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In 2006, the Chinese government passed a clean air energy law that mandated the creation of seven giant wind farms, each of which would, within a decade and a half, produce as much energy as 10 nuclear reactors. Daniel McGahn, vice president in charge of new business for American Superconductor (AMSC), saw a tremendous opportunity for his company in China. Over the course of the next several years, AMSC made deals with several Chinese companies that would manufacture wind turbines for which AMSC would supply the electronic control systems, the software, and the electrical components necessary to transform the wind energy generated into electrical power. And for a while, that strategy paid off.
AMSC produces advanced smart grid technology for power companies and electronic control systems that maximize wind turbine reliability, availability, and energy output. Yet American power companies have been reluctant to update their systems with smart grid technology that could prevent outages simply because of the huge cost involved in such an investment. So, the Chinese wind legislation was a windfall for AMSC. AMSC stock quadrupled in value between 2006 and 2009.
AMSC’s largest customer in China was Sinovel Wind Group, a company that had bid on and won 47 percent of the Chinese government’s wind projects. Sinovel captured a leading position in China’s wind market. However, as more and more Chinese companies began producing turbines, the price of turbines dropped by 40 percent, and Sinovel’s profits also dropped. Still, AMSC had multiyear contracts with Sinovel at set prices, and Sinovel continued to produce large quantities of turbines equipped with AMSC technology.
In March 2011, Sinovel began rejecting AMSC shipments of electronic components—shipments worth more than $70 million—without explanation. In April of that year, AMSC was forced to announce that Sinovel had stopped placing orders, despite the fact that AMSC had contracts committing Sinovel to $700 million in future orders. Daniel McGahn, now CEO of AMSC, tried to uncover the problem and mend relations, but Sinovel declined to resume placing orders. Then, in June 2011, a group of AMSC engineers testing a Sinovel turbine in northern China uncovered electrical components that were running a stolen version of AMSC software. Sinovel had somehow accessed AMSC proprietary source code and was manufacturing its own electrical components, cutting AMSC out of the operation.
In 2010 and 2011, China had experienced major disruptions in its power grids as disturbances, such as trees falling on lines, shut down thousands of turbines. The Chinese government proposed legislation to require energy companies such as Sinovel to upgrade their electrical components with software that would allow wind farms to continue to function despite power grid disturbances. Because AMSC software controlled all of Sinovel’s existing turbines, Sinovel would be required to purchase the software upgrade from AMSC. Instead, Sinovel recruited an Austrian-based AMSC engineer, Dejan Karabasevic, to develop the necessary software. Sinovel signed an employment contract with Karabasevic and flew him to an apartment in Beijing, along with code stolen from AMSC’s servers in Austria. He then spent several weeks reverse engineering the software to come up with the source code necessary to install in Sinovel’s turbines.
After AMSC discovered the stolen software, the company was able to track it back to Karabasevic. Ultimately, Karabasevic confessed to Austrian police and was sentenced to 12 months in prison for revealing trade secrets. AMSC filed several lawsuits against Sinovel in Chinese courts, seeking $1.2 billion in damages for intellectual property theft and breach of contract, while Sinovel has countersued for $207 million, claiming AMSC provided substandard quality equipment. The court battle, which garnered the attention of top U.S. and Chinese officials, is seen as a test case. Many Western companies (including DuPont, Google, and Lockheed Martin) have claimed that they have been victims of Chinese espionage, and the court’s decision will be an indication of whether China is willing to restrict such behavior. China’s Supreme Court surprised many when it agreed to review lower court decisions dismissing one of AMSC’s claims.
The director of the National Security Agency has called the theft of technological secrets by Chinese companies from U.S. and Western companies “the greatest transfer of wealth in history.” American leaders perceive these cases not as isolated incidents, but rather as part of a larger strategy of employing unfair trading practices—similar to China’s decision to corner the market on rare earth metals needed to produce high-tech hardware. The U.S. International Trade Commission has estimated that if China instituted intellectual property protection measures similar to those in the United States, the United States would gain between 900,000 and 2.1 million jobs. Yet AMSC and many other Western companies continue to do business in China.
AMSC is still working to recover from its 2011 losses when its stock dropped from almost $30 to $4 per share. The company has signed deals in Korea, India, and Russia for its electrical control systems, and Daniel McGahn recently noted that “silver linings are beginning to appear” as China is forecasting an increase in wind turbine installations now that stricter quality regulations have been implemented.
What additional evidence would convince you that China’s theft of technological secrets represents a national strategy rather than just a series of isolated incidents?
What actions might Western countries take to protect the loss of technological secrets and to reduce the risk of continuing to do business in China?
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