China Continues to Steal American Technology

The U.S. government was well aware of China’s aggressive strategy of leveraging private investors to buy up the latest American technology when, early last year, a company called Avatar Integrated Systems showed up at a bankruptcy court in Delaware hoping to buy the California chip-designer ATop Tech.

ATop’s product was potentially groundbreaking — an automated designer capable of making microchips that could power anything from smartphones to high-tech weapons systems. It’s the type of product that a U.S. government report had recently cited as “critical to defense systems and U.S. military strength.” And the source of the money behind the buyer, Avatar, was an eye-opener: Its board chairman and sole officer was a Chinese steel magnate whose Hong Kong-based company was a major shareholder.

Despite those factors, the transaction went through without an assessment by the U.S. government committee that is charged with reviewing acquisitions of sensitive technology by foreign interests.

In fact, a six-month POLITICO investigation found that the Committee on Foreign Investment in the United States, the main vehicle for protecting American technology from foreign governments, rarely polices the various new avenues Chinese nationals use to secure access to American technology, such as bankruptcy courts or the foreign venture capital firms that bankroll U.S. tech startups.

The committee, known by its acronym CFIUS, isn’t required to review any deals, relying instead on outsiders or other government agencies to raise questions about the appropriateness of a proposed merger, acquisition or investment. And even if it had a more formal mandate, the committee lacks the resources to deal with increasingly complex cases, which revolve around lines of code and reams of personal data more than physical infrastructure. 

“I knew what was critical in 1958 — tanks, airplanes, avionics. Now, truthfully, everything is information. The world is about information, not about things,” said Paul Rosenzweig, who worked with CFIUS while at the Department of Homeland Security during President George W. Bush’s second term. “And that means everything is critical infrastructure. That, in some sense, means CFIUS really should be managing all global trade.”

As a senior official at the Treasury Department, which oversees CFIUS, put it: “Any time we see a company that has lots of data on Americans — health care, personal financial data — that’s a vulnerability.”

When CFIUS was formed, in the 1970s, the companies safeguarding important technology were so large that any takeover attempt by foreigners would be certain to attract attention. Now, much of the cutting-edge technology in the United States is in the hands of much smaller firms, including Silicon Valley startups that are hungry for cash from investors. 

The gap in oversight became a more urgent problem in 2015, when China unveiled its “Made in China 2025” strategy of working with private investors to buy overseas tech firms. A year earlier, Chinese investments in U.S. tech startups had totaled $2.3 billion, according to the economic research firm CB Insights. Such investments immediately skyrocketed to $9.9 billion in 2015. These amounts dipped the following year, as the Obama administration voided a high-profile deal, but analysts say China’s appetite to buy U.S. firms and technology is still strong. In 2017, there were 165 Chinese-backed deals closed with American startups, only 12 percent less than the 2015 peak.

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