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Warren Reed

The Unseen World of Industrial Espionage

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In democracies like New Zealand and Australia, much of our attention is focused on what’s happening in our political front gardens.

The break-in at the end of April by three protestors at the Waihope Satellite Station and the damage done there naturally preoccupies the minds of many New Zealanders, especially those concerned about the reach of electronic surveillance. Others, however, see it as a poor way to make a point, expecting intelligent people to instead put their energies into a more balanced articulation of strongly-held views. After all, with the variety of purposes that the Station serves within the US-UK-Canada-Australia-NZ alliance, such break-ins are unlikely to force the facility’s closure. Wherever you stand on the issue, the least considered dimension of it is the breakdown in security that allowed the protestors to gain entry in the first place. If New Zealand is going to host the Station, it has to know how to look after it. The fact that it didn’t, suggests a slackness in attitude that can have far-reaching implications.

In a different way, the theft of Don Brash’s emails falls into the same category. In a democratic system, it is unacceptable for the authorities to fail to get to the bottom of such a situation. In the political and parliamentary process, it is vital that dishonesty and wrongdoing are rooted out. If we don’t take such matters seriously, it’s unlikely we’ll have the disposition necessary to protect ourselves in other areas where the threat is far more insidious. In effect, while we’re distracted by what’s going on in the front garden, a delivery truck’s being loaded with the family silver and other valuables round the back of the house.

Industrial espionage is a classical example of a less visible threat. It has a very long heritage, it’s rampant and on a global scale – and New Zealand is in no way immune.

Throughout history, intelligence has been about stealing other people’s ideas, mainly those that could be turned into products and sold to create wealth. At one time it was a quest to discover how the Chinese produced silk. Today, it can be someone’s research and development on rainforest plants that might hold the key to cancer treatment. The United States is one of the few countries to regularly attempt to quantify how much is lost to its economy each year from industrial espionage and while the conclusions can only be speculative, it is in the billions of dollars.

On the intelligence spectrum, the commercial end has always predominated. But it is the remainder – the political end – that has customarily attracted attention, particularly in the 20th century. It’s an image that can be exciting – witness the enduring allure of James Bond – but it distracts attention from the main game. The war against terror has taken our eyes even further off the industrial, scientific and technological ball and diverted an inordinate amount of time and energy to just one end of the spectrum. As anyone who has ever been in intelligence can tell you, it’s all about the allocation of limited resources. There is never enough to go around.

British writer Erskine Childers helped start the modern fascination with spying with his 1903 novel, The Riddle of the Sands, which Winston Churchill said influenced the British Admiralty’s decision to establish three new naval bases around the country to protect it from a possible German threat. Interest in spying heightened with the publication in 1907 of Joseph Conrad’s The Secret Agent, a novel inspired by the attempt of a French anarchist to blow up the Royal Observatory in Greenwich in 1894. Similarly, in Europe, a genre of novels arose questioning the intentions of the “perfidious British”.

But it was the prolific writings of Englishman William Le Queux – London-born of a French father and English mother – that put the spy novel on the map before the First World War. Le Queux was obsessed with the “German menace”, as was a disaffected soldier, Field Marshall Lord Roberts, with whom he teamed up to write a serialised story for London’s Daily Mail about a German invasion of Britain. It was an instant success, although it led to Le Queux being labelled a “scaremonger” in the House of Commons. Published in book form, The Invasion of 1910 sold more than a million copies in 27 languages, including Icelandic and Urdu.

This popular literature consolidated the image of spying as the pursuit of well-bred gentleman working inscrutably for the national interest on behalf of the government of the day. In effect, it was state-sponsored espionage of a highly political nature. The mystique and cachet that surrounded the craft carried through to the James Bond books and movies, which boomed during the Cold War period. But again, they distracted attention from the industrial and technological aspects. They also reinforced the impression that spying was a deadly game that only modern Western nations engaged in and were certainly best at. The success of the post-Second World War Japanese economy should have warned the West that matters industrial were ascendant, but the dazzle of the Cold War meant that most were looking in the other direction.

The 40-odd years of that war divided the world largely into two political camps and spanned the full careers of many who worked in government, private enterprise and even in intelligence. It was easy to assume that those decades were the norm: spying was overwhelmingly political. That is why there were so many calls for the dismantling of intelligence services when the Cold War ended. In reality, the norm was just the opposite: the thrust of spying throughout history revolved around new technologies and trade secrets. So when the Soviet Union collapsed, the West simply reverted to this old standard. Of course, many in the corporate world had known that all along. Some countries, like the United Kingdom and France, have always worked in partnership with their corporate sectors, seeking by clandestine means commercial information and technology that gives them an edge over their competitors.A celebrated example came in the 1980s in pre-handover Hong Kong, where MI6 (the British Secret Intelligence Service) and the CIA routinely exchanged political information on China. One day the British accidentally passed on to the Americans a large sealed envelope that was meant to go to London. To the Americans’ astonishment it contained a list of everyone in Hong Kong who was receiving secret trade-related intelligence, which included the management of almost every big United Kingdom firm operating there.

In its broadest sense, state-sponsored industrial espionage comes under the umbrella of economic intelligence, where covert means are used to access, say, a foreign government’s industry policy, its projections for energy requirements or its plans for research and development in new sectors. Not only classical human intelligence gathering methods are employed for this purpose: where necessary, electronic eavesdropping also comes into play. Some countries, particularly the United States have a formidable capacity in this hi-tech area. Such means can be highly productive when negotiations are under way for important resource deals on coal, iron ore, oil, gas and food or large-scale purchases of commercial aircraft.

Alongside all of this is the espionage that the business world itself engages in independently. In a globalised world, corporate espionage has become incredibly sophisticated. It is often difficult to distinguish where one country’s interests end and those of a multinational begin. The value of a firm’s intellectual property can often be rapidly transported in one human mind, and in an era when many seek to stay for only a few years in a job, the promise to pay off someone’s mortgage can be enough to make them walk.

It is not always the whole story of a commercial deal or of a new technological advance that is sought. More often than not, it is simply a missing link that is needed to fill a gap.

There are few reliable statistics on who is winning this intelligence war. Most firms that find they have had their most important asset (intellectual property, a tangible component or a process) stolen are averse to publicity: a company’s share price can drop overnight with one innocent reference in the financial press. Some prefer not to report to the police what has happened, opting instead to ease out the offending employee – if their identity is known – with minimal fuss.

In its post-war reconstruction phase, Japan was soon recognised as one of the world’s most aggressive collectors of economic, industrial and technological intelligence. The Japanese business community – particularly its overseas operations – was essentially integrated into Tokyo’s centralised intelligence gathering and analytical apparatus. South Korea followed suit. Now China has taken the lead, working from a similar blueprint to its neighbours but adding exquisite refinements. The US is a prime target, principally for industrial and military secrets. With more than 130,000 Chinese students in America, many of whom are close to the action in laboratories and R D centres, and with 3,000 front companies, China is well ahead. It is especially interested in areas such as biotechnology, advanced IT and software, space technology and new generation pharmaceuticals.

It was revealed in mid-2006 that the German government was extremely worried about Chinese espionage activity on its soil, which it thought to be as threatening as the actions of radical Islamists. German counterintelligence officers may have to be transferred from their present priority – Russian spies – to deal with the Chinese.

An example of China’s interest in not only military technology but also the business that goes with it came in October 2006 in Australia. The former managing director of weapons developer Metal Storm, Mike O’Dwyer, revealed that a Chinese go-between had offered him $US100 million to hand over the uncommercialised technology to the People’s Liberation Army. The firm’s revolutionary, rapid-fire gun had been classified by the US as sensitive technology that should be protected by America and its allies. A Chinese-Australian citizen, who claimed he was once a Chinese agent of influence in Australia, revealed at the same time that he had been offered a commission by China to acquire the technology.

In almost every industry in Australia and New Zealand there are stories of how the Chinese go about getting what they want. It is not uncommon for a “prospective” Chinese buyer to express interest in a piece of cutting-edge equipment or technology and to solicit an invitation to send a delegation to tour the Australian or New Zealand company’s manufacturing facility and talk business. The delegation may include one or more technical experts who know exactly what they are looking for, and how to ask casual questions about it. It is usually only one critical part of the process that they are focused on. In one apocryphal example in Australia, a seemingly “non-technical” Chinese member of one such delegation to a factory nonchalantly inquired about a cluster of component parts off to one side and was given a handful to take away. It was actually the only part of the Australian process that the Chinese were interested in and they were given it for free.

In these cases, the Chinese are not out to purchase anything. Rather, they are well advanced in their own developmental process and are after something that will save them years of R D. At other times, they may seek to install a piece of equipment on a test basis before placing large-scale orders, only to reverse-engineer it and produce it themselves. It’s all as old as the hills, but companies still fall for it, mesmerised by the prospect of huge sales to China. As an erstwhile British counterintelligence officer puts it: “The Japanese usually went about it with brutal subtlety. The Koreans less so. The Chinese dispense with foreplay unless it’s absolutely necessary.”

That’s why it’s so important for companies to understand the culture and the language of those they are dealing with. Europeans have been doing these kinds of things to each other for centuries, but Australian and New Zealand companies need to be careful outside their cultural comfort zone – where vastly different thought patterns and strategies apply. Fluency in English – the “global language of business” – doesn’t mean that the other side, such as the Chinese, has converted to the Western way of thinking. It merely means the Chinese can broadcast effectively on a Western wavelength when required.

Industrial espionage comes in various forms: that which companies do to other companies, that which is done to them and that which is done on their behalf by the state intelligence apparatus. Some Australian and New Zealand firms do well on the offensive and are savvy in places like China and India. But most aren’t. Likewise, our businesses are rarely served by our national intelligence machinery, which is simply not geared to function on behalf of “Australia Inc” or “New Zealand Inc” – and this in the face of China’s declared intent to become the world leader in science.

By contrast, the British and French are good at industrial and economic espionage because much of their education system develops the skills needed by the business community, either in commerce or government. Oxford and Cambridge alone stock much of the upper echelons of the UK financial and government sectors, creating the networks vital to the sharing of sensitive information. The Écôle National d’Administration in France plays a similar role. Australia once had a limited version of this by default, through the Melbourne-centricity of its first 30 years until the federal parliament and the bureaucracy moved to the new capital of Canberra. Australia’s overseas spy agency, the Australian Secret Intelligence Service (ASIS), and its domestic counterpart, the Australian Security Intelligence Organisation (ASIO), did not move to Canberra until the mid-1980s. With New Zealand’s Security Intelligence Service providing broad coverage, things are a little tighter in Wellington.

But with both countries’ lack of policy and direction for industrial espionage, it is difficult to see how they can meet the challenge from rapidly developing nations such as China. Understandably, the “nervous Nellies” in Canberra and Wellington baulk at the inherent conflicts of interest that may arise should one company ask, “Why did the government help our local competitor rather than us?”

It is equally important to avoid being “done over”, and on this front Australia is notoriously – and oddly – ineffective at catching traitors in its midst, wherever they might sit on the political, corporate or innovation spectrum. ASIO is crucial to the protection of Australia, and in the process, to the protection of Australia’s economic, industrial and technological secrets. And yet, like so much of the country’s intelligence apparatus, bureaucrats who have never worked in intelligence run it. That is anathema for agencies that are the eyes and ears of the nation, and this includes the police. An example of Humphrey Appleby at his worst came just a few years ago in Australia when ASIO claimed the right to attend a private meeting of senior executives in a critical industry, who meet regularly to swap notes on issues such as terrorism. They’re in a sector that’s vital to that fight. ASIO sent along an “expert” to brief the executives on how it could help, but he was just out of university, green and way out of his depth. He apologised and got a briefing in return.

Since intelligence is always about the allocation of

limited resources, Australia and New Zealand must ensure that their agencies are run by people who understand the nature of that restriction through direct experience, yet can still strike a healthy balance. Bureaucrats won’t do. Sir Richard Dearlove, the former head of MI6 who rose through the ranks pointed out not long ago that centralised bureaucracies impede operational effectiveness. The management of innovative companies and research centres in Australia and New Zealand should think about that.

Others know the nations’ weaknesses much better than Australians and New Zealanders do. And they don’t miss a trick. They read the Waihope break-in and the failure to get to the bottom of the theft of Don Brash’s emails in a way that should worry us all.