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May, 2018

US businesses: Proven IP abuses by Chinese firms fuel Trump's tough approach to trade

Original article: Australian Financial Review

As the Sino-U.S. trade dispute simmers, US businesses are starting to speak more openly about Chinese firms' appropriation of American intellectual property. Some of these cases present overwhelming evidence of wrongdoing by Chinese firms. One of the most relevant cases involves American Superconductor, a new-energy company hobbled by Beijing-based Sinovel's theft of its commercial secrets. 


Analysis:

In some cases, IP disagreements between the US and China involve forced technology transfers. We can question the wisdom of U.S. firms transferring valuable trade secrets to Chinese partners, but these technology transfers are not outright theft: They are a condition of market access for U.S. firms who want to do business in China. 


What happened to American Superconductor is different. In this case, Beijing-based Sinovel blatantly stole AMSC's technology. Sinovel was once AMSC's largest customer. But in 2011, Sinovel backed out of a big-ticket deal to purchase components from AMSC for wind turbines. 


As it turns out, Sinovel didn't want to pay $800 million - the going price for AMSC's technology. So it hired an engineer from an AMSC subsidiary in Austria, Dejan Karabasevic, to steal the technology for a fee of US$1.7 million. Su Liying, the deputy director of Sinovel’s Research and Development Department, and Zhao Haichun, a Sinovel technology manager, conspired with Karabasevic to steal ASMC's commercial secrets. 


According to the U.S. Justice Department, acting on Sinovel's instructions Karabasevic pilfered ASMC source code to be used in Sinovel's own turbines. Theft of the source code shaved a US$1 billion off AMSC's market capitalization, hobbled its workforce - 700 of 1000 jobs were cut - and forced the company to close its Wisconsin factory.  


“Sinovel’s illegal actions caused devastating harm to AMSC," U.S. Attorney Scott C. Blader said in a Justice Department statement, adding that "theft of ideas and ingenuity is not a business dispute; it’s a crime and will be prosecuted as such." 


In a March interview with CNN, AMSC chief executive officer Daniel McGahn noted that Chinese law requires 70% of every wind turbine used in China to be made domestically. For that reason, his company partnered with Sinovel. Acknowledging such a partnership could put AMSC's IP at risk, he said: "We had levels of protection that were well beyond best practices." 


McGahn previously told NBC in a 2013 interview: "We didn't anticipate outright theft as part of their business model. We thought we were playing by Chinese rules." 


In the recent interview with CNN, he suggested that Sinovel eventually turned to commercial espionage once it became evident that was the only way to access AMSC's trade secrets for a low price. "Their strategy was to kill us," he said. 


That strategy failed. While the company's share price is still hovering at just $6, it has expanded into technology that boosts electric grid resiliency. Further, in the summer of 2017, the U.S. Navy awarded ASMC a contract for technology that protects ships against mines.  


The U.S. Justice Department plans to sentence the defendants in the Sinovel case on June 4. Reportedly, it will fine Sinovel and order it to pay damages of $900 million to AMSC. McGahn told CNN that the world would be closely watching China's reaction to the verdict. It's a chance for China to show the world that it takes IP protection seriously, he said.

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