And the Chinese have arrived!
We have, in past issues, noted that the foreign press has devoted a lot of space to economic intelligence gathering by the Chinese, while there has been virtually no mention of it in the American press. While the optimistic view might have been that the Chinese had somehow overlooked the U.S. as a potential information source, the reality is otherwise.
The United States loses an estimated $300 billion a year to competitive intelligence, theft, and economic espionage, with the average loss being $50 million in a manufacturing environment and $500,000 in a non- manufacturing environment. It has become increasingly clear that China has been responsible for an increasing portion of these losses.
The SEC has recognized the impact of these losses, and has said that, under Sarbanes-Oxley, internal controls have to be in place to track the costs and impact of economic espionage and theft of intellectual property.
The response from industry to both the losses and to the SEC requirements has been indifference. One economics professor noted that business magazines with which he corresponded have no interest in anything dealing with solving the problem, which mirrors our experience. The American Management Association said in conversation that the area was of no interest to their members. And if you speak to the Public Company Accounting Oversight Board (http://www.pcaob.com/) about the implications of the SEC’s stance, you will be told that your inquiry has been received.
In spite this overwhelming indifference on the part of corporations and the business press, recognition of Chinese information acquisition efforts in the U.S. is finally making its appearance in the press. Unfortunately, some of the figures being quoted are patently absurd. Thus, one sometimes hears that there are 3,000 Chinese front companies in the U.S. When you pry a bit, it turns out that while there are 3,000 Chinese companies, of which only a dozen or two are thought of as front companies.
How comforting should the smaller numbers be? Well, in truth the media classifications are not meaningful because, to a large extent, and as happens with most information loss to economic espionage, competitive intelligence, and theft, the information is actually being given away, or left so unprotected as to be abandoned to anyone who wishes to acquire it. In the words of Paul Moore, who was the FBI’s top China analyst from 1978 through 1998, “It’s the mundane, day-to-day contacts that are killing us, not the exotic spy operations.”
Much, if not most, of this information loss is preventable, and even for a large company, $50 million or $100 million that is lost needlessly is money that could have been better spent elsewhere.