Victims Low-key on China Hacking

By Joseph Marks
POLITICO, 11/26/14 12:33 PM EST

Catalog all the public criticism of China for stealing American companies’ intellectual property in recent years and a remarkably small portion of it will come from the victimized businesses themselves.

The standard line is that U.S. tech companies are cowed by the Chinese, outraged by the loss of intellectual property and trade secrets but unwilling to endanger their positions in China’s vast market.

On the face of it, that makes sense. China is not only one of the largest world markets but among the fastest growing too with more than 630 million Internet users. It’s also a very difficult place for western firms to do business with byzantine laws and regulations and often opaque internal politics. Companies also must remain vigilant against spying and cyber intrusions. When they visit the country, executives are warned to take “clean” laptops, smartphones and tablets with no sensitive corporate information and that can be examined and cleaned when they return.

But that simple explanation belies a more complicated story, analysts tell POLITICO.

Private sector executives may be close-lipped about hacking concerns during large meetings and in public events, such as the recently concluded World Internet Conference in Wuzhen, which drew executives from Apple, Amazon, Intel, Hewlett-Packard, Cisco, LinkedIn and Facebook among others. But, behind closed doors, it’s a different story, they say, with Western executives speaking more openly about the damage caused by Chinese hacking, applying gentle pressure and making the case for a world in which Chinese businesses are viewed as fair players. And increasingly that case is also being made by China’s rising entrepreneurs, as they step onto the world stage.

It’s a peculiarity of the Chinese system of government that American CEOs spend almost as much time meeting with government officials when they visit the country as with business leaders and local partners. Because the line between government and industry is blurred to near invisibility, an entire industry has grown up around matching U.S. CEOs with the right Chinese officials and prepping the CEOs rigorously to ensure they charm rather than offend.

When Apple Chief Executive Tim Cook traveled to China last month, he met with Ma Kai, one of the nation’s four vice premiers, amid reports that China-based hackers had been targeting user data stored inside Apple’s iCloud. Data security was discussed at the meeting, according to China’s state Xinhua news agency. Apple declined to disclose further details of the discussions, but it’s likely IP theft and a host of other cyber concerns came up too, China watchers say.

“There’s no question cyber would be a part of it,” Jon Huntsman, a former U.S. ambassador to China and Utah Governor, told POLITICO. “CEOs no doubt bring [that] up in meetings and some would voice their deep, deep consternation about how it’s affecting the wellbeing of their companies.”

When American CEOs do raise the issue of IP theft with Chinese government officials, it’s often a stern but stage managed affair. Meetings with Chinese officials can take on the choreographed air of a ballet, experts said. There are the topics that must never be brought up — Tibet, Taiwan, Tiananmen Square, and, these days, probably the protests in Hong Kong as well. And there are the topics that must only be brought up tactfully and privately — cybersecurity and IP theft among them.

“I find that, if it’s a subject that is extremely important and you really want to see a change, it’s something you bring up quietly over dinner,” said Virginia Kamsky, CEO of Kamsky Associates and a consultant with decades of experience preparing executives to meet with Chinese officials.

“You don’t do it publicly in the Great Hall of the People,” she said. “If you embarrass your host in any way, you have exactly the opposite effect…If you bring an issue up publicly because you want to go home and say ‘look how I castigated the Chinese about IP theft or cybersecurity’ for your own political gain, my own experience tells me that won’t be effective.”

When Huntsman served as ambassador to China from 2009 to 2011, executives frequently visited his office to voice concerns about Chinese IP theft, he said, including then-Microsoft Chairman Bill Gates who was “deeply concerned about IP issue related to Microsoft, which had been ripped off beyond anyone’s ability to even imagine it.”

“That was an opportunity not only for the U.S. embassy to provide some ideas about how it might resolve some of the issues,” he said, “but for us to hear from Microsoft about how it was immediately impacting them.”

More recently, China watchers say, Chinese entrepreneurs are increasingly making the quiet case against hacking, arguing that it tarnishes their image on the world stage. A handful of provincial officials are making a similar case, arguing they can draw in more western investment by promising a hard stand against IP theft.

“I think the most important pressure will come from within China, from their own emerging entrepreneurs who want to go global,” Huntsman said. “As people like [Alibaba CEO] Jack Ma go global, they don’t want to be associated with a government that’s notorious for violations of IP rights.”

Huntsman compared the development with Taiwan, which moved from being a violator of IP rights to an advocate for them as its economy developed in the 1980s and ‘90s.

Huntsman co-chaired a Commission on the Theft of American Intellectual Property with former Director of National Intelligence Dennis Blair in 2013. Their report concluded that the total U.S. revenue lost to IP theft worldwide is comparable to the value of U.S. exports to Asia and that software manufacturers alone are losing tens of billions of dollars to Chinese counterfeiting annually.

Roughly a year after that report came out, the Obama administration, which had earlier attempted quiet diplomacy over Chinese IP theft, indicted five members of the People’s Liberation Army for hacking U.S. companies.

But the U.S. government’s turn against quiet diplomacy on Chinese IP theft is a relatively new phenomenon. Bush administration officials were under strict instructions from the White House to never say “China” and “IP theft” or “cyber” in the same sentence, and the Obama administration attempted quiet diplomacy for years before handing down indictments in May.

Robert Daly, director of the Woodrow Wilson Center’s Kissinger Institute on China and The United States, described the Obama administration’s new hard line on Chinese cyber theft as essentially “a throwing up of the hands” after quiet diplomacy had failed.

It’s even possible most members of the administration don’t even expect the indictments to do much good, he said, during a recent discussion at Georgetown University’s Mortara Center,

The administration figured “we’ve been damned if we don’t long enough,” Daly said, “[so] let’s take damned if we do out for a spin and see how we like it.”

And experts say there’s little evidence that either approach has yielded much.

“We’ve made very little progress on IP rights violations, and I’ve been tracking this for 25 years,” Huntsman said.