What is behind Cisco’s apparent dramatic recovery in China?


Cisco Executive Chairman John Chambers has offered some very interesting comments to a Reuters reporter in Dubai. He said that Cisco’s business was up by 40% in China in the third quarter. This would reflect a very dramatic turnaround as Cisco’s business in China had been tumbling after the company became one of the main targets of China’s quest for “secure and controllable” technology (replacement with Chinese products) in the wake of Snowden cyberspying revelations. Reuters reported earlier this year that Cisco’s products were being pulled from government procurement lists. But the situation seems to have changed.

Chambers told Reuters: “We spent three years winning the trust of the Chinese government and if you watch most American companies, their businesses in China is down dramatically, so was ours for several years. Do you know how much we grew in China last quarter? Forty percent.”

In June, various news reports said that senior Cisco executives in China had been removed. Then the company announced plans to invest $10 billion in Chinese high tech industries. This was part of a MOU signed with the National Development and Reform Commission in which Cisco agreed to cooperate with Chinese firms and government entities to enhance Chinese innovation, R&D, tech investments and job creation.

During President Xi Jinping’s recent US visit, Chambers was present for the Seattle tech confab and photo opportunities with President Xi. The company had earlier announced a $100 million joint venture with its leading local competitor, the Inspur Group. Inspur is said to hold 51% of the equity. Sun Pishu, the CEO of Inspur, was a member of President Xi’s delegation. The joint venture involves hardware and software development and Inspur reselling Cisco’s equipment in China. In July, Inspur had announced it would invest RMB 10 billion to build seven core cloud computing centers and 50 regional cloud centers in China.

So, is the spike in Cisco’s sales in China a result of selling equipment through — and to — a local competitor which is also investing huge money in cloud computing centers? Foreign tech leaders are finding themselves walking down winding paths to do business in Chinese these days.

This post originally appeared on LinkedIn.


The New Odd Couple? Hollywood and China: The Cinematic Interchange of Soft Power


It is difficult these days to avoid headlines either extolling or decrying the growing ties between China and Hollywood.

The impetus for collaboration is clear. About a dozen new cinemas are built per day in China, according to Forbes. And, don’t forget, Chinese tycoon Wang Jianlin’s Wanda Group for three years has owned, and revitalized, AMC Entertainment Holdings, the second-largest theater chain in the United States.

China’s box office is expected to reach some $5 billion this year, about half the size of the US market. And nearly 50% of these proceeds come from foreign movies, despite a government quota allowing only 34 foreign films per year and various other obstructions.

An impressive lineup from Hollywood and the Chinese film industry — and film financiers from both shores — showed up earlier this month in Los Angeles for the Asia Society’s 6th Annual US-China Film Summit. The organizers marked the occasion by announcing a new partnership between the Asia Society film summit and the Shanghai International Film Festival.

“Our positioning is ‘Based in Asia, Boost Chinese Films and Foster New Talent.’ We are helping the Chinese film industry reach the international level,” Ding Li, the Shanghai festival’s deputy general manager said when announcing the partnerhship. “Through cooperation with the U.S.-China Film Summit, we hope we can together build a quick and complete way for communication between two countries’ film industries, capital, outstanding projects and talent.”

Just as China is attempting to get its voice into the global news mix by building extensive and expensive international news operations through state-owned China Central Television (CCTV) and the Xinhua News Agency, the Chinese film bureaucracy has high hopes of Chinese movies serving as a key driver of country’s “soft power” overseas image-making.

But as veteran China entertainment journalist Jonathan Landreth points out in his China Film Insider blog, this sliver of the China Dream is hardly a glimmer. While on his state visit to the US in late September, Chinese President Xi Jinping referred to watching Sleepless in Seattle and House of Cards in his remarks to the business community. During the visit, director Xu Zheng’s comedy Lost in Hong Kong was released in the US.

Lost in Hong Kong, distributed in the United States by Plano, Texas-based Well Go USA Entertainment, thus far has pulled in about $1.3 million in U.S. ticket sales at 34 screens nationwide and has cracked the top ten of the most commercially successful Chinese-language films to play in American cinemas. Yet its success is dwarfed by, for example, the tenth most-successful Hollywood film in China just this year: Mission Impossible: Rogue Nation, which has raked in $137 million for its co-producers, Hollywood studio Paramount Pictures, Chinese e- commerce giant Alibaba, and the China Movie Channel, a unit of state-run broadcaster China Central Television. For all the hype about boom times in China’s movie marketplace—the box office in the first half of this year soared nearly 50 percent over the first six months of 2014—China can’t seem to land a single hit in what is still the largest theatergoing movie market in the world: the U.S. of A.

Part of the problem, of course, is that Chinese producers and directors must get their scripts approved by China’s censors in order for the movies to be shot and shown in China. These squeezed and scrubbed storylines appear to carry little appeal for foreign audiences beyond students looking to supplement their Chinese language learning. USC professor Stan Rosen, the expert’s expert on Chinese film, offered his views in “Hollywood in China: Selling Out or Cashing In?” in The Diplomat earlier this year:

Chinese success is inherently limited because in China, unlike Hollywood, film is expected to perform several contradictory functions simultaneously. For example, in discussing the film industry, Politburo member and director of the Propaganda (Publicity) Department of the Central Committee of the CCP Liu Qibao has praised the success of Chinese films in the domestic market and noted that China should also become an international movie power, but at the same time he has called for the country’s films to take “socialist core values as a guide” and “contain more elements of the Chinese Dream.” Liu’s comments may appeal to Xi Jinping and his colleagues on the Politburo, but they reflect a lack of knowledge of audience preferences. This introduction of politically correct requirements virtually guarantees a result counterproductive to state intentions. By contrast, Hollywood makes “high concept” films that are meant to have universal appeal, across all cultures, with profit virtually its only motive.

The most recent Hollywood hit in China, Mission Impossible, Rogue Nation, was co-produced by Paramount, Alibaba and a unit of CCTV. This represents just a trickle of the Chinese money that is flooding into the banks in Burbank. Through these investments, Chinese “soft power” seems to be gaining some traction through Chinese sensibilities slipping into the scripts of sino-financed films. According to Rosen, Hollywood’s “success has fueled widespread criticism that the quest for market share has compelled Hollywood to “sell out,” to self-censor in making films that, at best, avoid sensitive social and political issues, and at worst offer an overly positive picture of China under Communist rule.”

Rosen, however, also downplays China’s effect on Hollywood so far. He says that Chinese villains are certainly vanishing from Hollywood movies and various scenes are eliminated, added or enhanced to show China in a positive light. But, Rosen reckons, these sorts of alterations are part of Hollywood’s long success in projecting its own soft power.

For anyone familiar with the history and goals of Hollywood, it should not be surprising that films intended for overseas markets are tailored to suit the demands of those markets. Hollywood has always been concerned with the bottom line, so the reaction to the astonishing rise of the China market represents business as usual. It is this flexibility and ability to adjust that has been a major contributor to its long-term success. In this regard, it is instructive to compare Hollywood’s strategy to China’s efforts to promote its soft power by succeeding on the international film market.

This post originally appeared on LinkedIn.

MIT Picks Hong Kong for Innovation Node Focused on China. Why?


MIT has collaborated with a number of universities in Hong Kong over the years, so this is one strong reason that Hong Kong has been chosen as the location of an MIT “Innovation Node.” But the focus will be on the manufacturing prowess of China, especially neighboring Guangdong and Shenzhen. This initiative appears to go hand-in-glove with the Chinese government’s focus on entrepreneurship and the China 2025 plan aimed at upgrading the country’s manufacturing base.

So why not locate in Southern China instead of across the border in Hong Kong. Could this be another case where the challenges of intellectual property protection in China once again force intellectual capital to stay outside the border? This is most likely an unspoken part of the motivation. But alumni and funding also make or break these sort of programs.

MIT said that Hong Kong was chosen because it provides “ready access” to Shenzhen and Guangdong:

“MIT today announced the launch of an “Innovation Node” in Hong Kong, a collaborative space that aims to connect the MIT community with unique resources — including advanced manufacturing capabilities — and other opportunities in Hong Kong and the neighboring Pearl River Delta (PRD). Set to launch next summer, the MIT Hong Kong Innovation Node will convene MIT students, faculty, and researchers to work on various entrepreneurial and research projects alongside Hong Kong-based students and faculty, MIT alumni, entrepreneurs, and businesses. By combining resources and talent, the Innovation Node aims to help students learn how to move ideas more rapidly from lab to market…. 

“In addition to the presence of strong research universities, a major reason why MIT chose to establish an Innovation Node in Hong Kong is because it provides ready access to a unique manufacturing infrastructure that encourages rapid prototyping and scale-up, Sodini says. About an hour’s commute from Hong Kong’s Central District lies Shenzhen, a city home to many scientists and engineers — and fast, low-volume manufacturing. ‘Manufacturers in Shenzhen have mastered the ability to take a prototype device to unit quantities of hundreds overnight,’ Sodini says. ‘This unparalleled speed of small quantity manufacturing is unique to Shenzhen.'”

MIT President Raphael Reif cited quality universities, active MIT alumni and funding as reasons for the Hong Kong location:

“Universities in Hong Kong are very strong and the city has significant business expertise,” said Rafael Reif, President of MIT, in an interview with The Wall Street Journal. “In addition to that, you also have manufacturing infrastructure in Shenzhen that can handle small volume manufacturing.”

MIT currently has three centers outside the U.S., in Chile, Japan, and Singapore. The Hong Kong program will be the first one in the world that’s focused on innovation. It will have 5,000 square feet of space that will include a facility equipped with advanced tools and materials for invention and prototyping. Initial funding was provided by Hong Kong-based MIT alumni and other donors.”

This post originally appeared on LinkedIn.

Global Tech Titans Are Walking A Tightrope in China


Global technology executives are walking a tightrope in China as they balance increasingly aggressive government demands for Chinese partnerships and technology transfers against protecting their own business interests and US security concerns.

China has long sought technology and knowhow in return for market access. But multinationals have been necessarily wary due to rampant IPR theft. As the recent gathering of Chinese and American technology CEOs in Seattle organized by China for President Xi Jinping’s US visit demonstrated, China now believes it has the market size and the muscle to tell foreign tech MNCs to collaborate and cooperate with Chinese companies if they want a future in China.

In such sectors as telecom equipment, high speed rail, and nuclear and wind power, we are already seeing signs of state-sponsored competitors combining economies of scale, tweaked technology and an array of government subsidies and support to undercut MNCs outside of China.

This is forcing CEOs of tech MNCs to inventory their product portfolios to figure out what can be shared or sold to China without sabotaging their company’s future global success. Those on the high-wire today are the producers of backbone equipment and components: semiconductors, servers, routers, switches and the software that ties it all together. (Next on the agenda of Chinese state planners are medical devices and high end industrials such as factory robotics and 3D printing.)

In a January essay in China Brief, Clark Edward Barrett said that Edward Snowden’s cyber hacking revelations had emboldened China to be more forceful with foreign companies.

“China was quick to capitalize on U.S. discomfort from Snowden’s revelations. On June 25, 2013, People’s Daily claimed that the NSA had, ‘for the last 15 years conducted organized attacks, invasions, robbery and supervisory activities against Chinese and Hong Kong Internet and communications systems…and yet has repeatedly denounced China internationally for hacking without evidence, slandering the Chinese government and military in order to tarnish China’s international image’…. A key element of China’s interpretation of the Snowden affair is the claim that the NSA’s activities were aided by the massive technological superiority of the United States in IT hardware, computer operating systems, key intellectual property and the support of U.S. Industry.”

The tradeoffs underway by MNCs are shaped by their position in the China market and the barriers and benefits that China now presents.

  • Cisco’s formidable China market share has been shrinking fast as the government pushes “secure and controllable” local products. This helped fuel plans for Cisco investing $10 billion in Chinese tech and signing an MOU with the National Development and Reform Commission to enhance Chinese innovation, R&D, tech investments and job creation. This followed a $100 million JV with leading competitor, the Inspur Group, which includes hardware and software development and Inspur reselling Cisco’s router and switching products. In July, Inspur announced it would invest RMB 10 billion to build seven core cloud computing centers and 50 regional cloud centers in China.
  • In May last year, Inspur announced an “I2I Plan,” aimed at replacing IBMwith Inspur in smaller server systems. This came as the government began examining whether reliance on IBM servers in the banking system constituted a security threat. In August, IBM formed a partnership with Inspur in which the company’s WebSphere software and Power8 chips would be deployed in Inspur’s systems.
  • Facing a government ban on Windows 8 and increasingly popular and successful local ripoffs of Windows XP, Microsoft has expanded beyond its anti-piracy focus to partnerships and product deals. These include: customized cloud computing for SOE clients with Tsinghua Unigroup(which in July bid $23 billion for memory chip maker Micron Technology Inc.), and selling a localized version of Windows 10 in partnership with China Electronic Technology that replaces Bing search with Baidu.
  • As HP was sorting out splitting itself into two separate companies, and figuring out how to survive in China today, the company in May this year sold a 51% stake in its Chinese server and storage businesses for $2.3 billion toTsinghua Unisplendor (a subsidiary of the Tsinghua Holdings).

The tightrope could get more treacherous for American MNCs as journalists and politicians begin to examine what these partnerships and tech transfers could mean for US national security. The New York Times on October 30th publishedU.S. Tech Giants May Blur National Security Boundaries in China Deals, which looks at a number of companies and deals but focuses on IBM and various Chinese tech companies that have military ties.

Authors PAUL MOZUR and JANE PERLEZ wrote: “While the cross-border partnerships, under which American tech companies share, license or jointly develop advanced technologies with Chinese counterparts, are a growth area for business, security experts are increasingly questioning whether the deals harm United States national security. While the capabilities shared in the partnerships are commercial in nature, such technologies have also become more critical to defense. That is spurring concerns that widespread cooperation with Chinese companies could quickly increase China’s fundamental technological capabilities in a way that could easily help military research and operations.”

IBM responded with this rebuttal: “This misleading study wholly mischaracterizes IBM’s initiatives in China. The OpenPOWER initiative is global and not unique to any one country. All technology provided through the OpenPOWER Foundation is commercially available, general purpose, and does not require a U.S. export license. In addition, all IBM sales and technology licensing agreements comply with U.S. export regulations, and require that partners in any country do so as well.”

No matter how this current conversation sorts out, American tech MNCs should prepare themselves for increased US government scrutiny as they face intensified Chinese government pressure. Those on the China tech tightrope have a vested interest in not letting this turn into a political circus. The US government also has the responsibility to provide air cover for American companies that have no choice but to pursue success in China, as not doing so could threaten their competitive standing worldwide.

This post originally appeared on LinkedIn.

Who’s Running Your Business in China?

(Originally published in Harvard Business Review on November 26, 2013)

Nearly every prospective Chinese employee who I met with in the 1990s shot out the following sentence once — if not multiple times — during their job interviews:

“I will do my best!”

Young people were extremely eager to work for multinationals, to be associated with famous brand names, and to learn from the best companies in the world.

Today, the “I will do my best” attitude still prevails. But Chinese employees have learned that the management skills and systems in multinationals in China come in many flavors, from the exceptional to the abysmal. So they are very demanding that their multinational employers also “do their best” and “be the best.” And that means providing world-class training, clear and lucrative career paths and, increasingly, a work-life balance that allows people to enjoy the fruits of their success.

I have lived in Beijing since 1990 and hired and managed many hundreds of Chinese people over the years. When I was running Dow Jones’ businesses in the 1990s, the predominant trait of Chinese staff was an insatiable hunger to learn, and an impatient drive to move up fast. In the 2000s, when I ran a research and consulting company and worked with a variety of advisory firms, Chinese employees retained those earlier traits, but were also quick to engage in job-hopping, as the red-hot China market’s demands outpaced the available professional talent.

Today, as chairman of APCO Worldwide’s China operations, I have a deep view into the China operations of dozens of multinationals, and through that I can see that management in China is going through yet another phase. The work ethic of Chinese employees is still fierce. Their ambitions remain formidable. But, like the Chinese economy itself, multinationals in China are in need of “rebalancing” their work force.

The days when Goldman Sachs and McKinsey threw piles of money at overseas-educated returnees are long gone. MBAs are a dime a dozen in China today, and people who invested $100,000 or more for graduate degrees are settling for annual salaries in the $30,000 range. So the truly talented in this group need to see that they have a future, or they will find one elsewhere. Multinationals also are littered with highly compensated employees who were promoted beyond their experience and skill levels during the boom years. One further complication: by increasing the number of annual college graduates from 2 million to 6.5 million between 2000 and 2010, China is churning out a workforce with an inconsistent quality of education and with white-collar expectations in an economy most in need of top technicians, skilled production workers and executives who can run global operations.

For multinationals in China, it is time to cultivate and cull. Companies need sophisticated and sustainable programs to identify their most talented employees, and they need to focus on training and retaining them. Grow-Your-Own is still the best way to instill the company culture and integrate China management into global operations. Hiring senior Chinese managers from other multinationals or state-enterprises often carries with it a “culture bomb” of dictatorial and secretive practices that still pervade the China management world.

Culling your management ranks should include expat and local managers. Top talent in China will run away from companies with muddled management systems and mediocre managers very quickly. Chinese employees can recognize in a nanosecond if they have joined a company in which top managers are discards from headquarters, or if those in the middle are uninspired bureaucrats clinging to titles they don’t deserve. They will shrewdly grab whatever money and titles they can — while professing undying loyalty — to prepare for their next company.

Top talent in China is in search of mentors. They want capable leaders who they can learn from, and whom they can truly trust to look out for them — both in their professional and personal lives, as the workplace in China is more often than not a person’s main social circle. Multinationals that send their sharpest managers to China, and keep them in China for a long time, will attract and retain the best Chinese talent. Multinationals willing to cull their ranks of mediocre middle managers and corporate political players and replace them with enlightened Chinese managers and mentors will have a stable work force that integrates well with global operations.

This all starts at the top. Determining who runs your China operations is the most important decision a CEO can make. A leader who possesses equal parts IQ and EQ, and a thorough understanding of your business, is a good start. A decisive person who is steeped in integrity, humility and humor is also helpful in order to work in the very unpredictable and challenging Chinese business environment.

China’s new leadership this month has unveiled an agenda of wide-ranging economic reforms that will undoubtedly present new opportunities as well as considerable uncertainty for multinationals as the detailed policies emerge and unshackled local competitors gain strength. Nimble companies with enlightened managers and unified management systems will have the best shot at success.

The Key to U.S.-China Relations: ‘See You Again Next Year’

(Originally published in The Atlantic June 4, 2013)

Why the meeting between Barack Obama and Xi Jinping this week in California will be a good thing — even if nothing is accomplished.

In the run-up to the shirtsleeves summit between Chinese President Xi Jinping and U.S. President Barack Obama in the California desert at the end of this week, there are no shortages of suggestions about what they should discuss.

Foreign affairs and military advisers are crafting talking points on such hot topics as cyber hacking, territorial disputes with Japan, North Korean nukes and Syria’s civil war. Trade and business groups are prepping a smorgasbord of market access and cross border investment staples to chew over.

But the most important sentence these two leaders should say to each other during the July 7-8 confab is very simple: “See you again next year!”

If the U.S. Treasury had a dollar for every time somebody of importance has declared that the U.S. China bilateral relationship is the most important in the world — bar none — America’s budget deficit would be shrinking faster than congressional approval ratings. Keeping up with fear-provoking prognostications by politicians and pundits about what can and will go wrong in the world if the U.S. and China don’t intelligently recalibrate their relationship could be a full-time endeavor.

So, how does it not make sense for the American and Chinese presidents to meet face-to-face, one-on-one, once a year, for a couple of days set aside for just that? The risk-reward calculation for such a weekend retreat does not require an MBA. The downside would be that during difficult times the individuals would suppress their ire, and their aides would scramble to find sufficient common ground to announce a happy outcome.

The upside is that year after year, the two politicians who possess the most outsized influence on world peace and prosperity would sit together as humans and discuss their shared responsibilities and compare the array of burdens and rush of emergencies that disrupt their sleep.

People-to-people is what works best now in the U.S. China relationship. Chinese and American students are developing deep friendships as they study on each other’s campuses. Business ties between American and Chinese companies — and among employees who work together day to day — are much more friendly and trusting than the headline disputes would lead you to believe.

Long gone are the days when elder statesmen and business luminaries could back-channel messages between the top leaders of each government when the relationship got off track. We already have some five dozen bilateral dialogues through which battalions of American and Chinese bureaucrats talk to each other about everything from climate change to industrial standards to intellectual property rights and human rights. The truth is that these meetings are increasingly serving as forums for people to talk past each other.

Since becoming Communist Party leader last fall, and China’s president this spring, Xi Jinping has been increasingly talking about the U.S. and China forging a new kind of big power relationship. What that means has yet to be defined. But the broad strokes involve treating each other as equals. At the same time, some senior Chinese officials have been indicating to foreign visitors that China believes that current international institutions that stem from the post World War II Bretton Woods agreements, such as the World Bank and World Trade Organization, are considered so biased in favor of the West that China believes it may have to spearhead the creation of alternatives.

This is likely the motivation behind the announcement in March in South Africa when the BRICS nations — Brazil, Russia, India, China and South Africa — agreed to begin planning the establishment of a new development bank with each country putting $10 billion into the kitty. Some say this is an impossible endeavor given the size disparities, political differences and economic competition that exists between these countries. China is not one of the naysayers. A month later, the man who built the China Development Bank into a powerhouse, Chen Yuan, was assigned to lead China’s effort to establish the BRICS bank.

The storied Sunnylands Retreat outside Los Angeles appears to be the perfect venue for this president-to-president conclave. The sprawling estate built by the late media tycoon and political power broker Walter Annenberg has a 25,000 square-foot mansion that has hosted seven American presidents since Dwight Eisenhower signed the guest book in 1966. It has been a place for relaxation, realistic discussions and reflection.

During his presidency Ronald Reagan held New Year’s Eve parties at Sunnylands that brought together his Hollywood and political friends in a setting hidden from public and press scrutiny. The first President Bush hosted the Japanese prime minister at a Sunnylands summit and state dinner during a period of intense U.S. Japan trade friction. President Richard Nixon sought solace at Sunnylands after he was booted from the White House. He left behind this inscription in the estate guest book: “When you’re down, you find out who your real friends are.”

Right now, U.S. China relations are on a distinct downward trend, and comedian Steven Colbert’s description of America and China as “frenemies” is coming too close to being true. Areas of dispute are increasing, the erosion of trust is accelerating and neither country appears to have a clear vision for getting beyond the distinctly different DNA of each country’s political system and the pressures of domestic politics that will push the U.S. and China further apart if a path forward is not worked out at the top.

President Xi told National Security Adviser Tom Donilon last week that U.S.-China relations are at a “critical juncture” and that the upcoming meeting should “build on past successes and open up new dimensions for the future.” Donilon responded that President Obama is committed to “higher levels of practical cooperation and greater levels of trust, while managing whatever differences and disagreements might arise between us.”

The Sunnylands Retreat is located on Frank Sinatra Drive in Rancho Mirage, California. Let’s hope that the Sinatra hits “Strangers in the Night ” and “My Way” are not on the dinner music playlist.

Is the Specter of a ‘Cyber Cold War’ Real?

(originally published in The Atlantic, April 27, 2013)

Why the best and brightest in China and the United States have the most to lose from a cyber-related conflict between the two countries.

A cleaner sweeps the logo of Google China outside its company headquarters in Beijing, January 19, 2010. (Alfred Jin/Reuters)

A cleaner sweeps the logo of Google China outside its company headquarters in Beijing, January 19, 2010. (Alfred Jin/Reuters)

“How do I screen when hiring Chinese employees?”

I was asked that question the other day by a senior executive at one of America’s most prominent tech companies who is worried about Chinese employees stealing the company’s trade secrets. The epidemic of cyber-burglary and trade secret theft coming out of China is leading many technology and industrial multinationals to not only ask this question but to discuss avoiding hiring Chinese scientists, engineers and executives for key positions — or at least determine ways to isolate them from core company systems. Some companies are already doing both of those things.

I was immediately and sadly reminded of the late-1990s Chinese spy mania in the U.S. ignited by then House Speaker Newt Gingrich’s attempt to connect a scandal involving Clinton campaign contributions with accusations that American companies with ties to Clinton were sharing sensitive U.S. space technology with China. In the end, as is usual with Newt’s political nonsense, the smoke led to barely a flicker of fire.

But Chinese American scientist Wen Ho Lee at the Department of Energy’s highly classified nuclear laboratory at Los Alamos, Mexico, ended up badly burned. And, for a while, so were the career prospects of Chinese immigrants with technology and science expertise studying and working in the U.S. After being charged with 59 criminal counts, shackled in leg irons, incarcerated in solitary confinement, and pilloried by press leaks, Lee pled guilty to one count that amounted to bringing classified materials home to work on. The judge who accepted Lee’s plea said that his prosecution had “embarrassed our entire nation.” During this time, I ran into more than a few Chinese scientists and technologists in China who had returned home because they saw their future in America limited.


A couple hours after the screening question, I received the CNN email alert about the death of Lu Lingzi, the 23-year-old Boston University student from Shenyang, China killed in the Boston marathon bombing. She was the same age as my daughter Sally, who was also born and raised in China and speaks Chinese. It is impossible for parents to fathom how a child’s life and dreams can be destroyed by senseless criminal violence. As her classmate Zheng Minhui said at Lingzi’s Boston University memorial service: “Her dream was very simple. She wanted a not necessarily rich life, but a peaceful life, with a stable job, a happy family, and a lovely dog.”

Lingzi was one of the 200,000 mainland Chinese currently studying in the U.S. — and nearly 1 million who came before her — whose big dreams and bright futures depend on mutual understanding, clear communications and real trust between the U.S. and China as nations and as people. I chair the advisory board of a student group called Global China Connection with branches on some 60 U.S. campuses and a membership that mixes students from China with American and international students interested in China. The group’s mission statement is clear: Global China Connection is a student-run organization dedicated to fostering deep and trusting personal relationships among Chinese and non-Chinese university students. I believe the future of the U.S.-China relationship depends on these young people to help us overcome the inevitable friction between a rising global power and a reigning global power. When I travel on business in the U.S., I stop by campuses and talk with these students. I have met many, many like Lu Lingzi over the years. Sincere, decent and diligent Chinese who love their homeland but have great curiosity about and affection for America — and dreams and ambitions that involve both countries.

The fantastic Internet cyber world that has brought the globe together in so many ways is now endangering those dreams. The fallout for Chinese in the U.S., and those working for American multinationals in China, during the Wen Ho Lee fiasco was serious but short lived. The accusations were aimed at an individual who had resided in the U.S. for some 35 years at the time of his arrest. But today’s accusations and a large body of detailed and credible evidence point at Chinese state-sponsored cyber hacking and trade secret theft involving a Who’s Who of American multinationals.

Whenever American business talks about China with the U.S. government these days, this is topic number one. Most Chinese officials and business people I meet are completely unaware of the scope of the problem. The news and evidence is blocked by Internet censors. The Chinese government’s response so far has been to deny and dissemble, calling the accusations of state-sponsored Chinese cyber-theft “groundless accusations” with “ulterior motives.” After Secretary of State John Kerry and Treasury Secretary Jack Lew visited China in April and raised the cyber-hacking issue repeatedly, Qian Xiaoqing, deputy director of the state Internet Information Office told Reuters: “Lately people have been cooking up a theory of a Chinese internet threat, which is just an extension of the old ‘China threat’ and just as groundless.”


Here is a quick overview of what has become public.

Google closed down its self-censored mainland China search engine in March 2010 due to cyber-hacking of Google source code and attempts to steal the passwords of hundreds of Gmail accounts, including U.S. officials, journalists and Chinese activists. At the time,Google was one of some three dozen multinationals hacked from China . Except for Google, the other companies clammed up, lest they anger China and damage their China business. The problem continued to get worse, but few would talk about it publicly. The U.S. government didn’t want to reveal what it knew and how it knew it. Companies built stronger defenses and kept quiet.

China cyber-hacking news hit the headlines this January when The New York Times and The Wall Street Journal revealed that they had been hacked from China. Bloomberg BusinessWeek, in mid-February cover story entitled “Yes, the Chinese Army is Spying on You,” exposed a network of hackers, digging all the way down to a vacation photo of a People’s Liberation Army professor from Zhengzhou who had exposed his real identity by launching a small telecom side business that allowed investigators to connect his real name with his cyber-identity. The magazine followed the trail of Joe Stewart, director of malware research at Dell SecureWorks, who said he tracks 24,000 Internet domains “that Chinese spies have rented or hacked for the purpose of espionage.”

Days later, Mandiant, an American private cyber security company, issued an explosive report on Chinese hacking. The company said it had traced “one of the most prolific cyber espionage groups in terms of the sheer quantity of information stolen” to the neighborhood of a PLA building in Shanghai that houses an intelligence organization known as Unit 61398. The individual hackers tracked by Mandiant at 61398 included those such online monikers as “UglyGorilla” and “SuperHard.”

Mandiant said the group was one of more than 20 Advanced Persistent Threat (APT) groups it had been tracking in China. Mandiant said that in a seven year period, the Shanghai group – which it dubbed APT1 — had “systematically stolen hundreds of terabytes of data from at least 141 organizations” by periodically revisiting “the victim’s network over several months or years” to “steal broad categories of intellectual property, including technology blueprints, proprietary manufacturing processes, test results, business plans, pricing documents, partnership agreements, and emails and contact lists from victim organizations’ leadership.” Mandiant added that the companies targeted by APT1 “match industries that China has identified as strategic to their growth, including four of the seven strategic emerging industries that China identified in its 12th Five Year Plan.”

The “2013 Data Breach Investigations Report,” issued in recent days by Verizon’s RISK Team in conjunction with 18 others including the U.S. and other governments, for the first time separated hackers with financial motives from state-sponsored cyber-theft of intellectual property. Of the 120 occurrences of state-connected IP cyber-theft discussed in the report, 96     percent came from China. “We don’t think there was a super spike in that kind of [cyber-espionage] activity,” Wade Baker of the RISK team told the Washington Post. “It’s more about our ability to find them.”

The “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets” published by the White House in February labels China a “persistent collector” and cites a long list of trade secret theft prosecutions involving Chinese employees of multinationals in the U.S. The cases include: Space shuttle secrets from Boeing; Trading platform source code from the CME Group; Light emitting diodes from DuPont; Hybrid technology from GM; Car designs from Ford; Food component information from Cargill; Military technology from L-3 Communications; and paint formulas from Valspar. “China’s intelligence services, as well as private companies and other entities, frequently seek to exploit Chinese citizens or persons with family ties to China who can use their insider access to corporate networks to steal trade secrets using removable media devices or e-mail,” the report states. “Of the seven cases that were adjudicated under the Economic Espionage Act — both Title 18 USC § 1831 and § 1832 — in Fiscal Year 2010, six involved a link to China.”


Congress is searching for ways to respond. Mike Rogers, a Michigan Republican and chairman of the House Permanent Select Committee on Intelligence, is focused on making China pay a price. “Right now there is no incentive for the Chinese to stop doing this,” Rogers told The New York Times in February. “If we don’t create a high price, it’s only going to keep accelerating.

Unfortunately, Congress failed to do an inventory of U.S.-China trade before setting its first price. Congress in March added sanctions to the continuing resolution that funds the federal government through September. The sanction provision bars NASA, Commerce, Justice and other federal departments from purchasing information technology systems “produced, manufactured or assembled” by entities “owned, directed, or subsidized by the People’s Republic of China” unless the purchase is determined to be “in the national interest of the United States.”

If Congress continues down this road Americans may soon revert to manual typewriters and talking into tin cans with strings stretched between them. Here is the state of U.S.-China trade today: China sells America laptops, servers, routers, phones and televisions. America sells China beans, bits, Boeings and garbage. It would do House leaders good to read their own November 2012 report: Patterns in U.S.-China Trade Since China’s Accession to the World Trade Organization by the U.S.-China Economic and Security Review Commission, a body mandated and appointed by Congress.

10 years ago, Chinese exports to the United States were dominated by toys and games, footwear, textiles and apparel. Today, atop the list are all types of electronic exports, which increased to $145 billion in 2011 from $25 billion in 2000. Many of the components come from America. U.S. chips now account for about 90 percent of advanced technology products exported to China. Since 2008 soybeans have been the single largest export to China. The export of American scrap metals, waste paper and industrial leftovers to China has increased to $11.5 billion in 2011 from $740 million in 2000. “Yes, that’s right,” Clyde Prestowitz of the Economic Strategy Institute wrote in 2010. “We’re swapping garbage for computers with China.”

To complicate matters further, the electronics arriving in the U.S. are nearly all manufactured by foreign invested enterprises in China. In testimony to the Commission, economists estimated that some 60 percent of all Chinese exports to the U.S., and more than 90 percent of advanced technology product exports, come from foreign invested firms in China.


While Congress stumbles, others are exploring a wide array of alternatives.

The Heritage Foundation suggests that Chinese State Owned Enterprises (SOEs) that benefit from state cyber-burglary be charged with “trafficking in stolen goods” and have their offshore assets seized. Dan Blumenthal of the American Enterprise Institute suggests that Congresscreate a cyber-attack exception to the Foreign Sovereign Immunities Act as was done with terrorism. That Act prevents foreign states from facing civil suits in U.S. courts. The terrorism exemption allows such suits and the collection of damages if the country has been designated as a state sponsor of terrorism by the State Department. Then there is George Mason University law professor Jeremy Rabkin and scholar Ariel Rabkin’s Hoover Institution study that proposes the U.S. “think about cyber conflict in more imaginative ways.” One of them is creating a cyber-militia by reaching back 200 years when the U.S. and others signed “letters of marque” to “privateers” who were commissioned to attack pirates ships and allowed to keep a percentage of what they seized.

A more mundane approach comes from defense consultant and author James Farwell. He wrote in the National Interest in March that Chinese hacking should be taken to the WTO. While espionage is not against international law, he says, the theft or infringement of intellectual property is. Farwell suggests that the U.S. should initiate a case under the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement. “An internationally-recognized ruling, handed down in legal proceedings that found China guilty of intellectual-property theft or infringement, could render it liable for billions of dollars in compensation, expose it to multinational economic sanctions and cause it to be branded a ‘pirate state’,” Farwell wrote. “As a nation whose strategic thinking focuses on playing for psychological advantage, China would find that result uncomfortable.”

Real progress can only start with the separation of sleuthing and shoplifting. The U.S. and China should lead a global discussion of acceptable behaviors and protocols for cyber-spying and cyber-warfare. Those discussions could take years to become meaningful. But they at least open communications channels to avoid accidents, or a “Cyber Pearl Harbor” as Defense Secretary Leon Panetta put it as he headed into retirement. Even a cursory look at published studies makes it clear that both countries are cyber probing for ways to shut down each other’s financial markets, electric grids, telecom networks and transport systems in the event of conflict. China certainly took note in March when U.S. National Security Agency and Cyber Command chief Gen. Keith Alexander told Congress that 13 of the new 40 CYBERCOM teams being assembled would focus on offensive operations.

The Obama administration’s approach so far is to enlist allies and engage China in quiet talks about cyber-security, much like was done with some success when China was publicly denying mounting evidence of its nuclear proliferation. In the end, China realized that such proliferation was against its own interests. A cyber security working group between the U.S. and China is now being organized as a result of the recent visits to Beijing by Secs. Kerry and Lew and others. Public statements from Chinese officials appear to accommodate this. “Cyberspace needs rules and cooperation, not wars,” Foreign Ministry spokesman Hua Chunying said in mid-March. “China is willing, on the basis of the principles of mutual respect and mutual trust, to have constructive dialogue and cooperation on this issue with the international community including the United States to maintain the security, openness, and peace of the Internet.”

Even the Global Times, the Doberman of the Party propaganda press, suggested a good idea in a February editorial claiming the “insane U.S. accusations” reflected American intentions of “cyber hegemony.” The Global Times said that “China should confront the U.S. directly. China should gather, testify, and publish evidence of the U.S.’ Internet intrusions.”

That would be helpful as both countries could know who is doing what to whom. Many facts as the U.S. sees them are already on the table. If China has evidence showing that the U.S. government is stealing trade secrets from Chinese companies — or the companies of any country for that matter — that should be exposed and stopped. After all, the White House’s own February report on mitigating cyber hacking mentions a press report citing France’s Central Directorate for Domestic Intelligence calling China and the United States the leading hackers of French businesses.

As talks begin, both the U.S. and China need to step back and assess where this could be heading. Do the leaders of either nation really think a Cyber Cold War would benefit anybody? The longer this cyber-mess festers, the more distrust builds up, the more American companies question the trustworthiness of Chinese employees, the more China questions market access for American firms.

The victims I most worry about are our children, growing up in the age of globalization but in danger of being divided by distrust. Lu Lingzi’s father, Lu Jun, gave an eloquent and inspired eulogy to his precious daughter in front of 1,200 mourners at her Boston University memorial this week. He cited a Chinese proverb: “Every child is actually a little Buddha that helps their parents mature and grow up.”

The leaders of the U.S. and China may consider listening to Mr. Lu and manage this issue like mature grown ups who care about the world their kids will inherit.

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