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How China Obtains American Trade Secrets

BEIJING — The new trade deal between Washington and Beijing is intended in part to address one of the most acrimonious issues between them: China’s tactics in acquiring technology from companies based in the West.

It’s a thorny topic, and one that is unlikely to be fully solved with a trade pact.

The Trump administration blames China for stealing Western trade secrets, and it used those allegations as the legal basis for launching the trade war nearly two years ago. Trade talks between the two sides quickly became about broader issues, but the partial trade pact set to be signed on Wednesday includes pledges by China to stop some of the practices that Western businesses have long criticized. Depending on the details, that could make the deal more palatable for American businesses.

Underpinning these concerns is that China has repeatedly shown that it can acquire technology and, through heavy government subsidies, build competitive rivals to American companies. Businesses worry that it could do the same in other industries, like software and chips.

China has long denied that it forces foreign companies to give up technology. They do it willingly, Beijing asserts, to get access to China’s vast and growing market. Still, Chinese officials say they are taking steps to address the concerns.

The American authorities have long accused Chinese companies and individuals of hacking and other outright theft of American corporate secrets. And some in the Trump administration worry that Chinese companies are simply buying it through corporate deals.

American companies say Chinese companies also use more subtle tactics to get access to valuable technology.

Sometimes China requires foreign companies to form joint ventures with local firms in order to do business there, as in the case of the auto industry. It also sometimes requires that a certain percentage of a product’s value be manufactured locally, as it once did with wind turbines and solar panels.

The technology companies Apple and Amazon set up ventures with local partners to handle data in China to comply with internal security laws.

Companies are loath to accuse Chinese partners of theft for fear of getting punished. Business groups that represent them say Chinese companies use those corporate ties to pressure foreign partners into giving up secrets. They also say Chinese officials have pressured foreign companies to give them access to sensitive technology as part of a review process to make sure those products are safe for Chinese consumers.

Foreign business groups point to renewable energy as one area where China used some of these tactics to build homegrown industries.

Gamesa of Spain was the wind turbine market leader in China when Beijing mandated in 2005 that 70 percent of each wind turbine installed in China had to be manufactured inside the country. The company trained more than 500 suppliers in China to manufacture practically every part in its turbines. It set up a plant to assemble them in the city of Tianjin. Other multinational wind turbine manufacturers did the same.

The Obama administration questioned the policy as a violation of World Trade Organization rules and China withdrew it, but by then it was too late. Chinese state-controlled enterprises had begun to assemble turbines using the same suppliers. China is now the world’s biggest market for wind turbines, and they are mostly made by Chinese companies.

A somewhat similar industrial evolution occurred soon after in solar energy. China required that its first big municipal solar project only use solar panels that were at least 80 percent made in China. Companies rushed to produce in China and share technology.

The Chinese government also heavily subsidized the manufacture of solar panels, mostly for export. Chinese companies ended up producing most of the world’s solar panels.

Some in the Trump administration fear the same thing is happening in cars.

Shortly after opening China to foreign auto companies, Chinese officials held a competition among global automakers for who would be allowed to enter the market. The competition included a detailed review of each company’s offer to transfer technology to a joint venture to be formed with a Chinese state-owned partner.

General Motors beat out Ford Motor and Toyota by agreeing to build a state-of-the-art assembly plant in Shanghai with four dozen robots to make the latest Buicks. Executives at Volkswagen, the German automaker that had entered China even earlier, were furious, because competitive pressures forced them to upgrade their technology as well.

China is now the world’s largest car market. But except for a few luxury models, practically all of the cars sold in China are made there. Steep Chinese tariffs on imported cars and car parts have also played a role, as has the desire of foreign companies to avoid the costs and risks of transporting cars from distant production sites.

In the trade truce expected to be signed on Wednesday, Chinese officials have agreed not to force companies to transfer technology as a condition of doing business, and they undertook to punish firms that infringe on or steal trade secrets. China also agreed not to use Chinese companies to obtain sensitive technology through acquisitions.

Even before that, Chinese officials pledged to drop the joint venture requirement in areas like cars.

The question is whether China will stick to its pledges. Chinese officials have already issued rules echoing much of what they promised in Wednesday’s agreement. Foreign lawyers say the new rules have large loopholes. The rules give Chinese regulators broad discretion to act as they see fit in cases that involve “special circumstances,” “national state interests” and other fuzzy exceptions.

The trade pact calls for consultations within 90 days if the United States thinks Beijing is not living up to its commitments, but it is unclear whether the Trump administration could then force compliance. More broadly, the pact does not address China’s subsidies for new industries, a key factor in what happened in sectors like solar panels. China has largely rebuffed calls to rein in subsidies for homegrown competitors in industries like semiconductors, commercial aircraft, electric cars and other technologies of tomorrow.

The Trump administration is counting on tariffs to counterbalance that. The partial trade pact will leave in place broad tariffs on many of those industries to prevent Chinese competitors from flooding the American market. Leaving broad tariffs in place also gives Western companies a strong financial incentive to reconsider supply chains that are heavily reliant on China.

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Huawei Posts Solid Growth but Warns of Difficulties Ahead

HONG KONG — For Huawei, it has been a year of lawsuits, blacklists, diplomatic fights, spying accusations and, most recently, viral anger from the Chinese internet.

Through it all, the company posted solid growth, its deputy chairman Eric Xu said on Tuesday. In a year-end note, Mr. Xu said the company’s sales in 2019 increased an estimated 18 percent from a year earlier to $121.8 billion, just below the company’s initial target for revenue.

The results hinted at a slowdown in the final quarter of the year, and Mr. Xu’s note was rich in metaphors describing the difficult days ahead. Alternately likening the company to plums bitten by winter’s frost, a bamboo stalk battered by wind and an embattled aircraft, the executive said that in 2020, the company would not grow as rapidly as it did in the first half of 2019.

“It’s going to be a difficult year for us,” wrote Mr. Xu, adding that “the external environment is becoming more complicated than ever, and downward pressure on the global economy has intensified.”

Huawei is the world’s leading maker of equipment that powers cellphone networks and a champion of Beijing’s ambitions to build new, cutting-edge technology companies. Officials in the United States have long been worried that China’s government could use Huawei’s products to gather intelligence, an accusation the company has repeatedly denied.

Huawei’s year went from bad to worse when the United States added the company to an export blacklist in May. The move effectively restricted its ability to purchase American products crucial to its smartphones and telecom gear, weighing on revenue growth.

The blocks, though, have proven somewhat porous. The Trump administration has permitted sales to Huawei that are used to maintain existing mobile networks. Some of its American suppliers determined they could lawfully continue selling nonsensitive products to the company. In October, the Trump administration said it would issue export licenses to certain United States companies selling to Huawei, further easing pressures on its supply chain.

Even so, Mr. Xu indicated that the confrontation with the United States would continue to dampen growth and said he expected Huawei to remain on the blacklist in 2020.

“Difficulty is the prelude to greater success, and adversity the whetstone of an iron-willed team. The U.S. government’s campaign against Huawei is strategic and long-term,” he wrote.

Huawei, he said, will “need to go all out” to develop software and services that work with its smartphones. Analysts have worried about whether the company’s smartphones would remain competitive since it was blocked from working with Google. Huawei had to release its latest flagship smartphone, the Mate 30 series, without regular access to Google’s apps.

Mr. Xu said the company shipped a total of 240 million smartphones in 2019, an increase of almost 17 percent over the 206 million units it sold in 2018.

The company’s shares are not publicly traded and it has no obligation to announce its results. In a nod to transparency, Huawei has long announced financials, and this year it began reporting unaudited results quarterly. The numbers for 2019 are not audited, and the company will likely provide further details for its performance in the first months of 2020.

With Huawei’s business under pressure, Mr. Xu also warned of tough times for employees, even as he thanked them. Huawei unexpectedly became the center of online anger in China this month after an employee said he had been jailed for 251 days after demanding severance pay from the company. The experience struck a chord for many Chinese white-collar tech employees, who are now facing sagging returns for long hours at the office.

Despite the renewed focus on Huawei’s famous hard-charging corporate spirit, Mr. Xu did not mince his metaphors in describing the company’s outlook on its employees.

“Managers at all levels need to put company interests above personal gain and go where they are needed most, including hardship regions,” he wrote, calling those willing to put up with such difficulties “tree growers.”

He said the company would remove managers who were performing in the bottom 10 percent as part of a plan to better prune talent.

“We will remove mediocre managers more quickly — people who have lost their enterprising spirit, who have built their position on personal connections or empty and unactionable reporting, and those who prioritize short-term gains and pass problems on to their successors,” he wrote, calling such people “the pit-diggers among us.”

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At the Edge of the World, a New Battleground for the U.S. and China

TORSHAVN, Faroe Islands — The mere existence of the Faroe Islands is a wonder. Tall peaks of snow-patched volcanic rock jut out from the North Atlantic Ocean. Steep cliffs plunge into the deep waters of narrow fjords.

The remote collection of 18 small islands, which sit between Iceland and Norway, is known for a robust puffin population and periodic whale hunts. The semiautonomous Danish territory also has a thriving salmon industry.

Technology is not a common conversation topic among its 50,000 residents. Yet in recent weeks, the Faroe Islands have turned into a new and unlikely battleground in the technological Cold War between the United States and China.

The dispute started because of a contract. The Faroe Islands wanted to build a new ultrafast wireless network with fifth-generation technology, known as 5G. To create that new network, the territory planned to award the job to a technology supplier.

That was when the United States began urging the archipelago nation not to give the contract to a particular company: the Chinese telecommunications giant Huawei. American officials have long said Huawei is beholden to Beijing and poses national security concerns.

Then Chinese officials got involved. A senior Faroe Islands government official was recently caught on tape saying that the Chinese had offered to boost trade between the territory and China — as long as Huawei got the 5G network assignment.

“Commercially, the Faroe Islands cannot be very important to Huawei or anybody else,” Sjurdur Skaale, who represents the territory in the Danish parliament, said over breakfast in the capital of Torshavn this week. “The fact that the Chinese and American embassies are fighting over this as hard they are, there is something else on the table. It is about something else than purely business.”

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Credit…Ben Quinton for The New York Times

No location is now too small for the United States and China to focus on as they tussle over the future of technology. The Faroe Islands, whose proximity to the arctic gives it added military importance, joins countries across Europe caught in the middle of the two superpowers over Huawei, the crown jewel of the Chinese tech sector.

For more than a year, American officials have applied pressure on Britain, Germany, Poland and others to follow its lead in banning Huawei from new 5G networks. They argue the company can be used by China’s Communist Party to spy or sabotage critical networks. Huawei has denied that it helps Beijing.

But if the European nations side with Washington, they risk harming their economic ties to China, which has a growing appetite for German cars, French airplanes and British pharmaceuticals.

In the Faroe Islands, Bardur Nielsen, the prime minister, has tried defusing the conflict. In a statement, he said his government “has not been pressured or threatened by foreign authorities in relation to the development of a 5G network in the Faroe Islands.”

Any decision about awarding a contract to Huawei, he said, would be made by the local telecommunications company, Foroya Tele.

Foroya Tele said in a statement that it is testing different technologies. The choice of a 5G network provider, it said, “requires significant considerations given the scale and importance of the investment for the Faroe Islands.”

For the people of the Faroe Islands, the debate over Huawei and 5G is rooted in salmon more than in download speeds.

Salmon is central to the territory’s economy. More than 90 percent of the Faroe Islands’ exports are fish, including salmon, mackerel, herring and cod. In the surrounding waters, thousands of salmon can be seen splashing inside large netted rings, where they are bred for meals in Paris, Moscow, New York — and, increasingly, Beijing.

After 2010, the islands’ salmon exports to China picked up. At the time, the Chinese government had slowed the purchase of the fish from Norway in response to the awarding of the Nobel Peace Prize to Chinese human rights activist Liu Xiaobo in Oslo.

China now makes up about 7 percent of the Faroe Islands’ salmon sales. The Faroese government this year opened an office in Beijing to further expand trade.

In 2014, the islands’ salmon sales to Russia exploded after the European Union limited what fish other countries could export there. Those rules do not apply to the Faroe Islands because it is not a part of the European bloc.

In all, salmon exports from the Faroe Islands are expected to top $550 million this year, up from roughly $190 million a decade ago.

“This is the home place of Atlantic salmon,” Runi Dam, a consultant for local fishing companies, said while standing over giant pens filled with about 15,000 salmon each. “We have the perfect environment.”

Now the salmon business has become entangled in the fight over the 5G wireless network.

Credit…Ben Quinton for The New York Times
Credit…Ben Quinton for The New York Times

Last month, America’s ambassador to Denmark, Carla Sands, went public with warnings against Huawei. In an opinion piece in the local Faroe Islands newspaper, Ms. Sands said there could be “dangerous consequences” if the company was allowed to build the 5G network. When countries let Huawei in, she said, “they agree to work under Chinese communist rules.”

In another interview with Danish Broadcasting this week, Ms. Sands accused a Huawei executive responsible for the Nordic region of “working for the Chinese communists,” who are “exporting their spying, their corruption and bribery around the world.”

Ms. Sands declined to be interviewed.

At the same time, China’s ambassador to Denmark visited the Faroe Islands at least twice in the past two months.

This month, the Danish national newspaper, Berlingske, published the transcript of an audio recording in which a senior Faroe Islands official is summarizing one of the meetings. Herálvur Joensen, a senior aide in the Faroese government, was caught on tape saying China’s ambassador had threatened to block a trade deal — and more fish sales — if Huawei was not used for the 5G network.

“If Foroya Tele signed agreement with Huawei, then all doors would be open for a free-trade agreement with China,” he said in the recording. “If this doesn’t happen, then there won’t be a trade agreement.”

A spokesman for the prime minister said Mr. Joensen had not attended the meeting with the Chinese ambassador and was not available for an interview.

Credit…Ben Quinton for The New York Times
Credit…Ben Quinton for The New York Times

Huawei’s critics jumped on the revelations, saying the leaked recording showed the close links between Huawei and the Chinese government.

China’s ambassador, Feng Tie, wrote in Berlingske that the country did not pressure the Faroe Islands. “It’s my duty to secure that Huawei is treated fair and without discrimination in Denmark,” he said. “It’s not at all in Chinese culture to promote threats. Promoting threats is more known from the U.S.”

Huawei said in a statement it was not involved in any talks between the two governments.

In villages and harbors around the islands, people said they were bewildered about being thrust into a battle between China and the United States.

“It is a lice between two nails,” said Rógvi Olavson, who lives in Torshavn and is a lecturer at the local university. “You’re squeezed by the U.S. on the one hand and China on the other.”

While many residents said the Faroe Islands prefer the United States over China, several expressed anger at American officials for demanding that Huawei be banned. They said the company helped build the existing 4G network, which they use to make phone calls or share photos from some of the more far-flung areas of the islands.

Sissal Kristiansen, who designs sweaters and other clothing from Faroese wool, said she had listened to a recent interview with Ms. Sands.

“It awoke this, ‘Oh bugger off’ feeling in me,” she said. “We make our own decisions.”

Others are wary about harming economic ties with China, which they fear will retaliate if Huawei is not selected for the 5G network. Many locals remember an economic crisis in the 1990s, when about 10 percent of Faroese residents ended up moving abroad.

Today, unemployment on the islands is almost nonexistent — just 183 people were out of work as of Friday, according to government statistics. Like other Nordic countries, health care, education and other social services are free. There is virtually no crime.

“China is not just a nice customer, it is a necessity,” said Martin Breum, an arctic expert who has written about the Faroe Islands. The Faroese, he added, “have nothing else to sell to the rest of the world. They live off their fish.”

Martin Selsoe Sorensen contributed reporting from Copenhagen.