How China acquires ‘the crown jewels’ of U.S. technology

By CORY BENNETT and BRYAN BENDER

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.

Yet the failure to investigate some forms of Chinese investments in American technology has flown under the radar as President Donald Trump goes tit for tat with Beijing, imposing tariffs meant to punish China for unfair trade practices. Critics noted on Monday that Trump's tentative agreement to drop his tariff threat in exchange for Chinese pledges to purchase billions of dollars more in American goods avoided any mention of the outdated foreign-investment policies that have alarmed lawmakers across the political spectrum.

On the Senate floor Monday, Minority Leader Chuck Schumer (D-N.Y.) lashed out at Trump's approach.

"China’s trade negotiators must be laughing themselves all the way back to Beijing," he said. "They’re playing us for fools — temporary purchase of some goods, while China continues to steal our family jewels, the things that have made America great: the intellectual property, the know-how in the highest end industries. It makes no sense."

National security specialists insist that such a stealth transfer of technology through China’s investment practices in the United States is a far more serious problem than the tariff dispute — and a problem hiding in plain sight. A recent Pentagon report bluntly declared: “The U.S. does not have a comprehensive policy or the tools to address this massive technology transfer to China.” It went on to warn that Beijing’s acquisition of top-notch American technology is enabling a “strategic competitor to access the crown jewels of U.S. innovation.”

Some congressional leaders concur. Senate Majority Whip John Cornyn (R-Texas) regularly warns his colleagues that China is using private-sector investments to pilfer American technology. China has “weaponized” its investments in America “in order to vacuum up U.S. industrial capabilities from American companies,” Cornyn said at a January hearing. The goal, he added, is “to turn our own technology and know-how against us in an effort to erase our national security advantage.”

Legislation to expand the CFIUS budget and staff has been moving slowly through the halls of Congress amid pushback from Silicon Valley entrepreneurs and business groups. The legislation would give CFIUS new resources to scrutinize bankruptcy purchases and establish stricter scrutiny of start-up investments.

As months passed without any action, and the issue of Chinese investments got overshadowed by tariff fights and feuds between Beijing and the Trump administration, national security experts grew more concerned, fearing that Congress lacked a sense of urgency to police transfers of sensitive technology.

AIRING CONCERNS: China has “weaponized” its investments in America “in order to vacuum up U.S. industrial capabilities from American companies,” Senate Majority Whip John Cornyn (R-Texas) said at a January hearing. At right, Heath Tarbert, the Treasury Department assistant secretary overseeing CFIUS, testified in January that allowing foreign countries to invest in U.S. technology without making sufficient background checks “will have a real cost in American lives in any conflict.”

The White House began exploring what more it could do on its own, asking the Treasury Department in late March to offer a list of potential Chinese investment restrictions within 60 days.

Finally, earlier this month, Senate and House leaders announced plans to mark up the bill, starting a process that could lead to passage later this year.

Still, the failure to act more quickly may itself be jeopardizing national security. At a hearing in January, Heath Tarbert, the Treasury Department assistant secretary overseeing CFIUS, testified that allowing foreign countries to invest in U.S. technology without making sufficient background checks “will have a real cost in American lives in any conflict.”

“That is simply unacceptable,” he said.

‘Made in China 2025’

Last October, Chinese President Xi Jinping took the podium before 2,300 Communist Party delegates to deliver his expansive vision for China’s future.

Xi was speaking at the party’s 19th Congress, a summit held every five years to choose the nation’s leaders in the Great Hall of the People in Beijing, the expansive theater right off Tiananmen Square. Speaking in front of a giant gold hammer and sickle framed by bright red drapes, Xi held forth for 3½ hours, declaring that China would look outward to solve its problems.