Business Roundtable CEOs were furious at Lighthizer’s comments. What arrogance. A White House trade lawyer claiming he cared more about their employees than they did, the people who signed the workers’ checks. But Lighthizer and the rest of Trump’s top advisers felt they were working for U.S. business, too. They had the guts to take on China over the issues that CEOs complained about privately but were too frightened to speak about publicly. Beijing was after their most valuable technology and would steal it either through spying or through arm-twisting. That had to stop, the Trump administration believed, or the United States would lose its edge economically and militarily. Beijing denied it was engaged in such outrageous practices. The clash was at the heart of the U.S.-China trade war. It was the reason the two antagonists had stopped circling each other and started to brawl.
Beijing has many ways to purloin U.S. technology. The most mundane is hiring away employees who have worked on advanced technology for U.S. companies and paying them to bring the secrets with them. More sophisticated is using cyber espionage to infiltrate company computer networks. But outright theft is less important to China’s technology drive than subtler means. Beijing coerces companies to hand over their technology to get access to the Chinese market. Sometimes the pressure is applied through joint venture arrangements. Sometimes through regulators who feed technology secrets to Chinese companies. Sometimes through raids by antitrust investigators. Sometimes through local courts ready to help hometown companies by invalidating American firms’ patents and licensing arrangements.
Chris Padilla, an IBM vice president, has wide experience dealing with Beijing as a Washington lobbyist and a former U.S. trade official. During a January 2019 lunch at the U.S. Chamber of Commerce in Washington, he tried to explain to the visiting U.S. ambassador to China, Terry Branstad, how Beijing applies pressure. “It’s like someone getting knifed in a dark alley,” Padilla said. “You don’t know who did it until the next morning. But there has been a murder.”
DuPont de Nemours Inc. has yet to escape its knife fight. It suspected its onetime partner in China was getting hold of a prized chemical technology and spent more than a year fighting in arbitration to make the former partner stop.
Then twenty antitrust investigators showed up in December 2017.1 They fanned out through DuPont’s Shanghai offices, demanding passwords to the company’s worldwide research network. Investigators printed documents, seized computers, and intimidated employees, even accompanying some when they went to the bathroom.
The antitrust investigators left a message: DuPont should drop its arbitration case against its onetime partner, which DuPont felt had made off with valuable technology for producing textile fibers from corn, a $400 million business for the company in 2017.
In 2006, DuPont shared manufacturing processes with Zhangjiagang Glory Chemical Industry Company when it licensed the Chinese firm to produce and distribute Sorona, the textile polymer made from corn. DuPont executives labeled the Glory deal a “tolling” partnership—meaning that DuPont paid a kind of toll to get into the Chinese market. Over three years, DuPont trained Glory employees to set up a factory to produce Sorona polymer and to spin it into fibers.
“We believe our partnership with Glory will help us expand our business on a global level,” said Peter Hemken, a DuPont vice president, in 2006. He praised Zhangjiagang Glory and its leadership for their “impressive operating experience [and] attention to quality.”
Praise gave way to acrimony. Around 2013, DuPont didn’t renew Glory’s license because it suspected the Chinese firm was ripping off its intellectual property and selling products similar to Sorona. DuPont filed two arbitration cases in China, alleging patent infringement. Hearings stretched through 2017. DuPont especially worried that it would face Zhangjiagang Glory competition in other overseas markets.
Around that time, officials with the antitrust division of the powerful National Development and Reform Commission (NDRC) got involved and started holding meetings with DuPont. Chinese investigators focused on the DuPont-Glory standoff, not DuPont’s upcoming mega-merger with Dow Chemical Company. With three days of meetings scheduled before Christmas 2017, DuPont worried that the NDRC would raid its offices. DuPont planned an employee training session on how to deal with one, but the antitrust cops showed up before the training session.
After the raid, DuPont had at least five meetings in 2018 with NDRC officials, who told them they were looking at antitrust behavior, specifically their unwillingness to license technology to Chinese firms and their pursuit of the Glory case. Expect a heavy fine, the investigators said. But after the late November 2018 session, NDRC went silent. With the U.S.-China trade war deepening, DuPont officials feared that even dropping the case wouldn’t satisfy Beijing, which might want a hostage in the trade fight with Washington. DuPont and Zhangjiagang Glory declined to make officials available for comment.
Other firms also say antitrust cops have bullied them. In 2013, InterDigital Inc., a mobile technology firm, refused to meet with the NDRC, which was investigating the firm for the licensing fees it charged Huawei Technologies. The company feared its employees would be arrested. “We are simply unable to comply with any investigation that is accompanied by a threat to the safety of our executives,” said InterDigital’s chief executive, William Merritt. The company eventually settled with the NDRC by reaffirming its licensing practices, including offering arbitration.
“Chinese enterprises should bravely employ antimonopoly lawsuits to break technology barriers and win space for development,” said the Chinese chief judge in the InterDigital case, encouraging Beijing to use antitrust suits to pry away American technology.
In a 2018 survey by the American Chamber of Commerce in China, one in two technology and industrial companies said they limited their investment in China because they feared their technology could be stolen. In August 2019, 91 percent of companies in a U.S.-China Business Council survey said they were concerned about China’s enforcement of intellectual property rights. In 2013, about one-third of U.S.-China Business Council respondents said they had been asked to transfer technology to China recently. While that response shrank to just 5 percent in 2019, the change likely reflected China’s reduced use of joint ventures to pry away technology. Beijing uses many more tools to acquire company secrets.
The U.S. companies felt bullied by Beijing and feared retribution if they complained publicly. They pressed the U.S. government quietly for action. U.S. semiconductor firms lobbied against Chinese efforts to buy U.S. semiconductor companies, which convinced the Obama administration to block such purchases. Then the chip makers complained that Beijing was using massive subsidies to create semiconductor rivals and pressured them to hand over technology. That became a Trump administration priority. But the firms rarely make a fuss in public. China is the chip makers’ largest market.
High-tech companies, however, were ready to criticize the administration for the massive tariffs it used to pressure Beijing, a position that struck many in the administration as ungrateful and two-faced. Tariffs raise their costs and make them less able to compete, the companies argued—the opposite of what the administration said it wanted to accomplish. To many high-tech firms, the trade offensive had an almost Vietnam War quality: “It became necessary to destroy the town to save it,” a U.S. officer said at the time. Two networking companies, Cisco Systems and Juniper Networks, used less colorful language to make a similar point when they filed comments objecting to tariff hikes: “By raising the costs of networking products, the proposed duties would impede the development of cloud-based services and infrastructure and, perversely, would incentivize” customers to pick foreign competitors.
The administration also remained divided over how hard to push China. Aside from the nationalist-globalist divide in the White House trade team, there were other fractures. National security officials in the Pentagon, National Security Council, and Justice Department pressed for harsh measures and had to battle with the trade officials who sought a deal. Trump let the two sides fight it out.
In December 2018, the Justice Department unsealed criminal charges against two Chinese citizens who allegedly were part of a state-sponsored campaign to steal secrets from U.S. businesses and government agencies. The pair was accused of working for a company called Huaying Haitai in Tianjin, which worked with China’s Ministry of State Security. The indictment said their efforts were part of a “continuous and unrelenting effort,” called Operation Cloud Hopper, by a Chinese hacking group known as APT 10, for Advanced Persistent Threat, to steal advanced technology.
According to the charging papers, APT 10 used a technique known as “spearphishing” to convince targets to open emails laced with malware that would reveal their passwords to hackers. They targeted companies in at least a dozen countries, including IBM and Hewlett-Packard Enterprise Company. IBM said it was aware of the attacks and had taken measures to protect itself. HPE said the hacking affected customers of a business it had spun off in 2017. HPE products and services weren’t affected, the company said.
U.S. allies applauded the detective work, including the four other members of the Anglophone intelligence alliance, known as Five Eyes, which includes Canada, New Zealand, Australia, and Britain. The Trump administration also cited the case to accuse China of violating the 2015 Rose Garden Agreement with President Obama, discussed in chapter 7, not to target businesses for cyber espionage to gain a competitive edge. “More than 90 percent of the [Justice] Department’s cases alleging economic espionage over the past seven years involve China,” said then Deputy Attorney General Rod Rosenstein. China’s Ministry of Foreign Affairs denied the allegations and called the prosecution “a serious violation of the norms of international relations.”
The episode was a public relations black eye for Beijing, but it had little practical effect. Beijing wasn’t going to turn over the accused to the Americans. To strike back, national security officials wanted to sanction Chinese companies and individuals—which would cut them off from the global financial system. This would illustrate what they called a “whole of government” approach to China, and would have been a coda to what some were privately calling “Fuck China Week.” A coordinated response would have been the toughest blow yet struck by the U.S. side in its schoolyard-style battle with China.
Until about a week before the announcement of the indictment, John Bolton, the national security advisor, thought he had the president’s approval to package sanctions with the indictments. But Treasury Secretary Steven Mnuchin, whose agency oversees sanctions, objected and prevailed. Sanctions have been reserved for countries branded as enemies, such as North Korea or Iran, or to hobble terrorist groups, he argued. He didn’t want to extend them to cases of intellectual property protection. Besides, sanctions would screw up chances for a trade deal at a time when markets were already tumbling. President Trump, in his Wall Street mode, decided to ease off a bit on China.
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To Beijing, the U.S. complaint about technology transfer was mystifying and insulting. Americans exported the concept of joint ventures to China four decades ago. During a trip to China in 1978, General Motors Chairman Thomas Murphy proposed the idea of joint ventures to Chinese officials looking for ways to boost China’s antiquated auto industry. “Why do you only talk to us about introducing technology, not joint ventures?” Murphy asked his Chinese hosts. “A joint venture is like a marriage and building a family together.”2
Under the Communist Party, China had never done a joint venture and had no idea that a JV could help China get much-needed technology. As soon as the Americans’ proposal was sent to Chinese leader Deng Xiaoping, he approved. “Joint ventures can be done,” he said.
To Deng, JVs were a way to obtain Western technology but limit Western influence at a time when most senior officials were deeply suspicious of foreign interest in China. A year later, Deng laid out his reasoning. “To set up a joint venture, the counterpart has to make sure it’s economically viable, and has to bring advanced technology with it. Even though it preserves the rights to some technologies, no matter what, we’ll get to learn some.” In 1984, he pronounced, China “needs to give up portions of the domestic market in exchange for advanced technologies we need.”
Since then, generations of Chinese leaders have sought to interest American and other foreign companies to invest in China. A March 2018 paper by economists at universities in Colorado, Illinois, Hong Kong, and Nottingham, England, found that foreign technology “diffuses beyond the confines of the joint venture” and boosts competitors’ technology.3
When the Trump administration made forced technology transfer, through joint ventures or other means, the heart of its trade offensive, Beijing viewed the accusation as grossly unfair. U.S. companies willingly entered into contracts with Chinese partners, Chinese officials said. Nobody forced the Americans to come—or stay—if they were so upset about their treatment.
During a meeting with a group of U.S. corporate executives in March 2018, just before the United States released its Section 301 report accusing China of twisting arms to obtain U.S. technology, a senior Beijing official sought to explain China’s offer to the world. It was “simple,” said Fang Xinghai, a top financial regulator and a point person to the U.S. business community. “Foreign companies would be allowed access to China’s huge market but would need to contribute something in return—their technology,” he told executives from firms including Bank of America Merrill Lynch and buyout firm KKR & Company.
For example, Fang said, China didn’t have the technology to make its own aircraft engines, so when the government started buying engines, it sought a company that would share technology so the Chinese firm could learn from its foreign partner. Two of the world’s largest jet engine manufacturers, Britain’s Rolls-Royce Holdings PLC and America’s Pratt & Whitney, looked at the opportunity, he said, but decided not to accept the Chinese terms and walked away. But General Electric “saw the competitive opportunity” and agreed to enter a joint venture and share its technology with a Chinese partner, Fang said. “No one forced GE to share its technology,” he added.
Chinese Vice President Wang Qishan also shared the dismay. If the U.S. companies were so concerned about their technology transfer deals, he asked former Obama Treasury Secretary Tim Geithner when he was visiting China, why hadn’t the Americans made it a top priority earlier?
China was hardly the first country to try to advance economically by making off with foreign technology. After Britain invented the modern textile factory in the 1770s, it tried to block foreign competition by prohibiting artisans from emigrating until 1825 and forbidding most machinery exports until 1842. People and technology left anyway. France set up its first cotton mill in 1778; America followed in 1791.4
As trade tensions escalated, Beijing ratcheted up its rebuttal. In a white paper issued in late September 2018, after Washington hiked tariffs on $200 billion of Chinese products, China called the United States’ forced tech-transfer accusations “distorted and filthy.” Any transfer of technology between a U.S. company and its Chinese partner was a result of negotiations between the companies, the paper said. It also detailed China’s enormous investment in technology. Since 2000, according to the white paper, China’s total research and development spending had grown at an average rate of nearly 20 percent a year. In 2017, it spent 1.76 trillion yuan, roughly $266 billion, on R&D, second only to the United States.
Chinese officials point to GE’s experience in China as an example of their fair dealing. Aircraft manufacturing is a top Chinese priority. GE saw a huge market for its jet engines and other aircraft parts. China’s needs became GE’s opportunity.
When China set out to build its first large commercial passenger jet, the C919, in 2008, state-owned Commercial Aircraft Corporation of China, or Comac, made it clear it would buy components only from foreign suppliers willing to set up joint ventures in China and share technology. GE willingly agreed.
A year earlier, GE had spent $4.8 billion to buy Smiths Aerospace, a British-based aircraft component supplier. The Smiths business supplied avionics systems, which work like the operating systems on computers, to the Boeing 787 Dreamliner. But the business didn’t work out well, and GE was at risk of having to write off a big portion of the Smiths investment, according to former employees. When the Chinese government put out bids for its C919 program in 2009, GE jumped at the opportunity to set up a joint venture, even though that meant sharing technology.
In 2009, Jeff Immelt, then GE’s chairman and CEO, and Lin Zuoming, chairman of state-owned Aviation Industry Corporation, or Avic, did a handshake deal to set up a jointly owned manufacturer of avionics system. But it took the 50/50 joint venture, called Aviage Systems, three years to get up and running as the two companies squabbled over intellectual property protection, leadership and staff structures, computer safeguards, and other issues.
Avic at first wouldn’t provide its own engineers for the venture. It wanted GE to supply all the key personnel so that the Chinese side could learn GE know-how. Eventually the two companies compromised: GE provided some engineers, and the venture, based in Shanghai, also hired locally.
Another issue: The Chinese partner wanted GE to set up the venture’s computer servers, where all data are stored, in China. Western companies fear that arrangement makes it easier for Chinese hackers to steal information. As a compromise, GE insisted that IBM help manage the servers. In March 2012, the JV was officially formed. A year later, it got the contract from Comac, the state-owned aerospace manufacturer, to be a major supplier of avionics systems for the C919. Avionics systems are the second most-important component in aircraft after engines.
GE says it has protected its technology and is pleased with the arrangement. It also denies there had been a risk of a write-down to its avionics business. In recent years, China has become the second-largest market for the company after the United States, and the company has focused on China’s power and health care sectors, along with avionics. No complaints from GE; only praise.
“GE believes that the only way to achieve growth in China is to grow together with our Chinese customers,” Rachel Duan, president and CEO of GE China, told the country’s official Xinhua News Agency in late 2017. 5
By 2015, China had selected sixteen foreign firms, including Honeywell and Rockwell Collins, to set up aerospace ventures in the country. These JVs, said Comac in a press release, had “improved the overall level of China’s aerospace R&D and manufacturing through technology transfer, diffusion, and spillover.”
For Beijing, the GE venture is Exhibit A in its defense against the Trump administration’s allegations of coerced technology transfer. But Congress and the White House drew the opposite conclusion: the partnership illustrated how China uses JVs to pressure U.S. partners to relinquish technology.
Although GE got clearances from the Defense and Commerce departments to go ahead with the deal, the JV caught the attention of Senator John Cornyn of Texas, who feared JVs helped China move ahead militarily and who was pushing legislation to stiffen national security reviews of U.S. companies in China. “GE was a concern,” says Senator Cornyn. “China is notorious for its theft of intellectual property, and very skillful at insisting on joint ventures, which give them access to technology and also know-how to make systems in China.” 6
His staff noted that the Pentagon had listed avionics as a Chinese weakness in 2009 when the GE-Avic deal was announced. By 2011, the Pentagon no longer did, as Avic and GE were in final negotiations for the joint venture, which was established in 2012.
“‘Voluntary’ technology transfer takes place, but one that is only voluntary in the sense that the business transactions engaged in by the fictional gangster of the Godfather series, Vito Corleone, were voluntary,” said the Trump administration’s Section 301 report, quoting Carnegie Mellon economist Lee Branstetter. “China is effectively making an offer multinationals cannot refuse.”
* * *
Complaints about Chinese pressure on foreign companies go well beyond joint venture arrangements. A big concern involves regulatory panels that scrutinize new projects by foreign companies, including those in the chemical and auto industries, to make sure they meet environmental, production, and other standards set by authorities. These panels can become a way for local officials to pass foreigners’ trade secrets to Chinese competitors. In China, the government frequently staffs the so-called expert panels with members from Chinese universities, research shops, and state-owned firms. U.S. companies say they routinely demand more information than is formally required for approval and pass the data to Chinese firms.
“Companies have been required to disclose an amount of proprietary information sufficient for product duplication,” the American Chemistry Council, a trade association of chemical companies, told the trade representative’s office in 2018. That includes chemical identities, manufacturing information, and product formulations. Chinese companies steal microbial strains engineered to produce proteins, the ACC earlier said, and then rebrand them and sell copycat versions to the textile and grain ethanol industries.
Huntsman Corporation has singled out expert panels as a conduit for siphoning off trade secrets. The panels have drilled down on specialized knowledge, including how Huntsman makes plastics with high transparency and elasticity—the kind of materials used to make athletic shoes. Soon after the expert panels finished their work, Huntsman’s Chinese competitors used the same kind of technology in their own products.
The Woodlands, Texas, chemical maker entered the Chinese market in 1992, when it opened a technical service center. Since then it has set up joint ventures with state-owned China Petroleum & Chemical Corporation, or Sinopec, among others. China now is Huntsman’s second-largest market after the United States, accounting for nearly 14 percent of its 2018 revenue.
But the company has grown increasingly worried about losing its competitive edge to Chinese firms that it suspects steal its technology. “Our competition isn’t going to be standing on the sidelines cheering,” CEO Peter Huntsman told analysts in June 2018, speaking of China. They could be “trying to either steal the technology or develop the technology themselves.” Huntsman declined to be interviewed.
Huntsman laid out the risks it encounters in China in its 2019 annual report. “Certain of our competitors in various countries in which we do business, including China, may be owned by or affiliated with members of local governments and political entities,” it says. “These competitors may get special treatment with respect to regulatory compliance and product registration, while certain of our products, including those based on new technologies, may be delayed or even prevented from entering into the local market.”
For more than a decade, Huntsman has been battling in China over a crown jewel of its business, a black dye used in textiles that is less polluting to make. In 2007, it filed a lawsuit in Shanghai against a Chinese company for infringing a patent on the dye. Huntsman then found a court-appointed review panel stacked against it, it said in a 2011 complaint filed with the U.S. Commerce Department.
The three-member panel included an engineer from the company Huntsman was suing, another from a local dye research group, and a third who once worked at a local dye firm, according to the complaint and people with knowledge of the matter. The experts’ work “effectively turned them into allies and ‘spokespersons’” for the Chinese competitor, the complaint said.
Litigation of the patent infringement case has dragged on. In addition, Huntsman in 2017 filed another patent infringement suit involving the black dye against two Chinese companies. The Beijing intellectual property court in October 2018 dismissed Huntsman’s case on the grounds that the samples in question were too out of date. Huntsman believes that the court ignored significant pieces of evidence submitted by the company and omitted much of this evidence in its final judgment. It has appealed the ruling.
In February 2019, Representative Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, whose district includes Huntsman facilities, discussed the firm’s problem in a congressional hearing with Lighthizer. “The Huntsman example is unfortunately one of many, many thousands,” Lighthizer said.
* * *
Chinese firms can also use hometown courts to their advantage. Should a U.S. firm win a patent infringement case in a U.S. court against a Chinese competitor, the Chinese firm can push for a contrary ruling back home. That blocks the U.S. firm from selling products in China—a tactic that makes a company think twice about continuing to fight.
Veeco Instruments Inc., a maker of semiconductor manufacturing machinery in Plainview, New York, faced that dilemma. Veeco produces machinery, known as reactors, to make LED chips, a technology that’s a priority to China. Heavy subsidies by the Chinese government in 2012 led to a boom in the LED chip industry, with 100 manufacturers producing the chips, including 60 in China, according to a report by Benchmark Company, a market research firm.
Those manufacturers needed reactors to make the chips and Veeco was one of the most advanced producers of such equipment. Veeco’s sales from China jumped to $242 million in 2015 from $149 million in 2013.
Veeco’s main Chinese competitor, Advanced Micro-Fabrication Equipment Inc., in Shanghai, known as AMEC, is run by a veteran of Applied Materials Inc., a Silicon Valley semiconductor equipment maker. Veeco suspected that AMEC reverse engineered its products to make a competitive product that infringed on Veeco patents. Veeco also suspects AMEC hired some of its employees in China who knew the technology well. AMEC sharply undercut Veeco’s prices on the reactors, which go for about $2 million each, and started to gain big market share.
Worried about preserving its market, Veeco turned to the U.S. courts to sue one of AMEC’s major U.S. component manufacturers for also infringing its patent, hoping to hobble AMEC’s ability to produce LED-manufacturing machinery. In a seventy-six-page opinion filled with engineering drawings and a detailed examination of Veeco’s highly technical claims, Veeco won a decision in U.S. district court in Brooklyn on November 2, 2017, that blocked AMEC from getting critical components. Veeco figured it scored a knockout because it would probably take AMEC a year to find another qualified supplier.
Instead, AMEC turned to a Chinese court in Fujian province, a big LED chip production center where AMEC has facilities, and sued Veeco for patent infringement. In Securities and Exchange Commission filings, Veeco said that the Fujian court didn’t notify the company of the hearing or hear its position on the alleged patent infringement. Fujian courts are “very hospitable [to Chinese firms] because of Fujian’s semiconductor industrial policy,” said Mark Cohen, a former China expert at the U.S. Patent and Trademark Office. “It’s the heart of darkness.”
On December 6, 2017—one month after the U.S. court ruled in Veeco’s favor—Fujian Higher People’s Court forbid Veeco from selling its LED reactors in China. The four-page decision didn’t include any discussion of the technical issues involved.
With Veeco blocked from China, in February 2018 it cut a deal with AMEC but couldn’t obtain a long-term licensing agreement. Essentially, the Chinese firm was free to use Veeco-developed technology in its products. With AMEC’s price advantage, Veeco’s Chinese sales plummeted to $108 million in 2017. Although sales in China rebounded in 2018, the company’s losses widened substantially and Veeco executives say they don’t expect China to be a big revenue generator in the future.
Veeco won’t comment on the case; its SEC filings say it and AMEC “mutually agreed to settle.” AMEC didn’t respond to requests for comment.
Mark Miller, an analyst at Benchmark, says, “Veeco put up resistance. But in the end, the odds weren’t in their favor. With a government like China’s, you have very little recourse.”
* * *
As the U.S.-China trade fight rolled on, China sought to address U.S. complaints about forced technology transfer, although it never admitted that it sanctioned the practice. During its annual legislative session in March 2019, the National People’s Congress made last-minute changes to a proposed foreign investment law to tighten channels used to leak intellectual property.
Foreign businesses, which wanted to compete on equal terms as domestic firms, avidly sought the new law. Legislative and government bodies had worked on drafts for years, but then abandoned the efforts about four years ago, without explanation. Vice Premier Liu He, who has been leading the negotiations with the United States, helped push the law through. He saw it as a way to address U.S. complaints about intellectual property, investment restrictions, and other issues. The legislature then fast-tracked it for passage.
Earlier drafts of the law pledged broadly to protect foreign technology and said abuse of power by officials could be prosecuted criminally, but lacked specifics. The language in the final version of the law, which went into effect at the beginning of 2020, more directly addressed U.S. concerns over transgressions by Chinese officials. “Administrative agencies and their employees shall keep confidential the commercial secrets of foreign investors,” the law says. They “should not divulge or illegally provide [them] to other people.” The new language took aim at the regulatory reviews, known as “conformity assessments,” that foreign companies must pass before manufacturing new cars and other products or setting up plants.
The new law reflected the proposed text of the trade agreement the two sides were negotiating at the time. Under that text, China would agree to “eliminate conflicts of interest” in such regulatory reviews to prevent the officials involved from passing foreign companies’ proprietary information to Chinese competitors.
But when those negotiations broke down in early May 2019, as described in chapter 1, Beijing toughened its stance again. A white paper released a month later again called the U.S. accusation of China’s technology theft “absurd.”
* * *
With trade talks producing few results, U.S. companies hit on a different strategy—seeking financial sanctions on Chinese competitors to shut them down.
Micron Technology Inc., a large U.S. memory chip maker, got caught up in dueling lawsuits with a Chinese competitor, similar to the situation faced by Veeco. Micron helped Taiwanese prosecutors build a case that its technology was being stolen by former Micron employees who had gone to work for a Taiwanese chip maker, United Microelectronics Corporation. Taiwanese authorities say the evidence included stolen documents with detailed production secrets for producing Micron’s chips. The data was ultimately intended to help a Chinese semiconductor company, Fujian Jinhua Integrated Circuit Company, which planned to manufacture its version of Micron chips.
In December 2017, Micron alleged in a California lawsuit that Jinhua masterminded the plan to learn the complicated processes involved in semiconductor manufacturing. Three months later, Jinhua sued Micron in Fuzhou Intermediate People’s Court in Fujian province for patent infringement—essentially accusing Micron of stealing its technology instead of the other way around, and making the accusations in its home court. Jinhua is located in Fujian province; the Fujian government partly controls Jinhua.
In July 2018, Jinhua won a preliminary injunction prohibiting Micron from selling certain electronics in China. The injunction cost Micron about $300 million in sales, roughly 1 percent of Micron’s total revenue. Company officials considered the Chinese action to be a warning shot. In a statement, Jinhua said Micron “recklessly” infringed on its patents. Micron says it intended “to vigorously protect our intellectual property.”
Like Veeco, Micron had a choice: settle or fight. At risk, potentially, was Micron’s China sales of $17.4 billion—more than half the company’s $30.4 billion revenue in 2018. But the company figured it had leverage; Beijing needed its memory chips to supply the Chinese electronics industry. Shutting down Micron in China could damage Beijing’s ability to produce advanced electronics. The company doubled down by lobbying the U.S. government to make its case a priority.
During August 2018 trade talks, U.S. negotiators brought up Micron’s complaints that it was being ripped off by Jinhua and treated unfairly in China’s courts. Commerce Vice Minister Wang Shouwen dismissed the concerns. Micron and Jinhua “are like brothers,” Wang told negotiators. “And brothers fight.”
Micron tried a second approach—convincing Washington to levy sanctions on Jinhua for violating Micron’s patents. In July 2018, Micron’s CEO, Sanjay Mehrotra, and other top executives met with Treasury Secretary Mnuchin. Again, Mnuchin was skeptical about using Treasury’s ability to shut off companies from the global financial system to punish patent violators. Doing so could inadvertently block Western countries from buying Chinese equipment with dollars and ignite confrontations with allies. Micron officials suggested Mnuchin invoke emergency powers under the International Emergency Economic Powers Act—a course of action he had rejected a month earlier when he convinced the administration not to single out Beijing for investment restrictions, as recounted in chapter 13.
“I’m not using IEEPA for that,” Mnuchin said, growing red in the face. He closed a book he was looking at and ended the meeting.
Micron had better luck with the Commerce Department in September. Although its powers aren’t as sweeping as Treasury’s, Commerce can block U.S. companies from doing business with foreign companies by putting it on its entity list—the same provision the administration used against ZTE and Huawei Technologies. Only companies that get a Commerce license can sell to a listed company, and Commerce rarely approves such licenses.
Commerce officials required Micron to demonstrate that its problems in China represented a national security threat. Should Jinhua be able to use its technology and produce chips at subsidized prices, Micron argued, that would threaten its survival and ability to supply the military. That was a concern of the Pentagon, too. “Micron has been vocal about the importance of protecting our IP investments,” said a Micron spokeswoman, who added that the actions taken by the Commerce and Defense departments “have been based on their own independent review and analysis.”
Commerce Secretary Ross was convinced. “The entity list is based on national security,” he says in an interview. “IP is very much in the national security.”7 In October 2018, Commerce placed Jinhua on its blacklist. Without access to U.S. technology and components, Jinhua was crippled.
Since the Micron decision, Commerce has used its entity list power in other intellectual property cases. In 2016, Advanced Micro Devices Inc., a Silicon Valley chip company, entered joint ventures with Chinese private and state-owned entities, including the government’s Chinese Academy of Sciences and a state-backed supercomputer maker, Sugon Information Industry Company, to make chips licensing AMD’s x86 processor technology.
For AMD, the licensing deal was a winner. It was set to receive $293 million, plus licensing fees. The revenue was enough to help boost AMD into the black for 2017, for the first time since 2011. “We created a joint venture that was very much a win-win,” said the company CEO, Lisa Su, shortly after the deal was signed in 2016.
But the JV raised concerns in national security agencies that the venture would help China develop supercomputers used to design missiles and nuclear weapons. Intel Corporation also worried that its x86 technology would wind up in Chinese hands. AMD and Intel are the only two companies that make the semi-conductors. AMD initially sold chips that Intel designed but later made its own chips based on the x86.
“It’s the Chinese state figuring out ways to get technology,” said Mark Newman, a Sanford C. Bernstein & Company technology analyst in Hong Kong.
In June 2019, Commerce added Sugon to the entity list, effectively barring it from getting American technology. AMD says it won’t get $93 million of the fee it anticipated, though it believes it can make up the lost revenue through other sales. All in all it was a raw deal from the U.S. government, the company argues. “AMD received no objections whatsoever from any agency to the formation of the joint ventures or to the transfer of technology,” said Harry Wolin, AMD’s general counsel, in a statement. The technology involved “was of lower performance than other commercially available processors.”
Now producers of more mundane products are lobbying to see if they can get their Chinese competitors on the entity list. Brian Harker, president of Better Tools Company, a Granger, Indiana, maker of hand tools, went to the White House in August 2019 to plead his case. He says a big Chinese competitor is ripping off its patented technology, including different ways to make wrenches. Sometimes, he says, U.S. retailers ship his company’s product samples to Chinese manufacturers that produce copycat versions at prices he can’t match.
“We got tired of suing companies,” he says, so he approached the Commerce Department and the Federal Bureau of Investigation for help.
Still, it’s uncertain whether U.S. firms will come out ahead through entity listings. Beijing has so many ways to strike back. It is developing its own “unreliable entity” list, which could be used to bar American firms from selling in China.
Micron hasn’t declared victory. In August 2019, a Chinese government official in Beijing relayed a message to the company through visitors. The Jinhua entity listing cost the Chinese government the $1 billion it had invested in the company. If Micron’s fight with China isn’t settled, the official warned, Micron could face damages well in excess of that.