
but also the loss of future innovation and American jobs.
And (b)
A lot of big companies that get hacked, haha,
don’t report it publicly because it’s too embarrassing
and could make stock prices drop.
It’s quite likely that the Chinese military has hacked
just about every big American corporation.
It just doesn’t get publicized.
And that’s all for this episode of China Uncensored.
I’m Chris Chappell.
See you next time.
On the one hand,
I’d love to take millions of dollars from
some mysterious company in China.
On the other hand,
that might sliiiightly affect the integrity of China Uncensored.
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