Where the Dragon Honed Its Claws

This article is based on the author’s keynote address at the International Conference on Corporate Espionage and Industrial Security 2014 in Gatineau, Quebec, on Dec. 1, 2014.

Well before China had become synonymous globally with economic espionage, Beijing had turned its sights on Taiwan, the democratic island of 23 million people it regards as a “renegade province,” for intelligence gathering. As the Taiwanese economic miracle in the 1980s made it one of Asia’s “four tigers,” Beijing, which under Deng Xiaoping (鄧小平) was about to embark on a program of economic development, had many incentives to steal the island’s secrets. To catch up with more advanced economies, China therefore sought to acquire, steal, and copy foreign technology, from Boeing aircraft to semiconductor fabs, aircraft engines to high-speed railway systems. I call this strategy The Great Leapfrogging Forward. Why spend millions of dollars and years on R&D when others can do the investing for you?

Besides gathering military intelligence on matters such as discussions on U.S. arms sales to Taiwan, C4ISR architecture, preparedness and so on, Chinese spies, often operating on behalf of state-owned enterprises (SOE), actively targeted Taiwan’s high-tech sector to kick-start China’s own modernization. Ironically, intelligence collection and the recruitment of businesspeople were facilitated by the major investments that Taiwan made in China throughout the 1980s and 1990s (today more than 1 million Taiwanese live in China), billions of dollars that made a substantial, if now unacknowledged, contribution to the Chinese “economic miracle.”

Taiwan was a logical place to start, given the historical ties, similar cultures, and shared language. Moreover, a segment of Taiwanese society, though diminishing because of their advanced age, were themselves born in China and fled to Taiwan after Mao Zedong’s (毛澤東) communists defeated Chiang Kai-shek’s (蔣介石) Chinese Nationalist Party (KMT) in the Civil War in 1949. Although most were never able to return to China, many of them retained emotional ties to China and may have been more inclined to “spy” on its behalf for the cause of helping China get back on its feet after its “century of humiliation.” In other words, for some of the insiders, they were not doing anything wrong; they were only rectifying an injustice and doing their duty for their country. This “victim’s” mindset may account for China’s rampant collection efforts against Taiwan and elsewhere (see for example Iris Chang’s Thread Of The Silkworm).

Besides ideology, money, sex, “honey traps” and blackmail have also been used to gather intelligence against Taiwanese officials and businesspeople. Chinese spouses, prostitutes, tourists, students, and pro-unification triads are also known to have occasionally played a role in such endeavors. (Economic espionage is also conducted by reporters from the state-owned Xinhua news agency and People’s Daily, who often endeavor to develop close relationships with business communities in foreign countries as well as officials in positions of influence.)

Strict investment rules and controls of technological transfers to China were in effect during the first phase of Taiwanese investment in China (through the first decade of the twenty-first century), but were largely lifted following the election of Ma Ying-jeou (馬英九) of the KMT in 2008. Since then, about 20 agreements have been signed between Taipei and Beijing, most of them touching on trade and investment issues. With the liberalization of cross-strait ties, Chinese businesspeople and spies have had much greater access to every corner of Taiwanese society, while Taiwan’s counterintelligence capabilities appear to have stagnated.

Through partnerships with Taiwanese businessmen or the recruitment of Taiwanese — possibly made easier thanks to the ongoing privatization of military-run defense industries (e.g., the Chung Shan Institute of Science and Technology, or CSIST) — China has also sought to access critical technology that, because of longstanding embargoes or a lack of technological know-how, remains inaccessible to its engineers, especially in the defense sector (e.g., aircraft engines, high-performance semiconductors). This partly explains why many attempted thefts of U.S. military technology by China over the past two decades or so have involved Taiwanese agents who, thanks to the close U.S.-Taiwan relationship and security “alliance,” enjoy access that is simply unthinkable to the Chinese.

Cyber espionage

The advent of the Internet has presented China with new opportunities to spy on Taiwan’s industrial and IT sectors. For several years now, Taiwan has been the No. 1 target of such attacks, from both civilian and hackers operating under the People’s Liberation Army (PLA Third Department’s Sixth Bureau and the Nanjing Military Region’s Technical Reconnaissance Bureau).

Earlier this year, then-premier Jiang Yi-huah (江宜樺), said that despite warming ties in the Taiwan Strait, China was stepping up its cyber attacks against Taiwanese government web sites. Cyber attackers in China often used civilian websites as “springboards” to access government and private-sector websites in Taiwan, he said. We cannot emphasize this enough, as this has significance for other economic partners of China: Despite warm relations, People’s Republic of China (PRC) cyber units and agents continue to accelerate offensive collection efforts. All countries spy on each other, granted, but that doesn’t make it right. Furthermore, there is every reason to believe that China, which wants to quickly catch up, has been particularly aggressive.

According to a Taiwanese source who as a member of Taiwan’s National Security Council was in charge of information security for all government agencies under the Chen Shui-bian (陳水扁) administration (2000-2008), Chinese cyber attacks against Taiwan are often “experimental” in nature, thus making the island a rich, though largely untapped, source of knowledge about Chinese cyber espionage. A report by Reuters last year stated that “Taiwan is the frontline in an emerging global battle for cyberspace … a rehearsal area for the Chinese cyber attacks that have strained ties with the United States.”

Taiwan “has endured at least a decade of highly-targeted data-theft attacks that are then directed towards larger countries,” the report said. One Taiwan IT expert has said that specific-signature cyber attacks targeting Taiwan are often observed, six months later, in attacks in the U.S. The Criminal Investigation Bureau’s (CIB) High-Technology Crime Prevention Center has also gone on the record saying that viruses from China are first tested against Taiwan before being “released” against the U.S.

Tsai Der-sheng (蔡得勝), until recently the director of Taiwan’s National Security Bureau (NSB), said the Bureau’s external website “encountered more than 3 million hacking attempts from China” in 2012 alone, with “military and technology intelligence … included among the pilfered data.” In a report issued in 2013, the NSB stated that “China [is] armed with a cyber army of more than 100,000 people.”

Former NSB deputy director Chang Kuan-yuan (張光遠) has said that 38 percent of cyber attacks against Taiwan were launched from “zombie computers” that had been infected by viruses or Trojan horses. Those controlled computers then served as “nodes,” with Taiwan acting as a “springboard” for attacks against computers worldwide.

As China extends its cyber collection efforts to a global scale, Taiwan’s experience with this type of espionage is probably unparalleled. In fact, Taiwanese officials claim that their agencies have the “best response time” against such types of attacks. According to a recent article in the Sydney Morning Herald, Taiwan is “a canary in the coalmine of cyber warfare” and “can claim the dubious honour of being one of the most hacked, if not the most hacked, places in the world.”

Three units — at the Ministry of National Defense, the NSB, and the CIB — are in charge of cyber security and work closely with the private sector.

Other areas to watch out for

Confucius Institutes

With growing student exchanges between Taiwan and China, it is only a matter of time before Beijing pressures Taiwanese universities to host Confucius Institutes. CIs have been largely criticized (and some closed) worldwide over accusations that the centers are “spreading communist propaganda” and “undermining academic freedom.” Less discussed are the trends reflected in where the CIs are opened. In a private discussion in Taipei earlier this year, French journalist Roger Faligot, who has authored several books on the Chinese intelligence apparatus, drew my attention to the fact that CIs across France tended to be opened near top research institutions. Though more work needs to be done on the subject, we can probably conclude that this isn’t a coincidence and that the locations are chosen to facilitate recruitment, surveillance, and collection.

Attract foreign experts

“Brain drain” is a growing problem for Taiwan, whose top experts increasingly face greater prospects for career advancement and material gain in China. In recent years, a number of top researchers on remote-sensing technology, military hardware, and cellphone technology have been approached by Chinese agents; some were successfully recruited, while others attempted to flee to China but were caught. Besides representing a loss to Taiwan in terms of expertise, this recruitment has also sparked fears that trade or military secrets may have been acquired by China in the process.

Joint ventures

Through joint ventures, China also hopes to acquire technology and trade secrets. Many Taiwanese firms that operate in China face immense pressure from Chinese authorities to expand their operations there, often by opening factories to produce high-tech equipment that is currently regulated by Taiwanese authorities (high-performance semiconductors, TFT-LCD screens, and so on). Keen on continuing their operations in China for reasons ranging from supply-chain dependency, billions of dollars in fixed investment and the prospects of future growth, many of those firms have been compelled by Chinese authorities to lobby the Taiwanese government to lift those restrictions, which would then facilitate the legal transfer or theft of trade secrets and intellectual property.

Paul Midler’s book Poorly Made in China documents how this occurs at the SME level. Japanese firm Kawasaki Heavy Industries’ experience with bullet trains in China is a recent example of how advanced technology can be stolen via joint ventures (often a precondition for a foreign company’s ability to work in China) and then manufactured by a Chinese firm to outcompete the original manufacturer. Defense articles initially produced by Russia (air defense systems, Sukhoi Su-33 Flanker aircraft) were then reverse-engineered by Chinese firms, causing severe losses in Russian defense exports once China began producing — and exporting — cheaper copies.

Not only high-tech sectors are targeted. Several copies of Taiwanese products (including high-grade teas from Alishan) have been produced by China and marketed as Taiwanese (“MIT”) products, causing serious losses to Taiwan’s exports. Chinese who were working illegally in Taiwan were also recently caught attempting to steal tea cultivation techniques and technology on China’s behalf.

Co-optation of influential magnates

China has long targeted businessmen and groups with deep investment in the People’s Republic of China and uses them to pressure the Taiwanese government to adopt policies that are favorable to China. United Front Work units are often involved in this and provide incentives through all-expenses-paid visits, while local governments, as well as gangsters, can be used to coerce Taiwanese investors there (known as taishang) by causing legal troubles, the threatened seizing of fixed investments, or unnecessary red tape. Powerful billionaires such as Terry Gou (郭台銘, chairman of Hon Hai/Foxxonn), Tsai Eng-meng (蔡衍明, chairman of the China Times Group) and Cher Wang (王雪紅, chairwoman of HTC Corp) are examples of China-dependent business leaders who have used their wealth, influence, and visibility to pressure governments into adopting pro-China policies, prop-up candidates who would facilitate such efforts, or to threaten others who disagree with such policies.

Elbow-out smaller competitors

Another use of economic espionage by China comes in the form of sustained attacks against a smaller competitor’s high-tech institutions with the ostensible aim of undermining foreign investors’ confidence in that country’s ability to keep industrial secrets. Through such campaigns, China can undermine a country’s ability to attract foreign investment or to enter partnerships with foreign companies operating in the high-tech, telecommunications, and military sectors. Evidently, such a strategy need not even be a conscious one; a country can have its reputation “tainted” merely as a consequence of being the target of an aggressive intelligence collection campaign by China. In such a scenario, successful counterintelligence operations can still serve to undermine a country’s reputation with potential investors or potential partners. Private conversations with industry watchers indicate that Taiwan may be facing such a situation.

Conclusion

Taiwan has been (and remains) a testing ground for various types of new Chinese collection techniques, such as cyber warfare, and also provides a gateway for Chinese firms and spy agencies that are barred access to advanced technology from Western countries. Forced to adopt reactive and proactive measures to deal with the problem, and doing so while it was opening its economy to the economic giant next door, Taiwan has developed unique expertise on Chinese espionage in all its forms. As I hope this brief exploration has made clear, the international community — the private sector and governments alike — could learn a lot from Taiwan’s experiences over the years dealing with espionage from China. The fact that Taiwan is often excluded from multilateral bodies like the U.N., and therefore ignored, should not deter countries from seeking to learn from it.