Sunday, March 18, 2012

Inside the Chinese Boom in Corporate Espionage

Via Business Week -

Last June, three men squeezed inside a wind turbine in China’s Gobi Desert. They were employees of American Superconductor Corp. (AMSC), a Devens (Mass.)-based maker of computer systems that serve as the electronic brains of wind turbines. From time to time, AMSC workers are required to head out to a wind farm in some desolate location—that’s where the wind usually is—to check on the equipment, do maintenance, make repairs, and keep the customers happy.

On this occasion, the AMSC technicians were investigating a malfunction. They entered the cylindrical main shaft of the turbine, harnessed themselves to a ladder, and climbed 230 feet in darkness up to the nacelle, an overpacked compartment that holds the machinery used to convert the rotation of the blades into electricity. AMSC had been using the turbine, manufactured by the company’s largest customer, China’s Sinovel Wind Group, to test a new version of its control system software. The software was designed to disable the turbine several weeks earlier, at the end of the testing period. But for some reason, this turbine ignored the system’s shutdown command and the blades kept right on spinning.

The AMSC technicians tapped into the turbine’s computer to get to the bottom of the glitch. The problem wasn’t immediately clear, so the technicians made a copy of the control system’s software and sent it to the company’s research center in Klagenfurt, Austria, which produced some startling findings. The Sinovel turbine appeared to be running a stolen version of AMSC’s software. Worse, the software revealed that Sinovel had complete access to AMSC’s proprietary source code. In short, Sinovel didn’t really need AMSC anymore.

Three days after that expedition in the Gobi, Daniel McGahn, AMSC’s chief executive officer, got the news on his cell phone while he was traveling in Russia. Hired in 2006, McGahn helped revamp the then-floundering company by focusing it on two things: China and wind power. Those bets paid off for a while, as Sinovel bought more and more turbine controllers from AMSC. Then in March 2011, Sinovel abruptly and inexplicably began turning away AMSC’s shipments at its enormous turbine assembly factory in Liaoning province.


On June 15, standing in a St. Petersburg office tower, McGahn listened to the report from the Austrian team for 30 minutes and felt the blood drain from his face. He had been trying for months to save the relationship with Sinovel and was making almost no progress. By the time he ended the call from his Austrian team, he knew why.


In other espionage cases, such as those involving Google (GOOG), Lockheed Martin (LMT), and DuPont (DD), thieves did a far better job of covering their digital tracks. Sinovel, however, was caught red-handed. AMSC has presented to law enforcement officials in Austria and China computer logs and messages that show Sinovel courting one of the U.S. company’s employees and paying him to aid in the code heist. “It’s a red-hot smoking gun example,” says John Kerry, chairman of the Senate Foreign Relations Committee and the Democratic senator from AMSC’s home state of Massachusetts. “If this is the way the Chinese choose to do business, it’s going to be very contentious and tough sledding ahead for this relationship.”


AMSC has filed four civil complaints against Sinovel in Chinese courts—where Sinovel has a steep home-field advantage—seeking $1.2 billion in damages. Sinovel has filed its own countersuits claiming that AMSC owes it $207 million for problems including defective equipment. Sinovel declined to make its chairman available for interview or to comment for this story. And because Chinese courts do not make legal documents available to the public, it was not possible to read Sinovel’s counterclaims. “How China responds to this is going to be central to how they respond to other issues of concern between us,” Kerry says.


According to court documents, in 2010, Sinovel began recruiting Dejan Karabasevic, a Serbian software engineer who worked at AMSC’s research facility in Klagenfurt. In December, Karabasevic sent his existing contract with AMSC to Sinovel employees for review; by January 2011, Sinovel was hunting for an apartment for him in Beijing. Once in China, the engineer was pressed to create software that could go on existing turbines as quickly as possible, using source code taken from AMSC’s server in Austria. For five days beginning on May 10, Karabasevic said in a confession to Austrian police, he worked steadily in his Beijing apartment and then traveled to a wind farm with three Sinovel employees to test the code in working turbines. By June it was done.

Karabasevic, who pleaded guilty, was sentenced in September to 12 months in jail and two years probation for distribution of trade secrets. His attorney, Gunter Huainigg, declined further comment.

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