China’s New Industrial War
The Chinese Communist Party (CCP) has a new program for economic warfare, one that follows a path well trodden in the history of industrial competition.
According to a source in China who conducts business at the top levels of the CCP, the new program was launched in mid-2015 to early 2016 as a legal replacement to the CCP’s former model of using cyberattacks to steal information for economic gain.
On Sept. 25, 2015, then-President Barack Obama met with CCP leader Xi Jinping at the White House, where they announced a new bilateral agreement that said neither country would use cyberattacks to steal intellectual property, trade secrets, or other confidential information for “commercial advantage.”
The background of the meeting was that state-run cyberattacks from China had been stealing from the U.S. economy, and Obama had begun threatening to sanction Chinese companies that profited from the cyberattacks. The agreement diverted the sanctions.
Already, however, business leaders and high-level officials in China are acting on an alternative plan for, as the CCP’s program for economic theft Project 863 puts it, “catching up fast and surpassing” the West.
“What they’re doing is sending teams of individuals to the United States—they’ll hook up with their current partners, and make new partners—to be able to do the same song and dance as before,” said the source, who requested to remain unnamed for personal security.
“The other part is, they’re coming to this country to begin to set up shop, business-wise,” he said. The teams come in order to learn more directly the tradecraft and business operations of Western companies “and steal it to bring back to their country.”
He gave an example of this in motion, noting a Chinese company that makes industrial unmanned aerial vehicles that had begun setting up joint ventures with U.S. companies.
“They want to be able to have their company in the United States and be able to make a connection with another company, work with that company, then be able to bring people or technology back to the mainland,” he said. “That’s the main focus of what they want to do.”
The CCP has moved quickly in its push for foreign acquisitions and joint ventures, and by fall 2016 its effects were already becoming visible.
According to data from New York-based advisory firm Rhodium Group, annual Chinese direct investment in the United States nearly tripled in 2016 from the previous year, going from $15.3 billion to $45.6 billion.
The shift caused a stir in business and political circles, not just in the United States but around the world.
In February 2016, The New York Times reported on a growing political backlash in Washington over Chinese companies attempting to purchase U.S. technology companies.
Bloomberg reported in August 2016 that Chinese takeovers triggered a global backlash ahead of the G-20 Summit, and The Trumpet reported that in Australia, the federal treasurer rejected two deals from China for power companies, valued at over $7.6 billion, over security concerns.
In August 2016, Israel’s Haaretz published an analysis titled “Why China Is on a Shopping Binge in Israel,” noting the acquisition trend but missing the motivation behind it. The reporter said Israel, with a solid economy and reputation for innovation, was merely an attractive parking lot for Chinese capital flight.
A Classic Strategy
The new push from the CCP for economic gain is not a novel approach, according to Amar Manzoor, author of “The Art of Industrial Warfare.”
“They’ve essentially copied Japan,” Manzoor said, referring to the CCP’s new program.
A similar situation took place in the 1950s. Manzoor noted that many Toyota cars used to look like Ford Mustangs, but were sold at a cheaper price. After they broke into the American market, Toyota partnered with American manufacturer General Motors to create the New United Motor Manufacturing plant.
By partnering with a major U.S. company to build a manufacturing plant in the United States, Toyota was able to test how receptive Americans would be to full-fledged Toyota plants in their own backyard. It also allowed Toyota to begin developing supply chains in the United States.
Manzoor said many countries have gone through the process of copying a foreign competitor, then partnering with companies within the target market.
He noted that Indian automaker Tata Motors bought majority shares in Jaguar Land Rover, which is likewise helping them transfer automaker skills to India.
“Everything India is doing is based on industrial warfare. It wants access to the technology, it wants the plants,” Manzoor said. “This is the same thing with China.”
“What tends to happen is, you get these industrial hubs by doing that,” he said, noting it’s not just rising countries trying to build industrial hubs, but also developed countries, including the United Kingdom and the United States.
The value of controlling factories goes far beyond profit.
People involved in manufacturing—the folks who build the products—are often the ones who think of ways to improve the existing products.
Industrial innovation in the United States has been dropping due to competition from Chinese imports, according to a recent report from the National Bureau of Economic Research, which points out that fewer patents are being filed in the United States.
The country that controls the factories also controls the job market, and any nation well-versed in strategies of industrial warfare will also try to gain control of raw materials and the full supply chain.
With China in particular, Manzoor said, “They want to control supply and demand, and the best way to do that is to control the marketplace itself. This is where the industrial war is trending right now.”
When industrial warfare reaches this level, it also begins to affect national security.
According to a U.S. Army report, “Chinese companies’ access to resources, technologies, markets, and elites translates into means of influence and power than can be harnessed for a whole host of objectives that are not necessarily focused on commercial goals only.”
To show how this could play out, Manzoor gives the example of how during World War II, factories were re-purposed for the defense industry, and companies that had previously been building cars were instead building tanks and fighter planes.
If a country is pulled into a war unexpectedly, while also lacking domestic manufacturing, it will then need to build the factories, skills, and supply lines from scratch.
An Internal Shift
The CCP has reduced its cyberattacks against the United States, although some of its hacker units remain active. Cybersecurity company FireEye reported in June 2016 that since mid-2014, “we have seen a notable decline in China-based groups’ overall intrusion activity against entities in the U.S. and 25 other countries.” It says U.S. action responding to the attacks “may have prompted Beijing to reconsider the execution of its network operations.”
The CCP’s new program on state-sponsored cyberattacks has two points of focus: one, to expand the reach of Chinese factories, and two, to steal intellectual property from competitors directly.
According to the source in China, “the only way they can innovate is by doing one thing: steal.”
It builds on existing programs for economic theft the CCP already had in place, which ran parallel to its cybertheft operations. These include its Torch program for high-tech commercial industries, its 973 Program for research, and its 211 program for using universities.
According to the book “China’s Industrial Espionage,” all of these programs leverage “foreign collaboration and technologies to cover key gaps” and use methods that include encouraging skilled experts to return to China, or to have them “serving in place,” providing information they gained from Western employers.
The economic situation in China isn’t as flashy as the regime wants the world to believe. The source in China said “the business environment has completely changed,” he said. “It has changed for the worse.”
“There are some significant problems going on. There are a lot of people unemployed. They are looking for answers, and the government does not seem to have them,” he said. “There are a lot of protests taking place there as well, which were not there before. … You’re talking thousands of people. They have signs and they have stuff spray-painted on their shirts as well, and they get into fights very quick.”
“These people have lost money. They’ve lost their life savings, the government is not answering to their needs, and businesses are trying to get new sales.”
Meanwhile, he said, “the innovators are leaving in droves. They’re either being chased out by the government, or they’re realizing the government is stealing their stuff.”
“They’re not making enough money and they’re not getting enough orders from their customers,” he said. Companies are realizing that due to poverty levels, and due to the lack of a middle class, the actual Chinese market is only about 200 million out of a total population of 1.3 billion.
Meanwhile, many companies used to have their products manufactured in China, but as local wages increase—and as other countries such as India and Indonesia grow their own manufacturing bases—the cost benefit of manufacturing in China is starting to fade.
The CCP is now trying to build a middle-class economy and to start making strong pushes to bring Chinese products—such as Lenovo computers and Xiaomi smartphones—into global competition. It is also making strong pushes to acquire raw materials and to negotiate trade deals.
Moving away from reliance on Western products and technology is now a high priority for the CCP.
The CCP is also pushing out some companies directly. The strategy, the source said, is that it is selectively pushing foreign companies out of China if their own domestic products are at a level where they could compete with each other in global or third-world markets. The companies they’re keeping in China are the ones they can still learn from.
“This is a new push [to buy or partner with companies outside China] that’s taking place,” the source said, “because as they push people out, they need something to replace the lost innovation.”