The Saga of a U.S.-China Corporate Murder-Suicide

A few Sunday’s ago, my analysis of the Chinese wind industry, which the respected publication, Renewable Energy World, published in 2012, made a cameo appearance in a 60 Minutes’ segment called The Great Brain Robbery, which report described the widespread practice of Chinese cyber hacking of American companies. My article — A Harsh Winter for China’s Wind Industry and Its Leading Company: Sinovel — was used as a Trojan Horse by Chinese cyber hackers, acting on behalf of a Chinese company, to gain access to the computer network of American Superconductor (AMSC), a publicly traded Massachusetts company.

At the time my article was published nearly four years ago, the once mutually advantageous relationship between Sinovel Wind Group Co., Ltd. (Sinovel), then China’s fastest growing wind turbine manufacturer, and AMSC, whose advanced technology formed the “brains” of Sinovel’s wind turbines, had soured. The AMSC/Sinovel relationship, which began as a “win-win” proposition in 2007 turned into a “lose-lose” debacle in 2011, when Sinovel paid one of AMSC’s key employees to turn over AMSC’s proprietary technology and then abrogated its contract with AMSC.

Sinovel’s theft of AMSC’s intellectual property led to a number of nasty repercussions: AMSC sued Sinovel in China for $1.2 billion; the AMSC employee who collaborated with Sinovel was convicted and sent to prison; and AMSC’s prospects were dealt a fatal blow. As described in the 60 Minutes report, AMSC’s business in China, which had grown from $50million/year in 2007 to nearly $500 million/year in 2011, abruptly ended. The loss of this significant piece of business required AMSC to lay off nearly two-thirds of its workforce — some 600 people, and the market value of the company declined by approximately $1 billion. As Daniel McGahn, the President and CEO of AMSC remarked to Leslie Stahl, “Sinovel’s strategy was to kill us.”

Though the 60 Minutes report indeed was another cautionary tale of the often, fatal damage that Chinese intellectual property theft causes many Western businesses, it may have left the erroneous impression that Chinese intellectual property thieves like Sinovel, are the winners. But, in fact, Sinovel’s fate over the years since it stole AMSC’s intellectual property tells a different story, itself a cautionary tale of how perpetrators of intellectual property theft, supposedly “benefiting” from IP theft, often suffer self-inflicted wounds from which they usually don’t recover.

Ironically, in my 2012 Renewable Energy World article that the Chinese cyber hackers used as its “bait” to snare AMSC, I correctly predicted that the year Sinovel stole AMSC’s IP (2011) would be the high water mark for Sinovel’s fortunes. The “blowback” from Sinovel’s theft of AMSC’s IP has wounded Sinovel grievously, and it is doubtful that Sinovel ever will recover from those self-inflicted wounds. If Sinovel had read my article, rather than merely using it as a device to attempt to infiltrate AMSC’s computer systems, the company might have learned the commercial dangers that IP theft poses for the Chinese. These include being excluded from exporting their products to countries whose legal systems rigorously protect intellectual property (such as the U.S. and the EU), and facing the nearly impossible task of providing service to customers when they have little or no indigenous capability. As well, the very nature of cutting edge technology is that it is constantly being improved; stolen software quickly becomes outdated and less valuable, while the loss of trust with China’s “partners” is permanent and irretrievable.

So how has Sinovel faired since it stole AMSC’s IP in 2011? The commencement of litigation with AMSC in 2012, coupled with increased competition among Chinese wind turbine manufacturers, and technical challenges, which Sinovel was unprepared to handle on its own, has resulted in Sinovel suffering increasingly large losses in the four years since the IP theft.

By late 2014, Sinovel was in the midst of a debt re-payment crisis. In late December 2014, Sinovel was faced with bond interest payments totaling 2.76 billion Yuan, but only had 653 million Yuan with which to make those payments. To make matters worse, because Sinovel was on the brink of its third consecutive year of losses, in the words of one shareholder, Sinovel “had another sword hanging over its head”: a suspension in trading of its stock on the Shanghai stock exchange. Sinovel barely survived into 2015 with the infusion of funds from an investor. But as 2016 began, Sinovel’s slow painful death has continued. On Jan. 30, Sinovel reported net losses for all of 2015 totaling 4.537 billion Yuan, which in turn led to a Chinese credit rating company putting Sinovel’s long term debt on a credit rating watch list.

In 2011, the same year that Sinovel made off with AMSC’s IP and while Sinovel still was benefiting from its relationship with AMSC, Sinovel went public on the Shanghai Stock Exchange; soon thereafter its shares were trading as high as 90 Yuan/share. The price of a share of Sinovel’s stock in early 2016 is about 3 Yuan/share.

If Sinovel had read and absorbed the lessons of my 2012 article, and not merely used it as a digital crowbar to break into AMSC, Sinovel might have been able to save itself from five straight “harsh winters”. If it had not engaged in IP theft, it probably would have shared in the great profitable opportunities that Chinese companies involved in developing wind energy now enjoy.

While Sinovel was inflicting tremendous damage on both AMSC and itself over the last five years, China has grown to be the world’s leader in wind energy. As of the end of 2015, China’s cumulative installed capacity of wind power totaled 129,000 MW, nearly double the cumulative installed capacity of wind power in the U.S. In 2015 alone, China installed nearly 33,000 MW of new wind capacity. There is no end in sight for the ambitions of the Chinese government in growing its renewable energy capacity. By also critically injuring itself as it crippled AMSC, Sinovel won’t be among the Chinese and foreign companies that are benefiting as China races to the forefront of renewable energy development.

Lead image: Intellectual property concept. Credit: Shutterstock.

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Lou Schwartz is a lawyer and China specialist whose firm, China Strategies, LLC, focuses on the environmental and renewable energy sectors in China and provides its clients a range of support, including research and analysis, due diligence, merger and acquisition, private equity investment, compliance and data security. Lou has written and lectured widely about China and has taught law and development in China at the university level.

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