The Shapeshifting Evolution of Chinese Technology Acquisition

Executive Summary:

• Smuggling, a critical tool of the Chinese Communist Party (CCP) to acquire technology to enhance its defense industrial base, is reemerging in the wake of the US Government’s technology controls.
• Diversion—falsifying the end-user—is another common tactic that the Party has successfully used to acquire critical technology, including dual-use items that it would have been otherwise unable to obtain.
• Talent attraction is an underrated part of technology acquisition that the CCP has promoted in academia as well as in the corporate sector to help advance its technology ambitions.
• Foreign businesses have been willing to engage in technology transfer in return for potential access to the PRC market. This tradeoff frequently has not paid off for these firms.

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For decades, Washington has imposed various forms of export controls on the People’s Republic of China (PRC) in attempts to prevent US technology supporting the military buildup or the repressive apparatus of its rival. Similarly, the PRC has complained for decades about such actions, seeing them as attempts to stymie the country’s growth. Most recently, President Xi Jinping argued to US President Joe Biden that “the Chinese people’s right to development is inalienable and cannot be ignored (中国人民的发展权利不可剥夺、不容无视)” (MFA, November 16). By dropping the usual signifier “peaceful (和平)” to “development,” Xi implied that the PRC has the right to buy whatever it wants for any purpose, including to wage war against the seller.

Technology acquisition has long been a goal of the Chinese Communist Party (CCP)—and of China’s governing elite for a century prior to its rise to power in 1949. The Party’s modern program, driven by a determination to surpass the United States and its allies, has evolved through several stages. Smuggling, which provided an early lifeline to the CCP during wartime, is now back in vogue, while other tactics such as diversion (falsifying the end-user) have ebbed and flowed in recent years. [1] The prevalence of certain approaches has often come in response to the degree of openness of Western partners—whether in governments or the private sector—to sharing technology. However, Party history indicates that both licit and illicit technology acquisition have always been integral to its development strategies, and current efforts can be understood in light of those roots.

Key Techniques: Smuggling and Diversion

Smuggling played a significant role in the economy of Mao’s base areas in the 1940s and continued to be vital after the founding of the PRC in 1949. In the early days, the CCP relied on smuggling for weapons and ammunition, medical supplies, and cash from Moscow. [2] The CCP Social Affairs Department (SAD; 中共中央社会部), the Party’s intelligence arm, smuggled shipments of opium—on which the CCP’s economy largely relied at the time—into enemy-occupied cities. [3]

Macau was particularly crucial to the inflow after the CCP’s 1949 victory. During the Korean War, Portuguese authorities recorded smuggled opium exports from the PRC and imports of gold bullion. [4] Following the cessation of hostilities on the Korean peninsula, Macau remained important, as did Hong Kong, to the extent that Mao defied Stalin’s strong suggestions to retake the colonies. [5] Into the 1970s, Macau, then a haven for clandestine intelligence operations, became a center for CCP intelligence and the united front system to train, support, and dispatch agents to Southeast Asia and elsewhere. By the 1980s, Portuguese authorities could no longer even pretend to interfere with smuggling of technology or strategic goods across the increasingly porous Macau-PRC border. [6]

The famous red capitalist Ma Man-kei (马万祺) was an exemplar of the relationship between CCP intelligence and smuggling. His various assistances to the CCP included sheltering agents in his home as they prepared for intelligence and propaganda duties overseas in Hong Kong, Indonesia, and Portuguese territories. [7] Ma is openly celebrated in PRC media: His efforts and those of others such as Ho Yin (何贤) are praised in an article from 2021, which describes their work helping mainland agencies in Macau “purchase and transport strategic materials to support the People’s Liberation Army’s liberation of Hainan and Guangxi (购运战略物资，支持解放军解放海南与广西)” during the Korean War (All-China Federation of Returned Overseas Chinese, June 6, 2021).

Smuggling for the purpose of acquiring technologies critical to building the country’s defense industrial base is detailed in the 1956 “12-Year Science and Technology Development Plan (12年科技规划)” and its classified annex (Xinhua, September 1, 2009). [8] It was a small part of the contributions of three prominent returnee scientists of the period. On a 1949 trip to France, Qian Sanqiang (陈三强) entrusted his former professor Frederick Joliot-Curie with CCP funds to purchase books on atomic energy and relevant test equipment, while Frederick’s wife Marie provided radioactive samples to pass to another former Chinese student, Yang Chengzong (杨承宗). PRC accounts refer to the materials as “contraband (违禁),” suggesting that the two scientists smuggled them out of France and back to China (163.com, September 29). [9] The rocket scientist Qian Xuesen (钱学森), who was traded by Washington back to the PRC in 1955, became the father of Beijing’s rocket and space program. A classified document that he apparently smuggled past his FBI watchers and US Customs is on display at a Shanghai library named in his honor. [10]

In the 1990s, illegal acquisitions continued apace. Chi Mak (麦大志) was born in Guangzhou in 1940 and emigrated to Hong Kong in 1970, where he was assigned to log British and American naval vessels for PLA intelligence. He moved to the United States, becoming a citizen in 1985. Since at least 1983, Mak, his wife, and family members acquired US Navy military underwater propulsion technology from Power Paragon and transmitted it to the PLA. An associate, Greg Dongfan Chung, supplied design secrets from his employer, Boeing, about the Space Shuttle, Delta IV rocket, and C-17 military transport aircraft. Chi Mak’s spy ring was active before, during, and after the Tiananmen Incident, operating between California and the PRC. [11]

Diversion has been another key tactic for technology acquisition. In the years before the astonishing growth of Huawei and other technology firms, the PRC was awash with American and other foreign telecommunications, aircraft manufacturers, computer firms, and others seeking lucrative export opportunities through middlemen who sometimes forwarded technology on to unauthorized end-users (Spytalk, February 4, 2021; US House of Representatives, December 4, 2023; CFR, May 24; Statista, July 4).  Many bit players, including ambitious insiders, were convinced or bullied by contacts—not all of whom were ethnic Chinese—to help the motherland by smuggling technology. Some voluntarily stole technology to start businesses in the PRC, while others falsified manifests or diverted shipments to unlisted military destinations. There were also diversions from supposed civilian end-use to military, police, or other purposes that would have likely been denied in the US export licensing process. Examples of “dual use” items targeted included precision machine tools able to make prosthetics or missile nose cones, semiconductor manufacturing equipment (consumer electronics or military grade components), supercomputers (weather forecasting or simulated nuclear tests), and space launch technology (global communications or spy satellites) (Air & Space Forces, August 1, 1999; CSIS, accessed December 2). [12]

Even more serious cases involved purely military technology. For example, PRC scientists convinced Peter Lee, originally from Taiwan, to provide them with classified US nuclear weapons design information in 1985, and submarine detection technology in 1997. [13] More recently, Philip Cheng of Cupertino, California brokered the sale of military night vision equipment to the PRC, creating fake shipping documents suggesting Taiwan was the destination and not the PRC—a classic case of technology diversion. [14]

Other Tools: Licit Transfers, Attracting Talent

If smuggling and technology diversion were like transporting technology in a cocktail glass and China’s talent programs brought technology like a firehose, the added combination of willing foreign suppliers and cybertheft seems like Niagara Falls.

US President Richard Nixon’s 1972 visit to the PRC marked a shift back to pursuing foreign technology acquisition, with an overriding focus on licit imports and close cooperation with the United States and other Western countries. Beginning in the late 1970s, Mao’s successor Hua Guofeng collaborated with Zhou Enlai, Li Xiannian, and Deng Xiaoping to purchase equipment and knowhow for reviving industrial output, including petrochemicals, petroleum exploration, steel, metallurgy, power generation, and light industry technology. Though the program had a rocky start, legitimate technology imports surged after Mao’s death in September-October 1976 (Institute of Party History and Literature, December 26, 2019). [15] In subsequent US administrations, the government authorized the sale or transfer of dual-use systems to the PRC, including ground satellite stations, civilian jet aircraft, and high-speed computers. President Carter supplemented these after 1979 with military equipment such as transport aircraft, helicopters, communications hardware, and radar systems, while Reagan went one better, providing the PRC with torpedoes, anti-aircraft, and anti-tank weapons. [16] The “Peace Pearl (和平珍珠)” program, which equipped PRC fighter jets with advanced American avionics, was frozen by Washington in the wake of June Fourth and canceled by the PRC side in 1990 (The National Interest, February 29, 2020). Washington also approved the sale of UH-60 Blackhawk helicopters to the PLA. [17]

Over the last three decades, western firms have frequently traded technology for the promise of revenues in the PRC’s enormous market. Hikvision (海康威视), the company whose mission to build the PRC’s surveillance state began in the early 2000s, was greatly aided by the US firms Western Digital and Seagate. The latter worked with Hikvision beginning in 2005 to develop the world’s first surveillance hard drive and in 2017 released its first storage drive for “AI-enabled surveillance.” Hikvision has been implicated in PRC’s gross human rights abuses in Xinjiang (IPVM, July 25, 2023).

The PRC is also a key source of sales for chip firms Nvidia and Intel, where their products support the PRC’s ever-expanding urban surveillance network. [18] The Tianhe-1 supercomputer, developed in 2009–2010 and rated as the world’s sixth fastest machine, was built by the National University of Defense Technology (NUDT; 国防科技大学) with 6,144 Intel CPUs and 5,120 AMD GPUs, and was enhanced in 2010 with Nvidia GPUs (Xinhua, October 29, 2009; Hunan University, May 28, 2019; ZOL, November 2, 2009).

Attracting talent is a key branch of the PRC’s technology acquisition program. The PRC has poured vast resources into the Plan to Attract High-Level Overseas Talents (国家海外高层次人才引进计划)—aka the Thousand Talent Plan (千人计划)—and its iterations. All targets are approved by the CCP Organization Department to advance key projects. Sometimes. those approved are allowed to keep their jobs abroad but are required to not disclose the nature of their work in the PRC to unauthorized parties (like their foreign employer). [19]

In one case, the German scientist Ulf Leonhardt was not informed that his research was benefitting a military project and was not paid all his promised compensation. More recently, the former chair of Harvard’s chemistry department, Charles Lieber, was fully compensated at premium rates for bringing his US National Institutes of Health-funded nanoscience research to a PRC university (US DOJ, January 28, 2020). [20] Nanoscience has numerous military applications for manufacturing protective gear, weapons systems, and surveillance equipment (Sustainable Nano, accessed December 1).

Courting international talent also takes place at the corporate level. A prominent example of this is the multi-pronged campaign in the 2000s by the PRC’s leading computer chip maker, the Semiconductor Manufacturing International Corporation (SMIC), to catch up with Taiwan Semiconductor Manufacturing Corporation (TSMC). TSMC sued SMIC twice for theft of trade secrets, and by 2003 SMIC had lured 100 TSMC employees. SMIC paid millions to its competitor in legal settlements, but now SMIC and Huawei are developing AI chips that may eventually challenge the global leaders (Asia Financial, November 21). [21]

The New Era: Cybertheft, Tech Absorption, and Export Control Evasion

The rise of the Internet and a digitally connected world has led to the emergence of a vast, sophisticated network of state-sponsored hackers, dubbed APTs (advanced persistent threats). These groups became infamous in the mid-2000s for successfully stealing huge tranches of online information, including the massive US security clearance databases of the Office of Management and Budget and of companies whose databases would show government travel records (United Airlines and Marriott Hotels). They also acquired large amounts of proprietary technology useful for military and civilian manufacturing. The latest revelations about the potential APT Salt Typhoon, which has targeted the telecommunications, technology, consulting, chemical, and transportation industries in various countries, indicate that PRC’s cybertheft capabilities are advancing dramatically (Trend Micro, November 25).

The continued growth of licit and illicit technology transfer in the 2010s prompted a reexamination of previous strategies. Long Guoqiang (隆国强) of the State Council Development Research Center wrote that “China emphasizes the introduction of technology but does not pay attention to its absorption.” A popular saying lampooned the technology acquisition program as habitually “introducing [technologies], falling behind, reintroducing, and falling behind again (引起，落后，在引起，再落后).” [22]

This situation gradually changed with the 12th and 13th Five-Year Plans (2011–2015 and 2016–2020, respectively) that emphasized “re-innovation (再创新)”: taking foreign technology and improving it through “indigenous innovation (自主创新),” leapfrogging advancements in key sectors and developing “strategic emerging industries.” [23] Though the PRC appears to struggle with dozens of “chokepoint” technologies, breakthroughs are evident in quantum computing, artificial intelligence, and hypersonic missiles (VOA, June 5, 2023; ASPI, March 1, 2023). One area that appears to have been a beneficiary of “re-innovation” are the PRC’s supercomputers. Tianhe-3, co-developed by NUDT, uses PRC-made chips that appear to be one or two generations behind the cutting edge, but is competitive with the fastest American machines (Baijiahao, July 27, 2018; Baijiahao, February 14).

Washington has sought to respond to the PRC’s growing number of successes through a tightening and widening array of technology controls. Current regulations target the military, military intelligence, intelligence, and police entities in the PRC, Russia, and a handful of other countries, and constitute a significant enhancement of export controls (Covington, July 30).

This has led to a resurgence of old-fashioned techniques. Smuggling is now a key vector for the acquisition of technologies Beijing has dubbed its “chokepoints (卡脖子)” (China Brief, December 1, 2023). Smuggling Nvidia microchips into the country has been described as an “industry,” and high-end chips have been brought into the country in cars, packed in luggage, and strapped to human travelers (INSIDE, July 11, 2023; inews, June 20; The Information, August 12). Illicit technology transfers of other kinds are also back in vogue. In a Chinese-language advisory note to clients, international law firm King & Wood Mallesons counseled readers to:

1. Sort out business units and customers supplying parts and services to military entities, including universities doing military research, and evaluate the possible impact should US authorities learn about them;
2. “Formulate mitigation plans (制定 … 风险应对计划)” such as the separation and isolation of business lines to prevent the impact of risky businesses on normal businesses; and
3. Be careful not to release public statements that “could attract the suspicion of or trigger an investigation by US regulators (可能会导致美国监管机构的质疑并引发调查)” (King & Wood Mallesons, August 9).

That law firm may soon amend its advice. Washington upped the ante on December 2 by targeting over 140 additional PRC entities and key equipment makers whose machines are needed to make almost all computer chips (BIS, December 2; Technode, December 3). Included in the new rules is a provision targeting the PRC’s AI efforts. The controls also restrict shipments of High Bandwidth Memory (HBM) chips to the PRC, which are needed to process the massive amounts of data required to power AI technologies. That may lead to chip smuggling becoming even more important to the PRC (Nikkei Asia, December 3).

Though the US Commerce Department expressed optimism that the December 2 amendments will leave US controls stronger than ever, some industry analysts took exception. Gregory Allen of the thinktank CSIS pointed out that export restrictions will only become effective on December 31, giving PRC end-users time to stock up. He also asserted that not all of Huawei’s entities were included in the new target list (Wall Street Journal, December 2).

Conclusion

The PRC’s acquisition of foreign technology takes various forms, both licit and illicit. Today, smuggling technology into the country—something that the CCP has proven adept at over many decades—is returning to prominence, complementing advanced efforts in cyberspace. Once these technologies are acquired, Beijing must rely on people who know what to do with them, which is why attracting talent remains a core part of its acquisition strategy.

The West frequently debates export controls, as instances of smuggling and diversion make them look porous and ineffective. However, Beijing’s constant complaints, coupled with the historical record of their use in the past, indicate that they are a useful tool for slowing the PRC’s access to technologies that can be channeled into the PLA’s military buildup. Irrespective of how effective the recent US export controls will be, smuggling may be about to go into overdrive, with HBM technology from South Korea the likely next target.

Notes

[1] T.A. Bisson, Yenan in June 1937: Talks with Communist Leaders (Berkeley: Center for Chinese Studies, University of California, Berkeley, 1973), p. 8, 16–17, 29. The Party’s first attempt to acquire foreign technology may have come in 1937, when Mao Zedong asked a Swedish visitor named Effie Hill to take charge of Yan’an’s small motor pool. (Hill politely declined.)

[2] For example, the American communists Steve and Margaret Nelson, a married couple, took separate ocean liner trips from France to Shanghai at about the same time in 1934 wearing money belts with hundreds of thousands of dollars. Steve Nelson, James R. Barrett, Rob Ruck, Steve Nelson, American Radical (Pittsburg: University of Pittsburg Press, 1981), p. 141–152.

[3] Chen Yung-fa, “The Blooming Poppy Under the Red Sun: The Yan’an Way and the Opium Trade” in Saich and Van de Ven (eds.), New Perspectives on the Chinese Communist Revolution, 273-275. Peter Vladimirov, The Vladimirov Diaries (New York: Doubleday and Co., 1975), 100.

[4] Moisés Silva Fernandes, Macau na Politica Externa Chinesa 1949–1979 (Lisboa: Imprensa de Ciências Socias, 2006). Drug exports via Macau: 245, 259, 262–63. Gold: 267, 270–71.

[5] Moisés Silva Fernandes, “How to Relate with a Colonial Power on its Shore: Macau in Chinese Foreign Policy, 1949-1965,” Bulletin of Portuguese-Japanese Studies, 1 December 2008.

[6] Author’s interview with Macau Special Branch official, December 1989.

[7] Fernandes, Macau na Politica Externa Chinesa 1949-1979, p. 274–76.

[8] Tai Ming Cheung, Innovate to Dominate, the Rise of the Chinese Techno-Security State (Cornell: Cornell University Press, 2022), p. 8.

[9] John Wilson Lewis and Xue Litai, China Builds the Bomb, (Palo Alto: Stanford University Press, 1988), p. 36.

[10] Author’s personal observation during a visit to the Qian Xuesen Library (钱学森图书馆), 2015. https://www.qianxslib.sjtu.edu.cn/en/index.php. A sympathetic but fair account of Qian’s life is Iris Chang, Thread of the Silkworm (New York: Basic Books, 1996).

[11] Michael J. Sulick, American Spies: Espionage Against the United States from the Cold War to the Present (Washington, DC: Georgetown University Press, 2013), p. 257–260. Peter Mattis and Matthew Brazil, Chinese Communist Espionage, an Intelligence Primer (Annapolis: Naval Institute Press, 2019), p. 152, 238–239.

[12] Mattis and Brazil, Chinese Communist Espionage, p. 145–194.

[13] Mattis and Brazil, Chinese Communist Espionage, p. 164–165.

[14] James Mulvenon, “Economic Espionage and Trade Secret Theft Cases in the US” in William C. Hannas and Didi Kirsten Tatlow, eds., China’s Quest for Foreign Technology: Beyond Espionage (New York: Routledge, 2021), p. 297.

[15] Lei Liu, “China’s Large-Scale Importation of Western Technology and the U.S. Response, 1972–1976.” Diplomatic History, Vol. 45, No. 4, September 2021, p. 794–820, https://doi.org/10.1093/dh/dhab036.

[16] Aaron Friedberg, Getting China Wrong (New York: Polity, 2022)

[17] Bates Gill, Taeho Kim, “China’s Arms Acquisitions from Abroad: A Secret Quest for ‘Superb Secret Weapons.’” SIPRI Research Report No. 11 (New York: Oxford University Press, 1995), p. 41–43, 71–74.

[18] Dahlia Peterson, “Foreign Technology and the Surveillance State,” in Hannas and Tatlow, eds., China’s Quest for Foreign Technology, p. 246.

[19] Jeffrey Stoff, “China’s Talent Programs,” in Hannas and Tatlow, eds., China’s Quest for Foreign Technology, p. 42.

[20] Ibid.

[21] Mattis and Brazil, Chinese Communist Espionage, p. 176.

[22] Cheung, Innovate to Dominate, p. 214–215.

[23] Ibid., p. 286.