China turns it spies on Business.

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China turns it spies on Business.

If you have been reading the FT, WSJ, New Straits Times or The Standard, you will have noticed the comments of several business owners who are giving up on China – giving up altogether. Their comments might lead you to believe that their decisions involve human rights violations, the economy, or low cost labor available in other countries ‐‐ and you would be partially right, but there are substantial forces influencing these decisions that are not being reported.

China is incapable of, or unwilling to protect these corporations Intellectual Property and Critical Information (IPCI). The Chinese government has upped the ante, so to speak, to stay in the game. China has retasked methods used for military espionage to business purposes, and is now employing these methods on a grand scale. It is a full blown economic war. I know this is a strong statement, but it’s also very accurate.

If you add the pressure of corporate espionage on top of Chinas structurally asymmetric rules for foreign firms, the negative affects of Chinese commercial espionage is weighing heavily in many firms decisions to leave, and is having a similar influence on other firms plans to relocate. In a candid moment, a functionary with the AmCham in China said “It is economically, more or less, impossible for companies to work and operate in China, particularly innovation firms, without the almost certainty of a complete compromise and loss of their IPCI,” adding that, to his knowledge, not one of their members has ever made money in China. A potent point made.

You will also read that many of the major innovative giants of the U.S. ‐ like Google, Intel, Motorola, and AMD have experience aggressive attacks on their networks, and these attacks all had a reasonable amount of success. It is all part of the Chinese governments stated goal of aiding Chinese‐owned firms by using state power to cull information from a variety of sectors they deem valuable. The Chinese have made it very clear that they have a set of national commercial objectives and that those objectives will be promoted. Whether it is a state enterprise or simply one that has the favored status of the state ‐‐ it doesn’t matter.

Many outsiders are simply sick and disgusted with the one‐way economic attitude of the Chinese government, and their history of allowing foreign companies in and then aiding in the appropriation of their technologies for the benefit of domestic businesses. Many firms are allowed in for such a short period of time, all they experience is an opportunity to lose their competitive edge, educate their competition, a lose tens of millions of dollars before they are sent packing.

Why is it this bad? The Chinese government fears that the rebellions happening all over the middle‐east may spread to their streets. Their desire for full employment is a high priority, and they are willing to do anything to achieve it. Unemployed people are restless and dangerous. There are regular demonstrations in China, but they are not covered in the news for fear that the coverage will foment further unrest. They’ve seen the contagion ‐‐ it has hit them in the face. Their monitoring of Internet and social media sites has taught them that many of the subjects do not like them one bit ‐‐ not one bit at all. Their response was censoring the web and the establishment of Internet “retraining camps”.

Why do they target Western IPCI and technology? The idea of “property rights” is part of Western culture. It is so much a part of our culture that we forget to thing about the fact that China is not a Western civilization. The idea of property rights goes back to Thomas Aquinas in Summa Theologica, Thomas Hobbes, James Harrington, John Locke, Pope Leo the XIII, David Hume, and even Karl Marx. Property rights are not part of their culture! Oh, I almost forgot to mention ‐ they are still the world’s largest communist nation. Their reasons to steal Western technology are twofold. Chinas current culture does not produce great innovators ‐‐ failure is shunned and even punished in Chinese culture. Innovation only occurs after a long string of “failures” (learning what does not work). The second reason is that we make stealing so unbelievable easy. There is no consequence for the theft of Western business models, patents, technologies, or customer lists.

How bad is it? How does China, within a period of thirty years, go from a period of isolation and technological stagnation to a nation with a space program and a stealth fighter? Hint: Both look remarkably like U.S. spaceships and aircraft.

How do we know that the Chinese are using state sponsored spy‐craft to bolster the economics of their nations business? First, the persistent attacks on commercial enterprises, both cyber attacks and traditional HumInt penetrations directed at firms with little or no military value. Second, the UK’s domestic intelligence service MI5 sent a letter to most of the major technology firms warning them of state sponsored economic cyber espionage attacks coming from China.

So what to do? It’s really your choice.

We performed a vulnerability assessment for a company with offices and factories in China. The result was frightening ‐‐ but in reality, they were doing better than most at protecting information.

The CEO made some interesting decisions. As soon as he was aware that a manufacturing line was compromised, he fired everyone on the line and told them why. A competitor had stolen the technology from his factory and began producing cheaper. So sorry, no need to have you here – you’re fired. They did not abandon the line or the market; they set up manufacturing in another country with lower wages. The terminations went all the way up the management chain, and affected the bonuses any retained employees received. While this action slowed the losses, it did not stem them. In the end, the decision was made that sensitive items were not to be manufactured in China, and there was no expansion of operations in China. Among the actions taken, all Chinese IP address (except those from his company) were blocked. The important lesson is to be aware of your vulnerabilities, not blind to them.

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