Silicon Insider: Espionage Hits High-Tech
Jan. 14, 2003 -- As long as you keep running they can't pick your pocket.
One of the more interesting events in Silicon Valley in the last few weeks was the indictment of two local engineers on charges of stealing trade secrets for the People's Republic of China.
On December 5th, Fei Ye and Ming Zhong were charged with ten counts of trade-secret theft and economic espionage. They were popped by the Feds in November 2001 while trying to board a plane headed for China out of San Francisco Airport. This was pretty nasty stuff, especially occurring just two months after 9/11. If convicted, the two men (Ye is a naturalized U.S. citizen; Zhong a Chinese national with permanent U.S. residence) could face 95 years in prison and $3 million in fines.
The victims in the case appear to be Sun Microsystems, Transmeta, NRC Electronics and Trident Microsystems, all of whose stolen internal documents were found in the men's possession. The Sun documents related to the company's latest microprocessor, and may have been taken while Ye worked there.
But the big target appeared to be Transmeta, Ye's current employer. The much-publicized young company has had a rough road the last few years, taking on Intel in the laptop computer processor market.
No one has ever doubted the cutting-edge nature of the company's chip technology — and as the company began to shift into embedded processors for industrial applications, Transmeta was expected to be a formidable competitor. In terms of national defense, Transmeta's 'code morphing' technology is especially useful in building the kind of computers you use to model nuclear weapons or track missiles.
Foreign Espionage Hits the Valley
Ye and Zhong's apparent plan was to sneak the stolen secret documents out of the U.S. and set up a new company, named Supervision — or the Zhongtian Microsystems Company — that would build state-of-the-art chips in mainland China.
This might appear at first glance to be just another example of sleazy entrepreneurship. However, the FBI claims to have found documents in the two men's possession suggesting that the PRC government had blessed the project. As a result, Ye and Zhong were among the first people ever charged under the economic espionage act, enacted in 1996.
How were they caught? It turns out that the men had a third partner in Supervision, Sun Li. For reasons that remain obscure, Li called the FBI. The Bureau, along with executives from Transmeta and Sun, were waiting for the pair at SFO.
The two men, remarkably out on bail, now await their trial… if it ever occurs. Espionage cases have a tendency to disappear from sight.
As it happens, I covered some of the earliest Silicon Valley espionage cases 20 years ago for the San Jose Mercury-News. Even though I was the son of a spook and should have known better, I find myself amazed to discover another world beneath the Valley's glittering industrial parks.
In particular, what I quickly realized was that under the Valley there was a great flowing river of gray-market goods; a river that had many sources and many mouths.
At the sources, companies were constantly being robbed of new products, designs and inventions. And that robbery took many forms. It might be a meth addict on the assembly line paying for her habit by pocketing a few chips each day to trade with the Hell's Angels for crank. Or it might be a low-grade hood paying off a truck driver to "lose" a box every once in a while. Or an armed Vietnamese gang blackmailing an employee with a big gambling debt to leave a back security door open some night on graveyard shift.
In this great gray-market river everything that is stolen — be they ideas, prototypes or products — are fungible. They pass from hand to hand, waiting for the right customer to dip in and pull them out. Sometimes this customer is a competitor. Other times it is a customer tired of waiting and willing to cut corners for a quicker delivery.
And sometimes, the customer is an agent for a foreign power.
A Complex Web of Deceit
What astonished me as a reporter was how circuitous and complex were many of these transactions. A drug addict in San Jose might steal a mask design for a new chip and sell it to an Oakland gangbanger, who then fences it to a semi-legit chip schlocker in L.A., who unloads it at a premium price to an apparently legitimate businessman in Phoenix who turns out to be an agent for the KGB. Ironically, despite being criminals, most of the people in this transaction might also be staunch patriots and would never knowingly betray their country.
By comparison, the Ye/Zhong case is a pretty straightforward case of corporate espionage, albeit with an international twist. It might never have looked like more than a standard rip-off by two ambitious entrepreneurs had Ye and Zhong not hung on to incriminating ChiCom commendation letters.
I assume, dear reader, that you are not surprised that the Chinese are trying to steal our advanced technology, as I wasn't about Soviet espionage 20 years ago.
But here's what did surprise me back then: it wasn't just our enemies that were stealing our trade secrets, but our friends too — the Israelis, the French, the Japanese, the Indians. And I bet if I'd kept digging I would have found the British MI5 in there as well. I assume they, and a couple dozen other enemies and allies, are still at it.
No End in Sight
So the real question is: How do we stop it? How do we protect ourselves from the Ye's and Zhong's of the world?
My answer is that we can't stop it. However, we can defeat it.
I already told you my father was a spy. More precisely, he was a counterintelligence agent. One thing he taught me was that no place is ever secure. If the bad guys want to get in, and they have enough time, they WILL get in — whether it is your house, the corporate headquarters, or the design lab.
The best you can do is make the infiltration so difficult, time-consuming and risky that you scare off the mediocre and buy time against the competent. The best way to do that is to keep moving: changing your patterns, processes and systems, and forever implementing new security techniques.
By the same token, there is no way to make the U.S. high-tech industry completely secure from espionage. Foreign agents and their collaborators will eventually steal every competitive secret we now own.
Innovation Is Best Line of Defense
So, if we can't stop them, how can we defeat them? By the same two-tiered defense. First, make trade espionage as difficult as we can: better security systems, stronger software firewalls, more cops, more powerful counterintelligence, longer sentences. Even the staunchest libertarian ought to be thankful for the more energetic and vigilant FBI suggested by the Ye/Zhong case.
That's the easy part. Much harder is the second line of defense. Ultimately, the only thing that can save us from the predations of our friends and enemies is to out-innovate them. Let 'em steal what we've got if we're already two more generations down the road by the time they've got it.
That's what we did to the Soviets: they literally stole tons of chips, computers and components. But most of it rusted away in warehouses because they forgot to steal the manuals or the operating systems that went with them. And what they did finally manage to make some of the stuff work it was already obsolete.
Telling a place like Silicon Valley to innovate is like telling it to breathe. Yet, from state taxes to glacial patents to onerous federal regulation, sometimes it seems that we couldn't design a better system to dampen innovation and play into our enemies hands. Ten years ago, the liberation of high-tech innovation was presented as the path to economic prosperity. In the last 18 months we've learned it is more than that: it is about our survival.
Michael S. Malone, once called “the Boswell of Silicon Valley,” most recently was editor-at-large of Forbes ASAP magazine. His work as the nation’s first daily high-tech reporter at the San Jose Mercury-News sparked the writing of his critically acclaimed The Big Score: The Billion Dollar Story of Silicon Valley, which went on to become a public TV series. He has written several other highly praised business books and a novel about Silicon Valley, where he was raised. For more, go to Forbes.com.