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Mexican Risk Identification and Remediation

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Mexican Risk Identification and Remediation
By Gordon Housworth
Intellectual Capital Group LLC

Forecast accuracy:  Intellectual Capital Group LLC (ICG) predicted the disruption and criminalization of Mexico in late 2006 and made this outlook public in 2007.  Seen as alarmist -- even unbelievable -- at that time the projection was vindicated by 2010 updates that reported accelerated criminal activity. ICG flagged extortion as Mexican business supply chain risk in 2010.  Mexican entities' consistent denials of this risk are not supported by facts on the ground.

The headlong industrial investment into Mexico by OEMs and large tier one and tier two suppliers belies real and growing supply disruption.  In fact OEMs and upper tier suppliers already have unidentified risks in their Mexican supply chains.

Unremediated risk rises from information gaps between a corporate investment or sourcing decision and on-the-ground local consequences for affected companies in Mexico. Examples:

Fearing retribution Mexican firms and their management deny or underreport violence. Maquiladora plants and their employees have long been victims of robbery, extortion and abduction yet underreport for fear of criminal retribution and upper tier de-sourcing.

Firms with extensive Mexican operations quietly curtail movement of visiting and expat personnel.  An OEM client asked a tier one electrical supplier to accompany its staff on a multi-facility benchmarking effort including Mexican facilities.  The supplier declined noting that they no longer send US staff to Mexico due to risk of criminal harm.

Supplier operations can suffer reduced quality and/or increased costs as long as these under-reported risks remain unresolved. There are solutions that mitigate these risks but these remedies must be tailored and monitored to be effective.  A one-size-fits-all approach would be needlessly expensive and cumbersome and would overlook site-specific risks to plants and personnel.

Successful protective responses that adapt to emerging and changing threats exist and are best performed early, even at the supplier/site selection stage. Protective responses performed at a later date will have to accommodate legacy risks in site selection, hiring, and contractor selection. While the second condition is the industry norm, in all cases a cost-effective preemptive security response will include:

Asset Value Assessment (Assess value of the facility, process, personnel to be protected which is needed to estimate an appropriate cost of protection. If the protective cost is too high or the target is too vulnerable the function may have to be relocated.)
  •  Threat/Hazard Assessment (Specific nature and scope of the threat(s) which is essential to design the minimum effective protective response.)
  • Vulnerability Assessment (Assess vulnerability of the target(s) to attack.)
  • Risk Assessment (Assess risk from each threat actor or group, the likelihood of attack and the likely damage of an attack.)
  • Risk Management (Continuous management of pertinent threats and appropriate responses.)

Mexico's Low Cost Country (LCC) Position

ICG has long recognized Mexico is a low cost country (LCC) in terms of total chain cost, as opposed to many Asian piece part costs that are not low cost when total chain costs are considered. While this view is vindicated by the inclusion of Mexico in backshoring (repatriating manufacturing) to the "US local" region (defined as the US, Canada and Mexico), conditions on the ground in Mexico have deteriorated to the point that even the industrial heart of Mexico is at risk. Disruptions in Nuevo Leon (Monterrey) are proof that all of Mexico faces these risks. Investor optimism regarding crime as a temporary problem is unsupported by the Mexican trade and popular press.

Mexican firms often conceal risk for a variety of reasons such as extortion threats to Mexican employees and their families, desire to keep the parent firm from pressing organizational changes at the Mexican firm, or to shield local financial operations.

Mexico's Rising Cost of Security

Negligible only a few years ago, small and medium-sized companies "operating in and around Monterrey in 2011 were spending 5 percent of cash flow on security." From If Monterrey falls, Mexico falls:

Even if manufacturing is showing some resilience, security costs are growing, while moving goods up to the U.S. border and to neighboring states is getting riskier. 

Small and medium-sized companies operating in and around Monterrey are spending 5 percent of cash flow on security, a cost that was negligible just five years ago, while firms selling GPSs, alarms, locks and cameras in Monterrey have seen a 20 percent jump in annual profits in three years, according to Monterrey's commerce, retail and tourism chamber.

"If you look at the figures, companies are still investing, but there's a lot of evidence that the money is being diverted into security, not into research and development... This is money that's going into barbed wire fences, not solar panels and that is going to hurt competitiveness in the long term."

In extreme circumstances, such costs can go much higher, rising to 40+% of the operating budget as happened in high threat periods in Africa and the Americas.

Security costs are far lower when remediation is commenced early, before criminals have come to perceive the company as a target.

Mexican News Blackouts Do Not Imply Improvement

Monterrey, for example, has receded from the headlines without a significant reduction in crime. On the ground, the Gulf Cartel with the assistance of the Sinaloa Cartel reasserted control over significant areas of the city and substituted a less violent but equally aggressive control.

This new arrangement coupled with a government mandated reduction of crime related news and redirection (such as claims that violence was geographically bounded; that most deaths were linked to organized crime members - none of which were correct) largely removed Monterrey from the US mainstream press.

Organized crime does its part by intimidating and killing journalists. Dozens were killed during the Calderon Hinojosa administration's actions against cartel leaders. Intimidation and horrific crimes against the press have continued under the Pena Nieto administration, primarily in northern states along the US border. The result is self-censorship among Mexico's regional news outlets.

The election of Pena Nieto and the return of the PRI accelerated the PR campaign without significantly altering the national level of violence. The government stopped announcing arrests, seizures, and operational details of security policy, while deflecting the public agenda onto topics such as the automotive sector (the "new Detroit") and export growth.

The Risk Tree

A ranking of least risk to greatest risk would typically contain this vulnerability hierarchy:

1.    Global investors.  [Least Risk]

2.    Corporate or group level management.

3.    In-country expat management.

4.    Tier 1, 2, 3... tier N suppliers.

5.    Employed local nationals.

6.    Local nationals in industries and services outside the top tier and its suppliers.

7.    Citizenry of the region. [Greatest Risk]

The issues that routinely confront Mexican citizens and most of its industries are either unknown to, have no effect upon, or do not enter into the risk calculation of the more insulated and least risky parts of the hierarchy (typically groups 1. And 2.).  Friedman's "How Mexico Got Back in the Game" states an opinion typical of US/EU corporate decision makers that will elect to produce in Mexico.[1] At their remote risk/high reward level, Mexico makes perfect sense.

Mexican companies immediately adjacent to US/EU companies can have very different risks. A company's size, skill and location in the tier supply chain often make a substantial difference in its threat posture. While large manufacturers do consider their immediate risks they often do not take into account the susceptibility of their supply chain to predation and interruption.

See Realistic Supply Chain Transparency

Capacity at tier (from top tier or OEM down to smaller, isolated tier suppliers) is an important factor generally overlooked in risk analysis because there is no single security or risk rating for all companies in a state or region.  A major supplier may have the size, revenue, processes and training to better protect its commodities, personnel, plants and finished goods. 

An example would be a large supplier's ability to assemble a convoy of vehicle transporters escorted by vetted, paid Mexican federal police officers. Yet a smaller supplier that may be physically located next door to the larger supplier is vulnerable precisely because it lacks those resources.  Furthermore, hourly workers at these lower tier suppliers are completely vulnerable to criminal predation at work, at home and in transit.

While criminal elements can strike both expat and Mexican nationals of US/EU firms, attacks against expats generally occur at much lower frequency, are opportunistic or simply a result of accidentally "being in the wrong place" events.  Thefts of inbound commodities and outbound finished goods are increasing in Mexico. In addition, both contraband (usually narcotics) and counterfeit goods are being inserted in shipments bound for the US.  

Mexican industry and local suppliers fare worse as criminal elements attack wide tiers of industry and society.  Criminals have long troubled maquiladora plants with robbery, extortion, abduction and murder of maquiladora workers and family members. Extortion payments by maquiladoras are rising despite silence from the victims of these crimes.  Lower tier suppliers remain silent for fear that publicity will result in retaliation by criminal elements and/or upper tiers will resource their business elsewhere.

Certain automotive parts are candidates for criminal extortion intended to choke vehicle production. Manufacture of wiring harnesses for North American assembly have been highly localized in Mexico.  Criminal interruption to this wiring harness nexus would impact a significant portion of US vehicle production.

Because of these many variations the risks to a particular supplier and that supplier's appropriate remediation strategies must be analyzed on a case by case basis.

Extortion Is Now a Pervasive National Threat

Extortion [extorsion], also called "illegal protection" [proteccion ilegal], is now rampant in Mexico.

Extortion includes activities that imply coercion of the victim by an agent distinct from the state. Successful extortion demands that said agent demonstrate a reputation for the use of force against those who refuse to pay for their services. High levels of violence coupled with participation of police confer impunity on the extortionist.

Extortion is economically depressive, a production-less crime, i.e., criminals have only to tax without having to produce and sell a product. Long present in Mexico, extortion has surged as part of criminal diversification beyond narcotics into extortion and kidnapping, costing Mexico one percent of GDP. We call it an unsustainable societal tax that continues to grow, in part, because it is so easy to raise incremental demand without risk or cost to the attacker.

Mexican assets are highly vulnerable to predation despite denials from the Mexican side of the supply chain that a problem exists. There is immediate loss, possibly death, to the victim; retribution to both the victim and his/her family members for any corroboration or public comment; and forced induction of locals into the criminal apparatus.

Mexican statistics are supremely underreported as individuals refuse to report extortion as the police are either directly running the extortion, or managing gangs running the extortion. Businesses and individuals pay as long as they can, then close or are harmed when they cannot.

The breathtaking penetration of Mexico's commercial sector has allowed the narcotics trade to diversify their revenue streams and reduce their net organizational risk while the economic loss to Mexico continues to rise.

Supply Chain Vulnerabilities

Mexican supply chains are notable for insider threats (co-opting/threatening employees), supply chain threats (takeover of labor providers, sub-suppliers and shippers); and expropriation (forced sale/turnover of companies and assets).

Primary extraction industries (mining, petroleum, timber) have been a staple of Mexican criminal interest, from hardwood timbering on native lands in the south, to illegal bunkering/skimming of PEMEX petroleum in the east, to silver, gold and iron mining in western Mexico.

The dining, bar, brothel, and storefront sector - virtually anything with a fixed address for customers - has already been brought under monthly extortion or driven out of business (as testified by the thousands of shuttered businesses).

The focusing of criminal predation against the Mexican side of the supply chain is good business because:

  • Targeted employees and families are local, accessible and defenseless.
  • The cost of predation is low while the reward is high.
  • Local predation does not attract significant US political and police attention.
  • Mexican authorities compound the problem by limiting access when US assets make inquiries against local predations.

Extortion's Rising Disruption

Extortion, theft and contraband continue to increase in the Mexican supply side. Extortion risk is already present to maquiladora employees and the maquilas themselves. We have already seen limited jumps to the US/EU side in areas of transport, power interruption and contraband insertion into parcel carriers and corporate shipping containers (especially damaging to C-TPAT suppliers as it may negatively impact their expedited customs clearance).

The US/EU side of the supply chain strives at all costs to have no appearance of unreliability to its upper tiers and investors alike. Being seen as a potentially unreliable supplier is to invite a resourcing review by an upper tier and/or see the company's share price suffer. As a result the US/EU side of the supply chain is willing to under-report the risks.

We see the entry point for extortion shifting in the automotive supply chain. Initially it was Mexican tier suppliers but has now expanded to Mexican employees of US/EU firms. Mexican nationals are desperate not to talk about these threats for a variety of reasons, e.g., personal threats, termination/reassignment and fear of driving an upper tier supplier to resource.

As a result, it is difficult for Mexican firms to execute genuinely rigorous security assessments as too many points are open to compromise.

US/EU supply chains in Mexico will face greater risk from compromised firms and individuals on the Mexican supply chain side. Crossover will occur as one or more criminal groups become more aggressive vis-a-vis its peers, more acquisitive for revenue, and simultaneously less fearful of US response. Once the Mexican chain side is consumed (offers no further share growth), there is only taking market share from competitors and entering new markets such as the US/EU suppliers.

Unfortunately most commercial firms have a defensive (target) mentality that prohibits seeing themselves through an attacker's eyes. Gaining the potential to influence outcomes demands an ability to see into the attackers' assessment of risk and uncertainty.

Tailored Solutions Under a Governing Architecture

Prepared companies select risk to accept by design. The unprepared or poorly advised company blindly accepts risk by default. Such firms will continually put their assets and personnel at risk.

Preparedness for such eventualities means that needed security measures are identified and quickly put in place to ensure that the company is operating with a layered defense against current and emerging threats.

Preparedness means that the company will be able to demonstrate its commitment to a genuine preemptive protection of its employees, dependents and suppliers. Risk assessment and mitigation must be performed without triggering reprisal by adversaries.

Local and international press disclosures need to be managed as the company reduces security risk without raising uncertainty or concern on the part of any customer or partner.

Resolution commences with real world risk assessments and recommendations followed by implementation and subsequent review of what succeeded and what requires correction. Successful risk resolution implies business and supply chain continuity, thus company managers are co-participants in the assessment and implementation effort.

Choose Deflection Over Confrontation to Minimize Risk

Given the high threat environment in certain areas, operations must be conducted with the highest level of control and security in all phases, as both Mexican security forces and operating criminals can be expected to be on high alert for any counter-surveillance.

Criminal groups in Mexico can deliver more firepower than most companies are willing to sustain. A corporate response that confronts or challenges such criminal groups invariably draws unacceptable reprisal against staff, facilities and product.

Effective, lower cost, lower risk responses focus on deflecting hostile attention without confrontation. Criminals make a risk-reward calculation just as businesses do. Effective security must drive up their level of uncertainty, thereby moving them onto a more docile or unprepared victim.

Assessments must be performed in a highly compressed timetable to address existing and needed security risk mitigation efforts in the critical areas of key personnel (including dependents), facility operations and transport of commodities and finished goods.

Implementation must focus on specific and actual security risk management matters that will need the company's immediate, short term and medium term attention. The initial assessment should serve the company as an extendable regional template that can be applied to security risk management across the company's operating portfolio.

Company managers and staff must be taught tools and skills so as to understand what has been working, why it has worked, what should be changed and how urgently this needs to occur. Skills training is needed to build core competencies in key areas of operating risk management specific to security and safety risks.

Each protection program must be designed for the actual threat environment in a specific location, and must produce a security risk mitigation effort that will generate assessments, briefings, decision points, implementation plans and immediate effectiveness reviews.

Beyond this immediate scope, company personnel must gain a broader ability to ensure continuity of operations in any deteriorating security environment and provide the company a basis for balancing resources while ensuring effective security risk management.

Proven Solution Paths Do Exist

All firms, and most certainly firms seen as high value targets, must continuously address three vulnerability areas:

  • Pricing model compromise (Tier supply chain events, supplier outsourcing, subcontracting, tertiary services such as trucking, etc.).
  • Corporate core (Company/research, R&D hives, manufacturing, warehousing).
  • Human resources (Personnel data.)

Each of these areas, singly and in combination, are best examined by Design Basis Threat (DBT) process (originally created to protect nuclear facilities and weapons) to define and adjust specific responses to specific threats. This Threat Analysis entered the mainstream in the wake of the Khobar Towers bombing in Saudi Arabia.

As the threats change so must the protective responses change. DBT is adaptive, can be taught and embedded in normal business operations to be monitored by company personnel. As security is embedded, there is no added organizational layer for security.

The top level steps in this dynamic process are:

  • Asset Value Assessment (Assess value of the facility, process, personnel to be protected which is needed to estimate an appropriate cost of protection. If the protective cost is too high or the target is too vulnerable the function may have to be relocated.)
  • Threat/Hazard Assessment (Specific nature and scope of the threat which is essential to design the minimum effective protective response.)
  • Vulnerability Assessment (Degree of vulnerability of the target(s) to attack.)
  • Risk Assessment (Assessment of risk from any actor or group, the likelihood of attack and the likely damage of an attack.)
  • Risk Management (Continuous management of pertinent threats and appropriate responses.)

Necessary Risk Remediation Activities in Mexico

In potentially high threat environments such as Mexico, all associated surveillance must be performed by skilled personnel in a completely non-alertive manner as many criminal groups will assume that an unknown person or group is a hostile competitor to be immediately eliminated.

Affected firms will need a partner that can perform a thorough threat analysis and a calibrated response that includes:

  • Actionable intelligence at national, regional and situational levels
  • Outreach to authorities and relevant entities
  • Executive protection
  • Facility protection and upgrade steps
  • Transportation protection of raw materials and finished goods
  • Vetting employees and contractors to reduce insider threats

Each step must be executed with precision and with continuous monitoring of any changes that alter the inbound threats.


#Mexico #SupplyChain #Risk #Extortion #Corruption

[1] Thomas L. Friedman, "How Mexico Got Back in the Game", The New York Times, February 23, 2013:  11.



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Realistic Supply Chain Transparency

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Realistic Supply Chain Transparency

 

Supply chain risk mitigation cannot now be achieved without transparency through Tier 2 overall and Tiers 3 to 5 on both core competency components and essential manufacturing commodities.

 

Critical, core competency components and essential manufacturing commodities must be identified more deeply as either criminal interdiction, M&A buyout or natural calamity can put a critical supplier offline.

 

The Golden Rule: Know Who makes What Where How at Tier.

 

Realistic chain transparency

 

ICG implemented this level of supply chain analysis in 2011 as its standard for chain transparency and risk mitigation after evaluating eight event series:

 

(1) 2004-to-date Mexican Drug Trafficking Organization (DTO) incursions against companies and personnel in Mexico.

 

(2) 2004-to-date Global Intellectual Property (IP) harvesting by Chinese, Russian and other state-related assets.

 

(3) 2011 Japanese earthquake/tsunami. Multiple tier impacts.

 

(4) 2010 Chrysler US east coast supplier flooding.

 

(5) 2011 Thailand OEM/multiple tier flooding.

 

(6) Impact to a segment by the entry of an Apple-like firm with similar mastery, manipulation and price suppression of key industries.

 

(7) Corruption risks, notably BRIC and emerging markets.

 

(8) Lanthanide (rare earth elements) monopoly and hostile export restriction by China.

 

Consequence convergence

 

Supply chain risk mitigation cannot now be achieved without transparency through Tier 2 overall and Tiers 3 to 5 on both core competency components and essential manufacturing commodities. (The ultimate buyer is the Original Equipment Manufacturer (OEM) or Tier 0.)

 

Critical, core competency components and essential manufacturing commodities must be identified more deeply as either criminal interdiction, M&A buyout or natural calamity can put a critical supplier offline.

 

ICG sees consequence convergence between (1) criminal supply chain predations, (2) natural disaster impacts (e.g., earthquake, tsunami and flood), (3) repositioning and localization shifts in global supply chains, (4) supply embargos with political intent and (5) commercial supply chain risks.

 

Highly critical, core competency components and essential manufacturing commodities must be identified more deeply as either Drug Trafficking Organization (DTO) interdiction, M&A buyout or natural calamity can put a critical supplier offline, perhaps permanently. The Chinese are examining US and EU supply chains for such pickoffs.

 

OEM/top tier manufacturers err in thinking that they have acceptable transparency with Tier 1 identification. That is a false positive as Tier 1 is often (even very often) as much assembler as manufacturer. Many strategic components or processes are at the Tier 2 to Tier 5. Any and all are subject to penetration or interruption.

 

In terms of compliance response, ICG has seen entities affect supply chain realignments to move potential trouble points below the mandated Tier 1 review level, e.g., to Tier 2 and below. Risk remains for the incautious upper tier or Tier 0.

 

Today the ultimate buyer, the OEM (Original Equipment Manufacturer) or Tier 0, knows relatively little of their supply chains below their Tier 1 suppliers (those suppliers selling directly to the Tier 0.)

 

That superficial view is grossly insufficient. Without greater transparency, Top tier firms cannot protect themselves and their customers from strategic surprise and disruption.

 

The ICG supply chain Golden Rule: Know Who makes What Where, How at Tier.

 

In the aftermath of the Asian tsunami/earthquake, Toyota realized that it was vulnerable not knowing who made what where at tier. The firm publicly stated that it would gain that chain transparency. Two sources subsequently confirmed to ICG that Toyota had achieved its goal. We must suspect that Nissan is not far behind.

 

Tier 2 is a minimum. Witness the single Tier 2 bearing manufacturing that halted both Toyota and Nissan engine production. ‘Where’ is not enough; you need what will likely happen at ‘where’ and what happens along the transit path (which can be as simple as the 4X price rise of limes in Mexico due to criminal cartel regional road taxes).

 

The shift to local sourcing over Low cost country (LCC) sourcing will bring a surge of new OEM/Tier 1 orders to a supply base that can potentially overwhelm and consume existing suppliers’ current capacity, leaving upper tiers scrambling in a state of strategic surprise.

 

All an industry needs for disruption is for an entity to decide to become its sector Apple, a DTO understands the effortless blackmail and extortion at hand for the taking, the unanticipated impacts of a global sourcing realignment, or the next earth sciences calamity.

 

More than one disruption can occur simultaneously. There are frequent Ladder Effects where one failure compromising or weakening an adjacent process or entity.

 

Specific concerns

 

If Mexican Drug Trafficking Organizations (DTOs) fully engage the US/EU Tier 0/Tier 1 automotive industry in Mexico in the manner which they have penetrated the Mexican automotive and mining industries, there will be a spike in corporate and personal extortion and kidnapping, as well as penetration and takeover of entire supply chains just a Mexico is poised to expand its manufacturing footprint under a Backshoring renaissance.

 

Backshoring has the potential to create supply chain capacity chokepoints as appropriate productions are repatriated.

 

CONUS (Continental US) and Mexican suppliers will benefit whereas Canadian suppliers will see negative impacts.

 

Backshoring’s manufacturing repatriation may begin to reduce one of the most massive involuntary Intellectual Property (IP) transfers caused by Tier 0/OEM firms driving suppliers to move design and manufacturing to the PRC.

 

OEMs and Tier 0 assembly plants surrender 100% of their IP in a joint venture regardless of the actual partner shares.

 

The scope of IP theft often escapes attention as it is outside the normal purchasing mindshare, yet its impacts are severe in both Direct and Indirect supply chains.


[Originally released to clients November, 2014]


#SupplyChain #Risk

 



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Miniaturization Threat Impact (MTI) system

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Identifying items at th
e edge of technology


It is an axiom at our shop that "items at the edge of technology" are often unrecognizable or unidentifiable by inspectors unfamiliar with the technology. Two characteristics most contributed to a lack of recognition, robbing the viewer of visual cues as to function:

  • Miniaturization - a reduction of size and form.
  • Integration (often a handmaiden of miniaturization) - the combination of functions of multiple items into a single item, itself often miniaturized.


Defenders too often fail to recognize miniaturization and integration as crucial components in risk evaluation. The emergence of Micro-Electro-Mechanical Systems (MEMS) that exhibit both miniaturization and functional integration are already complicating timely identification of risky items. (Also see Berkeley Sensor & Actuator Center and search the domain for "mems".)


We expects fluid conditions as defenders expand their screening focus beyond larger, more recognizable items to include a proliferating class of smaller, cheaper items:

  • Unexpected, innovative and non-traditional methods will proliferate, finding broad applicability.
  • Targets will have changing vulnerabilities, technological abilities and associated risks.
  • Attackers' tactics will evolve in methods and operational activities from internal technological "lift" and as a response to changes by their targets.
  • Short of nation state confrontations, conventional operations will draw less interest as adversaries will look to escape retaliation and the cost of investments required to underwrite an overt effort.
  • Unless we design with the asymmetrical adversary in mind, such adversaries will continue to find ways to bypass our defenses and exploit our vulnerabilities. Such asymmetric operations will have common characteristics:
    • Small-scale high-impact operations.
    • Operations performed with greater efficiency and effectiveness, both to minimize footprint and discovery and to conserve organizational resources, in order to achieve maximum results.
    • Rise in operations taken to address ideological causes and this applies equally to fringe Muslim fundamentalists and single-issue groups such as Earth Liberation Front (ELF).


Creating a generalized risk assessment hierarchy

Done for the US Defense Logistics Agency (DLA), a pilot Miniaturization Threat Impact (MTI) system capable of classifying threats from miniaturization and integration was developed.


Risk characteristics spanning easily known to insufficiently known to otherwise unknown items were captured in a generalized risk assessment tree (from least to greatest risk):


LEAST RISK 
  1. Primary function is identifiable from life experience and general training.
  2. Primary function is identifiable from specific industry/technology experience.
  3. Dual use/unintended use is ascertainable from specialized training and added knowledge-base.
  4. Miniaturization (function no longer evident) becomes difficult to defeat.
  5. Functional integration (embedding multiple functions by virtue of miniaturization) is difficult to defeat.

GREATEST RISK

The relative ease or difficulty of identification scaled appropriately (from easy to most difficult):

IDENTIFICATION WITH EASE
  • Generalists were good at #1, generally poor at all others.
  • Specialists were good at #1 and #2, generally poor at all others.
  • #3 much harder as it requires understanding of function(s) and the ability to transfer those characteristics to new objects, especially for a "good enough" capacity.
  • Highly skilled and frequently retrained specialists might address #4 on an irregular basis. 
  • Miniaturization and Integration #5 were effectively undefeatable in the short to medium term.

IDENTIFICATION MOST DIFFICULT
 
Capabilities difficult to automate


The author's ability to identify dual-use capability (can be used for both civil and military use) and "unintended use" capability (can be used for unintended or unimagined applications) proved difficult to transfer to existing staff without extensive retraining. Existing staff were either Generalists good at #1, or modest Specialists good at #1 and #2. Staff were, in effect, being asked to perform a role for which they had no prior experience.


Implications going forward


The glide slope to the desktop that brings increasingly greater capacity in smaller form factors at lower cost to the lay user or asymmetrical attacker will continue. Capability and/or lethality will rise even as components shrink.


Google Glass as an example in transition


"Wearables" (properly named the wearable computing market) has moved beyond early adopter status, but its three segments have varying degrees of acceptance:

  • Complex accessories - "operate partially independent of any other device, but fully operate when connected with IP-capable devices".
  • smart accessories - similar to complex accessories but allow users to add third-party applications.
  • smart wearables (notably Google Glass) - "function with full autonomy, independent of any other device except to access the Internet".

While it is now said to be a question of "when" and not "if" the wearables segment extends into the enterprise, aggressive miniaturization and integration continues to drive social unease - with more women than men in the negative. Google might benefit from flooding trusted segments with subsidized Glass, e.g., physicians, essential technicians, police and military. From Pew:

[P]ublic attitudes towards ubiquitous wearable or implanted computing devices are the most positive, or more accurately, the least negative. Although 53% of Americans think it would be a bad thing if “most people wear implants or other devices that constantly show them information about the world around them,” just over one third (37%) think this would be a change for the better

The glide slope to the desktop will continue to accelerate as Google has already received a patent for smart contact lenses with built-in cameras and other sensors such as infrared. The technical, police and military implications are staggering.


Today's Google Glass will by then have ceased to be an issue as people look carefully at your eyes to see if you are reality augmented. I would expect a certain class of detectors to emerge to detect wearers of such contacts. And they will be mounted in contact lens, or embedded in the wearer's biologic eyes.


Readers are recommended to read up on transhumanism.


U.S. Views of Technology and the Future
Science in the next 50 years
Aaron Smith, Lee Rainie, Michael Dimock
Pew Research Center
APRIL 17, 2014


Google invents smart contact lens with built-in camera: Superhuman Terminator-like vision here we come
By Sebastian Anthony
ExtremeTech
April 15, 2014 at 8:53 am


Don't blink or you'll miss this: Google to put cameras in contact lenses
By Michael McEnaney
Tech Times
April 15, 6:07 PM


Worldwide Wearable Computing Market Climbing to Nearly 112 Million in 2018, Says IDC
The Financial
12/04/2014 16:36


#Gogleglass #Wearables #Risk


Gordon Housworth



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Mexican trends: further destabilization and penetration of commercial supply chains

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ICG recently updated its 2007 Mexican forecast, then seen as aggressive but now seen as on point.

 

Commentary in this article is designed as elaboration to, and be read along with, specific slide segments of the 2011 Border Wars: Are Your Company and Human Capital Safe? presentation.

 

Key takeaways:

  • Cartel activity moving beyond narcotics into increasing penetration of commercial supply chains for multiple purposes.
  • No internal Mexican solution is able to deal with this incremental, rising threat.
  • Business can still be transacted in concert with enhanced guidelines beyond piece part considerations.

OPENING REMARKS to 2011 update to ICG’s 2007 Mexican risk projection:

 

Nature of the threat

 

Having worked in the Americas, Middle East, Africa and Asia, we have seen conditions far worse than Mexico. Business is, and can be, done in Mexico. Problems facing businesses are not uniformly distributed (at either supplier tier or location) as some areas are clear or face diminished threat levels.

 

Our concern is that there are no factors in the Mexican economy effectively promoting correction or improvement of the trends we publicly identified in 2007.

 

Corruption is vastly wider in scope than ever experienced in Colombia. The amounts of money at play boggle the mind.

 

There are no blacks and whites in Mexico; there is no binary contest of good government against bad criminals. Instead, there are multiple groups of corrupt local, municipal, state, federal and judicial assets working in concert with various criminal cartels.

 

Different groups of the same police unit can be working for or with different cartels. There are honest members in various agencies, but their numbers are under pressure due to a combination of payoffs or death for failure to comply – what is called Plata o plomo, Silver or lead.

 

Cartel predation will continue to increase as it is a pure form of unrestrained, unregulated capitalism attempting to move to monopoly, likely a narcostate. Just as Adam Smith felt that capitalism must be regulated not because it is inefficient but because it is too efficient, cartel criminal actions should be regulated by the police and justice systems.

 

Those protective systems are unfortunately not up to the task, at least in Mexico. In the face of that rising void, our only forecast is a step series of increasing US interventions. We submit that training, joint cooperation, intelligence gathering, covert operations and interdiction are early steps along that path.

 

Hear, see, speak no evil

 

No party wants to publicly recognize Mexico’s failing state stature:

  • Commercial firms fear loss of business, investment and supply chain interruption.
  • Advisors fear loss of consulting revenue and client backlash.
  • Mexican authorities fear crisis of confidence.
  • US cannot tolerate a failed state on its border.
  • Criminal elements fear overt US intervention.

Consequently, we expect intervention to be held below the horizon as long as possible. Of the above actors, we suspect that it will be a cartel action that will draw matters into the open, galvanizing US public opinion in the process.

 

Unintended consequences of government offensive against the cartels

 

Cartels have been forced to diversify by attacks on their drug production and transport, both by the government and rival cartels. Those diversified areas now rival drug profits. If drugs were to disappear from the market, the cartels remain positioned to prosper and succeed.

 

Those diversified areas will increasingly bring criminal assets into, and adjacent to, commercial activities. We forecast expansion in:

  • Recurring ‘taxation’ (cuota) upon businesses in order for them to operate.
  • Criminal infiltration of tier suppliers.
  • Rising insertion of contraband packages into supplier shipments and/or contract shippers.
  • Criminal takeover/substitution of tier suppliers.
  • Rising threats to personnel. Mexico has gained the title, Kidnapping Capital, for example.

Impact on business

 

On an individual piece part basis, Mexico has bettered the ‘China Price’ -- the global lowest cost production price -- but we submit it has done so at structural costs to Mexico and its nationals that will become increasingly evident as time progresses.

 

Interestingly, we have found business to be immune to the future impact of these structural costs, preferring to focus upon immediate piece part savings and supply chain cost reductions. (If you work with purchasing officers, and know how most are compensated, you understand their near-term focus.)

 

The usual business process is to monetize risk such that short of relocation, production in troublesome areas, and transit to and from troublesome areas, is covered by allocating a premium. We submit that this process will not suffice once cartels increase their commercial penetration.

 

Companies and their staffs, both expat and national, have to better understand their risks by:

  • Region
  • Industry
  • Supply chains and their supply lines
  • Size of firm and/or Supply tier (An automotive OEM/manufacturer has very different risks than a Tier 3 in all respects)
  • Expat or Local nationals
  • Collateral effect (Who are you adjacent to? Who are you simply in the way of?)
  • Growth directions of criminal groups (constantly in flux)

PRESENTATION

 

Recapping the 2007 Forecast, slides 2-9, 12-16

Slides with a bracketed date, e.g., [2007], indicating the year published, recap the original forecast.

 

The 2007 forecast was based upon early symptoms of Calderón’s 2006 assault on the cartels. By late 2006, a cartel counterattack progression could be projected. Those Cartel counterattacks [2007] were seen as dire, even inflammatory, in 2007. The intervening four years have shown the forecast remains valid.

 

By 2011, the trends begin to accelerate in the absence of any realistic governors other than cartel retrenchment or an external intervention.

 

Then, and still today, much industrial calculation on supplier relocation/expansion is based upon the piece part landed cost, ignoring key Mexican factors.

 

Failing/failed state characteristics, slides 17-18

 

Mexico shares characteristics of both failing and failed states. The state still functions but substantial areas have passed from sovereign to criminal control, and criminal assets have forcefully inserted themselves into the legitimate commerce that remains, leaving citizens, employees and visitors at rising risk.

 

The slipping veil of denial, slides 19-22

 

Each for their own purposes, all parties - Mexican and US governments, commercial firms and their business advisories, and the criminal elements themselves - support denial of the country's substantive problems.

 

As noted in the introduction, all parties are attempting to maintain the status quo below the horizon as long as possible. Some observers have remarked that such denial on the commercial side is tantamount to fiduciary breech.

 

Of the many actors involved, we suspect that it will be a cartel action that will draw matters into the open, galvanizing US public opinion in the process.

 

While many cite snippets of Chargé d’Affairs John Feeley’s primmer on Mexico for a forthcoming Defense Bilateral Working Group, Feeley's text is so important that it should be read in its entirety:

Second to that would be the summary of: 

Round out your reading with these representative items and you will have entree to the severity of the situation:

The softer commercial voice, slide 23

 

Commenting early on of the banality of certain UN documents, I was advised that its materials destined for public release had to suffer the scrutiny of many diplomatic eyes intent on defending parochial interests. The result was often text that offended no one and omitted granular, actionable recommendations.

 

Commercial entities are often in similar orbit, desiring furtherance of business, avoiding offense to governments and key players, and damping down public risk issues that could interrupt business continuity.

 

Larger top tier OEMs such as GM, Volkswagen, Chrysler and Honda have much greater resources and more protected supply transport not available to their supply tier companies.

 

We also maintain that investors and more senior business echelons do not share the same risk horizon with local nationals and even expat employees. For the former it is a financial risk/reward calculation. For the latter it is more pressing.

 

My co-chair was an AmCham Mexico member who had authored Foreign Direct Investment in Mexico: Is Your Investment Safe? His document and presentation painted a largely risk free environment.

 

Two respected business advisory firms, Boston Consulting Group (BCG), here and here, and AlixPartners, here and here, document advantaged piece part savings for Mexican manufacturing and assembly without touching on other risk issues.

 

A more recent OECD report, Latin American Economic Outlook 2011, also painted a comforting view in print of all Latin America, Mexico included, but public comments by its contributors were more cautious. First the unintentional understatement by OECD economist, Jeff Dayton-Johnson:

At the macroeconomic level, Mexico probably has not suffered in terms of the orientation of foreign investors. They are still investing in the country,... For the people who live in the violent areas,” however, drug trafficking has “a very important negative impact,”

Then Banco Santander’s chief economist and director of strategy and analysis for Latin America, Jose Juan Ruiz indirectly points out the foreign investor’s immediate lack of shared risk with regards to Mexican investments:

Drug trafficking is “the fundamental threat” that Mexico must deal with, but there are no figures showing that foreign investors have been driven away by the violence...

 

“In the short-term, in the past 12 months, I have not seen any drop in tolerance for investing in Latin America because of the perception of narco risk, not even in Mexico,” ...

 

“I do not have any evidence today that somebody decided not to make an investment in Mexico because of the war on drugs,”...

 

“It is clear that (drug trafficking) imposes political costs” and “reduces the attractiveness of investment” in Mexico...

Closing with a unresolved Catch-22, Dayton-Johnson and Ruiz "agreed that the Mexican state must deal with the threats from drug traffickers" while flagging its lack of resources to do so:

"The capacity of the state" must be brought to bear on the problem in Mexico, Dayton-Johnson told Efe, noting that in other countries dealing with similar situations, such as Colombia, "they have apparently had some success in recent years."

 

"In Mexico, it is hard to see what the capacity of the state for dealing with this problem is,” Dayton-Johnson said, adding that “with the unbelievable financial resources available to the narcos, it is really difficult for a country with more limited resources to deal with such an opponent."

It is our opinion that such advisories along with the appropriate risk remediation guidelines should enshrined in the printed texts.

 

The dissenters, slide 24-26

 

Our consistent finding is that those closest to the threat, either as victim or police agent, see matters rather differently.

 

Mexican press

 

Among themselves, Mexicans speak candidly about rising crime, increasing criminal encroachment and inability of local, state and federal assets to interdict. One often has to get verbals as the Mexican press has been attacked to the point that it must self censor in order to stay alive. This is astounding to most US and EU nationals:

"You can openly criticize the president or the government ... In this administration, there has never been gag laws or censorship," Calderon said at the annual meeting of the Inter American Press Association, a Miami-based organization that groups newspapers across the Western Hemisphere.

 

"Now the great threat to freedom of expression in our country, and other parts of the world, without a doubt, is organized crime," Calderon added.

 

Many small newspapers in the most violent regions of Mexico, especially the northern areas bordering the United States, acknowledge that they no longer cover drug-gang violence because their reporters have been threatened or killed.

And here:

"We live under constant threats, like if a guy was pointing an AK-47 at you all the time,"...

 

Even stories published without a byline can be dangerous if a co-worker tips off criminals about the identity of the reporter...

 

The war between the cartels is being waged not just with assault rifles but with censorship of the press, preventing media outlets from reporting adverse stories or victories over rivals.

 

The threats sometimes come via cops on the cartels’ payrolls, journalists said, adding that crooked police intervene to get reporters to scrap a story.

 

"We only publish about 10 percent of the information, a lot of it ends up in the files,”... it was dangerous to let a drug capo know what you know when he rides around the city in a convoy with 40 armed men. “We wait until they kill him or arrest him,"...

 

Writing small bits is better, however, than the alternative, which is to "be a hero" and get the deadly visit from the hitmen...

 

Voluntarily working with the drug traffickers, like some reporters do, often because they have no choice, can become a sword pointed at your neck, the journalist said.

 

"If the narco seeks you out and you publish according to his instructions, you can appear to the public to be a mouthpiece for the cartel, and then the other gang will go looking for you,"...

Cartels are nothing if not thorough; beyond informally and formally extorting news staffs on the article selection and reporting end, they station pre-informed ‘bystanders’ to brief arriving news staffers, and report back any comments or questions posed by reporters.

 

Mexican business

 

We find it remarkable that the US/EU high street press continues to overlook the best Mexican business barometer, issued quarterly. From Beyond Colombianization, Mexico is the Iraq, the Afghanistan, on our southern border, 25 July, 2010:

Even the nominally legitimate Mexican business sector sees itself being destabilized. Deloitte México has issued a quarterly Business Barometer (Barometro de empresas) since April 2007, covering executive expectations, trends and current event impacts. (All reports are in Spanish, with some in English.)

 

[The] July 2010, Business Barometer 14 and prior, April 2010, Barometro de empresas 13, issues reflect markedly different concerns by business from the prior two quarters.

 

As late as January 2010, security was seen as a secondary, even moderate, threat:

 

October 2009, Business Barometer 11, based upon “Current situation compared with one previous year”. “political discord” was greatest among the “Threats to the Mexican economy within the incoming months,” followed by the “US economic downturn.”

 

January 2010, Business Barometer 12, ranked political discord (desacuerdos politicos) and US economic slowdown (desaceleración norteamericana) highest among the threats.

 

The change comes by April 2010 and further spikes in July 2010:

  • April 2010, Barometro de empresas 13, shows failing security emerging as a greater threat than a lapsed US economy.
  • July 2010, Business Barometer 14, shows a spiking increase in industry fears of failing security over the previous quarter.

See charts on pages 4, 5 and 11 of Business Barometer 14:

  • CURRENT CHART, page 4: All indicators are up except for “seguridad” which sinks.
  • FUTURE CHART, page 5: All indicators remain up except for “seguridad” which stays in the cellar.
  • FACTORS THREATENING THE ECONOMY CHART, page 11: Inseguridad (insecurity) goes off the chart. Conversely, issues such as corruption and social conflicts (and there are many, especially in Southern Mexico) are near zero, i.e., they are baked in the Mexican operating outlook.

The most recent issue, Barómetro de Empresas 16, January 2011, is as of this writing only available in Spanish. The key trend charts noted above, however, remain consistent.

 

Police and Military

 

I refer readers, again, to Beyond Colombianization, Mexico is the Iraq, the Afghanistan, on our southern border, 25 July, 2010, for coverage of pertinent US and UN drug threat reports that enshrine Mexican DTOs (drug trafficking organizations) as the "greatest organized crime threat" to the US. 

 

I also refer readers to Near-term global risks in the early weeks of the Obama administration, 1/20/2009, for the 2008 Joint Operating Environment (JOE) that raised criminal gangs to a national threat level and stated that "Any descent by Mexico into chaos would demand an American response..."

 

For additional trends not covered in the 2011 presentation, see Trend prediction update for Mexico, 9/2/2010.

 

NAFTA’s unintended consequences unevenly distributed, slides 27-28

 

NAFTA is a signal success from the standpoint of US/EU and foreign manufacturing companies. Lower manufacturing costs, lower transport costs, shorter supply lines, and lessened port and customs issues have seen Mexico better the China Price that was the investment go, no-go decision point for over a decade.

 

The China price is now in the process of increasing rather than decreasing, noticeably so for lower technical content assembly and manufacturing (due in part to the Chinese government pressure to substitute more highly engineering products in their place). The end of denim supplies at virtually any price is one of many canaries in the Chinese coal mine.

 

All this would normally be a boon to states such as Mexico. Unfortunately the unintended consequences of NAFTA are causing major structural fractures in Mexico.

 

Most businesses we speak to are surprised that the benefits they derive from NAFTA are not broadly shared by their Mexican workforce. Even within the Mexican labor pool, impact and benefit are not uniform. Engineering staffs, especially those in the OEMs and Tier 1 suppliers, fare much better than low end assembly workers.

 

Migration to the maquiladoras became driven less by betterment and more by desperation of decreasing opportunity. As the cost of living has nearly equalized along the border, low wage maquila workers cannot survive and so often leave. (Prices are often lower on the US side.) Here again the impacts are disproportionate with more men leaving and women remaining as head of the nuclear family. Those who remain become targets for predation or slip into criminal orbit.

 

We believe that business, their employees and investors do not see these effects, as with the attacks on Eagle Ottawa labor buses, investors and those employees insulated from local conditions do not share a common risk-reward envelope with local employees and their dependents at risk.

 

Until that gap closes, or its direct and indirect costs pierce the financial window of investors and insular employees, the focus will remain on the piece part cost. Operational cadres cannot be blamed as they have specific metrics to achieve in their procurement and production objectives, even if the metrics being measured (currency, for example) have other negative effects.

 

Given the plight of low end maquila assembly workers, we also marvel that no one has taken up their cause, at a minimum, as a reputational risk. The total number of injuries and fatalities from Apple/Foxconn, Nike and Adidas combined is a rounding error compared to the losses suffered by Mexican maquila workers yet there has been virtually no outcry from major US constituencies. That may change as we have seen a US group, the Pittsburgh Human Rights Network, take up the plight of employees of a Ford Motor Company supplier in China, Yuwei Plastics and Hardware.

 

Overlapping commercial and criminal footprints, slides 29-32

 

Violence is coterminous to Mexican and foreign industrial centers. The branching out of cartels into non-narcotic pursuits has brought criminals around and into the plant and corporate environments.

 

The cartel regional coverage in slide 31 is recent but nominal as cartels increasingly compete, fracture and recombine. Many outside observers are unaware that cartel footprints mimic the impacts of geography and culture. Slide 32 shows the geography of a central valley/plateau surrounded by two mountain ranges bordered by two coasts.

 

Extortion and insider threats, slides 33-35

The so-called Juarez Valley where the converted school buses were attacked has been racked by fighting between powerful drug cartels. But the more than 330 border factories, or maquiladoras, that dominate Ciudad Juarez and surroundings have [heretofore] been left out of the worst of the recent drug violence... factory buses have been burned by attackers in extortion attempts... escalating violence has forced factories and other businesses to boost security in Ciudad Juarez, where foreign manufacturers are drawn by a large workforce, mostly female, willing to work for low wages...

The automotive supplier, Eagle Ottawa, was understandably attempting to calm the situation by deflecting any threat to the maquiladora itself. The firm had no grounds for its pronouncement and, as colleagues have noted, the bilingual El Paso Times reporter did not question the firm's statement or present any contrary evidence of which there is ample supply. As chance would have it, on the same day Eagle Ottawa was in denial, the lead story in Diario (the valiant must-read paper across the Rio Grande) was devoted to the prevalence of extortion aimed at maquiladora suppliers in Juarez. Again, if you are deprived of both local ears on the ground and a nuanced reading of local Spanish language press, you will come away with a view wide of ground truth.

 

Maquilas and the employees are trapped in an intramural rivalry between criminal groups. (The New York Times did not appear to report this until late 2010 but better late than never):

"This attack on the employees was a high-impact event that seeks to destabilize governments... They are fighting over their own interests, and only the bad guys know what it is about."

 

The buses bore the name of the company where the employees worked, Eagle Ottawa, an automobile upholstery manufacturer based in Auburn Hills, Mich., that has two plants in Ciudad Juárez...

 

Determining patterns in the drug war is difficult. At least seven major trafficking organizations, and their various splinter groups as they break apart and re-form, are vying for territory and supremacy.

 

"As the organized crime groups are pressured by the government and in a sense the military strategy, as people are arrested and drugs taken away, you are going to see internal strife and intergroup competition over the market..."

The Eagle Ottawa attack brought a wider audience to a problem that had been ongoing. Accounts from family for months earlier noted buses being attacked, people robbed or kidnapped. In addition, the ruteras in Juarez have been increasingly attacked for months. Crime is so great that residents of Ciudad Juarez have taken the unusual step of closing - with or without city permission - more than 2,000 streets in an attempt to keep out criminals.

 

Mexican statistics on drug war fatalities are not credible. Until late 2010, despite repeated evidence to the contrary, the Mexican government consistently repeated the view that all those killed - now 30,000 - were involved in the drug supply chain in some manner. Only recently, including the high profile innocents of the Eagle Ottawa shootings, did the government relent by admitting that homicides in the general population were under represented. Unfortunately, the opinion that all those killed are guilty also appears among US law enforcement.

 

Mexican criminal enterprises are increasingly inserting themselves into legitimate supply chains, or supplanting legitimate supply chains by forcing them from the market. Until those effects become manifest, it will take extraordinary political will to overcome the commercial focus on the piece part cost:

"The infiltration is often a real concern in a city like Matamoros [just] south of Brownsville (Texas), you have two unions and if you are operating a factory and you have people that you need to hire for your factory floor, you've got to work with one of the two unions... Both unions are involved with organized crime so there is a concern there that if you don't take the time to do at least a little bit of due diligence on the people that you're hiring, then you could be hiring a criminal to come do work in your factory and who knows what happens after that."

We see supply chain issues, cloaked but real otherwise no mention would have been made, in OEM discussions of insuring that materials arrive in timely fashion.

 

Criminal groups have begun to replace legitimate supply chains, and/or institute parallel low(er) cost supply chains, with the effect of chasing legitimate firms from the market. This is well underway in the mining/primary extraction sector.

 

Criminal groups are creating exclusion zones all across Mexico for production and warehousing, assumption of legitimate enterprises, access (ingress/egress routes) and security (creating their own free fire zones against opponents).

 

Increasing violence requires actionable preemption, slides 36-37

 

Cartel activities have already affected Mexican businesses; the national oil producer, Petróleos Mexicanos (Pemex), being a prime example.

Although [Pemex] has a reputation for operational inefficiencies and must deal with a powerful workers union, revenue from Pemex accounts for some 40 per cent of Mexico’s federal budget. At the same time it represents a fat target for organized crime, whose activities include stealing oil from clandestine pipeline connections, selling refined petroleum products and kidnapping oil workers – some for ransom; others have simply disappeared.

 

The situation raises questions about the government’s ability to defend the company, which was created after the 1938 expropriation of the petroleum industry and is now an important symbol of sovereignty and self-respect for Mexicans...

 

“Once Pemex … comes under regular attack from the cartels, rather than just random, disorganized thugs, then you have far more serious national security problems – much worse in the government's eyes than a bunch of homicides in the slums of Ciudad Juarez,” Mr. Beith said. “The government's management of Pemex has long been questionable, but the fact that it can't secure its pipelines from organized crime … shows just how insecure parts of the country are and could become.”

Pemex and the Petroleum Workers' Union (Sindicato de los Trabajadores Petroleros de la República Mexicana) have long been deeply permeated by corruption and have now been penetrated by criminal activity. Its problems are long standing and are now institutionalizedThe citation list has numerous Pemex and organized crime items.

 

We believe that with state and national political and police assets compromised, even complicit, that one of the few means of recovery will come from other large established Mexican firms that can independently muster sufficient political cooperation while providing both creditable resistance and physical protection to their employees.

 

One such firm is Cemex (Cementos Mexicanos SAB) and its owner, Lorenzo Zambrano. It will be crucial to watch Cemex's efforts, the "change back" reactions from criminal elements; counter-responses from Cemex; and what, if any and when, allies that Cemex can draw to its side.

 

All firms, certainly high value targets such as Cemex, must continuously address three vulnerability areas:

  • Pricing model compromise (tier chain event, supplier outsourcing, subcontracting, etc.).
  • Citadel attack (Corporate/research, R&D hives, manufacturing, warehousing).
  • Human resources (HR).

Each area, singly and in combination, should be examined by the criteria of Design Basis Threat (DBT):

  • Asset Value Assessment.
  • Threat/Hazard Assessment.
  • Vulnerability Assessment.
  • Risk Assessment.
  • Risk Management.

All-source vs. piece part risk, slides 38-39 

 

Operational, reputational, geopolitical, financial and technology risks are best managed as a portfolio. We reduce the chance of adversarial surprise by using an all-source approach to risk management rather than a partial piece part approach.

 

Design Basis Threat (DBT) does not add new task layers for employees. On the contrary, DBT adjusts current business processes to make them more robust to penetration.

 

Our grounding in operational supply chain and purchasing allows us, as needed, to address chain efficiencies while insuring that the protective envelope in not pierced. Slides 40-43 are examples of our granular supply chain analytics.

 

Conclusion, slides 44-45

 

Those who rely on US/EU high street press sources unsupported by local knowledge will not have a granular understanding of what we call ground truth. Our experience is that investment decisions are too often made in the absence of that information.

 

Commercial calculations are necessary but not sufficient for corporate risk management. Operated in a vacuum, commercial-only risk decisions have and will lead to vulnerabilities.

 

Takeaway: In such instances, companies accept risk by default rather than by design.

 

Design Basis Threat (DBT) supplies that consistent risk amelioration approach for pricing model compromise, citadel attack and HR.

 

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Gordon Housworth 



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Stone Corporation, SERI and the brief window when China’s political and economic 'doors' were open

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The Chinese research community and business sector are the focus of this 20th anniversary note on the events of May-June, 1989, culminating in the military’s expulsion and dispersal of demonstrators, later their parents and sympathizers, from Tiananmen Square on 4 June. As the Chinese place added importance to anniversaries at a multiple of five to the event, I hope to do justice to themes and outcomes now largely lost to western readers.

 

James Miles’ The Legacy of Tiananmen: China in Disarray is recommended for a traverse of the events leading to 4 June, as is Goldman’s The Twentieth Anniversary of the Democracy Wall MovementThe events of June 1989 can reasonably be said to rise from the Democracy Wall of 1978-1979: 

Beijing democracy activists [were] encouraged to criticise the Gang of Four and failed government policies. But the [Chinese Communist Party (CCP)] became dismayed as more and more posters began to call for a complete overhaul and even the abolishment of the CCP. As the current leadership and policies came under fire, a new wave of party intolerance at political dissent began.

One might think that this should have come as no surprise as: 

Most of the participants were ex-Red Guards and workers, who might have been students but for the suspension of their education from 1966 to 1976. They used the methods and strategies they had learned in the Cultural Revolution forming unofficial groups, putting up large-character posters, writing and printing pamphlets, and setting up their own networks to achieve their own political goals. In the Cultural Revolution, they had employed these practices initially to purge party officials and the intellectual establishment in response to Mao's summons to "rebel against authority."

Elements of this note rose from a discussion with colleagues who were involved in construction technology transfer to and through a series of joint ventures in China in the early 1980s. One was working with the founders of Stone Corporation of China prior to the May 1989 uprising. Stone Corp was highly regarded as the new symbol of Chinese capitalism before 1989, but condemned by Li Peng as “counter-revolutionists” days after suppression of the uprising and fall of Zhao Ziyang, then general secretary of the Communist Party.

 

As some of the early documents are not easily available in electronic text, I have tried to site enough for readers to pursue.

 

Never underestimate your enemies

 

From If you want food, find Ziyang"; If you want Ziyang, pierce the Golden Shield:

An administrator given to revisionist thinking or pragmatic solutions depending upon your political viewpoint, Zhao was tapped by Deng Xiaoping to revitalize the economy. Zhao created much of the 1980s economic package credited to Deng Xiaoping:

  • Coastal development with special economic zones, drawing investment and creating exports
  • Agriculture reform that disbanded communes, returning private plots to farmers while assigning production contracts to individual households.
  • Industrial reform that included expanded self-management for peasant farmers and some industries
  • Price reform allowing farmers and factories to set prices for their products

Zhao threaded the policy needle with a 1987 speech that declared China to be in a stable, "primary stage of socialism" that could afford to experiment with approaches to stimulate economic production. In a stroke, market economics appeared within the evolution of socialism.

Zhao's pragmatism led to his stepping on the third rail of political reform, thinking the "goal of Chinese political reform was to build up democracy and rule of law." Having acquired a legion of old school enemies, Zhao was said to have doomed himself by making public (to Mikhail Gorbachev, already a tainted reformer in communist eyes) that all major Central Committee decisions had to be approved by the nominally retired Deng, which implicitly showed Deng to be the stonewall of reform...

Without approval of conservative elements of the Chinese Communist Party (CCP), Zhao commenced to simultaneously open what would later be called the political and economic doors to a dissatisfied citizenry.

 

The nascent RAND: Beijing Social and Economic Sciences Research Institute (SERI)

 

Independent of government, Chen Ziming set up his first think tank, the China Political and Administrative Sciences Research Institute, to fulfill a “long cherished dream.” (Wang Juntao joined Chen's second think tank in the late 1980s the Beijing Social and Economic Sciences Research Institute (SERI) and was "deputy editor of SERI's newspaper, Economics Weekly, at the time of the 1989 demonstrations): 

“[Chen] said that he wanted to turn his organization into something like the U.S. Rand Corporation, doing consultancy work for government decision-making bodies, providing top-level advice and strategies for reform,"... Among the group's founding members was Wang Juntao. [Both Chen and Wang had activist histories dating preceding the Democracy Wall.] The two men quietly built up an organization of extraordinary sophistication, quite independent of party control. Unlike more conventional dissidents they did not seek out the Western media, preferring instead to cultivate good relations with radical reformers working for the government. Their groundbreaking efforts thus went almost entirely unremarked by the outside world. “The two men’s long-term aim was not to pursue scholarship... If they'd wanted to do that they could have done it in the Chinese Academy of Social Sciences. Their aim was to change the socialist system." It was only after Tiananmen [that] most Western journalists and even many Chinese intellectuals learned their names.

 

[In 1987] Chen founded a new [group] called the Beijing Social and Economic Sciences Research Institute [SERI, whose] activities ranged from conducting public opinion surveys - a science then in its infancy in China - to publishing books on social and political issues. Within two years, the institute had nearly 50 employees and more than 100 associate researchers. It had office space consisting of 60 rooms. sophisticated computer equipment, and dozens of cars. By the time the Tiananmen Square protests erupted, it had launched nearly 40 research projects, organized 14 academic conferences, and published more than 100 books on the social sciences... Hardliners were deeply suspicious of the institute's activities, but thanks to the relative strength of reformist leaders at the time, the Chinese media gave the institute considerable encouragement by publishing some of the results of its surveys...

It is a testament to the strength of the reformers that the shock of hardliners could be restrained when Chen was publishing polls such as this 1987 item: 

[M]ore than 3,000 respondents answered questions about their attitude toward highly sensitive political issues. A book based on the results contained what for China were embarrassing revelations about people's political views. It said, for example, that more than a quarter of private entrepreneurs surveyed believed that it was right to rebel against the state “if the state caused you to lose hope.” More than 15 percent of peasants gave the same reply and nearly 10 percent of intellectuals and officials. Even asking such a question would have been unthinkable a few years earlier.

 

[F]ewer than 45 percent of peasants felt proud of living in a socialist country and only just over 50 percent of intellectuals. Officials showed the greatest enthusiasm for socialism, with more than 65 percent expressing pride in the system. Nonetheless, more than 10 percent of cadres replied that “there is nothing to be proud of.” Asked whether they trusted the government, nearly 40 percent of peasants surveyed replied “No.” Most respondents expressed dissatisfaction with the behavior of civil servants, including nearly 70 percent of officials themselves. A similar proportion agreed that “problems in the political system are the main reason why China is developing slowly.” Fewer than half expressed satisfaction with the amount of freedom of speech and belief they enjoyed...

 In retrospect, with such political explosives in hand it is a marvel that Chen and Wang were not silenced prior to being accused as the "black hands" behind the 1989 movement. The thirteen-year prison sentences imposed on both “probably had more to do with what they represented - the emergence of an organized, independent intellectual force - than with anything they actually did in 1989.” Wang’s wife said, “I cannot but respect the Communist Party's insight, their ability to see at a glance who are their real adversaries.” Think tanks and research institutions henceforth curtailed any social commentary not acceptable to CCP interests.

 

China’s 'first IBM'

 

Wan Runnan was the business equivalent to Chen Ziming and Wang Juntao in the research community:

Wan said his aim was to create China's answer to IBM [just as] Chen wanted his company [SERI] to become China's Rand Corporation... “When Wan established [Stone Corporation] with 20,000 yuan [$5,400] in a two-room office provided by a rural factory, nobody could imagine this humble 'Stone' would become a computer empire with 30 million yuan in fixed assets and a turnover last year of 300 million yuan," gushed Xinhua in 1988, when Wan was still a model entrepreneur lionized by the official media. “Some People call these new entrepreneurs China's 'red capitalists' of the 80's," the agency said.

 

Unlike Chen and Wang, Wan, who was in his mid-forties by the time Tiananmen erupted, was not a man with a long record of political activism on the wrong side of the party line. Wan was, in fact, a party member. But that did not stop him from sharing some of Chen and Wang's interests. When one of his employees proposed setting up a think tank, Wan readily agreed. In 1988 he established the small but influential Stone Social Development Research Institute, appointing the well-known political and legal scholar Cao Siyuan as its head. Cao, a former researcher in one of Zhao’s think tanks, had extensive contacts in the official world thanks to his role as the chief drafter of China's first law on bankruptcy, the most fiercely debated piece of legislation ever considered by China's normally docile parliament. The law was adopted in 1986 and went into effect two years later, providing a legal framework for the winding up of loss-making, state-owned industries that for decades had been propped up by massive state subsidies.

 

One of Cao's jobs as director of the Stone think tank was to do consultancy work on the new law, But his activities also strayed into the more sensitive realm of politics. Cao had long been an outspoken advocate of giving the National People's Congress greater clout and removing overtly political jargon from the constitution. In March 1989, not long before the student protests erupted, Cao's institute organized a large-scale conference on constitutional reform attended by many of the country's radical intellectuals. Among the constitutional amendments Cao wanted to see were provisions that those brought to trial should be presumed innocent until proved guilty and that the secretive proceedings of the National People's Congress should be broadcast live and published in full. Cao wanted ordinary members of the public to be admitted to the Great Hall of the People to observe the meetings. His suggestions fell on deaf cars. The only part of the congress the government was prepared to broadcast live was the carefully scripted opening address by the prime minister. This was not a concession to Cao. Such broadcasts hid been introduced several years earlier. The government was not prepared to take even the remote risk of a dissident voice being heard by publishing a full record of debates, and it certainly did not want members of the public observing the sycophantic behavior of the “people's representatives” close up.

 

By the time of Tiananmen, Wan's Stone Corporation employed more than 700 people, many of whom eagerly joined the demonstrations. Unlike Chen and Wang, who preferred to stay in the background, Wan threw himself and his company into the movement, donating large sums of money to the students and organizing meetings of protest leaders. As the People’s Daily put it, -Wan Runnan picked up a big stone - 'the entire company' - and threw it at Beijing.” Cao Siyuan and his think tank helped Hu Jiwei, a liberal member of the National People's Congress Standing Committee, collect the names of fellow members on a petition calling for an emergency session of the Standing Committee to discuss the unrest. The authorities later accused Hu and Stone of including the names of people who had not agreed to give their support and of plotting to use the Standing Committee to dismiss Li Peng and rescind martial law. Hu was stripped of his post and expelled from the party. Cao also lost his party membership and was imprisoned without trial for nearly a year.

The Chinese Communist Party’s clear and present danger

 

While the events of May-June 1989 have been assiduously scrubbed from Chinese media and contemporary histories by the CCP, they have also fallen from Western minds by the passage of time. To many, only the image of the Tank Man, stripped of context, remains in Western consciousness:

Tiananmen Square was a war zone [in June 1989]. An army 300,000 strong - that's almost twice the numbers we sent into Iraq - the People's Liberation Army, fought its way into Beijing from four directions, with orders to converge on the square. Unarmed citizens and students faced armored personnel carriers, tanks and soldiers armed with semi-automatic weapons. By 5:30 A.M. on June 4th, 1989, the army's mission had been accomplished...

 

The protests [had] begun five weeks earlier with a mass student demonstration, and in most Western media, continued to be treated as a student phenomenon... The students had touched a nerve, and soon everyone seemed to be out there protesting against hardship, government corruption and 40 years of repression. In Tiananmen Square and on the streets of Beijing, in cities right across China, there were tens of millions of Tank Men. Whole swathes of the country were in open revolt...

 

In Beijing, one in ten of the population was joining in, and that includes all the old people, all the little children. So it was massive... There were people in heavy earth-moving equipment. Honey bucket collectors and a tank truck came in. There were pilots. There were hotel workers... It was just a carnival of protest. All the groups were out there with their own banners, saying, "We are the Beijing journalists. We demand press freedom. We demand the right to tell the truth." ... You had doctors and nurses and scientists and army people demonstrating. The Chinese navy was demonstrating. And I thought, this is extraordinary because who's left? It's just the top leaders who aren't out there...

 

For the very first time, press and television were reporting freely and truthfully. The virus of freedom quickly spread... Uprisings occurred all over China, in at least 400 cities - we know this from the Chinese press and from their own military museum - all the way from Mongolia in the northwest down to the southeast near Hong Kong... And from these cities, hundreds of thousands of supporters converged on the capital. The students had started the protest, hoping to cleanse the party of graft and corruption and encourage free speech. They sought reform, not revolution. After all, they were, by and large, the children of the elite. But as their movement spread outwards to the middle classes and then to the workers and peasants, attitudes hardened...

It is instructive to revisit the threat perceived by conservative politburo members to the continued existence of the Chinese Communist Party (CCP):

The move from student uprising, if you will, to a worker uprising is what really scared the Chinese government. They felt that they could deal with the students. After all, students had been involved in uprisings for many, many years. But where it became dangerous to the stability and to the survival of the Communist Party was when ordinary workers became involved...

 

After all, the Chinese Communist Party had originally used the workers' movement to gain power for itself. Now those in government were terrified that we'd take it back from them... In fact, the government was paralyzed by infighting between those who advocated peaceful negotiation and hard-liners who demanded a crackdown. On May the 19th, Zhou Ziyang, the reformist general secretary of the Communist Party, suddenly appeared in Tiananmen Square to appeal for compromise. It would be his last public appearance. That night, before an audience of party faithful, hard-line Premier Li Peng showed the way forward. "We must end the situation immediately. Otherwise, the future of the People's Republic will be in grave danger." He completed his address with a declaration of martial law. Troops would occupy the city and put an end to the protests in Tiananmen Square...

 

Never before in the 40-year history of communist rule had China put its citizens and its army in this situation... It was a massive display of force, 300,000 troops by most counts... all converging on the city... Four days after [this] attempted entry, the army withdrew to bases outside the city. Beijing was euphoric... But it also was an enormous humiliation for the leadership. They had been thwarted and they had lost face, and they weren't going to let it happen again... The party elders feared that the whole edifice of communism was going to collapse, like it was collapsing in the Soviet Union and in other parts of Eastern Europe. They needed to make a stand - and a bloody stand - to show their population, in effect, to cow their population back into submission... Over the next 10 days, Supreme Leader Deng Xiaoping hatched a new plan. Troops armed with semi-automatic weapons and backed by tanks were drawn from military districts across China [rural units with no attachments to the urban center]... On the night of June 3rd, a huge invasion force [came in again] from all directions but mostly from the west, this time with live ammunition, this time strict orders: the square must be cleared by dawn on June 4th...

The end of nascent political reform came quickly:

Angry citizens were everywhere. People just couldn't understand why this country and its army, the People's Army, would slaughter its own people, the Beijing citizens... People still pour into the streets... People were just so angry, so furious at what was happening in their city that they were not going to step back and let the army do what it was doing... Troops began to fire in all different directions... Everybody was frightened by this overwhelming use of force... What was amazing was that the army used battlefield weapons...

 

[It] was a one-sided pitched battle all the way from the western suburbs until [the PLA], about 1:30 AM, began to arrive at Tiananmen Square... [The] troops had orders to clear the square by dawn [of 4 June]. That was the deadline... And it was clear to everyone from that point on that we were absolutely trapped. You had the military coming in from the west with their tanks. We knew there were tanks coming in from the south of Tiananmen Gate. And now on both sides of the square, you had hundreds, if not thousands of soldiers... And then the firing started. Even at this late stage, many couldn't believe the army was using live ammunition, and they stood their ground... And there was this continual announcement of, "Under the martial law regulations, no one should be on the street. If you stay on the street, you will be responsible for what happens to you"...

Firing on civilians recommenced later in the morning as parents came to search for their children:

The tactics of overwhelming force that were used had a point. They were meant to shock, terrify and awe... No one knows for certain how many people died. The Chinese Red Cross initially reported 2,600 and immediately retracted under intense government pressure The official government figure is 241 dead, including 23 officers and soldiers, and 7,000 wounded... In the aftermath of the Beijing massacre, tens of thousands all across the country were arrested. Unknown numbers were executed. Some are still in prison today. China television portrayed these people as counter-revolutionaries, hooligans and agents of foreign powers...

By the close of 4 June, the People’s Liberation Army was again in complete control. Readers can now understand the velocity of retribution directed against firms such as Stone: 

SOLDIERS of the People's Liberation Army are occupying the offices of China's most successful independent computer company, the Beijing Stone Group. Wan Runnan, the software engineer who founded the company, is in hiding and officials have issued a warrant for his arrest as the government continues to crack down on supporters of democracy.

 

The authorities have pinpointed Stone as a symbol of the 'counter-revolution'. The company, founded five years ago, rapidly became the vanguard of China's computer industry and, in its management style, established itself as a model for economic reform...

 

Stone owed its success and its downfall to the prominent position it played in China's reform and to the associations it had forged with prominent politicians. Wan had been a confidant of Zhao Ziyang, the reformist general secretary of the Communist Party, and his supporters. But with Zhao's fall from grace, Stone lost its [influence and protection]...

Stone’s founder and president, Wan Runnan, had overplayed his hand, likely due to his having been a privileged child of the establishment: 

Because the government did not imprison leaders of the 1985-86 democracy protests, many of them became important figures in the 1989 movement. The voices of Fang Lizhi and Wang Ruowang were openly heard, and Liu Bin Yan became a key organizer. Other leaders emerged as spokesmen and organizers for the movement, most having privileged backgrounds and associations with their supposed enemies:

 

• Sun Hui, a Beijing University student, helped found the Autonomous Students’ Federation to organize the demonstrating students. Sun’s parents were Communist Party members, but his death at the Tiananmen massacre suggests that he may not have fully understood the dialectic he was a part of. Nevertheless, Sun’s ties to the regime made him vulnerable to manipulation.

 

• Wan Runnan has been married twice, both times to daughters of high Communist Party officials. According to one undisclosed source in the student democracy movement, Wan closely associated with members of the inner circle of control in the Communist Party of China. These connections helped him financially, since he was allowed to own and build the Stone Corporation, the largest private corporation in mainland China and its main producer of computers. Wan supplied public address systems, walkie-talkies, and other equipment to help the student leaders organize. Given his contacts, he probably knew Communist Party Secretary Zhao Ziyang rather well; Zhao was purged after the June massacre for supporting the democracy movement. Wan Runnan was quoted in a July 1990 Reason article as insisting that “we are not counterrevolutionaries.” After hinting that he supported free market reforms in addition to democracy, he qualified himself by noting, “The transformation must take place in stages… the communication, transportation, and energy sectors will remain in government hands.” Wan now heads the Paris-based Federation for a Democratic China, one of the two largest organizations in the currently exiled Chinese democracy movement…

Wan at least escaped the blade that befell many of his peers, ultimately making it to the US: 

Wan Runnan: former Chairman of FDC (the second and third Congress). He was the founder and Chairman of Stone Corporation which was the first private company in China. He was on the wanted list of CCP, because he had supported the democratic movement of 1989. After June 4th Massacre he escaped abroad and has settled in the USA.

Without this background it would be hard for Wan to think that he could get away with providing financial and logistic support to the democracy movement. With backing from hard liners, Li was happy to root out Wan and his counterparts as part of bringing the private sector to heel under party control:

Despite its importance, in a system that is still largely owned and controlled by the government, the role of the private sector is limited: Even today [2002], as management responsibilities have been passed on to managers and local officials, and as industrial output has shifted to the private sector, the government still owns about 70 percent of the industrial assets... Yet, this sector has played a significant role in encroaching upon state sovereignty in two ways. First, in times of crisis, this sector has played a role of outright resistance. During the Tiananmen movement, it was the private entrepreneurs of Beijing that provided the students with fax machines, radio equipment, televisions and other perishable goods that became a staple of the movement... The Stone Corporation was the largest and most famous of these behind-the-scenes participants, but there were many others. It would be a stretch to argue that private businesses in China are predisposed to resistance. However, it is the case that these organizations are structurally the ones that hold the greatest degree of independence from the state, and therefore have the greatest latitude in protesting when the opportunity presents itself.

Continuing the theme of lawful suppression of "counterrevolutionaries," the Communist Party staged an exhibition in September 1989 containing images of "burned out tanks and armored personnel carriers, photographs of soldiers who had been burned to death or hanged from overpasses, and photos of burning buses and clashes between students and police in riot gear." On the 5th anniversary, Li Peng announced "new security regulations defining political discussions outside the Party line as sabotage." On the 10th anniversary, the government released a lengthy documentary on the "counterrevolutionary rebellion."

 

Termination of modest entrepreneurial support for liberalism

 

Political dissidents placed too great a faith in private entrepreneurs to spur democracy. (Note: geti are individual entrepreneurs, often in consumer services, while siying are larger privately owned businesses or enterprises.): 

It is in the interest of entrepreneurs to cooperate with local cadres. Cooperation allows private-sector businesses to operate more smoothly, and sometimes just to get started in the first place... "Capitalist entrepreneurs see capitalist growth as possible because of, not in spite of, the involvement of officials." Rather than the larger siying enterprises being most autonomous, moreover, ties to officials matter tremendously for the development of the largest and most profitable enterprises. Even a large and innovative private enterprise like the Stone Corporation had to depend upon strong bureaucratic connections to succeed...

 

Some commentators have pointed to banners of support hung by geti entrepreneurs and to monetary and material donations made by entrepreneurs, such as managers of the Stone Corporation to demonstrators in 1989, as evidence for growing activism and political consciousness among entrepreneurs. But as a rule [members] of the business elite in the private sector have shown strong inclinations toward neither political activism nor the formation of strong horizontal ties. Stone's actions and supportive banners cannot be used to proclaim the existence of a politicized, much less democratizing, class. Donations by the Stone Corporation were not exceptional and, as noted previously, most entrepreneurs [did] not actively support the student demonstrators. More generally, entrepreneurs' participation in politics outside of state-sponsored organizations has been unusual, and has not been sustained...

 

The enthusiasm that reformers were expressing in the mid-1980s for the growth of "interest groups" and "social pluralism" was accompanied by the growth, immediately prior to and during the Tiananmen demonstrations, of what appeared to be an autonomous Chinese associational life. Examples of new organizations included the Beijing Autonomous Students' Union and the Capital Independent Workers' Union, which were founded during the 1989 protests. Similarly, the Beijing Institute for Research in the Social and Economic Sciences [founded] by Chen Ziming and Wang Juntao, both of whom had been active in the 1979 Democracy Wall movement and, later, the publication of Beijing Spring. These organizations were perceived by some to be harbingers of a second "golden age"... Yet these liberalizing trends of the mid-1980s, along with many others, were reined in by the 1989 Tiananmen protests. The autonomous organizations proved to be highly vulnerable and failed to become enduring features of post-Mao state-society relations. The [independent] unions were crushed by the government, while the Institute saw much of its autonomy undermined subsequent to the arrests of Chen and Wang for their role in the 1989 events.

Altering the education system to produce a new patriotic citizen

 

Beyond wounded national pride and primarily anti-US and anti-Japanese resentment:

Chinese nationalism in the 1990s was also constructed and enacted from the top by the Communist state. There were no major military threats to China's security after the end of the Cold War. Instead, the internal legitimacy crisis became a grave concern of the Chinese Communist regime because of the rapid decay of Communist ideology. In response, the Communist regime substituted performance legitimacy provided by surging economic development and nationalist legitimacy provided by invocation of the distinctive characteristics of Chinese culture in place of Marxist–Leninism and Mao Zedong Thought. As one of the most important maneuvers to enact Chinese nationalism, the Communist government launched an extensive propaganda campaign of patriotic education after the Tiananmen Incident in 1989. The patriotic education campaign was well-engineered and appealed to nationalism in the name of patriotism to ensure loyalty in a population that was otherwise subject to many domestic discontents. The Communist regime, striving to maintain authoritarian control while Communist ideology was becoming obsolete in the post-Cold War era, warned of the existence of hostile international forces in the world perpetuating imperialist insult to Chinese pride. The patriotic education campaign was a state-led nationalist movement, which redefined the legitimacy of the post-Tiananmen leadership in a way that would permit the Communist Party's rule to continue on the basis of a non-Communist ideology. Patriotism was thus used to bolster CCP power in a country that was portrayed as besieged and embattled. The dependence on patriotism to build support for the government and the patriotic education campaign by the Communist propagandists were directly responsible for the nationalistic sentiment of the Chinese people in the mid-1990s.

From Beijing moves to preempt flash mob behavior for any purpose, be it civil, commercial, nationalistic or anti-state...:

The authorities are highly attentive to young nationalists known as fenqing, or the 'angry youth' among other translations:

"These people have been trained in an authoritarian system. They are at the same time victims of an authoritarian system, but they also behave in an authoritarian way towards others and are incredibly self-righteous... We should be more tolerant and respect the right of people to disagree with us but these people do not understand such values."

The definition of fenqing has morphed:

 

Cultural Revolution: urban-dwelling students who were sent to the countryside to toil with peasants and became embittered towards a society that had stolen their futures.

1980s: students and intellectuals who shaped the movement for greater social and political freedoms that ended when the tanks rolled into Tiananmen Square

2000s: patriotic, xenophobic, nationalistic and, in some cases, violent in their defence of the motherland. This latest incarnation has partly emerged as the result of government policies implemented in reaction to the events of 1989, after which "patriotic" indoctrination became an even more important element of the education system.

Fenqing are tailor made to meet CCP needs for sustained legitimacy.

 

Closing the political door; expanding the economic door

 

From "If you want food, find Ziyang"... 

Confined to house arrest, Zhao remained "steadfast that his views are correct, and their views were wrong," and he remained a remembered, if unheard, symbol that demonstrations were not a "counter-revolutionary rebellion" and that Tiananmen must be reassessed. Even in death, Zhao is a lightning rod of accountability.

 

Whereas Zhao and his generation made enormous contributions to individual wellbeing and thus much gratitude, e.g., "If you want food, find Ziyang," he is said to be less well known to younger generations either focused on wealth generation on the coast, or cut off in rural isolation.

Deng reasserts himself:

What the Party has relied on to prevent [public] pressure from building up is to allow people to exercise all of their ambitions and urges to be able to advance themselves and to have lives on the economic side of the ledger. This was Deng Xiaoping's great moment of genius. After the massacre of 1989, he in effect said we will not stop economic reform; we will in effect halt political reform.

 

What he basically said to people was: "Folks, you are in a room. There are two doors. One door says 'Politics'; one door says 'Economics.' You open the economic door, you are on your own. You can go the full distance to basically whatever you want: get wealthy, help your family have a bright future, move forward into a glorious future. If you open the political door, you are going to run right into one obstruction after another, and you are going to run into the state." People logically being practical -- and Chinese are very practical -- opened the economic door. They wouldn't open the political door. It was foolish to do so.

Private companies and research groups proceeded to chose the economic door, avoiding the political:

In retrospect, it seems extraordinary that the leadership of such an authoritarian state should allow the emergence of large, wealthy, independent institutions such as those operated by Chen Ziming and Wan Runnan. It is particularly remarkable given that, at least in the case of Chen Ziming and Wang Juntao, the authorities had been keeping [both under surveillance]...

The leadership would almost undoubtedly have meted out similar punishment to the private businessman Wan Runnan [as they had to Chen and Wang] had [Wan] not fled the country after Tiananmen.

Wan Runnan wrote a reflective retrospective of the CCP, Why The Chinese Communists Are Not Doomed To Finish Yet, in 2006. Recommended. Idealism and compromise are now absent: 

During the 1989 democratic movement and the Russian/Eastern European changes, the Chinese Communist became even firmer in the will and determination to suppress the opposition... How did the Communist Party defeat the Nationalist Party to win the country? One point was the will and determination to sacrifice. By sacrifice, they mean sacrificing the lives of their warriors in large and systematic ways... The Communists won the nation by this rule and they governed the nation by this rule. What is political power? Lin Biao understood: Political power is the power to suppress. To maintain political power is to maintain the power to suppress... That was the will and determination to suppress that the Communists exhibited during the June 4th massacre...

 

Deng Xiaoping said: "Development is the only solid reason." This should actually read "Getting rich is the only solid reason." The reason is solid, but the words are soft. According to Comrade Zhang Chunqiao's critical opinion: "This is a capitulation to the national capitalist class." On this issue, I have the right to speak. I started the company Stone (四通), which had sales of over 1 billion RMB in 1988. I accounted for half of Zhongguan village. I was called by the western media as the "most outstanding result of the ten year flirtation between Deng Xiaoping and capitalism." At the time, a western reporter asked me: "Do you think that Deng Xiaoping is on your side?" I answered without hesitation: "Of course, because I am on his side." After the June 4th massacre, I could no longer be on his side and therefore I parted ways with the Communist Party.

Wan summarizes the CCP as follows:

  1. From the lessons of the former Soviet Russia and eastern Europe, the Communist Party is more firm and clear about suppressing the opposition;
  2. After forming alliances, the Communist Party has established a relatively stable international environment;
  3. The continuous economic development has provided adequate resources for improving their ability to govern;
  4. Under the pretext of "we won't argue," the Communist Party has actually totally abandoned their former ideology;
  5. The Communist Party has become a political party that represents wealthy people and the social elite.  This newly created middle class is the foundation of stability in Chinese society today;
  6. The confirmation of their model for power succession has eliminated the concerns about their ability to maintain government.

Keep this in mind when you read Drezner’s “wishful thinking” about the capacity of the pro-democracy petition Charter 08 to induce a new popular rebellion. Drezner’s piece is valuable solely for the reader comments that gently but firmly correct him. China will still grow at about 6% per annum; not enough to keep everyone happy but enough for the CCP to sacrifice what it must to keep the political door closed and the economic door open, at least for the privileged, cooperative business class.

 

Epilog

 

Stone and SERI were part of a remarkable flowering that, along with far less adventuresome firms, quickly learned that in order to survive they had to work with the CCP and PLA as opposed to operating in relative independence.

 

In the same period, the PLA was disgorging its money losing firms onto provincial government and was expanding its overt and covert subsidiaries tasked with capturing needed foreign Intellectual Property (IP). When that network proved to be insufficient at capture an entrepreneurial bounty system was instituted by which Chinese firms otherwise unrelated to the PLA could capture IP and share it in return for various means of reward.

 

Americans continue to overlook the extremely high degree of nationalism among Chinese, a characteristic sharpened by post-1989 education reforms. (I do not impute anything negative to the Chinese; my point is that Jingoism is not purely an Occidental disease.) Had this flowering continued, Stone and its peers would have become technical powerhouses that would have become even more efficient at foreign IP collection as foreign firms flocked to partner with Stone et al.

 

Firms such as Stone were perfectly positioned to be both attractive to foreign government and corporate assets while being able to absorb and transmit the IP on offer into the Chinese economy. If Wan could have even remained an international democrat, there would have been many in the firm that would have supported IP diversion to Chinese national interests.

 

Thus this analyst is left to wonder if Li Peng’s retrenchment slowed rather than accelerated foreign IP collection. In other words, the crushing of this technical flowering may have slowed IP collection. It is interesting to consider the implications if Zhao had bested Li.

 

Exiled Tiananmen-era dissident detained in China

Associated Press

May 13, 2009, 11:13 pm ET

 

It's Just History: Patriotic Education in the PRC

By Julia Lovell

The China Beat

4/22/2009

 

The war that changed China

Posted by: Benjamin Lim

Reuters

February 17, 2009

In China, a Grass-Roots Rebellion

Rights Manifesto Slowly Gains Ground Despite Government Efforts to Quash It

By Ariana Eunjung Cha

Washington Post

January 29, 2009

 

China's Charter 08

Translated from the Chinese by Perry Link

New York Review of Books

Volume 56, Number 1 · January 15, 2009

 

What does Charter 08 tell us about China in 09?

Daniel W. Drezner

Foreign Policy

Mon, 01/05/2009 - 9:51am

NOTE: The post is wide of the mark; reader responses are on point

 

The United States and China

Bill Moyers Journal

August 22, 2008

 

Peking U. Draws Fire for Demolishing 'Democracy Wall'

Chronicle of Higher Education

November 5, 2007

 

Cross Cultural Dialogue on China’s Traditional Universalism

Thomas Bartlett

Response to Xiong Peiyun’s (熊培云) article “China’s Nationalism, and How Not to Deal with It”

Posted by Xiao Qiang

China Digital Times

May 11, 2008 7:37 PM

 

China’s Nationalism, and How Not to Deal with It

Posted by Michael Zhao

China Digital Times

May 10, 2008 10:02 PM

 

China’s angry youth vent their feelings

By Jamil Anderlini in Beijing

FT

Published: May 2 2008 17:15 | Last updated: May 2 2008 17:15

 

Summary of Chinese History ruled by Chinese Communist Party

Contributed by Federation for a Democratic China, (FDC)

Monday, 10 December 2007

Last Updated Monday, 10 December 2007

 

Tiananmen Veteran Chen Ziming Talks to RFA

by rfaunplugged

RFA Unplugged (Radio Free Asia blog)

Posted on December 27, 2006

 

My Life After Tiananmen: Chen Ziming

Radio Free Asia

Original reporting in Mandarin by An Ni. Mandarin service director: Jennifer Chou. Translated, written and produced for the Web in English by Luisetta Mudie. Edited by Sarah Jackson-Han.

2006-12-27

 

Why The Chinese Communists Are Not Doomed To Finish Yet

Wan Runnan

EastSouthWestNorth

2006

 

THE TANK MAN

Written, produced and directed by Antony Thomas

FRONTLINE

Air date: April 11, 2006

 

Wang Juntao: "To Resign from the Communist Party is for the Future of China"

Voluntary Resignation from the Chinese Communist Party Sets the Standard for Morality and Justice

By Xin Fei

The Epoch Times

Apr 21, 2005

 

Annex 1 How is “Private” Defined in the People’s Republic of China?

The Development of Private Enterprise in the People's Republic of China

Asian Development Bank

2003

 

Information Technology, Sovereignty, and Democratization in China

Doug Guthrie

New York University

Social Science Research Council

2002

 

Problems of democratization in China

By Thomas Gong Lum

Edition: 2, illustrated

Taylor & Francis, 2000

 

The Twentieth Anniversary of the Democracy Wall Movement

By Merle Goldman

Harvard Asia Quarterly

Summer 1999

page last updated: March 22, 2001

 

DEMOCRACY WALL: A Sudden Explosion of Free Speech, 1979

Unorthodox Opinions Are Heard on the Street

By WEI JINGSHENG

TIME Asia

SEPTEMBER 27, 1999 VOL. 154 NO. 12

 

A state-led nationalism: The patriotic education campaign in post-Tiananmen China

Suisheng Zhao

Communist and Post-Communist Studies

Volume 31, Issue 3, September 1998, Pages 287-302

 

China's New Business Elite: The Political Consequences of Economic Reform

Margaret M. Pearson

UNIVERSITY OF CALIFORNIA PRESS

1997

 

The Legacy of Tiananmen: China in Disarray

by James A. R. Miles

University of Michigan Press

1996

 

Beijing Revokes Parole, Returns Dissident to Jail

By Rone Tempest

LA Times

June 27, 1995

 

Free Chen Ziming and Wang Juntao

New York Times

February 13, 1992

 

How to Resist the Memory Hole

New York Times

Published: Wednesday, February 13, 1991

Playing the China Card

The New American

Jan. 1, 1991

 

Chinese troops turn on computer pioneers

by KATHERINE FORESTIER , HONG KONG

NewSceintist

Magazine issue 1671

01 July 1989

 

Democracy Wall

BBC

 

Democracy Wall

China’s Communist Revolution

BBC

 

Gordon Housworth



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A greased pig race: US cybersecurity architecture and organization

  #

 

The nature of modern cyberwarfare makes a mockery of present legal boundaries that have heretofore usefully served the US and its citizens.

 

The similarities between asymmetric and cyberwarfare are striking, so much so that it is increasingly useful to interchange titles of one when reading materials about the other. It is already clear that cyberwar cannot be won with the equivalent of 'conventional forces':

  • State and nonstate actors coexist and cooperate, with nonstate actors offering useful plausible denial.
  • Attacks, botnets included, have both foreign and domestic computer and network components, many of which are unwitting accomplices.
  • Attacks are increasingly a swarm of blended attacks combining probing, intelligence gathering, phishing (including spear phishing), DDoS, interruption/disruption, spoofing/sensor overload and/or tampering, penetration.
  • Hostile C2 (command and control) nodes may rotate, either for security or operational needs.
  • Attacks can share cyber and electrical grid components, with attacks on one compromising the capacity of the other.
  • Only certain parts of the attack may be visible at any one time - and those visible parts viewed in isolation without confirming intelligence - may have severe jurisdictional and statute roadblocks.

Generally speaking, the ability of states - at least the OECD states - and their militaries to adapt to these asymmetrical challenges seems perpetually in doubt; bureaucratic and doctrinaire issues alone make established bureaucracies and armies vulnerable. We know that, "Systems fail at their boundaries, and that includes boundaries between components and clusters of components that act as subsystems." See: Structured IT risk remediation: Integrating security metrics and Design Basis Threat to overcome scenario spinning and fear mongering, 5/17/2007.

 

It is painful to watch someone so attentive to cyber issues as Defense Tech's Kevin Coleman as he attempts to parse cyber threat ownership in such a fluid, borderless environment. Without a wholistic analysis capacity of all active and passive threats, regardless of the jurisdiction of first observance, subtle signals of surveillance and attack patterns will be missed until it is too late.

 

Time to zero exploit is narrowing. Writing in 2004, Delta between worst-case and realistic cyberattacks narrow:

[cyberattacks come in] three categories: data, analysis of data, and control. Data is often of modest value, especially when data volumes are large and/or frequently changing, and time is short. Actionable information comes from the speedy analysis of data. Poor design, design driven by cost cutting, and design taking immediate advantage of newer technologies without thinking of security intrusion have conspired to create conditions in which data, analysis and control increasingly merge...

 

I submit that increasing systems interconnectivity and interdependence is narrowing the gap between loss of data and loss of life. Pursuing the analysis of data as opposed to raw data allows perps to obtain insight that allows them to attack a target either directly or gain an understanding of the means to attack its control systems. If the default shutdown conditions of a control system are poorly designed, interrupting the control system is tantamount to overtaking the system... If the perps can spot an asymmetrical weakness they will take that path of least resistance, least cost, and least exposure.

Quaint idea: The Forward Edge of the Battle Area

 

Neither cyberwars or contemporary battlefields have a well defined FEBA (Forward Edge of the Battle Area). In many instances they share little of conventional battle structure:

Substitute cyber warriors for asymmetricals in this item from a conference on complex systems, of which homeland security was one of over forty topics:

For insurgents to exploit their asymmetries, they must also negate the asymmetries that favour the conventional force. In particular, they must avoid direct, large scale confrontation against the better equipped, trained and synchronized conventional force. This can be understood using a multi-scale perspective: by generating and exploiting fine scale complexity, insurgents prevent the conventional force from acting at the scale they are organised for: large scale but limited complexity environments.

 

By dispersing into largely independent cells, insurgents can limit the amount of damage any single attack from the conventional force can inflict. This significantly reduces the threat of retaliation from acting as a deterrent, since the insurgents have negligible physical resources exposed to retaliatory attack. Insurgents that do not wear uniforms and blend into a civilian population cannot be readily identified or targeted until they attack, in a situation of their choice. There is no longer a forward edge of the battle line, meaning softer support units are vulnerable. The number of possible locations, times and direction of attack increases significantly compared to attrition warfare, increasing fine scale complexity. The heightened potential for collateral damage from mixing with civilian populations dramatically increases the task complexity for a conventional force that must minimise the deaths of innocent civilians for any hope of strategic victory.

US cyberdefense cannot be a perpetual 'greased pig race'

 

Having long struggled for an appropriate analogy to our dysfunctional cyber jurisdictional divisions between DHS, DoD, NSA, CIA and the FBI, I first chose baseball’s Pennant Race, then NASCAR’s Race to the Chase. But both pretend too much structure; I finally settled for old fashioned pig wresting or greased pig chases. It should be noted that the pig is a juvenile, merely evasive, not hostile. Were the pig an adult sow or boar, its pursuers would be greatly the worse for wear.

 

In yet another failed run at the pig, a recent director of the National Cyber Security Center (NCSC), Rod Beckström, resigned "over what he said is the National Security Agency's (NSA) domination of the nation's cybersecurity efforts" and that "allowing the NSA to control national cybersecurity efforts is a "bad strategy on multiple grounds."

 

My observations:

  • "Homeland security" starts far beyond US borders; waiting till it arrives onshore to be discovered by DHS is too late.
  • DHS may be the traditional protector of civilian networks but they have done an miserable, execrable job of it, washing through one cyber-czar after another. (When even Dick Clarke departs, you know the situation is untennable, and there has been no effective improvement.)
  • Anyone who thought that a tiny appendage within DHS such as Rod Beckstom's National Cyber Security Center (NCSC) could perform a task that Clarke could not has no clue of how the federal bureaucracy functions, but then Beckstrom was the infinite outsider.
  • Only a group with the prestige, capability, scope and bureaucratic muscle of an NSA can mandate a Pax Cyberica.
  • NSA has the rigor and resources to work out standards of reasonably scalable response protection whereas no one in the commercial sector can come near.
  • Protecting civilian networks is herding cats UNLESS changes/upgrades are mandated to all parties lest one player think that another player is gaining a competitive advantage by skipping infrastructure upgrades. (This is exactly the same problem that is inhibiting protective improvements in the commercial power grid).
  • Yes, NSA has, in my opinion, made missteps but I extend the benefit of the doubt in saying that NSA was forward leaning in a very permissive, even cheerleading, environment coming on the heels of 11 September. Better to hold judgment until operation is reviewed under Obama’s rules.
  • I suggest that the "Beckstrom function" needs to exist, if nothing else, to deliver external news, needs and opinion back to NSA, but to do that it needs to be a group attached more to DCI and not DHS.

In a similar vein, an earlier head of DHS’s National Cyber Security Division, Amit Yoran, stated that while DHS had been demonstrably inept (demonstrated "inefficiency and leadership failure"), ceding the function to the one group that could reasonably work the problem, the intel community and NSA in particular, placed the nation in "grave peril." I submit the greater peril is to continuing to chase pigs while expecting different results.

 

The following snippets from Yoran carry my observations following COMMENT:

The government's national cybersecurity efforts would be in "grave peril" if they were dominated by the intelligence community

COMMENT: Possibly, by no means an absolutism. 

"One of the hard lessons learned from the Terrorist Surveillance Program is that such a limited review can lead to ineffective legal vetting of a program," Yoran said. "The cyber mission cannot be plagued by the same flaws as the TSP."

COMMENT: Agreed. TSP was dimly architected, archaic in responsiveness. In short, all manner of silliness that should not be repeated in any application.

Yoran said the intelligence community's mission -- to collect information on adversaries -- is at odds with the mission to secure networks. Faced with a network compromise, the intelligence community's focus would be on counterintelligence activities targeted at the offender rather than working with the public and private sector to secure the network. "Simply put, the intelligence community has always and will always prioritize its own collection efforts over the defensive and protection mission of our government's and nation's digital systems,"

COMMENT: The reflex is in that direction, but a charter can be established to achieve the mission, including all the standard career tracking for those involved so that it does not become a black hole. Also, staff must be selected, not subject to the "each dept give x people" as those people will be the most expendable.

"High levels of classification prevent the sharing of information necessary to adequately defend our systems... It also creates insurmountable hurdles when working with a broad range of government IT staffs that do not have appropriate clearances, let alone when trying to work with, communicate and partner with the private sector. Classification cannot be used effectively as a cyber-defensive technique, only one for avoiding responsibility and accountability."

COMMENT: Can be, but if standards are going to be mandated, they must be discussed for impact and rolled out to all. There can be no effective standards proliferation without sharing, negotiating, and defining both process and firmware changes.

Charney said that there was no question that the NSA was the government's center of technical expertise, but that to get the public "to trust that the networks are being secured well in a transparent fashion, the mission cannot reside in NSA."

COMMENT: The mantle of the new administration can wipe away much of that 'trust' issue. As to mechanics, see answer immediately above.

Instead, he recommended that the DHS retain its lead operational role over cybersecurity but work with the NSA in a way that utilizes the agency's technical expertise.

COMMENT: DHS has been copeless at worse, not architected to deliver or enforce at best. DHS is categorically not the center of excellence in IT hardening skills. Only NSA fullfills that role whereas DHS is seen, with good reason, as feckless.

Yoran said DHS had demonstrated "inefficiency and leadership failure" in its cyber efforts and that "administrative incompetence and political infighting" had squandered its efforts to secure the nation's infrastructure for years.

COMMENT: Correct, and if you believe this, you cannot possibly park the cyber effort within DHS.

 

The forgotten asset

 

It was widely recognized among the military collection assets, Army Security Agency (disbanded, assets rolled into INSCOM), Naval Security Group (now NIOC), and the Air Force Security Services (now Air Force Intelligence, Surveillance and Reconnaissance Agency (IRS), that they were regarded by NSA as "cheap hired help" in field collection and analysis.

 

Conversely, conventional force commanders of all services rarely understood what these three security services did and how conventional forces could reduce their electronic vulnerability. Career intelligence soldiers that did not command an infantry or armored unit, vessel or aircraft did not ascend the promotion ladder, often being transferred into non-technical billets.

 

It appears that matters are now worse as the need is ever more critical. Writing in Spring 2009 issue of the Information Assurance Technology Analysis Center (IATAC) newsletter, two serving officers, Conti and Surdu, state:

The Army, Navy, and Air Force all maintain cyberwarfare components, but these organizations exist as ill-fitting appendages that attempt to operate in inhospitable cultures where technical expertise is not recognized, cultivated, or completely understood. The services have developed effective systems to build traditional leadership and management skills. They are quite good at creating the best infantrymen, pilots, ship captains, tank commanders, and artillerymen, but they do little to recognize and develop technical expertise. As a result, the Army, Navy, and Air Force hemorrhage technical talent, leaving the Nation’s military forces and our country under-prepared for both the ongoing cyber cold war and the likelihood of major cyberwarfare in the future. One need only review the latest computer security report card, which gave the Federal Government an overall grade of C, and the Departments of Agriculture, Commerce, Defense, Interior, Treasury, Transportation, and Veterans Affairs a grade of D or lower, to understand our nation’s vulnerability.

Richard Bejtlich summarizes the issues and provides corroborating personal observations. The implications for a sustaining military cybersecurity asset are ugly and not easily resolved.

 

 

Microsoft Executive Tapped For Top DHS Cyber Post

By Brian Krebs

Security Fix

Posted at 6:53 PM ET on Mar 11, 2009

 

A Ship Without a Captain

Kevin Coleman

Defense Tech

March 10, 2009 07:49 AM

 

NSA Dominance of Cybersecurity Would Lead to 'Grave Peril', Ex-Cyber Chief Tells Congress

By Kim Zetter

Wired

March 10, 2009 | 6:24:42 PM

  

A Struggle Over U.S. Cybersecurity

By Brian Krebs

Washington Post

March 10, 2009

 

10 IT agenda items for the first U.S. CIO

Obama's appointment of Vivek Kundra marks an important first step for rectifying the nation's concerns about IT

By Paul Venezia

InfoWeek
March 09, 2009

 

Federal cybersecurity director quits, complains of NSA role

Rod Beckstrom resigns from NSCS after less than a year, citing concerns over what he said is the NSA's domination of the nation's cybersecurity efforts

By Jaikumar Vijayan

InfoWorld

March 09, 2009

 

Cybersecurity chief Beckstrom resigns

Reuters

Sat Mar 7, 2009 6:19am EST

 

Cybersecurity Chief Resigns

By SIOBHAN GORMAN

WSJ

MARCH 7, 2009

 

Cyber-Security Czar Quits Amid Fears of NSA Takeover

By Noah Shachtman

Wired

March 06, 2009 | 11:52:14 AM

 

New Cyber COCOM Likely

By Colin Clark Friday,

DoD BUZZ

March 6, 2009 6:44 pm

 

NSA gains support for cyber security role

HS Daily Wire

Published 4 March 2009

 

NSA should beef up civil cybersecurity

Ian Grant

Computer Weekly

Posted: 17:39 26 Feb 2009

 

ANNUAL THREAT ASSESSMENT

HEARING OF THE HOUSE PERMANENT SELECT COMMITTEE ON INTELLIGENCE

WITNESS: MR. DENNIS C. BLAIR, DIRECTOR OF NATIONAL INTELLIGENCE

CHAIRED BY: REPRESENTATIVE SILVESTRE REYES (D-TX)

LOCATION: 334 CANNON HOUSE OFFICE BUILDING, WASHINGTON, D.C.

TIME: 9:00 A.M. ET

DATE: WEDNESDAY, FEBRUARY 25, 2009

 

Statement for the Record

Annual Threat Assessment of the Intelligence Community for the House Permanent Select Committee on Intelligence

Dennis C. Blair

Director of National Intelligence

25 February 2009

Buck Surdu and Greg Conti Ask "Is It Time for a Cyberwarfare Branch?"

Posted by Richard Bejtlich

TaoSecurity

February 24, 2009

 

Army, Navy, Air Force, and Cyber—Is it Time for a Cyberwarfare Branch of Military?

by LTC Gregory Conti and COL John "Buck" Surdu

IA Newsletter (IATAC)

Volume 12 Number 1, pp 14-18, Spring 2009

 

Outsider to Run Cyber-Security Initiative

By SIOBHAN GORMAN

WSJ

MARCH 20, 2008

About the bears and the bees: Adaptive responses to asymmetric warfare

Alex Ryan, DSTO, Australia

Proceedings of the Sixth International Conference on Complex Systems

Editors Ali Minai, Dan Braha, Yaneer Bar-Yam

June 25-30, 2006, Boston, MA

 

U.S. cybersecurity chief resigns

By Robert Lemos

Staff Writer, CNET News

October 1, 2004 2:52 PM PDT

 

Where is the Battle-line for Supply Contractors?

By Susan A. Davidson, Maj, U.S. Army
AU/ACSC/038/1999-04

April 1999

Reprinted: Air Force Journal of Logistics, Vol 23, No 2, pp 12-19

Summer 1999

Published by DIANE Publishing

ISBN 1428990941, 9781428990944

 

FM 101-5-1/MCRP 5-2A

Operational Terms and Graphics

Headquarters, Department of the Army/U.S. Marine Corps

30 September 1997

 

Gordon Housworth



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Intellectual Property and Investment Risk in Russia

  #

 

Intellectual Property and Investment Risk in Russia was presented 30 October, 2008.

 

Individuals and firms that are used to a US or EU business and legal assumptions are at a great disadvantage in the Russian Federation. It it still difficult to listen to skilled attorneys describe an "effective compliance program" for a US and Russian relationship but the reality is that the compliance program is for the US Sarbanes Oxley, SEC, FCPA side of the relationship.

 

The Institute of Corporate Law and Corporate Governance (ICLG) is correct to say that "no due attention is paid to corporate governance risks" and that the "fundamental problem in the area of corporate governance in Russia is the fact that company insiders (managers and controlling shareholders) abuse their position to the detriment of minority shareholders, including expropriation of assets" through transfer pricing, asset stripping, capital dilution, restructuring/mergers, and lack of transparency.

 

We would add brazen cash stripping to that list but it still understates the Russian condition as things are much more fluid and opaque on the Russian side. A European colleague schooled in Russia and skilled in dealing with Russians advised thusly:

If you want to protect your IP in Russia, don't bring it. If you want to protect your asset in Russia, don't invest...

 

Every law exists... on paper... Everything is possible [in Russia]; everything is impossible...

 

[You are] wasting time and money trying to go to court with a Russian company. [You must] Use Russian strong points; use Russian weak points... If you use US or British law you will pay, pay, pay and pay.

 

[Largest corruption risk is] any business condition where cash exists. No cash and you are [a] little safe.

For those of you who must invest or must bring IP, read Intellectual Property and Investment Risk in Russia. You must:

  • Question everything you hear.
  • Listen for what you do not hear, what is omitted.
  • Treat minor steps (such as connecting to a "nearby" power drop) as a rigorous supply chain analysis.
  • Test every assumption of what will work or not work, how long it will take and at what cost.

Even the simplest steps in any given transaction become opportunities for unexpected cost-ups. The same issue, something as simple as documentation and certification of goods becomes an opportunity to incur repeated costs on the same item.

 

You will need assistance. And that assistance will need to be working solely on your behalf and not unknown counterparties. The analogy is relying on the counterparty's translator during a negotiation. What is translated and how it is translated are at the whim of the counterparty and not your side.

 

Beyond traditional financial support in regulatory compliance, you will require non-financial support in regulatory compliance and corporate governance programs:

  • Establish third party valuation, handling non-financial aspects (undisclosed valuation-relevant issues, such as liabilities relating to key personnel).
  • Structure investments and engage new counterparties (interests, background, reputation, litigation, and other factors that may transfer risk to you).
  • Mitigate exposures beyond reach of contractual and financial risk management options.
  • Support requirements for governance, FCPA) and Patriot Act (funds, contacts, customers, and adverse relationships with unseen third parties).

In terms of business strategy you will require assistance in: 

  • Actionable, timely information about specific industries, markets, prospects, and counterparties.
  • Monitoring specific risk areas.
  • Business facilitation support, due diligence on local staff, and support for development personnel as they review in-country prospects.
  • Vetting local partners and identify undisclosed issues to build good local relationships operating under optimal terms.

You will need assistance in realistic IP protection as opposed to "feel good" security steps that will lull you into complacency. Russian law requires that you set up "trade secrets regime" at your Russian workplace otherwise your trade secrets do not legally exist. (IP law in Russia is now in Part Four of the Civil Code.)

 

In what amounts to your identifying a target set to an IP collector, you must state the IP, state who has access to the IP, identify it as such to all employees, and then establish workplace rules that are reflected in your workplace labor agreements. All this must occur under the cumbersome Russian union canopy.

 

It is refreshing to see some attorneys acknowledge Russia's systematic commercial corruption and its effect on legal matters. (Medvedev has made a public effort to improve the legal environment but Russians do not take his actions seriously. At best these steps are seen to be directed internally rather than externally.)

 

Problems still occur when Western attorneys reflexively apply US concepts to the Russian environment. For example, when asked what was the "optimal stake" to acquire in a Russian entity, a good, Russian speaking US attorney replied "100% as you then have full control." The reality is that '100% control' leaves you vulnerable as you own 100% of the responsibility. Not a recommended condition in Russia.

 

You will need assistance going to Russia. Call us.

 

Governance & Anti-Corruption

World Bank Institute

 

Indicators of Governance & Institutional Quality

World Bank Institute

 

Doing Business - Economy Rankings

World Bank

Doing Business 2009

 

Doing Business - Russian Federation

World Bank

Doing Business 2009

 

Russian Economic Survey

Keith Bush, Research Director

US-Russia Business Council

October 2008

 

Doing business and investing in the Russian Federation, 2008 edition

PricewaterhouseCoopers

2008

Ruissian Federation thumbnail summary

 

2008The Russian Economic Survey - ALL ISSUES

Comprehensive review of the Russian economy, produced monthly by Keith Bush, the Council's Director of Research.

 

Corporate Governance and Emerging Markets: Lessons from the Field

Cally Jordan, Mike Lubrano

U of Melbourne Legal Studies Research Paper No. 356

July 29, 2008, Last revised: September 19, 2008

 

Russian Economic Report

The World Bank in Russia

No 16, JUNE 2008

 

Governance Matters VII: Aggregate and Individual Governance Indicators, 1996-2007

Daniel Kaufmann, World Bank Institute; Aart Kraay, World Bank - Development Research Group (DECRG); Massimo Mastruzzi

World Bank Policy Research Working Paper No. 4654

World Bank Institute

June 24, 2008

 

2008 CORRUPTION PERCEPTIONS INDEX

Persistently high corruption in low-income countries amounts to an "ongoing humanitarian disaster"

Against a backdrop of continued corporate scandal, wealthy countries backsliding too

Transparency International

2008

 

The Global Competitiveness Report 2008-2009

The Global Competitiveness Index rankings and 2007-2008 comparisons

World Economic Forum

PDF

2008

 

Russian market special commentary

BNP Paribas

Flash Report

July 2008

 

Worldwide Governance Indicators: 1996-2007

World Bank

Released - June 2008

 

Governance Indicators: Where Are We, Where Should We Be Going?

Daniel Kaufmann, Aart Kraay

The World Bank Research Observer, vol. 23, no. 1 (Spring 2008)

 

Expanding Overseas: The Best Large Markets

by Jennifer Alsever

Bnet

April 2008

 

Dmitri Medvedev, in His Own Words

Excerpts of speeches by and interviews with Dmitri A. Medvedev, President Vladimir V. Putin's hand-picked successor, as posted in English on his campaign Web site.

New York Times

February 28, 2008

 

INTELLECTUAL PROPERTY: Risk and Enforcement Challenges

Statement of Loren Yager, Director, International Affairs and Trade

Testimony Before the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property

GAO-08-177T

October 18, 2007

MIRROR

 

Transparency of Russian companies: results of the study conducted by Standard & Poor's with the support of the MICEX Stock Exchange in 2007

MICEX

November 15, 2007

 

A Decade of Measuring the Quality of Governance

The International Bank for Reconstruction and Development / The World Bank

Governance Matters 2007

Worldwide Governance Indicators, 1996-2006

 

New Concerns in an Uncertain World

Foreign Direct Investment Confidence Index

A.T. Kearney

2007

 

Deloitte Study: Emerging Market Innovation

The management consultancy surveyed 446 top executives to profile business practices of U.S. companies in developing countries

by Reena Jana

Deloitte Touche Tohmatsu

Page Last Updated: July 23, 2007

 

Asia/Pacific Cities Among Frontrunners in MasterCard Ranking of the World's Centers of Commerce

New MasterCard Research Explores Strategic Role of Cities in Driving Global Commerce

Report Names 50 Cities as Hubs of the New Worldwide Economy

Auckland, 13 June 2007

 

Special Report: Russia Post-2008: Road To Riches Or Slippery Slope

RatingsDirect

Reprinted from http://www.ratingsdirect.com/

Jan 19, 2007 22:50 Europe/London

Publication date: 19-Jan-07, 17:50:41 EST

 

Global Threat Research Report: Russia

Eli Jellenc, Senior Threat Intelligence Analyst

Kimberly Zenz, Senior Threat Intelligence Analyst

An iDefense Security Report

Jan. 10, 2007

 

Bribe Payers Index 2006

Transparency International

2006

 

INTERNATIONAL PROPERTY RIGHTS INDEX (IPRI) 2007

International Property Rights Index (IPRI)

By Alexandra C. Horst

2006

 

A Decade of Measuring the Quality of Governance

Worldwide Governance Indicators

Governance Matters 2006

 

World Bank Puts Russia on Par With Swaziland

Russia is comparable to Swaziland, Zambia and Kazakhstan in how it governs, according to a World Bank report released Friday.

Moscow Times

18 September, 2006

 

Timeliness of Financial Reporting in the Russian Energy Sector

Robert W. McGee

Florida International University - School of Accounting

April 2006

 

Global Sourcing: Destination Russia

Eugene Kublanov, Paul Melling, Art George, Michael Mensik

Baker & McKenzie LLP

February 23, 2006

 

Corporate Governance in the Oil and Gas Industry

Cases from Poland, Hungary, Russia and Ukraine in a Comparative Perspective

Andreas Heinrich, Aleksandra Lis and Heiko Pleines

Koszalin Institute of Comparative European Studies (KICES)

KICES Working Papers

ISSN: 1895-0450

No. 3, December 2005

 

International Trends in Corporate Governance

Justin Reynolds

ISS Europe

Vienna, 4 October, 2005

 

Russian Companies Show Themselves Only by Half

Kommersant Moscow

Sep. 23, 2005

 

Russian IT Seasons Seminar
Arthur L. George
Partner, Baker & McKenzie, Chicago
Chicago, September 22, 2005

 

Corporate Governance and Corruption: A Cross-Country Analysis

XUN WU, National University of Singapore

Governance: An International Journal of Policy, Administration, and Institutions, Vol. 18, No. 2, pp. 151-170

ISSN 0952-1895

April 2005

 

Russia BusinessWatch

US-Russia Business Council

Vol 13, No 1

January-March 2005

 

Transparency And Disclosure By Russian Banks: Disclosure Practices Of Russian Banks Currently Dismal

Julia Kochetygova, Nick Popivshchy, Oleg Shvyrkov, Levon Atanassian, Elena Pastukhova

Standard & Poor's Governance Services

October 26, 2005

 

Transparency And Disclosure By Russian State-Owned Enterprises

Standard & Poor's Governance Services

Julia Kochetygova, Nick Popivshchy, Oleg Shvyrkov, Vladimir Todres, Christine Liadskaya

Prepared for the Roundtable on Corporate Governance

organized by the OECD in Moscow on June 3, 2005

June 2005

 

Russia: Investment Destination

A survey of foreign investors

Conducted by PBN

Foreign Investment Advisory Council (FIAC)

March 2005

 

The links between intellectual property crime and terrorist financing

Text of public testimony of by Ronald K. Noble,

Secretary General of INTERPOL

Before the United States House Committee on International Relations

One hundred eighth congress

July 16, 2003

 

An American Compliance Officer at a Russian Bank

For Your Information

Bankers' Association for Finance and Trade (BAFT)

Volume 8, Number 1

February 2003

 

Corporate Governance in Russia

Investor Perceptions in the West and Business Reality on the Ground

SRU Limited

October 2002-January 2003

 

Gordon Housworth



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Realistic Intellectual Property (IP) Protection in China, Updated: 26 Jun, 2008

  #

Realistic IP Protection in China, 26 Jun, 2008, is the latest in our series on Intellectual Property (IP) threat and remediation given at the GlobalAutoIndusty (GAI) conference on 26 June.

In preparation of this particular conference, GAI asked for "What you will learn" bullet points to include in their trade press. My immediate response was this set of six key takeaways:

  1. Define IP and its loss
  2. Redefine the nature of IP loss into a workable global framework
  3. Understand the nature of supply chain "risk at any tier" as opposed to "risky countries"
  4. Learn the common "solutions" that do not work, that actually leave the user more vulnerable
  5. Overview an approach that does work, drawn from counterintelligence practice
  6. Know that most of your advisory firms are less skilled in IP protection than you are.

Reviewing previous IP risk presentations against these criteria, the latest China risk presentations best address these key points as the risk analyses for India, Mexico and Brazil have to contrast too many other topics such as threats to personnel and facilities, terrorist focus on disrupting BPO and data centers, and impacts of the drug trade.

For those wishing to dig deeper into the 26 June China presentation:

Keynoted topical thefts and acts of piracy, as well as the government's capacity to suppress illegal activities when it is so inclined, are explored in detail in:

The processes on risk remediation and the Design Basis Threat (DBT) analysis and response are addressed at length in this two part series:

The "Misadventures in IP protection" summary is abstracted from the detailed analysis of PRTM's survey of failed IP "protective" practices employed by a set of global automotive suppliers in: 

Just as this note was going to release, I was discussing the fake Chinese iPhone clones (also here) that are just now gaining notoriety in the west. My colleague offered yet another example of how little things change in China when it is not in the government's interest to suppress illegal activity that produces revenue and growth so long as it does not embarrass the party:

A year ago I was in Beijing with [Taiwanese colleague], who grew in Taiwan before getting his MS degree at Stanford. A few  blocks from our Hotel on the main street were two multi-tenant shopping buildings, one for tourists, with likely all legitimate goods, cashmere clothing, tabletop art, furniture, and so on.

 

The other according to [him] had been knocked off the Internet (the authorities had begun their ongoing show of cracking down on counterfeit stuff in prep for this summer).  It was jammed with aggressive merchants manning small booths, many chock full of fake watches, others selling cameras, cell phones, knock-off designer clothing.  When I walked through by myself, several called out "iPhone" and I stopped to look at them.

 

[Both of us] went back and heard none of that. I even went to one that an hour earlier had showed me one and when I asked was told they had no such thing.  The likely reason for the change was that they thought [my colleague] was with the [Chinese] authorities. [private email]

Fake Chinese iPhone is Pretty Good Photocopy of the Real Deal

By Kit Eaton

Gizmodo

3:56 AM on Thu Jul 3 2008

 

Fake Chinese iPhones Look Pretty Convincing

posted by arn on Thursday July 03, 2008 12:34 AM

MacRumors/iPhone

Gordon Housworth



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Olympian embarrassment coupled with central government revenue loss produce instant Chinese Intellectual Property (IP) compliance

  #

Excess optimism in the face of asset harvesting

This writer has long identified IP risks in China:

[E]dicts on IP infractions, or anything else, often rarely leave Beijing as provincial, city and enterprise zone mangers do largely as they wish and are tolerated so long as they bring growth and revenue without significant embarrassment to the Party (CCP)...

The CCP (Chinese Communist Party) can only maintain its "mandate from heaven" to govern by providing rising economic growth, nor can it maintain the PLA (People's Liberation Army) solely on the "imperial wheat" of government subsidy.

Various Chinese sources have pleaded the 'youth' of their nation, implying that foreign aggrieved targets must grant China more time to reform such practices. The reality is that China is unique among developing nations. Even in 1980 it had a "first world" mentality atop a "third world" industrial capacity. China's controlled economy closed off industrial penetration and investment that it did not like while it turned a benign eye on the means by which domestic industries nurtured growth, revenue and industrialization. The Chinese Communist Party (CCP) encourages IP collection and can and will suppress it when it suits state needs.

 

Suppliers and those with assets of interest to the PRC inhabit a Panglossian world if they do not believe that their assets are at risk or subject to interdiction by the authorities if party or state security is deemed at risk. For readers immune to the attractions of Voltaire, his novella "Candide" (Optimism) showcased a character Dr. Pangloss ("all tongue" or "windbag") in order to:

point out the fallacy of [Gottfried] Leibniz's theory of optimism and the hardships brought on by the resulting inaction toward the evils of the world. Voltaire's use of satire, and its techniques of exaggeration and contrast highlight the evil and brutality of war and the world in general when men are meekly accepting of their fate. Leibniz, a German philosopher and mathematician of Voltaire's time, developed the idea that the world they were living in at that time was "the best of all possible worlds." This systematic optimism shown by Leibniz is the philosophical system that believed everything already was for the best, no matter how terrible it seemed. In this satire, Voltaire showed the world full of natural disasters and brutality. Voltaire also used contrast in the personalities of the characters to convey the message that Leibniz's philosophy should not be dealt with any seriousness... Voltaire created the character Dr. Pangloss, an unconditional follower of Leibniz's philosophy. Voltaire shows this early in the novella by stating, "He proved admirably that there is no effect without a cause and that, in this best of all possible worlds...." Pangloss goes on to say that everything had its purpose and things were made for the best. For example, the nose was created for the purpose of wearing spectacles...

Intersection of state embarrassment, national pride, and central government revenue loss

The Summer Olympics in Beijing is the latest in a series of intrastate events that repeatedly demonstrate that the PRC can act decisively to curtail threats as diverse as Intellectual Property (IP) theft (below) and unrest in the aftermath of the Sichuan earthquake:

The furtive trade in the five official, adorable Olympics figures -- including Huanhuan, Jingjing the Panda and others -- is part of an Olympic-size battle that has erupted between the keepers of the Games' lucrative symbols and an army of Chinese citizens who traffic in counterfeit versions of the world's most coveted brands.

 

For years, China has been known as the leading exporter of fake goods, from Louis Vuitton handbags and Patek Philippe watches to auto and jet engine parts. The underground economy, which according to U.S. trade officials costs American companies $3 billion to $4 billion annually, has been allowed to flourish by a Chinese government that seldom prosecutes intellectual property violations.

 

But the Olympics have mobilized China's piracy police like never before. Beijing, the host city, stands to receive up to 15 percent of all revenue from Olympic merchandise, a figure expected to easily top the $62 million raised in Athens four years ago. Aside from the mascots, China is also reportedly collecting up to $120 million each from Coca-Cola, McDonald's, Adidas and other companies that have qualified as the highest-level Olympic sponsors.

 

With the world's gaze on China in the run-up to the Aug. 8-24 Games, officials have moved to make sure counterfeit goods don't reflect poorly on the festivities. Fake Adidas clothing that was widely available at popular Beijing markets a year ago is now hard to find.

 

"It's a political mission, and the government doesn't want anything to ruin the quality of the Games," said Wang Hai, a Beijing-based advocate who has campaigned against fakes and worked with government officials to crack down on counterfeiters. "The Olympics are about the country's image, so it has a priority."

 

Through stepped-up market raids and better interagency coordination, officials have demonstrated that they can reduce counterfeiting. But in doing so, they have forced the sale of fake Olympics mascots and other souvenirs onto the black market...

 

"It proves that China can do something about the problem when its own interests are aligned with the crackdown... More police have joined the fight against counterfeiting, which used to be primarily the domain of commerce and quality-inspection officials, Wang said. Companies are beginning to successfully sue markets for selling fake merchandise. And thresholds for the amount of illicit proceeds that constitute a crime have been cut in half, to about $7,000 for individual suspects and about $21,000 for companies.

 

The counterfeiting of Olympic products has cost other host cities, including Atlanta and Salt Lake City, millions of dollars. But the scope of the problem in China is particularly vast. At Yiwu market, for example, a major destination for Chinese wholesalers and tourists, there are tens of thousands of shops and more than 200,000 vendors.

Conversely, when the PRC is secure that no international embarrassment will occur, the penalty for even modest transparency is swift:

The Communist Party's Central Propaganda Department and the official All-China Journalists Association issued a directive ordering [Pang Jiaoming's] employer, the China Economic Times, not only to fire him, but also to "reinforce the Marxist ideological education of its journalists." In a separate notice to news organizations across China, Pang said, propaganda officials announced that he was also banned from further work as a reporter at other publications.

 

Pang's offense was a pair of articles reporting that substandard coal ash was being used in construction of a showcase railroad, the $12 billion high-speed line running 500 miles between Wuhan, in Hubei province, and Guangzhou, an industrial hub just north of Hong Kong. The ash is a key ingredient in concrete used for tunnels, bridges and roadbed, Pang wrote, and a substandard mix raised the specter of collapsing structures and tragic accidents.

 

Pang's report, which was published on the front page, illustrated the growing desire of young Chinese reporters to push the limits of the country's draconian censorship system. In a booming and fast-transforming economy riddled with corruption, they have found a fertile field for investigative journalism, along with readers increasingly hungry to know about malfeasance that affects their lives.

 

But his fate also dramatized how helpless China's journalists remain under the thumb of an authoritarian government that maintains a vast propaganda bureaucracy with unquestioned power to control what is published and decide who rises and falls in the news business.

"The Chinese government usually only manages during a crisis... When things reach a peak and they have to deal with it, they will."

 

While the following action outcome was written in 2008, it could have easily been 2002 0r 2006:

Counterfeit mascots were produced almost immediately after the government unveiled the official versions in November 2005. For a time, fake versions of Beibei the Fish, Yingying the Tibetan Antelope and Nini the Swallow, as well as Jingjing the Panda and Huanhuan the Olympic Flame, were easily found at Beijing subway stops. Now, in the capital, they are harder to spot. "When the authorities feel more pressure from America, they can do it, they take it seriously...

 

[Chinese] officials were generally taking a greater interest in protecting [Chinese] intellectual property, in hopes of encouraging entrepreneurs to create their own brands while assuring them that those brands will be protected. But the Olympic Games provide another incentive. "The Chinese government usually only manages during a crisis... When things reach a peak and they have to deal with it, they will."

In 2002, the authorities made a determined and largely successful effort to protect the film release of Zhang Yimou's "Hero," as the Chinese government was intent on protecting the revenue of a Chinese director well known in the west and whose film needed recognized attendance figures:

When the members of the preview audience showed up at China's fanciest new movie theater here this week, they were treated to much more than just the first look at Zhang Yimou's big-budget martial-arts film, ''Hero.''

 

Viewers had identity card numbers inscribed on their tickets. They were videotaped as they entered the theater's foyer. They handed over all cellphones, watches, lighters, car keys, necklaces and pens and put them in storage. Before taking their seats, they passed through a metal detector. Then they got a welcoming address.

 

''We are showing this preview for your enjoyment tonight,'' announced Jiang Wei, an executive with the film's Chinese distribution company. ''I plead with you to support our industry. Please do not make illegal copies of this film.''...

 

Security guards heightened the drama at the theater. They ordered people to leave behind jewelry and pens to protect against ''needlepoint'' digital camcorders, though varying descriptions of how such devices worked sounded more like something Q made for 007 in a James Bond movie than a common pirate's tool. Uniformed policemen roamed the aisles during the film. A few sat in front of the screen and watched the audience with what appeared to be night-vision binoculars...

 

The belt-and-suspenders security procedures during the limited release of ''Hero'' at New South Country Cinema here, just across the border from Hong Kong, were aimed at protecting what China's film industry hopes will be the biggest martial arts sensation since ''Crouching Tiger, Hidden Dragon.'' The movie, with an all-star cast led by Jet Li, cost $30 million, making it China's most expensive film production to date. Beijing will submit it to the Oscars as a candidate for best foreign-language film. Miramax, a division of Disney, has bought the international rights...

In 2006, the authorities summarily suppressed and gerrymandered showings of foreign films in an effort to prime attendance figures for Zhang Yimou's "Curse of the Golden Flower" submission as an Academy Awards candidate. (Zhang Yimou is one of the most successful of the Fifth Generation group of filmmakers - talented graduates who emerged from the Beijing Film Academy after the Cultural Revolution. Yimou achieved international acclaim in 1991 with "Raise the Red Lantern."):

In the midst of a boffo three-week run, Chinese authorities suddenly plucked "The Da Vinci Code" from theaters. Even though "Mission: Impossible 3" was made in China with full approvals and scrutiny, local bureaucrats abruptly delayed its release... The big question: Is China limiting Hollywood pics to keep its local movie industry in the race?

 

While such speculation reflects tinges of paranoia on the part of frustrated executives -- and would be difficult to prove -- the situation is being taken seriously enough that the Motion Picture Assn. has commissioned an internal report to examine what has happened...

 

Day-and-date releases are hugely popular -- the recent gala opening of "Da Vinci Code," which had its world preem in China, was one of the social occasions of the year -- and big premieres are used to showcase China's growing openness and tolerance. But while the politicos are happy to enjoy the night out, they are less happy with the commercial and political ramifications of hugely successful foreign product...

 

A heavy hint that the government is prepared to take action favoring Chinese film at the expense of others came during last month's Shanghai Film Festival. While opening-night addresses are usually congratulatory and banal, State Administration for Radio, Film & Television (SARFT) director general Hu Zhanfan dropped a couple of sentences into his speech describing "preferential treatment for commercial Chinese cinema" and the "opportunities ahead for domestically produced movies to increase screenings...

 

State news agency Xinhua also quoted Liu Shusen, distributor of a number of recently released low-budget local films, saying, "The box offices of these movies would be guaranteed by SARFT, which required theaters across the country to allocate time spaces, and to organize officials, students and soldiers to watch."...

 

[US] Studio execs do not view China's film restrictions as malicious, but they fear worse is to come, and that administrative tools are being used to make commercial reality fit a policy goal. Specifically, they worry that:

  • the 20 films imported into China each year and eligible for revenue-sharing distribution are being selected to keep B.O. on Hollywood pics down;
  • there is an unofficial ceiling of RMB100 million ($12.5 million) placed on the revenues of foreign films. In other words, "Da Vinci" may not be the last Hollywood film whose run is cut short prematurely in China;
  • censorship and approvals bureaucracies are being used to delay the release of Hollywood movies. This keeps marketers in the dark until the last minute and allows disc piracy to erode theatrical potential;
  • the number of "blackout" periods in which foreign films are not allowed to release is on the increase from a typical two or three to perhaps five this year.

Chinese authorities deny any attempt at market manipulation... While most individual instances of release difficulties for foreign movies can be attributed to plausible explanations, taken together the list of complaints looks to some like the manifestation of a policy to suppress Hollywood's B.O. in China...

 

Trouble is, 2006 has been a lousy year for Chinese releases. And in order to maintain the very important Asian concept of "face," which roughly translates as "respect," films of other nationalities are being held down...

 

The regular April blackout of foreign films -- intended to allow room for local movies in theaters -- appeared to protect nothing much at all [while]  Zhang Yimou's crucially important "Curse of the Golden Flower" was [not scheduled for release until] December.

Beijing's willingness to damp down its long awaited international coming out party

It is hard to overstate the CCP's attention to, and expectations for, the 2008 Summer Olympics in Beijing. It was to be nothing less than an international showcase for China as well as an ambassadorial and financial windfall to the state. With party and state image now at risk, the state has reluctantly but forcefully opted for the state:

[With] the Olympics less than two months away, China has been restricting foreign visitors from entering the country in the hope of guarding against terrorist threats or unruly visitors who might plot to disrupt the Games, which begin Aug. 8. The government appears to be approving fewer tourist visas. Business executives say they face new bureaucratic hurdles to visiting the city. And hotels are being asked to give the government detailed information about foreign guests.

 

The measures, combined with the tragic news about the powerful earthquake in Sichuan Province last month, have already sapped tourism in China and cast a pall over Beijing during what was supposed to be a busy and jubilant tourist season leading up to the Olympics.

 

The high published rates for Beijing hotels during the summer and difficulty getting Olympic tickets have also dampened expectations, even though many five-star rated hotels say they are fully booked during the Olympics...

 

The government does not seem to have come to its decision lightly. In a year plagued by riots in Tibet, protests of the Olympic torch relay, a terrorist plot to kidnap journalists covering the Olympics (according to Beijing officials) and the Sichuan earthquake, the government is stressing public safety, above all else.

 

Beijing appears less concerned about being the host of a global party, experts say, and more concerned with making sure no one spoils it... If there were any doubts about Beijing's priorities, they were made clear [with] the announcement that 100,000 commandos, police officers and army troops would be placed on high alert during the Games, signaling that China is prepared for anything...

 

Nothing is hurting more than the visa policy... Hotel operators are also frustrated. A massive hotel building boom - which has bolstered the number of four- and five-star hotels in Beijing from about 64 in 2001 to 161 as of April 30, according to government figures - is beginning to look frothy. Many operators are depressed...

If any supplier believes that their assets will fare any better in the face of state interest, Dr. Pangloss has a world for you, the best of all possible worlds.

Visa limits undermine Beijing's tourism hopes

By David Barboza

IHT

Friday, June 20, 2008

 

China's Olympic Turnabout on Knockoffs

Fake Games Merchandise Targeted

By Maureen Fan

Washington Post Foreign Service

June 13, 2008

 

Chinese Parents Call Off Quake Memorial After Official Warning

By EDWARD WONG

New York Times

June 13, 2008

 

China Vows Harsher Punishment on Piracy amid "Grave" Situation

Xinhua

CRI English

2008-06-13 20:17:23

 

The "ten firsts" that follow China's massive quake

China View/Xinhua

2008-06-13 04:14:05

 

Some Chinese Officials Punished, Some Promoted for Actions After Quake

By Edward Cody

Washington Post Foreign Service

Tuesday, June 10, 2008; 10:39 AM

 

DPRK media: Chinese army's response to quake shows high combat capacity

China View/Xinhua

2008-06-03 16:59:26

 

Quake Is Formidable Challenge to China's Government

Rescue and relief efforts continue in China as the death toll from Monday's 7.9-magnitude earthquake neared 15,000 and is expected to rise, with tens of thousands still buried in rubble. An analyst examines how the country and its government have handled the disaster.

Gwen Ifill, Judy Woodruff

NewsHour

May 14, 2008

 

China moves quickly in quake zone

The country's deadliest quake in three decades hit central China Monday.

By Peter Ford

Staff writer of The Christian Science Monitor

from the May 13, 2008 edition

 

News Analysis: China's response to quake is unusually open

By Andrew Jacobs

IHT

Tuesday, May 13, 2008

 

Powerful Earthquake Destroys Buildings, Builds Mountains in China

There's a saying among seismologists: "Earthquakes don't kill people. Buildings do." The powerful 7.9 magnitude earthquake that rocked central China on Monday afternoon, killing upwards of 8,500 people, was a grim reminder of that common phrase.

By Jenny Marder, NewsHour with Jim Lehrer

May 12, 2008

 

Dishonesty in world of luxury brand goods

By Dana Thomas

China Daily

Updated: 2007-11-29 07:22

 

Chinese Muckraking a High-Stakes Gamble

Propaganda Authorities Intervening With Increasing but Unpredictable Frequency

By Edward Cody

Washington Post

November 12, 2007

 

China's global luxury brand workshop
By Olivia Chung
Asia Times
Apr 14, 2007

 

Zhang Yimou Blames China's Movie System

Shanghai Daily

CRI English

2006-12-25 14:38:00

 

Curse of the Golden Flower not violating copyright!

Posted by Joel Martinsen

DANWEI

December 22, 2006 3:39 AM

 

Chinese film industry split over "Curse"

UPI/M&C (Monsters & Critics)

Dec 20, 2006, 2:08 GMT

Original scrolled off

 

Curse of the Golden Flower breaks Chinese box office record

AFP

2006-12-19

Mirror

 

U.S. trade visit to China yields piracy promise, business deals

By JOE McDONALD

The Associated Press

Wednesday, December 13, 2006 - Page updated at 01:50 PM

 

Curse of the Golden Flower

Anne Thompson
Risky Business Blog
November 15, 2006

 

KEYNOTE ADDRESS TO THE ASIA PACIFIC ENTERTAINMENT AND MEDIA SUMMIT 2006

by Michael Schlesinger

Partner, Smith, Strong & Schlesinger LLP

NOVEMBER 6, 2006

LOS ANGELES, CALIFORNIA

 

Chinese checkers

The Great Wall shatters H'wood's hopes for pic blitz

By VARIETY STAFF

Posted: Sun., Jul. 16, 2006, 6:00am PT

 

Chamber of Commerce Asks U.S. to Crack Down on Chinese Copyright Violations

By ELIZABETH BECKER

New York Times

February 10, 2005

 

HERO (YING XIONG)

Zhang Yimou, China/Hong Kong, 2004

Interview with Zhang Yimou conducted by The Culture Show production team

BBC Four

November 2004

 

REALITY BITES: HOW THE BITING REALITY OF PIRACY IN CHINA IS WORKING TO STRENGTHEN ITS COPYRIGHT LAWS

By: Graham J. Chynoweth

iBRIEF / Copyrights & Trademarks

Duke Law & Technology Review 0003

2/11/2003

PDF

 

SHANGHAI TRIAD

Zhang Yimou, Hong Kong, 1995

Clare Norton-Smith

BBC Four

Saturday 1 February 2003 11.45pm-1.30am

 

The Pinch of Piracy Wakes China Up On Copyright Issue; It's More Than a Trade Dispute When the Victims Are Chinese

By JOSEPH KAHN

New York Times

November 1, 2002

 

Gordon Housworth



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Congressional Quarterly's remarkable recap of Israeli espionage

  #

Congressional Quarterly (CQ) recently released a startlingly candid analysis of Israeli espionage, including the process of Mossad's seeking "spotters" able to identify members of the Jewish-American community susceptible to recruitment:

Mossad agents also scout for people to help them in the Jewish-American community, he said, based on their religious and political commonality. It's a vast community of potential "spotters," who can point them to other Jewish Americans in government, law, finance and banking who might be susceptible to recruitment, as is the case with potential Chinese and Cuban recruits.

Furthermore, the level of Israeli penetration is so great that many or all trials on the topic may be hamstrung:

A former senior CIA counterintelligence operative believes the [Ben-Ami Kadish] case "will never go to trial, because of all the ugly stuff that would come out" about Israeli activities in the United States. Indeed, Justice Department attorneys have fought to keep "ugly stuff" from emerging in the trial of two officials of the American Israel Public Affairs Committee, or AIPAC, charged with accepting classified documents from Pentagon official Larry Franklin.

NOTE TO READERS: If you are already aware of pro-Israeli efforts to deflect frank discussions of US geopolitical interests, or are immune to comments critical of Israel, skip down to the full text mirror of the CQ article by Jeff Stein. If you are unfamiliar with Congressional Quarterly or the efforts to stifle debate I submit the next comments are worth the read as a follow-on to Israel was planting malicious chips in US assets before China.

For those unfamiliar with CQ, it is the gold standard in Capitol Hill and congressional reporting, fielding more than 150 reporters and researchers while maintaining substantial databases on both Congress and government. Founded in 1945 by husband-wife team of Nelson and Henrietta Poynter as a explanatory link between newspapers and the opaque operations of DC, Nelson Poynter stated that "government will never set up an adequate agency to check on itself," foundations were "too timid," thus client-driven commercial effort was needed. (Most of CQ's products are subscription based but the espionage item was among the subset flagged for public release.)

One would think, but cannot be certain, that CQ is above reproach from the hyper-Israeli press sentinels of which I have written:

The pro-Israeli HonestReporting is often not, but it is only modestly apologetic in comparison to the Committee for Accuracy in Middle East Reporting in America (CAMERA), the velocity of whose text barely holds onto a claim of legitimacy in presenting an Israeli issue.

A month has elapsed since the CQ National Security Editor, Jeff Stein, released Israel Might Have Many More Spies Here, Officials Say and as of today neither CAMERA or HonestReporting has attacked CQ, Stein or the article so there may be limits after all. If so, it is the first in recent memory. As the UK's Financial Times observed in its 2006 American and Israel:

Reflexes that ordinarily spring automatically to the defence of open debate and free enquiry shut down - at least among much of America's political elite - once the subject turns to Israel, and above all the pro-Israel lobby's role in shaping US foreign policy.

 

Even though policy towards the Middle East is arguably the single biggest determinant of America's reputation in the world, any attempt to rethink this from first principles is politically risky.

 

Examining the specific role of organisations such as the American Israel Public Affairs Committee, commonly considered to be the most effective lobby group in the US apart from the National Rifle Association, is something to be undertaken with caution...

 

Moral blackmail - the fear that any criticism of Israeli policy and US support for it will lead to charges of anti-Semitism - is a powerful disincentive to publish dissenting views. It is also leading to the silencing of policy debate on American university campuses, partly as the result of targeted campaigns against the dissenters...

 

Doctrinal orthodoxy was flouted [in] a paper on the Israel lobby by two of America's leading political scientists, Stephen Walt from Harvard's Kennedy School of Government and John Mearsheimer from the University of Chicago. They argue powerfully that extraordinarily effective lobbying in Washington has led to a political consensus that American and Israeli interests are inseparable and identical.

 

Only a UK publication, the London Review of Books, was prepared to carry their critique, in the same way that it was Prospect, a British monthly journal, that four years ago published a path-breaking study of the Israel lobby by the American analyst, Michael Lind...

The irreverent Texan political commentator, Molly Ivins, observed from our side of the pond:

For having the sheer effrontery to point out the painfully obvious - that there is an Israel lobby in the United States - Mearsheimer and Walt have been accused of being anti-Semitic, nutty and guilty of "kooky academic work." Alan Dershowitz, who seems to be easily upset, went totally ballistic over the mild, academic, not to suggest pretty boring article by Mearsheimer and Walt, calling them "liars" and "bigots."...

 

In the United States, we do not have full-throated, full-throttle debate about Israel. In Israel, they have it as a matter of course, but the truth is that the accusation of anti-Semitism is far too often raised in this country against anyone who criticizes the government of Israel.

 

Being pro-Israel is no defense, as I long ago learned to my cost... It's the sheer disproportion and the vehemence of the denunciations of those perceived as criticizing Israel that make the attacks so odious. Mearsheimer and Walt are both widely respected political scientists - comparing their writing to "The Protocols of the Elders of Zion" is just silly...

That disproportion was demonstrated against a renown economist attempting, at US military request, to estimate the cost of conflict:

A good example was the furor made over Thomas Stauffer's estimation of the cost of conflict of US policy in the Middle East which was disputed by pro-Israeli sources. Stauffer made his initial comments under US Army War College auspices at a conference at the University of Maine but that presentation seemed to be obscure, ultimately yielding only one HTML copy on the web, with a PDF mirror at an appallingly anti-Semitic site. That led to more developed items in Middle East Policy Council (MEPC) and the Middle East Economic Survey (MEES).

Stauffer suffered the same withering criticism as did any source mirroring his conclusions as the very reliable Christian Science Monitor (CSM) found when it attempted to cover the topic.

 

Preface concluded, here is Stein's article: 

Israel Might Have Many More Spies Here, Officials Say

By Jeff Stein, CQ National Security Editor

CQ Homeland Security

Congressional Quarterly Inc.

April 25, 2008 - 8:13 p.m.

The elderly New Jersey man arrested last week on charges of spying for Israel years ago was probably still working for the Jewish state's espionage service in tandem with another, as yet unidentified spy, former American intelligence officials say.

Ben-Ami Kadish, now 84, was employed as a mechanical engineer at a U.S. Army weapons center in New Jersey when he allegedly supplied his Israeli handler with classified military documents, according to charges filed last week.

The handler was named only as "CC-1," or co-conspirator 1, in the criminal complaint. But its description of him as the same man who was handling the notorious Israeli mole Jonathan Pollard all but identified him as Yosef Yagur, formerly the consul for scientific affairs at the Israeli consulate in New York.

Pollard, who gave Yagur thousands of highly classified documents while working as a navy intelligence analyst in the 1980s, is in the 21st year of a life sentence for espionage.

Kadish, who worked at the U.S. Army's Picatinny Arsenal in Dover, N.J., from 1963 to 1990, could also spend the waning years of his life in jail if he is convicted.

A former senior CIA counterintelligence operative believes the case "will never go to trial, because of all the ugly stuff that would come out" about Israeli activities in the United States.

Indeed, Justice Department attorneys have fought to keep "ugly stuff" from emerging in the trial of two officials of the American Israel Public Affairs Committee, or AIPAC, charged with accepting classified documents from Pentagon official Larry Franklin.

But the federal judge in the case has indicated he might not go along with their strategy. Last month Judge Thomas Ellis III indefinitely postponed the trial of AIPAC officials Steven Rosen and Keith Weissman, which was scheduled to open next week.

Neither the United States nor Israel, strategic allies struggling with Middle East terrorism, the war in Iraq and the rising threat of Iran, can afford a breech in relations triggered by either case.

The Justice Department said Kadish brought home briefcases full of classified documents, which "CC-1" photographed in his basement. Among the documents was "restricted data" on nuclear weapons, classified information on a modified F-15 fighter that was sold to an unnamed foreign country (most likely Saudi Arabia), and a document relating to the Patriot anti-missile system, which the United States deployed to Israel during the first Gulf War in 1990.

Yagur fled New York in 1985 as U.S. counterintelligence agents closed in on Pollard. He has not been back since, U.S. officials believe.

They thought that was the end of his espionage operations here.

But Yagur evidently kept in touch with Kadish, exchanging e-mails and telephone calls with him long after he returned to Israel. Kadish went to Israel in 2004 and met with his former spy master, authorities said.

Just last month, on March 20, "CC-1" told Kadish to lie to FBI agents who had questioned him about the documents, according to a wiretap transcript produced by federal prosecutors.

"Don't say anything. Let them say whatever they want. You didn't do anything," CC-1 told Kadish. "What happened 25 years ago? You didn't remember anything."

Ron Olive, the navy investigator in charge of the Pollard case, said he was shocked when he heard about Kadish's arrest.

The description of CC-1 as Pollard's handler meant that "it has to be" Yagur, he said by telephone from Arizona, where he was giving a counterintelligence lecture to federal officials.

"I was like, 'holy cow, this is unbelievable,'" he said.

Olive said the arrest meant that Kadish was still working for Israeli intelligence.

"It means Israel still has an agent in place in the U.S. who can ferret out someone who has access to information they want," Olive said.

One role Kadish could play was as a "spotter," who could size up possible recruits for Israeli intelligence, even while living in a retirement community in Monroe Township, N.J., said Olive and another former federal agent.

"That jumped out at me," said Harry B. "Skip" Brandon, a former deputy assistant director of counterintelligence at the FBI.

"It is very unusual for a former agent handler and his former agent to remain friends. And it's dangerous for both," he added. Any communication between the two, no matter how innocent, raises the risk of detection and exposure.

Other aspects of the case suggest that Jerusalem has at least one, and maybe several more spies embedded in U.S. military services or intelligence agencies: As with Pollard, the Israelis asked Kadish for specific documents, indicating they knew what they were looking for, supplied by another spy.

"You know, it wouldn't surprise me one bit," said Olive, who in 2006 published a memoir about the case, "Capturing Jonathan Pollard: How One of the Most Notorious Spies in American History Was Brought to Justice".

Olive said Pollard stole "360 cubic feet" of classified documents during his six years as an Israeli mole. "It was the most devastating spy case I ever saw," he said. "No other spy in the history of the United States has stolen so many secrets, so highly classified, in such a short period of time."

"No other spy in the history of the United States has stolen so many secrets, so highly classified , in such a short period of time," he said.

There have long been rumors of a "Mr. X," Olive said, "another unknown government employee who had access to information that the Israelis could use."

Israeli intelligence had a spy, code-named MEGA, high up in the Reagan administration at the same time Pollard, and now allegedly Kadish, were stealing documents, according to a Washington Post story years ago that has never been confirmed.

In fact, according to past and present U.S. counterintelligence officials, Israeli agents were so aggressive even after the Pollard case that an FBI counterintelligence boss in the late 1990s, David Szady, summoned Mossad's top official for a tongue lashing.

"Knock it off," Szady said, according to a reliable source on condition of anonymity.

Szady has been pilloried in pro-Israel circles for pursuing the AIPAC case, which many critics say amounts to trumping up espionage charges against officials who were merely engaging in the kind of transaction officials and journalists conduct every day.

But the Israelis here have never stopped practicing the "world's second oldest profession," as espionage is sometimes dubbed, despite years of rote denials, many officials say.

"I guarantee you the same thing is happening now," said Olive, who trains Department of Energy security officials on detecting signs of espionage.

One effective espionage tool is forming joint partnerships with U.S. companies to supply software and other technology products to U.S. government agencies, intelligence officials say.

But Brandon, who retired in the mid-1990s but retains many intelligence contacts for his global security consulting business, says the Israelis are interested in commercial as much as military secrets. They have a muscular technology sector themselves.

"They are always looking for a leg up," he said.

Congress is a major target, too, Brandon said.

"God, they would work the Hill," he said. "They really worked the Hill. They were not necessarily interested in collection [of information] so much as they were in influence."

Influencing Congress is usually the domain of foreign diplomats, he said, but in Israel's case there was "very little distinction between Mossad and the diplomats."

"They were very sharp," he added. "Their best and brightest."

Mossad agents also scout for people to help them in the Jewish-American community, he said, based on their religious and political commonality. It's a vast community of potential "spotters," who can point them to other Jewish Americans in government, law, finance and banking who might be susceptible to recruitment, as is the case with potential Chinese and Cuban recruits.

Or just useful conversation. Israeli agents, Brandon said, are skilled at eliciting information from unwary Jewish Americans in strategically important positions.

"They make you feel good, feel important," he said. "They don't even realize they're giving up something" sensitive, or even classified - until it's too late.

At the same time, U.S. and Israeli intelligence officials have worked hand in glove on numerous fronts since 1948, when the Jewish state was founded.

Mossad had access to Russian Jews who supplied the West with Soviet military, scientific and technical secrets. American and Israel intelligence have always worked closely in counterterrorism.

But they don't tell each other everything, which is why the relationship sometimes veers from friendship to competition.

"They were never, ever allowed in our facilities," says a former CIA officer who was sometimes assigned a liaison role with Israeli counterterrorism agents.

Likewise, when CIA or other U.S. intelligence operatives visited Israel, Israeli security agents would "toss their room," he said, "just to show who's in charge."

Jeff Stein can be reached at jstein@cq.com.

Source: CQ Homeland Security
(c) 2008 Congressional Quarterly Inc. All Rights Reserved.

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In fair disclosure, following is my AIPAC series:

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