China’s Wind Industry Boosted by Espionage

In June 2011, employees of American Superconductor Corp. in China discovered a wind turbine manufactured by Sinovel Wind Group Co. was running a stolen version of AMSC’s software and that Sinovel had access to AMSC’s proprietary source code. That’s according to Bloomberg BusinessWeek.

It might explain why Sinovel had started to turn away AMSC shipments in March 2011.

A few days later, AMSC announced that Sinovel, which was responsible for more than two-thirds of its revenue in 2010, had stopped making purchases. Investors were spooked and AMSC lost 84 percent of its value by September.

The AMSC/Sinovel saga is one example of the corporate spying cases coming to light as the U.S., Japan and the EU file a formal complaint to the World Trade Organization over unfair trading practices in China.

In November, U.S. intelligence agencies issued a report on industrial espionage by the Chinese. It included industries like biotechnology, telecommunications, nanotechnology and clean energy and companies like Apple and Ford, as well as NASA.

Other cases involve Google, Lockheed Martin and DuPont.

U.S. politicians and executives have complained for years, but little has come of it as China continually promises to take a stance and rarely follows through.

AMSC, however, has taken the unusual step of filing complaints against Sinovel in Chinese courts seeking $1.2 billion in damages. (Sinovel has countersued for $207 million.)

Willy Shih, a professor at Harvard Business School, says intellectual property theft has a historical basis and may be part of a normal development pattern among nations. However, in order to succeed, China must develop a research and development culture beyond its existing copycat culture, he adds.

Sinovel is second-largest turbine maker in the world. It is also well connected. It counts New Horizon Capital, which was founded by the son of China’s premier, among its investors.

However, China’s wind industry may be in trouble as developers have cut corners and many turbines lack the technology needed to keep them going during a power disruption. Oversupply is also a problem. The country has 80 manufacturers in a market that can supply 10, Bloomberg reports.

And as prices of turbines has dropped, so pressure on Sinovel has risen, which may explain the motivation behind its later actions.

AMSC appeared to have leverage with Sinovel as a result of Chinese regulations that require wind turbines to be updated with technology that keeps them from shutting down. But Sinovel had already recruited AMSC employee Dejan Karabasevic to create software for the turbines using stolen source code.

Karabasevic was later sentenced to a year in jail and two years probation.

By the end of 2010, Sinovel had $1.7 billion in unsold inventory and was owed $2 billion by its customers. It may have trouble finding sales overseas as its first major international deal with Dublin-based Mainstream Renewable Power Ltd., was shelved after AMSC voiced its concerns. And if Sinovel exports turbines with stolen code, AMSC said it can file lawsuits in other markets, too.

And yet despite everything that has happened, Daniel McGahn, AMSC’s chief executive officer, said he still wants to do business in China.

To read the full Bloomberg BusinessWeek article cited in this story, click here


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