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June, 2017

Former IBM employee admits he stole trade secrets

​PRC national Xu Jiaqiang has pleaded guilty in a New York court to economic espionage and trade secret theft. Xu pilfered source code from IBM, where he worked from 2010-2014 and tried to share it with China's National Health and Family Planning Commission. Xu pleaded guilty to all six of the counts mentioned in his indictment, according to the Department of Justice.

In December of 2015, Xu was arrested following his meeting with an undercover law enforcement agent at a hotel in White Plains, a town in New York's Westchester County. According to authorities, Xu was recorded saying he used IBM's source code to make software to sell to customers. The proprietary computer code Xu stole is related to a "clustered file system," which helps to boost computer performance.

The Department of Justice did not identify IBM by name in the statement it published May 19. However, Xu's LinkedIn profile says he worked as a system software developer at IBM during the period in question.

Analysis:

For brand owners, Xu Jiaqiang's indictment is a timely reminder that corporate espionage remains a serious problem. In this case, a Chinese employee in a US company was responsible for espionage, and law enforcement officials were able to capture him in the US, making the indictment process relatively straightforward.

But IBM has a complex web of business relationships in China that are potentially problematic - and beyond the reach of US authorities, analysts say. In a 2015 report, research firm Defense Inc. said IBM's efforts to modernize China's industrial base carry threats for its customers' cyber security as well as the national security of the United States. The report criticizes IBM for transferring sensitive advanced technologies to Chinese firms. That will weaken U.S. corporate advantages and allow Chinese firms to better compete globally, it says. Further, given the links between IBM's Chinese partners and the Chinese state, U.S. military and government supply chains could be compromised, the report says.

Why is IBM transferring sensitive technology to its Chinese partners, given the risks? Because it sees no other way to ensure sustainable growth in that market. As Beijing increasingly focuses on indigenous innovation, foreign firms are finding it harder to compete. For foreign tech companies, one of the few ways to stay competitive in China is by volunteering to help Beijing in its quest to become a global technology powerhouse. Shareholder expectations for strong quarterly earnings make pressure on foreign tech companies more acute.

From the standpoint of technology brand owners, the greatest risk of this type of strategy is not related to national security. Rather, it is the risk that once Chinese firms have obtained what they need from foreign partners regarding technology, they will no longer seek to cooperate with those partners. Brand owners should consider that before they agree to divulge valuable intellectual property secrets.

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