Inside the Chinese Boom in Corporate Espionage

Bloomberg Businessweek. Mar 15, 2012. Last June, three men squeezed inside a wind turbine in China’s Gobi Desert. They were employees of American Superconductor Corp. (AMSC), a Devens (Mass.)-based maker of computer systems that serve as the electronic brains of wind turbines. From time to time, AMSC workers are required to head out to a wind farm in some desolate location—that’s where the wind usually is—to check on the equipment, do maintenance, make repairs, and keep the customers happy.

On this occasion, the AMSC technicians were investigating a malfunction. They entered the cylindrical main shaft of the turbine, harnessed themselves to a ladder, and climbed 230 feet in darkness up to the nacelle, an overpacked compartment that holds the machinery used to convert the rotation of the blades into electricity. AMSC had been using the turbine, manufactured by the company’s largest customer, China’s Sinovel Wind Group, to test a new version of its control system software. The software was designed to disable the turbine several weeks earlier, at the end of the testing period. But for some reason, this turbine ignored the system’s shutdown command and the blades kept right on spinning.

The AMSC technicians tapped into the turbine’s computer to get to the bottom of the glitch. The problem wasn’t immediately clear, so the technicians made a copy of the control system’s software and sent it to the company’s research center in Klagenfurt, Austria, which produced some startling findings. The Sinovel turbine appeared to be running a stolen version of AMSC’s software. Worse, the software revealed that Sinovel had complete access to AMSC’s proprietary source code. In short, Sinovel didn’t really need AMSC anymore.

Three days after that expedition in the Gobi, Daniel McGahn, AMSC’s chief executive officer, got the news on his cell phone while he was traveling in Russia. On June 15, standing in a St. Petersburg office tower, McGahn listened to the report from the Austrian team for 30 minutes and felt the blood drain from his face. He had been trying for months to save the relationship with Sinovel and was making almost no progress. By the time he ended the call from his Austrian team, he knew why.

McGahn has been schooled about doing business in China in a way he never imagined. “I used to be a Sinophile,” McGahn says, then pauses for a long exhale. “I don’t know what I am now.”

What happened may be incredibly brazen, but it’s hardly exceptional. There have been a large number of corporate spying cases involving China recently, and they are coming to light as the U.S., along with Japan and the European Union, have filed a formal complaint to the World Trade Organization over China’s unfair trading practices.

In November, 14 U.S. intelligence agencies issued a report describing a far-reaching industrial espionage campaign by Chinese spy agencies. This campaign has been in the works for years and targets a swath of industries: biotechnology, telecommunications, and nanotechnology, as well as clean energy. One U.S. metallurgical company lost technology to China’s hackers that cost $1 billion and 20 years to develop, U.S. officials said last year. An Apple (AAPL) global supply manager pled guilty in 2011 to funneling designs and pricing information to China and other countries; a Ford Motor (F) engineer was sentenced to six years in prison in 2010 for trying to smuggle 4,000 documents, including design specs, to China. Earlier this month, the National Aeronautics and Space Administration told Congress that China-based hackers had gained access to sensitive files stored on computers at the Jet Propulsion Laboratory.

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Report to Congress on Foreign Economic Collection and Industrial Espionage, 2009-2011, singles out China for many, if not most, of the offenses. Of seven cases that went to the U.S. courts under the Economic Espionage Act last year, six involved links to China. “Chinese actors are the world’s most active and persistent perpetrators of economic espionage,” the report says. “U.S. private-sector firms and cyber-security specialists have reported an onslaught of computer network intrusions that have originated in China, but the intelligence community cannot confirm who was responsible.”