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PRC Acquisition of U.S. Technology

page 5

Joint Ventures with U.S. Companies

This section describes the pressures brought to bear on U.S. companies linked with militarily-sensitive technology attempting to do business with the PRC, and provides examples of U.S. companies conspiring to evade export control laws in pursuit of joint ventures.

The vast majority of commercial business activity between the United States and the PRC does not present a threat to national security, but additional scrutiny, discipline, and an awareness of risks are necessary with respect to joint ventures with the PRC where the potential exists for the transfer of militarily-sensitive U.S. technology.

The U.S. 1997 National Science and Technology Strategy stated that:

Sales and contracts with foreign buyers imposing conditions leading to technology transfer, joint ventures with foreign partners involving technology sharing and next generation development, and foreign investments in U.S. industry create technology transfer opportunities that may raise either economic or national security concerns.56

The behavior of the PRC Government and PRC-controlled businesses in dealing with U.S. companies involved with militarily sensitive technology confirms that these concerns are valid and growing. The growing number of joint ventures that call for technology transfers between the PRC and U.S. firms can be expected to provide the PRC with continued access to dual-use technologies for military and commercial advantage.

Technology transfer requirements in joint ventures often take the form of side agreements (sometimes referred to as offset agreements) requiring both that the U.S. firm transfer technology to the PRC partner, and that all transferred technology will eventually become the property of the PRC partner.57

Although many countries require technology transfers when they do business with U.S. firms, no country makes such demands across as wide a variety of industries as the PRC does.58 Despite the PRCs rapid economic liberalization since 1978, it continues to implement its explicitly designed goals and policies to restrict and manage foreign investment so as to bolster the PRCs military and commercial industries through acquisition of technology.59

The Communist Party has long believed that forcing technology from foreign firms is not only critical to the PRC, but also is a cost that foreign firms will bear in order to obtain PRC market entry.

In the past, the PRC has favored joint ventures with U.S. high-technology companies for several reasons:

  • The U.S. excels in many areas of technology that are of special interest to the PLA and to PRC-controlled firms
  • Many PRC scientists were educated in the United States and retain valuable contacts in the U.S. research and business community who can be exploited for technology transfer
  • Many other countries are more reluctant than the United States to give up technology60

The PRC has dedicated increasing resources to identifying U.S. high-technology firms as likely targets for joint venture overtures. Science and technology representatives in PRC embassies abroad are used to assist in this targeting of technology, and to encourage collaboration with U.S. firms for this purpose.

Unless they are briefed by the FBI pursuant to its National Security Threat List program, U.S. companies are unaware of the extent of the PRCs espionage directed against U.S. technology, and thus - at least from the U.S. national security standpoint - are generally unprepared for the reality of doing business in the PRC. They lack knowledge of the interconnection between the CCP, the PLA, the State, and the PRC-controlled companies with which they deal directly in the negotiating process.61

The U.S. General Accounting Office (GAO) has found that U.S. businesses have significant concerns about arbitrary licensing requirements in the PRC that often call for increased technology transfer. The GAO has also found that transparency was the most frequent concern reported by U.S. companies.62 Because of the lack of transparency in the PRCs laws, rules, and regulations that govern business alliances, and the dearth of accessible, understandable sources of regulatory information, U.S. businesses are often subjected to technology transfer requirements that are not in writing, or are not maintained in the field, or are contained in "secret" rules that only insiders know about.63

The PRCs massive potential consumer market is the key factor behind the willingness of some U.S. businesses to risk and tolerate technology transfers. Some of these transfers could impair U.S. national security, as in the cases of Loral and Hughes described later in this Report. The obvious potential of the PRC market has increasingly enabled the PRC to place technology-transfer demands on its U.S. trading partners.

U.S. businesses believe that they must be in the PRC, lest a competitor get a foothold first.64 In fact, many U.S. high-technology firms believe it is more important to establish this foothold than to make profits immediately or gain any more than limited access to the PRC market.65 Some of the PRCs trading partners have focused on increased technology transfers to raise the attractiveness of their bids.

In addition to traditional types of technology transfer, many U.S. high-tech investments in the PRC include agreements establishing joint research and development centers or projects. This type of agreement represents a new trend in U.S. investment in the PRC and is a potentially significant development.66

U.S. companies involved in joint ventures may be willing to transfer technology because they believe that the only risk is a business one - that is, that the transfers may eventually hurt them in terms of market share or competition.67 These businesses may be unaware that technologies transferred to a PRC partner will likely be shared within the PRCs industrial networks and with the PLA, or that joint ventures may be used in some instances as cover to acquire critical technology for the military.

COSTIND, which controls the PRCs military-industrial organizations, likely attempts to monitor technologies through joint ventures. U.S. businesses may also be unaware that joint-venture operations are also vulnerable to penetration by official PRC intelligence agencies, such as the MSS.

In one 1990s case reviewed by the Select Committee, a U.S. high-technology company and its PRC partner used a joint venture to avoid U.S. export control laws and make a lucrative sale of controlled equipment to the PRC. Following the denial of an export license, the U.S. company attempted to form a joint venture to which the technology would be transferred. The joint venture was controlled by a PRC entity included on the U.S. Commerce Departments Entity List, which means it presents an unacceptable risk of diversion to the development of weapons of mass destruction.

Acquisition and Exploitation of Dual-Use Technologies

The acquisition of advanced dual-use technology represents yet another method by which the PRC obtains advanced technology for military modernization from the United States. The PRCs military modernization drive includes a policy to acquire dual-use technologies. The PRC seeks civil technology in part in the hope of being able to adapt the technology to military applications. This is referred to by some analysts as "spinning on." 68

A strategy developed by the PRC in 1995 called for the acquisition of dual-use technologies with civil and military applications, and the transfer of R&D achievements in civil technology to the research and production of weapons.

The PRC collects military-related science and technology information from openly available U.S. and Western sources and military researchers. This accelerates the PLAs military technology development by permitting it to follow proven development options already undertaken by U.S. and Western scientists.

PRC procurement agents have approached U.S. firms to gain an understanding of the uses of available technology, and to evaluate the PRCs ability to purchase dual-use technology under the guise of civil programs and within the constraints of U.S. export controls. Additionally, the PRC has attempted to acquire information from the U.S. and other countries about the design and manufacturing of military helicopters.69 The PRC could use this approach to acquire chemical and biological weapons technology.

The key organizations in the PRCs drive to acquire dual-use technology include:

  • COSTIND, which acquires dual-use technology for PRC institutes and manufacturers by assuring foreign suppliers that the technology will be used for civil production. COSTIND uses overseas companies to target U.S. firms for acquisition of dual-use technology for the military.
  • The Ministry of Electronics Industry,70 which is responsible for developing the PRCs military electronics industry. Among other things, the Ministry approves and prioritizes research and development and the importation of electronics technologies that can be used to speed up the PRCs indigenous production capabilities.
  • The Ministry of Post and Communications, which is acquiring asynchronous transfer mode switches that could be used for military purposes by the PLA.71
  • PLA-operated import-export companies, which also import dual-use technologies for military modernization. Polytechnologies, a company attached to the General Staff Department of the PLA, plays a major role in this effort, especially in negotiating foreign weapons purchases.72
  • The Aviation Industries Corporation of China (AVIC), and its subsidiary, China National Aero-Technology Import-Export Corporation (CATIC), which have sent visitors to U.S. firms to discuss manufacturing agreements for commercial systems that could be used to produce military aircraft for the PLA.73 AVIC is one of five PRC state-owned conglomerates that operate as "commercial businesses" under the direct control of the State Council and COSTIND.

Several incidents highlight CATICs direct role in the acquisition of controlled U.S. technology. One clear example was CATICs role as the lead PRC representative in the 1994 purchase of advanced machine tools from McDonnell-Douglas, discussed more fully later in this Report.

Another possible example of the PRCs exploitation of civilian end-use as a means of obtaining controlled technology was CATICs 1983 purchase of two U.S.-origin CFM-56 jet engines on the pretext that they would be used to re-engine commercial aircraft. Although the CFM-56 is a commercial engine, its core section is the same as the core of the General Electric F-101 engine that is used in the U.S. B-1 bomber. Because of this, restrictions were placed on the export license. However, the PRC may have exploited the technology of the CFM-56. When the U.S. Government subsequently requested access to the engines, the PRC claimed they had been destroyed in a fire.

CATIC has, on several occasions reviewed by the Select Committee, misrepresented the proposed uses of militarily useful U.S. technology. The Clinton administration has determined that the specific facts in these cases may not be publicly

disclosed.

In 1996, AVIC, CATICs parent company, attempted to use a Canadian intermediary to hire former Pratt & Whitney engineers in the United States to assist in the development of an indigenous PRC jet engine. AVICs initial approach was under the guise of a civilian project, and the U.S. engineers were not told they would be working on a military engine for the PRCs newest fighter jet until negotiations had progressed substantially. The U.S. engineers pulled out when they were told what they would be asked to do.74

The degree of diversion to military programs by the PRC of commercially-acquired technologies is unclear, since the PRCs parallel civil-military industrial complex75 often blurs the true end-use of technology that is acquired. As a result, there may be more use of U.S. dual-use technology for military production than these examples suggest.

Back  |  Forward


COX REPORT

Overview
pages 1 | 2 | 3 | 4

PRC Acquisition of U.S. Technology
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

PRC Theft of U.S. Nuclear Warhead Design Information
pages 1 | 2 | 3 | 4 | 5

High Performance Computers
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

PRC Missile and Space Forces
pages 1 | 2 | 3 | 4 5 | 6 | 7 | 8 | 9

Satellite Launches in the PRC: Hughes
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

Satellite Launches in the PRC: Loral
pages 1 | 2 | 3 | 4 | 5 | 6

Launch Site Security in the PRC
pages 1 | 2 | 3 | 4 5 | 6

Commercial Space Insurance
pages 1 | 2 | 3 | 4

U.S. Export Policy Toward the PRC
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

Manufacturing Processes
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

Recommendations
pages 1 | 2 | 3

Appendices
pages introduction | A | B | C | D | E | F



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