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Chinese inaction gives technology thieves a shield

Friday - 8/9/2013, 12:00pm  ET

JOE McDONALD
AP Business Writer

BEIJING (AP) -- American prosecutors say Pangang Group aimed high. The Chinese state-owned company wanted a better process to make titanium dioxide, a white pigment used in paint, toothpaste and Oreo cookie filling. So it paid spies to steal it from industry giant DuPont.

Pangang was indicted last year on U.S. charges of industrial spying and a retired DuPont scientist pleaded guilty to selling secrets. Prosecutors say another defendant was encouraged by a Chinese leader to "make contributions" to the country -- rare evidence of high-level official involvement. Then the case stalled while prosecutors tried to force Pangang to answer the charges in a U.S. court.

DuPont says it has asked Chinese authorities to block use of its stolen secrets. There is no indication they have acted.

The American chemical producer is far from alone. China's reputation as a global center for industrial spying is well established but experts say the scale is growing as Beijing tries to create its own competitors in fields from robotics to energy to pharmaceuticals.

While more victims take action abroad, DuPont's experience illustrates the legal dead-ends and official inaction in China that stymie even the biggest global companies and foreign prosecutors. Chinese companies accused of using stolen secrets face few consequences.

That is no accident, intelligence experts say. They say Beijing has carried on a quiet but relentless campaign since the 1970s to acquire technology through its spy agencies and Chinese companies, scientists and students abroad.

Possible losses due to intellectual property theft traced to China have multiplied since the '90s. Then, companies complained about copying of movies, software and designer clothes. Today, thieves target technologies that form the heart of multibillion-dollar industries. In the case of titanium dioxide, the global market is worth $17 billion a year.

A report in May by a panel that included a former U.S. director of national intelligence, Dennis Blair, said China accounts for 50 to 80 percent of theft of American intellectual property. Companies surveyed by the U.S. International Trade Commission estimated they lost $48.2 billion in 2009 in potential sales and license payments to Chinese infringement.

"There is no question that the PRC government encourages these extralegal transfers," said William C. Hannas, James Mulvenon and Anna B. Puglisi, authors of a new book, "Chinese Industrial Espionage: Technology Acquisition and Military Modernization," in an email.

Companies are becoming more vulnerable as they expand production and research in China to get closer to its market or in response to taxes and other policies that prod them to shift operations to this country.

Companies are "increasingly worried about trade secrets and technology being compromised in China," said Tadashi Kageyama, head of security firm Kroll Advisory Services for Asia.

Victims often are reluctant to talk about losses. But the DuPont case gives an unusually detailed look into how U.S. prosecutors allege one Chinese state company stole technology and might be using it with impunity.

Pangang, three subsidiaries and one of its employees were charged in February 2012 in federal court in San Francisco with conspiracy to commit economic espionage and attempted economic espionage. Pangang, in Sichuan province in China's southwest, is controlled by the Cabinet's State-owned Assets Supervision and Administration Commission.

Other defendants include a Malaysian-born American of Chinese ancestry, who is alleged to have obtained details of DuPont manufacturing processes from former employees, and two retired DuPont scientists.

Titanium dioxide, also known as TiO2, was one of a series of technologies Beijing tried to obtain to supply its booming industries in plastics and other goods that require the pigment.

Other companies also make TiO2 but DuPont's process is regarded as more efficient and profitable. American prosecutors said Chinese leaders deemed it an "economic priority" but DuPont declined to sell or license it to Chinese companies.

The case offers rare evidence of possible involvement by a Chinese leader in encouraging technology theft.

Prosecutors cite a letter written by one defendant, Malaysian-born Walter Liew, about meeting at a 1991 banquet with Luo Gan, then a secretary-general of China's Cabinet. Luo would later serve in the inner circle of Chinese power, the ruling Communist Party's nine-member Standing Committee, until his retirement in 2012.

Liew wrote that Luo "gave directives so that I would better understand China and continue to make contributions to her." Two days later, the letter said, he received a list of high-priority tasks and titanium dioxide was "one of the more important projects."

Liew later denied he met Luo and other officials at that time, according to court documents. But prosecutors argued he would have told the truth in his letter because it was written to Chinese executives who could verify its accuracy.

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