Is this the biggest industrial espionage campaign in history?

In 2016, the Chinese Communist Party announced that producing its own dynamic random-access memory (DRAM) chips was a national security priority. DRAM is critical for a variety of personal, commercial, and military computers, providing temporary, quickly accessible file storage when the computer is running programs.

Soon thereafter, the Chinese government spent $5 billion to create Fujian Jinhua Integrated Circuit Company to produce the chips. But massive amounts of money don’t magically manufacture technological know-how. State-owned Fujian Jinhua had the physical resources, but lacked the human expertise to actually make advanced DRAM chips. So Fujian Jinhua turned instead to United Microelectronics Corporation (UMC) in Taiwan to provide the needed technology and experience.

What started as a seemingly innocuous business partnership ended in one of the most costly heists of American technology ever pulled off. The victim? Micron Technology, a leading US semiconductor company.

According to a Federal Bureau of Investigation (FBI) press release in 2020 detailing UMC’s guilty plea in the crime, after Fujian Jinhua engaged UMC, UMC then hired three individuals away from Micron’s subsidiary in Taiwan, luring them with substantial raises. UMC made one of them, Stephen Chen, a senior vice president and assigned him to lead negotiation of an agreement with Fujian Jinhua to develop DRAM technology for the state-owned Chinese firm. 

Chen then hired away the other two individuals to join the DRAM development team. Before leaving Micron, they stole confidential information, valued by prosecutors at between $400 million and $8.75 billion. Once at UMC, they stored the stolen data on two “off network” laptop computers that allowed employees to access Micron’s confidential information without detection by UMC’s IT department. The ruse didn’t hold up forever. Taiwan authorities raided UMC’s offices and recovered one of the two laptops. That month, Chen conveniently became president of Fujian Jinhua, taking charge of its memory production facility.

Despite UMC’s guilty plea, and the company’s implication of Fujian Jinhua in the theft, a federal judge earlier this year acquitted Fujian Jinhua of wrongdoing, ruling that there wasn’t enough evidence to convict the firm. The incident, little known in the US despite its dramatic details, showcases the grand stakes in the battle for semiconductor supremacy between China and the West and the difficulty of holding Chinese companies accountable for acts of economic espionage.

Semiconductor spycraft 

“The People’s Republic of China (PRC) is implementing ‘a deliberate, state-sponsored project to circumvent the costs of research, overcome cultural disadvantages and ‘leapfrog’ to the forefront by leveraging the creativity of other nations,’ thereby achieving ‘the greatest transfer of wealth in history,’” former Central Intelligence Agency (CIA) senior intelligence officer Arturo G. Munoz wrote as far back as 2013, summarizing a book on China’s industrial espionage efforts.

Federal Bureau of Investigation Director Christopher Wray has called this threat “The greatest long-term threat to our nation’s information and intellectual property, and to our economic vitality.”

“It’s not like something goes missing, which you’d notice. It’s that something gets copied and the victim may never figure it out.”

James Andrew Lewis

Industrial, or economic, espionage is the theft of business trade secrets by a competitor, often a government or company, to achieve a competitive advantage. Today, Chinese companies, oftentimes with direct support from the ruling Communist Party, are the primary perpetrators of this type of crime, at least in the US. Incidents of Chinese espionage far outnumber those by any other country, even Russia. The Center for Strategic and International Studies (CSIS) has documented more than 224 known instances of espionage by China against the United States since 2000, along with more than 1200 cases of intellectual property lawsuits brought by US companies against Chinese entities. The thefts have targeted a range of industries, from agriculture and automotive to software and semiconductors.

James Andrew Lewis, Senior Vice President at CSIS and Director of the organization’s Strategic Technologies Program, told Freethink that, owing to the immense rise of hacking, there are undoubtedly many more incidents that we’ll never know about.

“Since most hacking goes unnoticed, it’s fair to say that most cyber espionage goes unnoticed. It’s not like something goes missing, which you’d notice. It’s that something gets copied and the victim may never figure it out.”

Semiconductors — commonly describing an integrated circuit or computer chip — are ubiquitous and essential in modern technology. The most pressing national interest in these bits of silicon, with millions or even billions of tiny circuits etched into them, is that the most advanced chips are needed to power artificial intelligence, quantum computing, and advanced weaponry — technologies that will shape the future. Thus, China’s espionage efforts have increasingly turned their way.

Not just the US

American semiconductor companies are far from the only targets of Chinese spycraft. A handful of companies in Japan, South Korea, Taiwan, and the Netherlands dominate the supply chain for advanced chips, and thus draw industrial espionage attempts.

ASML, based in the Netherlands, designs and manufactures the gargantuan, bewilderingly complex photolithography machines that make microchips. It is the only company in the world with the know-how to make the machines needed to create the world’s most advanced chips. The company reportedly faces thousands of “security incidents” each year from China. NXP, another Dutch semiconductor firm, was infiltrated by Chinese hackers between 2017 and 2020. While they had access, the interlopers repeatedly pilfered new chip designs. NXP semiconductors provide the backbone for a variety of technological services, including Apple Pay in iPhones.

Separated by just 110 miles of water from China, Taiwanese chip-makers are targeted with a more personal form of espionage. The island nation boasts 92% of the world’s most advanced semiconductor manufacturing capacity, staffed with throngs of talented engineers. According to a Reuters report in 2022, Taiwan’s government was investigating around 100 Chinese companies suspected of illegally poaching semiconductor engineers, wooing them with two to three times their existing salaries, with the implication that they will divulge trade secrets.

Many forms of espionage

Taiwan’s example showcases how Chinese industrial espionage doesn’t merely revolve around hacking. Cybercrime in various forms is substantial, but there are two other primary ways that China steals proprietary knowledge from foreign companies.

One of them is simply the price of doing business in China. As CSIS research assistant Tom Bryja explained in an article published to the Georgetown Security Studies Review, foreign companies that operate within China are frequently forced to form “joint ventures” with Chinese companies in order to operate in the country — allowing them and Communist Party cells within them to access valuable IP and trade secrets.

“As a result, the CCP retains easy access to internal information, enabling the theft of technology, IP, and data locally and through the worldwide reach of company networks.”

“The CCP’s long-term strategy is to steal priority technologies and information from American companies, then force that competition out of business.”

Tom Bryja

Large companies like Apple and Tesla that sell boatloads of phones and cars in China are often aware of the risks and are simply making a business decision. To them, access to China’s 1.4 billion consumers is worth the costs of potential theft.

“Companies will tell you that they take extra precautions in China to protect their IP, but that risk is part of doing business in China and sometimes the precautions don’t work,” Lewis told Freethink. “They’ll stick in as long as they can make more money than they lose, but it’s getting harder to do business in China.”

“Given the PRC’s publicly-stated intent to monopolize all security-critical industries, the CCP’s long-term strategy is to steal priority technologies and information from American companies, then force that competition out of business,” Bryja bluntly wrote.

Back in foreign semiconductor companies’ home countries, Chinese spies regularly try to recruit or trick company insiders to reveal prized information. As former FBI Assistant Director of Counterintelligence Bill Priestap points out, “One malicious actor on the inside of a company can undermine almost any security system, be it physical or virtual.”

Chinese intelligence services sometimes target Chinese nationals who come to the US to work or study, especially those who intend to return to China or have close family members there, making them more susceptible to coercion.

In a common ruse, CSIS says, intelligence agents will pose as scientists, engineers, or businesspersons to establish a working relationship with the target, one sprinkled with perks like all-expenses-paid business trips. During the con, they might try to steal their laptops, hard drives, or passwords.

A mounting chip war

The FBI is now investigating more instances of Chinese espionage than ever before. Since 2014, there’s been a 1300% increase in counterintelligence cases involving China. US law enforcement is likely to get even busier now that the United States and other allied countries have imposed major restrictions on the export of related technologies to try to slow China’s progress in semiconductors. 

In October 2022, and again a year later, the US and other countries restricted sales of certain chips to Chinese firms and limited their workers from collaborating in the country. US officials are currently in talks with Japanese and Dutch counterparts to further tighten the controls. They want leading companies like ASML and Tokyo Electron to slow down servicing, software updates, and maintenance of their chip-making machines used in China. 

“There’s no doubt that China’s efforts to acquire sensitive IP and trade secrets have intensified in the wake of US export controls on advanced chips and machinery,” Sam Howell, an associate fellow in the Technology and National Security Program at the Center for New American Security, told Freethink. “We’ve seen a marked increase in the number of IP theft lawsuits brought by US companies against Chinese entities since the US unveiled its new export control regime. Anecdotally, multiple major semiconductor companies have also reported unprecedented levels of attempted IP theft, compelling significant increases in their spending on security measures.”

“Semiconductors are critical to both our national defense and everyday American life.”

Sam Howell

Typically, Americans go about their busy days not thinking about semiconductor export controls and industrial espionage. But as Howell told Freethink, the reasons we should care are literally all around us, found in the essential gadgets and machines we use each and every single day.

“Semiconductors are critical to both our national defense and everyday American life. The problem is that a handful of countries in East Asia — Taiwan, South Korea, Japan, and China — dominate the semiconductor industry and supply chain. The United States currently lacks the infrastructure, capacity, and expertise to offset a loss of access to Asian semiconductor manufacturing, which is a real possibility given China’s renewed assertiveness and technological rise,” she said.

In the summer of 2022, Congress passed and President Biden signed into law the CHIPS and Science Act, allocating $52.7 billion for semiconductor research, workforce training, and subsidies to strengthen the resilience of American chip-making supply chains.

Howell hearkened back to the coronavirus pandemic of just a few years ago as a reminder of what’s at stake.

“The COVID-19 pandemic offered a glimpse into the consequences of chip shortages — price spikes for many consumer goods, dramatic losses in revenue, and widespread layoffs due to reduced American manufacturing. But these ramifications would pale in comparison to those associated with chip shortages caused by a future conflict, natural disaster, or similar contingency in Asia. Efforts to restructure semiconductor supply chains and reinvigorate the American semiconductor industry are thus critical to US security and prosperity.”

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