China Makes A Big Play In Silicon Valley "The Chinese figured out that technology is the key to wealth and power, and the source of technology is still the West for China," says one China and tech watcher.
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China Makes A Big Play In Silicon Valley

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China Makes A Big Play In Silicon Valley

China Makes A Big Play In Silicon Valley

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LULU GARCIA-NAVARRO, HOST:

There is a trade war underway between the U.S. and China, and it is a big concern to the global economy. But there's another deeper rift brewing between Washington and Beijing. And that stems from China's effort to unseat the U.S. as the global leader when it comes to technology and innovation. In the next installment of our series on China's growing role in the world, we turn to the U.S., where NPR's Jackie Northam reports Washington is pushing back.

JACKIE NORTHAM, BYLINE: The U.S. is unquestionably the leader in advanced technology - think artificial intelligence, robotics, sophisticated weaponry. It's what's helped give the country a national security edge. That's something China has recognized and wants in on, says James Lewis, a specialist in China and technology at the Center for Strategic and International Studies.

JAMES LEWIS: The Chinese figured out that technology is the key to wealth and power. And the source of technology is still the West for China. So how do they get their hands on that Western technology?

NORTHAM: Three years ago, Beijing unveiled its Made in China 2025 strategy, which calls for the country to become a world leader in advanced technologies, including artificial intelligence, AI. As part of that, China is forming global partnerships, pumping massive resources into tech firms at home, in Europe and here in the U.S.

MICHAEL BROWN: I'd say they're very systematic, very long term in their approach. And it's very well-funded.

NORTHAM: Michael Brown is with the Pentagon's Defense Innovation Unit in Silicon Valley. He says there's serious concern in Washington that China is acquiring too much sensitive U.S. technology and transferring it back home.

BROWN: They don't play by the same rules that we do. So cybertheft is on the table. Industrial espionage is on the table - which could include recruiting key talent at networking events that are sponsored by the Chinese government, working with U.S. universities.

NORTHAM: Just last week, Bloomberg reported the U.S. was investigating whether China allegedly infiltrated the Pentagon and major companies, such as Apple and Amazon, by building spy chips into server motherboards. The motherboards were manufactured in China. The companies deny the allegations. But there are other ways China is making inroads to capture American innovation.

There's a quiet leafy part of Silicon Valley called Sunnyvale, and a lot of the tech giants have a presence here. There's Amazon Labs, LinkedIn, Yahoo. And I'm coming up now to a Google complex. And I can actually see some of the workers sitting at picnic tables and enjoying the fine weather. Just behind the Google complex is a Chinese company called Baidu. And it's Google's rival.

Baidu is China's largest Internet search provider. It opened this innovation center here in Silicon Valley with a focus on self-driving vehicles. And other Chinese tech powerhouses - Alibaba, Tencent, Huawei - also have their own research and development centers here. Instead of buying an existing U.S. business, the Chinese tech giants come in and build a new company from the ground up. These moves are called green field investments. And they hire away a lot of U.S. workers, says the CSIS' Lewis.

LEWIS: People change jobs frequently in the tech industry. And you say, I'll pay you a little bit more than the market rate. You'll get a lot of talent. This is a way to acquire knowhow.

NORTHAM: There's also been a surge of investments in tech startups through Chinese venture capital. Adam Lysenko, a senior analyst at Rhodium Group, an economic research firm, says there were more than 1,300 rounds of funding for U.S. startups with at least one Chinese investor over the past eight years.

ADAM LYSENKO: It is very common for Chinese firms to have some sort of ties to the government. It might just be because they have to answer to the government and party leaders back at home. And that infers the state some level of control.

NORTHAM: Lysenko says this has become a concern in national security circles because the nature of emerging technology is inherently dual use. In other words, the AI algorithms used to help speed up your smartphones could also be applied to weapons on the battlefield. Lysenko says while he's not aware of any smoking-gun case where a Chinese venture capital has plundered sensitive technology from a startup, it's widely acknowledged that a risk exists.

LYSENKO: That venture capital and other minority investments provide Chinese investors to access potentially sensitive technologies, particularly ones that are in, in a sense, an early stage where U.S. governments haven't had a full chance to evaluate the implications of those technologies.

NORTHAM: But for many American tech startups, Chinese investment can be critical.

CHRIS NICHOLSON: I think we got lucky. We got a beautiful office, right? It used to be an architectural consulting firm.

NORTHAM: Chris Nicholson is the CEO of Skymind, which makes cutting-edge artificial intelligence software. Daylight pours through the large windows overlooking San Francisco's Mission Street.

NICHOLSON: Mission between 9th and 10th is a little rough, which is not great when you're trying to impress clients.

NORTHAM: Nicholson helped create Skymind about four years ago. He says the company, like many startups, was very fragile in the beginning, until it got its first investment of $200,000 from Chinese consumer tech giant Tencent.

NICHOLSON: And nobody else followed. But it allowed us to survive. And that's just - like, the whole trip of startups is just surviving. Buy yourself enough time until you can realize your idea and test it on the market.

NORTHAM: Skymind now has funding from some major American venture capitalists and a few smaller Chinese ones. Nicholson disputes that venture capital investors automatically gain access to startups' research or knowhow. Later-stage investors putting in much larger amounts typically ask for things like information rights and board seats. Nicholson says no investor has ever asked Skymind for confidential technical information.

NICHOLSON: Right now we have a board of two people. And it's me and my co-founder. And we're both Americans.

NORTHAM: For decades, funding for firms like Nicholson's was through the Defense Department. It helped create technological breakthroughs that led to things like semiconductors and miniaturized GPS. But that funding over the years has become slow and cumbersome while technology has been moving much faster in the private sector. The Pentagon recognized the problem and, in 2015, set up the DIU, the Defense Innovation Unit.

(SOUNDBITE OF DRONE FLYING)

NORTHAM: A military engineer maneuvers a tiny drone as it buzzes above a tarmac at the DIU in Silicon Valley. Lt. Col. David Rothzeid says the Pentagon created the unit as a way to make it easier to get funding to startups.

DAVID ROTHZEID: We're trying to grow the defense industry base by enticing these companies that traditionally wouldn't work with us and don't honestly need to work with us but have a great capability that we would all benefit from.

NORTHAM: This alternate funding is one way Washington is trying to counter Chinese investment. The Trump administration has also been aggressive in blocking several large mergers and acquisitions of U.S. tech companies by Chinese firms. And Congress is beefing up laws on the books aimed at protecting U.S. technology from foreign governments. It will allow closer scrutiny of all sorts of Chinese inroads in the tech sector, says Mario Mancuso, a trade lawyer with Kirkland and Ellis.

MARIO MANCUSO: I think some deals where there are Chinese investors will be a lot harder. More deals will get a lot more scrutiny. And some deals just are not going to happen.

NORTHAM: Many U.S. tech companies push back against tougher laws on foreign investment, warning it could strangle innovation. Skymind's Nicholson again.

NICHOLSON: In Washington, D.C., people think innovation is an American monopoly. They think that people can't go anywhere else for innovation. That's not true. Tech is moving fast in a lot of different countries. So if we shut the door here, that capital is just going to flow through another door. And it's going to be outside of U.S. jurisdiction.

NORTHAM: And that's the conundrum for policymakers. How does the U.S. balance its national security concerns with its drive to be the leader in advanced technology? Jackie Northam, NPR News, Silicon Valley.

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