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Mexican trends: further destabilization and penetration of commercial supply chains

- Gordon Housworth  [ 2/28/2011 - 22:59 ]   #

 

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 institutionalized. The 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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John D. Feeley

US State Department

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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

- Gordon Housworth  [ 5/22/2009 - 16:49 ]   #

 

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 Movement. The 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

- Gordon Housworth  [ 3/14/2009 - 14:01 ]   #

 

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

- Gordon Housworth  [ 10/30/2008 - 20:12 ]   #

 

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

- Gordon Housworth  [ 7/4/2008 - 13:44 ]   #

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

- Gordon Housworth  [ 6/13/2008 - 11:49 ]   #

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

- Gordon Housworth  [ 5/29/2008 - 11:55 ]   #

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:

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.

 

Molly Ivins: Pro-Israel 'Nutjobs' on the Attack

By Molly Ivins

TruthDig

Posted on Apr 25, 2006

 

America and Israel

Financial Times

Published: April 1 2006 03:00 | Last updated: April 1 2006 03:00

 

Economist tallies swelling cost of Israel to US

By David R. Francis

Christian Science Monitor

December 09, 2002 edition

Editor's note to Economic tallies

Christian Science Monitor

posted December 16, 2002

 

Gordon Housworth



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Israel was planting malicious chips in US assets before China

- Gordon Housworth  [ 5/20/2008 - 11:13 ]   #

Reporting on the FBI investigation of Chinese counterfeit, some possibly malicious, electronics has made no mention that Israel had embedded malicious chips in nothing less than the White House phone system by 2000. Outside of members of the intelligence community and attentive technical readers of the period, this will come as a surprise, possibly coupled with the erroneous assumption of anti-Israeli bias, to many readers.

Nothing in open source then or since has convinced me that the US telecommunications network is either secure or immune to further interruption or breach. Whereas SCADA control networks, primarily for power grid generation, transmission and distribution applications (genco, transco, disco), and recently fiber optic networks have been identified as vulnerable to attack, little has been made publicly of telco vulnerability until the China Cisco counterfeits. The vulnerability of the US/EU telco network to a variety of state and nonstate actors is so great that it should be ranked adjacent to the vulnerabilities of our SCADA networks, for all applications, and fiber optic networks. See:

Telco supply chain analysis has again been reduced to function at lowest cost with the assumption of low risk. All tier providers from whatever state actor need to be examined and risk assessed in the design, fabrication, installation and maintenance phases. See Foreign vulnerability inherent in US globalization of its commercial and defense supply chains, 5/6/2008.

Israel as independent actor, often counter to US interests, not unlike China

From Palmerston, interests, and forms of governance, 5/22/2004:

Israel pursues an independent diplomatic policy at odds with US interests. Israel is a modest cooperative partner in the US war against terrorism. Just as the Russians, the Pakistanis, the Chinese and others did in the post 11 September period, Israel immediately offered the US data that painted their parochial adversaries as the architect or participant of the air liner assault so that we might attack them. Each country offers or withholds information so as to advance its national interests, and attempts to influence where it cannot command. Israel is no exception and I think that it applies Palmerston better than the US.

Israel ran Jonathan Pollard, a US Navy civilian analyst, as a spy to enormous and ongoing harm to the US. Israel not only used that information to US disservice but further went on to sell or broker that information to the Russians and the Chinese, perhaps others. The impact on the US is still being felt to this day and none of the attempts of his apologist spouse, Esther, will wipe that away. The effects of Pollard's espionage is so great that Director CIA threatened to resign if Clinton pardoned Pollard. (If a US national has strong loyalties, be it religious, tribal, cultural or geographic, that work to the detriment of US interests, then I am also at odds with them.)

Israel is not a devoted friend of the US and it has nothing to do with religion or its democratic governance. (We forget that France was the principal post-partition mentor of Israel before the US.) It is a nation state acting in its best interests, some of which correspond to our own...

Yes, there are tactical interests between the US and Israel. Examples being the identification of certain Palestinian assets to the Israelis... I was in some briefings by Israeli officers in which they used a metaphor that I think circulates within the IDF, as others have heard it, that Israel is like the man atop a burning building that can neither put out the fire or get down off the building. All actions are conducted within that narrow range of options.

Commentary follows on related Israeli collection efforts and how those events receded from the public consciousness. The note on sources for a series on the interaction of AIPAC, American Jews, the State of Israel and the Christian Right also applies here.

Recognition of intel collection events obscured by fog facts

Larry Beinhart, author of American Hero [snippets here] filmed as Wag the Dog, describes "fog facts" as an overlooked class of information that become increasingly obscure with the passage of time. (This analyst would add lack of simple search tool access by scrolling off of the original source, lack of mirroring or mirroring at sites that have an otherwise offensive character, original foreign or foreign language sources, or pre-2004 topical information before the advent of the web that is still less well captured than post-2004 data.):

Fog facts are things that have been reported, somewhere, sometime, but have disappeared into the mist - like the pre-9/11 hints that there were hijackers in our midst. The fog facts can still be found by enterprising reporters, but with time and news space increasingly crunched - and media priorities shifting to the trivial - they usually remain obscure, at least to the general public.

Diplomatic "dead air," from both the embarrassed target and successful collector, combined with dissuasion of national reporting creates fog facts in record time. In the case of Israel, two events have persisted in the public consciousness, out of the fog bank: the Jonathan Pollard and USS Liberty affairs. Almost all other Israeli intel collection efforts against the US have receded into fog facts as if they never existed.

Espionage at the pinnacle of impunity

Consider Bush43 standing before the State Duma (lower house) or the Federation Council (upper house) of the Russian Federation or the PRC's National People's Congress (NPC) or Central Committee of the CCP and making the equivalent declaration:

I have been fortunate to see the character of Israel up close. I have touched the Western Wall, seen the sun reflected in the Sea of Galilee, I have prayed at Yad Vashem. And earlier today, I visited Masada, an inspiring monument to courage and sacrifice. At this historic site, Israeli soldiers swear an oath: "Masada shall never fall again." Citizens of Israel: Masada shall never fall again, and America will be at your side.

Given the level of espionage directed against the US by the State of Israel, the comparison is pointedly appropriate.

 

Israel's espionage efforts against the US, despite Israeli diplomatic statements to the contrary, are long standing, and all too effective. From Who's on the National Security Threat List and why?, 4/27/2004:

The 2000 Annual Report to Congress on Foreign Economic Collection and Industrial Espionage uncloaked to identify six greatest offenders as China, Japan, Israel, France, Korea, Taiwan, and India. I surmise the temporary Russian absence was due to the disruption from the breakup of the former Soviet Union. Taiwan was greatly exercised by being publicly placed among 13 nations designated as a threat to US national security, "including Russia, China, North Korea"... Who doesn't get publicized on the list are our closest allies such as the UK, (then West) Germany, the Netherlands, Belgium, and Canada.

Commercial enterprises and individuals account for the bulk of international industrial espionage activity, roughly three times the percentage due to foreign government-sponsored efforts.  Even developing countries pose a threat as their intel agencies profited from training provided by the USSR, DDR (East Germany), Czechoslovakia, Bulgaria, and even the US and so have created a "reservoir of professionally trained intelligence mercenaries."

Israel's espionage efforts are rivaled by their technology diversion efforts. From the 2005 Israel as serial violator, temporarily the chicken killed to scare the monkeys:

It is appropriate to class Israel as a serial violator in terms of its diversion of US weapons technology and weapons systems embedding US technology to states such as the PRC. Israel regards such sales as essential both to bolster its own defense industry and to secure greater independence from US strictures on its diplomatic action. Israel is also a purchaser of US weapon systems as well as a creator of weapons systems of interest to the US, thus it becomes a multi-edged proposition in purchases, technology, diplomacy, and US domestic politics.

 

Despite its violations Israel has succeeded in deflecting the bulk of US displeasure, thus is was interesting to see the US move to "sideline" Israel from "participating in developing the Joint Strike Fighter because of violations of agreements about arms sales to China."

Whatever one's opinion is of the State of Israel, the state is certainly unique in its ability to target US assets while retaining a more than cooperative relationship with the US.

Security risks in telco supply chains

This analyst would have the same concerns of employing a Chinese telco to build and/or maintain sensitive telecommunications systems, or provide service via their systems, as I would an Israeli firm as we have already had three significant, verified breaches courtesy of Tel Aviv, most notably the breach (also here) of the White House phone system by Telrad during the Clinton administration. I would have equal interest in the master purchase agreement between Sprint and ZTE, and the presence of Huawei of Telrad in telco installations.

PTT (Post, Telegraph and Telephone) applications should be on a national security-level footing regardless of who builds, and the pen testing and on-going monitoring should be done externally. Yes, this approach requires more money, assets and training but that is part and parcel of a national security footing. Witness the recent penetration of the Greek cell phone system (details here) and the recording of calls by senior government officials. Due to both architecture and insufficient patching, the perpetrators were able to penetrate and monitor even as they shielded their efforts.

 

Possible targets must examine their entire supply chain well into the lower tiers, the ostensibly more innocuous the better. Witness the Israeli firm, Amdocs Ltd, which did, and may still do, the bulk of directory assistance calls and call records and billings in the US. It was said that it was virtually impossible to make a landline call without generating an Amdocs record. NSA long felt that while Israel may not have been intercepting the contents of the calls, it did have a perfect "traffic analysis" of who called whom when and for how long. Combine that with external events and you have amazing abilities.

 

Israel penetrates the White House communications network

 

Said to have been operational in 1998 during intense Israeli speculation about US intentions of the ongoing peace process:

The tip-off about these operations [appears] to have come from the CIA... A local phone manager had become suspicious in late 1996 or early 1997 about activities by a subcontractor working on phone-billing software and hardware designs for the CIA. The subcontractor was employed by an Israeli-based company and cleared for such work. But suspicious behavior raised red flags. After a fairly quick review, the CIA handed the problem to the FBI for follow-up...

 

"It's a huge security nightmare,"... "The implications are severe,"... "We're not even sure we know the extent of it...All I can tell you is that we think we know how it was done... That alone is serious enough, but it's the unknown that has such deep consequences."

 

Sources in Israel say intelligence agents infiltrated Telrad, a company that had been subcontracted by Nortel, America's [then] largest telecommunications conglomerate, to help develop a communications system for the White House.

 

Company managers were said to have been unaware that virtually undetectable chips installed during manufacture made it possible for outside agents to tap into the flow of data from the White House.

 

Information being sent from the president to his senior staff in the National Security Council and outside government departments could be copied into a secret Israeli computer in Washington, the sources said. It was transferred to Tel Aviv two or three times a week.

 

One opportunity for Israeli agents to mount the operation arose when Nortel, Telrad and another firm won a 33m contract to replace communications equipment for the Israeli air force. Members of the air force were allowed access to manufacturing areas as a result...

 

As for how this may have been done technologically, the FBI believes it has uncovered a means using telephone-company equipment at remote sites to track calls placed to or received from high-ranking government officials, possibly including the president himself, according to Insight's top-level sources. One of the methods suspected is use of a private company that provides record-keeping software and support services for major telephone utilities in the United States.

 

A local telephone-company director of security, Roger Kochman, tells Insight, "I don't know anything about it, which would be highly unusual. I am not familiar with anything in that area."

 

U.S. officials believe that an Israeli penetration of that telephone utility in the Washington area was coordinated with a penetration of agents using another telephone support-services company to target select telephone lines. Suspected penetration includes lines and systems at the White House and NSC, where it is believed that about four specific phones were monitored -- either directly or through remote sites that may involve numbers dialed from the complex.

 

"[The FBI] uncovered what appears to be a sophisticated means to listen in on conversations from remote telephone sites with capabilities of providing real-time audio feeds directly to Tel Aviv," says a U.S. official familiar with the FBI investigation. Details of how this could have been pulled off are highly guarded. However, a high-level U.S. intelligence source [said] "The access had to be done in such a way as to evade our countermeasures .... That's what's most disconcerting."

Supply chain breach of the US telecommunications network

 

As part of, or in concert with, the Telrad penetration, the FBI was investigating Bell Atlantic and Amdocs Ltd., a "Chesterfield, Mo., telecommunications billing company [that] helped Bell Atlantic install new telephone lines in the White House in 1997":

Amdocs provides billing and customer services to telecommunications companies around the world, including Bell Atlantic, BellSouth, Sprint and Vodafone. The Israeli-owned company has grown at an incredible rate since opening an American base in 1997, tripling its U.S. revenues to more than $600 million in 1999. Amdocs software handles 50 percent of all local calls in the United States and 90 percent of all local calls in Germany...

 

Amdocs, once a small Israeli software company, is the world's leader in the $20 billion telecommunications billing software industry, with expected revenues this year of $1.1 billion, said Debra Katz, an analyst with Gerard, Klaur and Mattison in New York. The company employs 5,600 people worldwide and is run by "an amazingly high caliber of people."...

In what was a stupendous opportunity for traffic analysis, the US offered significant parts of its telephone logs (date, time, duration, to, from, likely more) to Israeli assets:

In 1997, the White House had a new, state-of-the-art phone system installed by Bell Atlantic. The system installed was not the secure, military-installed system for classified conversations but rather a commercially secure phone system. The classified phone lines presumably remain secure and are not involved in the alleged breach, sources said...

 

[A]  senior-level employee of Amdocs had a separate T1 data phone line installed from his base outside of St. Louis that was connected directly to Israel. [Investigation centered on] whether the owner of the T1 line had a "real time" capacity to intercept phone calls from both the White House and other government offices around Washington, and sustained the line for some time... An interceptor could allegedly place the location in the White House or other buildings where phone calls originated Sources familiar with the investigation say FBI agents on the case sought an arrest warrant for the St. Louis employee but Justice Department officials quashed it...

A US cryptographer and security specialist asked the same question that first came to mind when the breach was discovered:

Why should we be freely giving to Israeli corporations information (call records, CALEA information) that requires court orders to obtain in this country?  Such information is obviously sensitive, and the well-motivated efforts to strengthen and protect our national infrastructure should reasonably include mandating that such information not be routinely handled by any foreign entities...

 The balance tipped further in Israel's favor by its ownership of the major Lawful Interception (LI) products producer, Comverse Infosys. As US domestic calls transit telco routers, "Custom computers and software, made by companies like Comverse, are tied into that network to intercept, record and store the wiretapped calls, and at the same time transmit them to investigators":

The [Lawful Interception (LI)] manufacturers have continuing access to the computers so they can service them and keep them free of glitches.  This process was authorized by the 1994 Communications Assistance for Law Enforcement Act, or CALEA... [W]hile CALEA made wiretapping easier, it has led to a system that is seriously vulnerable to compromise, and may have undermined the whole wiretapping system...

 

[Comverse] insists the equipment it installs is secure. But the  complaint about this system is that the wiretap computer programs made by Comverse have, in effect, a back door through which wiretaps themselves can  be intercepted by unauthorized parties.

 

Adding to the suspicions is the fact that in Israel, Comverse works closely with the Israeli government, and under special programs, gets  reimbursed for up to 50 percent of its research and development costs by  the Israeli Ministry of Industry and Trade. But investigators within the DEA, INS and FBI have all told Fox News that to pursue or even suggest  Israeli spying through Comverse is considered career suicide.

Significant elements of the US/EU telecommunications network are neither secure or immune to further interruption or breach from a variety of state and nonstate actors. To focus on only one state, possibly erroneously, only does us harm.

 

President Bush Addresses Members of the Knesset

The Knesset

Jerusalem

Office of the Press Secretary

For Immediate Release

May 15, 2008

 

USS Liberty Summary of Events

USS Liberty Memorial

 

I busted Pollard

By RON OLIVE

Jerusalem Post

Nov 20, 2006 20:18, Updated Nov 20, 2006 20:41

 

telnetd root Backdoor in Vodafone's Ericsson Systems?

Sascha Welter

Betabug

1 March 2006

 

Phone Tapping Scandal in Greece

Sascha Welter

Betabug

02 February 2006

 

Why Jonathan Pollard is Still in Prison?

By EDWIN BLACK

Forward

JUNE 28, 2002

See the section: 'THE CRIME'

 

Allies and espionage

Jane's Intelligence Digest

15 March 2002

Original

Mirror via Nucnews

 

AN ENIGMA: VAST ISRAELI SPY NETWORK DISMANTLED IN THE US

ARTICLE 3 OF 7

By Sylvain Cypel

LE MONDE

05 March 2002

Translated by Malcolm Garris

Original

Mirror

 

The Israeli Spy Flap Will Fade Away, But At What Cost?

By Douglas J. Brown

GOPUSA

February 7, 2002

 

Israeli News Reports On The Fox Series Of Israel Spying On US
IsraelNationalNews.com
12-28-2001

Mirror

 

U.S. phone eavesdropping software open to spying --Fox News

From: Declan McCullagh

Politech

Date: Fri, 14 Dec 2001 14:51:51 -0500

A Fox series of 4 items, of which this is part 3, is mirrored at Cryptome

 

FBI Probes Espionage at Clinton White House - suspected telecommunications espionage

by J. Michael Waller,  Paul M. Rodriguez

Insight on the News

May 29, 2000

Mirror

 

POSSIBLE PENETRATION OF WHITE HOUSE EMAIL BY ISRAELI AGENTS

Weekly  Intelligence Notes
Association of Former Intelligence Officers (AFIO)
26 May 2000

 

Israeli spies tapped Clinton e-mail

by Uzi Mahnaimi

Sunday Times (UK)

May 21, 2000

Original scrolled off

Mirror

 

TECH ASSESSMENT OF ISRAELI SPY ALLEGATIONS

Weekly  Intelligence Notes

Association of Former Intelligence Officers (AFIO)

19 May 2000

 

ISRAEL ESPIONAGE PROBE

Weekly  Intelligence Notes

Association of Former Intelligence Officers (AFIO)
12 May 2000

 

President, Senior Officials Briefed on Possible 'Penetration' of White House Phones

By Carl Cameron

FOXNews

6:57 p.m. ET (2257 GMT) May 5, 2000

Original scrolled off

Mirror

 

The ABC's of Spying

By ROBERT M. GATES

New York Times

March 14, 1999

 

Why Pollard Should Never Be Released (The Traitor)

Seymour Hersh

The New Yorker

January 18, 1999

Mirror

Gordon Housworth



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FBI Cisco counterfeit investigation is live fire demonstration of failed supply chain oversight

- Gordon Housworth  [ 5/15/2008 - 11:09 ]   #

The recent bureau investigation outlined in FBI Criminal Investigation: Cisco Routers of counterfeit Cisco routers, switches, interface converters (GBIC), and WAN interface cards (WIC) is a long overdue spotlight on the failure to properly manage and assess critical supply chains. Two themes stand out:

  1. Validation of insufficient supply chain analysis at tier: From a supply chain analysis standpoint, the problem is worse that the FBI notes. If the tier 0 is the OEM or top level consumer as it is in the manufacturing sector, then the malicious entry is coming in at tier 4, not tier 3, as the "GSA IT Vendor" is the tier 1. The 'tier 3' to the tier 1 is thus a tier 4 to the OEM/top tier consumer and thus well below superficial oversight limits. Alternately, federal purchasing guidelines were so loose that malicious equipment could be effectively sanitized at tier 2 as noted in the eBay and federal credit card procurement paths. As noted in Foreign vulnerability inherent in US globalization of its commercial and defense supply chains, the lack of effective means and metrics had led to complacency and ignorance.
  2. Probably PLA participation at overt/covert subsidiary: From a motivation standpoint, this analyst believes that the question of "For profit or state sponsored?" is not an 'or' but an 'and,' i.e., both motives are cooperating within the People's Liberation Army (PLA) and have been for well over a decade.

Extensive supply chain 'undersight'

 

While there are many things of interest in FBI Criminal Investigation: Cisco Routers, these caught my eye.

 

Foil #10, "Sub-Contracting Process":

  • Material is coming in via a drop ship GSA vendor to a tier 3 sub, i.e., well below the tier 2 boundary and largely sanitized from the nominal tier 3.
  • The problem is worse that the FBI notes as if tier 0 is the OEM or top level consumer as it is in the manufacturing sector, then the entry is coming in at tier 4, not tier 3, as the "GSA IT Vendor" is the tier 1 and thus well below superficial oversight limits

Foils #13-14, "Directly from PRC" and "Through Foreign Country":

  • Material is sanitized through US and nominal friendly states which confer validation in the absence of investigation.

Foils #15-16, "eBay" and "Government Credit Card":

  • Material apparently bypasses all tracking as a discrete federal group uses their fed credit card or PayPal account to buy from eBay or non-GSA vendor.

Foils #22-23, "U.S. Navy Project":

  • Lockheed Martin is the tier 1, thus the material is again coming in at tier 4 from PRC, whereupon the tier 4 ships direct to the Navy.

Foil #48, "Intelligence Gap"

The scope of criminal activity by insurgent and terrorist groups is vastly underestimated by lay readers; It is as if operational money appears as Minerva from the head of Jupiter, if it is thought about at all. Terrorist organizations build criminal funding arms that have the real possibility of dwarfing the military mission, and in some cases, as I believe is happening in Northern Ireland, they become nearly pure criminal groups with a veneer of rhetoric. None are immune:

[The Red Brigades'] daily life was ruled by economics. Members of the organization spent most of their time raising money to carry out their violent attacks, to buy weapons, to rent new safe houses… The Red Brigades [often] sailed to Lebanon to pick up arms from the PLO. The weapons were them brought to Sardinia where other European groups, such as the IRA and ETA, came to collect their share of the cargo. For this service the Red Brigades received a fee. [To give an idea of the] money required by an armed organization to function, in the 1970s, the Red Brigades had a turnover of $8 to 10 million, equivalent to about $100 million today. This figure was equivalent to the turnover of a medium size Italian company. Generating such vast flow of money required constant attention and absorbed the bulk of the time of the full time members of the organization…

Napoleoni goes on to describe that 2003 market "has merged with the international illegal and criminal economy and together they have a turnover of $1.5 trillion dollars" allocated as:

  • $500 billions are capital flights, money which move from country to country undetected, unreported and illegally;
  • $500 billions is what is commonly known as the Gross Criminal Product, money generated primarily by criminal organizations;
  • $500 billions is the New Economy of Terror, money produced by terror organizations of which 1/3 is represented by legal businesses (which include charitable donations) and the rest comes from criminal activities, primarily drug trade and smugglings.

The bulk of the $1.5 trillion flows into Western economies, it gets recycled in the US and in Europe. It is a vital infusion of cash into these economies.

Tradition of simultaneously 'manning the trenches and the cash register'

As previously noted, "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," thus the PLA was instructed to become largely self-sufficient.

From working notes in 2004:

Official position: Peoples' Liberation Army (PLA) relinquished all commercial investments other than "logistics" in 1999.  Highly visible, high-profile investments handed over.

 

Reality: PLA influence over the economy remains deep and widespread.  The 1999 deadline merely commenced the start of protracted negotiations on who gets what and how Beijing will compensate the military for the revenue lost by handing over its companies. [Includes current value of airlines, pharmaceutical firms, manufacturing and chemical plants, as well as their future revenue stream.]

 

PLA units used the divestiture to shift money-losing firms to local governments even as they kept the best for themselves, blocked audits that would reveal theft and corruption, moved assets into umbrella companies to hide ownership, and allowed departing military officers, their wives or relatives to take over "divested" firms.

 

By 2000 PLA still owned some 10,000 companies selling everything from toilet paper to telecommunications services [Per military analysts, diplomats and China watchers] vastly undervalued at $9.7 billion USD.

 

PLA has a long tradition of simultaneously manning the trenches and the cash register. [Army actions against the Japanese and the Nationalists before and after WW II relied on farming, factory work and other extracurricular activities to support guerrilla operations. Mao Tse-tung cited Ming and Qing dynasty precedents as justification.]

 

China lacks the financial resources to support the PLA solely on the "imperial wheat" of central government funding.

 

PLA's modernization efforts are posting even more aggressive financial demands, yet the Communist Party (CP) needs the PLA as the ultimate defender of its privileged position. Backlash over US-led NATO bombing of the Chinese Embassy in Belgrade [8 May 2000] reduced "pressure to close up shop" of extra-commercial activities.

 

Before 1978, the PLA's business focus was largely limited to production for its own use.  Deng's exhortation to the people to "get rich for the good of China" found fertile ground in the military.  The PLA used its tax-exempt status, warehouses, vehicles and border control to its advantage.  Resulting abuse of power undermined Communist Party credibility, embarrassed CP leadership, while private sector interests undermined military loyalty and left many soldiers with divided loyalties.  PLA greed during the 1997 Asian economic crisis pulled forward the timeline for military divestiture.  PLA was engaging in massive oil smuggling (almost bankrupting China's two state-run oil monopolies) using its border control, ships, warehouses, trucks, private gas pumps and storage tanks to operate the smuggling operation and arbitrage the price difference between dropping world oil prices and China's higher protected prices.  The CP was enraged, recognized the PLA as a corrupting force, and feared that the PLA could endanger CP legitimacy.]

 

July 30, 1998: Military officials in Beijing and analysts abroad believe it will be many years before there is more than "incremental" change in People's Liberation Army ownership of private businesses, the Wall Street Journal reports. Several PLA officials say that lucrative companies, many related to the acquisition and development of weapons systems and related technology, owned by the powerful Headquarters of the General Staff will be exempt from the new rules by the central government. Companies such as the five-star Palace Hotel in Beijing and China Poly Group, a weapons dealer and real estate firm, will keep their military ties.  The PLA is considered the world's biggest business empire. The WSJ cites the recent sale of a PLA-owned restaurant to a private entrepreneur. The new owner pays the PLA a $1,200 monthly fee to "rent" the restaurant's name. "The military stands behind everything we do," says an employee.

PROVENANCE: My notes are unclear on provenance. At the time, was reading Mulvenon and Yang's The People’s Army in the Information Age, notably Jencks' "COSTIND IS DEAD, LONG LIVE COSTIND! RESTRUCTURING CHINA'S DEFENSE SCIENTIFIC, TECHNICAL, AND INDUSTRIAL SECTOR"; Scobell's CHINESE ARMY BUILDING IN THE ERA OF JIANG ZEMIN; Mulvenon's Soldiers of Fortune; Mulvenon and Yang's The People's Liberation Army as Organization, Reference Volume v1.0, notably Finklestein's THE GENERAL STAFF DEPARTMENT OF THE CHINESE PEOPLE'S LIBERATION ARMY: ORGANIZATION, ROLES, & MISSIONS; Magnier's Chinese Military Still Embedded in the Economy; and French's China Moves Toward Another West: Central Asia. Apologies to any that were omitted.

F.B.I. Says the Military Had Bogus Computer Gear
By JOHN MARKOFF
New York Times
May 9, 2008

US, Canadian agencies seize counterfeit Cisco gear

Grant Gross

IDG

02.29.2008

 

FBI Criminal Investigation: Cisco Routers

Section Chief Raul Roldan

Supervisory Special Agent Inez Miyamoto

Intelligence Analyst Tini Leon

January 11, 2008

 

Managing the Risks of Counterfeiting in the Information Technology Industry

KPGM International

Electronics, Software & Services

2005

 

China Moves Toward Another West: Central Asia

By HOWARD W. FRENCH

New York Times

March 28, 2004

 

The New Economy of Terror
By Loretta Napoleoni, author of Modern Jihad: tracing the Dollars behind the Terror Networks
Sign of the Times (UK)

1 December 2003

 

The People's Liberation Army as Organization

Reference Volume v1.0

Ed: James C. Mulvenon, Andrew N. D. Yang

RAND

ISBN/EAN: 0-8330-3303-4

2002 

4. THE GENERAL STAFF DEPARTMENT OF THE CHINESE PEOPLE'S

LIBERATION ARMY: ORGANIZATION, ROLES, & MISSIONS, By David Finklestein

 

Soldiers of Fortune

by James C. Mulvenon

M.E. Sharpe

ISBN-10: 0765605805

November 2000

 

CHINESE ARMY BUILDING IN THE ERA OF JIANG ZEMIN

Andrew Scobell

Strategic Studies Institute, U.S. Army War College

ISBN 1-58487-030-3

August 2000

 

Chinese Military Still Embedded in the Economy

Mark Magnier

Los Angeles Times

January 9, 2000

 

The People’s Army in the Information Age

Ed: James Mulvenson and Richard H, Yang

RAND

CF-145-CAPP/AF

ISBN/EAN: 0-8330-2716-6

1999

5. “COSTIND IS DEAD, LONG LIVE COSTIND! RESTRUCTURING CHINA’S DEFENSE SCIENTIFIC, TECHNICAL, AND INDUSTRIAL SECTOR” by Harlan W. Jencks

 

Gordon Housworth



Cybersecurity Public  InfoT Public  Infrastructure Defense Public  Intellectual Property Theft Public  Risk Containment and Pricing Public  Strategic Risk Public  

discussion

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Foreign vulnerability inherent in US globalization of its commercial and defense supply chains

- Gordon Housworth  [ 5/6/2008 - 11:36 ]   #

The US and, and to a lesser degree, Europe have lost control of their defense and commercial industrial supply chains. Exporting capability rather than capacity, the US has increasingly retained only a top tier or integrator role while exporting its tier 2-tier n base. Worse, the US cannot realistically define discrete and net risk as the chains are too opaque for identification and there is decreasing ability to direct sourcing to less risky tiers.

The loss has not come without warning, especially in the seminal analyses of the mid-1980s to early 90s (much of which is cited here) and near-disaster supply chain bottlenecks that nearly sidelined front line equipment during Desert Storm (1990-91).

Having surveyed four decades of research on globalization impacts, we can state that there are virtually no metrics in open source. There are drivers and characteristics but there are no actionable metrics of sufficient robustness to pass the test of falsifiability. At a macro level we are secure that we and some others have the compass right, but actionable information about a specific chain condition and greatest risk at component at tier in the chain is fuzzy at best. Given our supply chain analytic experience, we can see the tracks of bland assumptions without the understanding of how supply networks actually work. Defense and commercial sides of the house share the same problem - insufficient granularity of analysis which if they get there they find that they do not have accurate and timely data. At this point the commercial side generally gives up. The defense side can't so spends much time in Rommel's Wolkenkuckucksheim (Cloud-Cuckoo-Land after Aristophanes). Striped of politeness, almost everyone is guessing although they shroud it in tech speak which pacifies the unknowing.

 

The US manufacturing loss is staggering in its sweep as it includes:

  • Technology (Research Testing Development and Evaluation - RTD&E)
  • Industrial base (tier base capability , knowledge gaining, performance curve and price/volume)
  • Volume (capacity)
  • Availability (conversely product unavailability, product as hostage, withheld or not surged in time of national need)
  • Supply chain (chain complexity masks risky sourcing and possible interdiction)
  • Forensics (undocumented/latent/hostile firmware and/or software additions)
  • Education (learning citadels clustered to engineering and production centers)

Having reviewed analyses of manufacturing globalization for both the defense and commercial sectors, this analyst is of the opinion that the risk to the US has become so great that it should study itself as a reasonable target of economic sanctions (also here), hence the inclusions of citations on that topic. (The Chinese have studied means of countering economic sanctions; can we do no less?)

 

Before globalization there was 'NATO-azation'

 

The issue of dealing with the effects of globalization on US commercial and defense industries has been with us for decades. The 1985 Strategic Materials: Technologies To Reduce U.S. Import Vulnerability, whose advisory panel an Air Force logistics colleague advised me "looks like a 'Who's Who' for the defense department in the 1990's.  Lot of them went on to very senior DoD positions," stated the problem and its complexity well:

Crafting a workable policy [regarding dependence on foreign sources, NATO allies included, for defense material and technology] will be a tricky job.

 

There are three basic policy choices:

  • demand that anything that goes into defense equipment be built in the U.S. from U. S.-sourced components, taking whatever measures are necessary to ensure that all the necessary industries are alive and well in the United States;
  • let the market dictate which industries will be healthy in the United States and look only for the best deals wherever they can be found worldwide; or
  • choose some industries that have to be located in the United States, take appropriate measures to ensure that, and let the rest go with the market.

The first and third require some sort of intervention in the international economy, either supporting the international competitiveness of U.S. companies or protecting, supporting, and subsidizing U.S. companies that cannot otherwise survive. Another approach is to design nothing into U.S. defense systems that cannot be domestically sourced. But this cuts off a great deal of modern technology, a Western strength. In making these choices, the United States will have to decide how dependent we can afford to be, and how much independence we are willing to pay for. If the United States demands self-sufficiency without taking measures to keep U.S. companies alive and competitive, the list of technologies available for defense systems is likely to decrease as time goes on.

 

It will be necessary to decide how to treat dependence on various nations. There are significant differences in being dependent on Canada (already defined as part of the North American industrial base), Britain, our other NATO allies, Mexico, Japan, Korea, etc... Other nations are much less tightly tied to the United States.

 

The high-technology economy is an international one and responds to international market forces. These forces are likely to continue to move industries offshore despite U.S. efforts to will (or legislate) them to stay. In the vast majority of cases, defense business is far too small to provide the necessary clout, particularly when faced with other nations that manipulate their civilian markets to keep their companies healthy. Competition comes from Japan, the smaller Asian nations - Korea, Taiwan, Singapore, etc - and Western Europe...

The US chose the second path by a combination of default and design augmented by partial regulation; Private industry sought performance and integration coupled with higher margin and lower costs. Our current globalization impasse is its direct descendent.

By 2000, the challenges facing the US Air Force were typical of an increasingly globalized and consolidated industrial base:

Between 1990 and 1998, a horizontal and vertical integration took place across all segments of the U.S. aerospace industry. [Driven by a dramatic decline in military aircraft procurement budgets as well as overall defense authorizations since the end of the Cold War,] The number of credible U.S. prime contractors for integrating fighters and bombers fell from seven to two; the number of U.S. missile manufacturers from fourteen to four; and the number of space launch vehicle producers from six to two. By the end of the 1990s, the European defense aerospace industry had also begun to experience a dramatic cross-border consolidation and restructuring. This growing consolidation of defense prime integrators and subsystem suppliers has resulted in increased numbers of strategic and product-specific alliances, international teaming and joint ventures, and cross-border mergers and acquisitions (M&As) among defense firms, together with heightened interest in foreign exports and foreign lower-tier suppliers.

From foreign source to dependency to vulnerability

As early as 1987, US Industrial Base Dependence/Vulnerability. Phase 2. Analysis, had defined three elements of foreign sourcing: (1) a foreign source is a source of supply, manufacture, or technology that is located outside the United States or Canada, (2) a foreign dependency refers to a source of supply for which there is no immediate available alternative in the United States or Canada, and (3) foreign vulnerability, related to foreign dependency. refers to a source of supply whose lack of availability jeopardizes national security by precluding the production, or significantly reducing the capability. of a critical weapon system. While the US has yet to suffer a sustained foreign supplier cutoff "either in peacetime or war," the military and economic balance has now shifted against the US, making it increasingly plausible that the PRC or Russian Federation could directly or indirectly influence 'just-in-time' availability:

One potential scenario simply posits disagreement by the foreign supplier with US policy... Problems such as strikes, political unrest, or natural disasters within the supplier's country are all plausible. Cutoffs might also be created by the supplying nation giving priority to ventures more profitable than DOD contracts, or giving priority to the supplier's home country needs over the United States, especially in times of crisis. Countries external to the supplying country could also create cutoffs - by threatening the supplier, by an overt blockade, or by war. One US study done prior to the end of the Cold War, reminded readers that Japan was within easy bombing distance of the Soviet Union, and thus the USSR could easily cut off critical components for US weapon systems... The USSR test fired two sea-launched ballistic missiles into the Sea of Japan at a time coinciding with Mikhail Gorbachev's April 1991 visit to Japan. Some analysts described the test firings as a "muscle flex" and a "political message for Tokyo." The message, however, has ramifications for the United States also - sources of certain critical supplies are vulnerable to hostility, a situation that creates a possible domino effect on US weapon systems.

Given the shift in manufacturing key component categories from Japan to China, were the US to incur the ops tempo of a second Desert Storm or OIF level endeavor not to Chinese favor, the issue of shortages would not be 'if' but rather 'how many and how soon.' (Nothing has to overt; polite expressions of regret coupled with 'work to rule' responses and the need to service current customers would attenuate/terminate supplies of many critical parts and assemblies needed to sustain the ops tempo.):

Despite the successes of US military weapon systems that used foreign high technology components during the Gulf War, there were moments of uncertainty as to whether the United States would be able to get requested "rush" orders filled for needed components on a timely basis. [On] "nearly thirty occasions, the Bush administration had to call upon foreign governments for help to get delivery of crucial parts for the war effort."... "foreign manufacturers often were reluctant to put the Pentagon's purchase orders ahead of their regular customers' without prompting from their governments, according to officials at embassies here and at the Commerce Department." Of special concern were Japanese suppliers... "The Japanese electronics companies - whose identities have not been publicly disclosed - reportedly said they could not curtail existing commercial contracts, such as orders from VCR, television, and automobile manufacturers, to meet the needs of the US forces in the Gulf." Experts on Japan [also] speculated that Japanese suppliers, in a society geared toward avoiding any military involvement beyond national borders in the post-World War II era, "may have been afraid of domestic political ramifications of favoring military over commercial customers." [An] interview with an unnamed Commerce Department official revealed that the US government "had to 'jump through the hoops' and that the department took the unusual step of asking Japanese government officials at the embassy in Washington for help in prodding Japanese suppliers."

Said of Japan in 1991, the following applies with greater intensity to China. As a calibration, consider a US air and naval intercession on behalf of Taiwan in the Formosa Strait. Leaving aside the likely effort by the Chinese to sink a US carrier battle group, thereby shocking the American populace, one can assume that the entire component supply chain would shut down. Whatever ops tempo the US envisioned would have to come from inventory or alternate supply. Lesser scenarios should have less chain disruption, but a degree of disruption remains high:

The potential for crisis, however, certainly existed and only a common political objective shared by top levels of the US and foreign governments averted more serious problems. The bond between most governments during the war was created by nearly-unanimous outrage over Iraq's aggression; such a bond was both unprecedented and delicate, thus it may be tough to duplicate in the future. Had there not been a common political objective or had the Japanese government, for instance, been more inclined to bow to domestic calls for avoiding contributions to the war effort (and there was considerable pressure within Japan for noninvolvement), it is quite likely the United States would have had to look for other sources to obtain necessary components. Without pre-planning for alternate supply sources, the probability of a favorable resolution would have decreased significantly.

Analogous to mercury accumulation in top tier marine predators, buyers of assemblies, modules and larger finished goods faced with chain opacity will incur rising risk of chain interruption and functional tampering. Without actionable information and the ability to affect chain substitutions, virtually all are now accepting risk by default. See: Confluence of thinking on Chinese outsourcing and supply chain risks from DSB and USCC. From an ICG note:

As we do quite a lot of supply chain analysis, we know why it so often fails, namely the OEM or top tier cannot get the data from their immediate tier who are loath to reveal their chains. Data is shielded, normalized, changed without notification, fictionalized either by surrogate data or simple commercial misrepresentation. Counterfeits add yet another layer on the problem set.

 

From electronic/electrical chain examples we have at hand, many are PRC at tier 2 to tier 5, others are Taiwanese ODMs which means PRC for almost all tiers save design, Japanese chains have PRC, Korean and Singaporean tiers. There are many cases where the OEM or top tier believe that a certain part comes in at tier x in its entirety, but the reality is that a goodly portion comes in PIA down to tier x+3. The PRC presence, either as source or influencer, is overwhelming.

 

Our commercial experience has repeatedly shown that the OEMs don't know what, from where, is in their chains. A common experience is that as the OEM or top tier develops the algorithms of granularity needed to be effective, the data becomes too difficult or costly to obtain. If the OEM demands an identified tier x validate volume and pricing as stated by the purchasing tier (tier x-1), the tier x will validate lest they run afoul of their purchasing tier.

 

As automotive OEMs are phasing out Full Service Suppliers (FSS) by their recognition that they were enduring margin without equivalent value, defense sector firms are enthusing over Performance Based Logistics (PBL) structures which are beginning to blind Defense Logistics Information Service (DLIS) as to what it in a chain and conceivably debase the value of a National Supply Number (NSN). (It should be remembered that DLIS rose from "the World War II era when each of the Military Services operated independently and maintained a separate supply system and procedures for cataloging their items of supply [in which] many items were given a different name by each of the services, making efficient use of available stock impossible.")  [As an aside, buying "Power by the Hour" (PBH) has its merits (also here) but it is disconcerting to see how contractors perceive its profitability.] [ICG note]

Inability to divorce supply chain access from mercantile efforts

Writing in 2004:

The PRC is preoccupied with the US given it current dominance in Asian and global affairs, and see it as the principal "international danger" able to "confront and complicate China's development and rising power and influence in Asian and world affairs." China is mindful that three nations that sought to overturn the prevailing international order of their day, Weimar Germany, Imperial Japan, and the Soviet Union, were punished by an allied coalition of established nations. While I've not see it in print, I cannot but note that the leader of the winning coalition in each case was the United States, a fact that I cannot imagine has been lost on the Chinese.

China is well into the process of creating a mercantile, rather than fungible, market for raw materials that is expressly grounded on the inability of the US or US allies to interdict it. (China's growing mercantile net is of keen interest to this author, but lest I be accused of China bashing, items of equal weight are a Russian kleptocracy class armed with the energy weapon and the implosion of the US Pre-K through 20+ education structure.) See:

Chinese mercantile highlights of interest to this author are:

  • Strategic plan creates mercantile structure that secures energy stocks, raw materials, and crops.
  • Cannot be interdicted by the US or its allies.
  • Delivers export markets for commercial and military production, redirects regional elites to study in China, and extracts diplomatic obedience.
  • Sends large groups of diplomatic and consular agents that meet counterparts at each level of the target country's bureaucracy.
  • Promotes infrastructure projects using Chinese firms, creating a camouflaged posting for People's Liberation Army (PLA) assets.
  • Veiled PLA works have common pattern: tidewater port presence offering partial or complete opaqueness connected by a strassendorf (street city) style of satellite towns connected by new roads to a processing plant at the primary extraction asset, e.g., coal, oil, minerals, timber, etc.

Taken together with China's regional economic might, the PRC is demonstrably capable of building the regional relationships needed to eject the US and in the process become the dominant mercantile center of an Asian trading block that includes Asia's "most vibrant economic sub-region" (China, Hong Kong, Taiwan, South Korea, and Japan).

While I freely admit this macro level view lacks granularity and has yet to be submitted to the test of falsifiability, I do not believe it can be removed from a discussion of sustained supply chain access.

 

A unitary threat exceeding combined prior Soviet and Japanese threats

Economic power is the foundation of military power. The most important single indicator is GDP. Like defense budgets, however, GDP provides only a limited picture of power. It says little about the composition of the economy, such as whether it is spearheaded by leading sectors or dominated by old and declining ones. Other important variables include human capital and technology. The best readily available measure of human capital is the average year of educational attainment. For technology, the best indicator is per-capita expenditure on research and development.

The US now faces a potential threat of chain disruption from the PRC greater than that presented by combined Soviet espionage efforts directed against the US technology base, military, dual-use and commercial, and Japanese commercial inroads against a wide range of commercial products, notably electrical and electronic systems, that were conceived in the US:

  • In the case of the Soviets, the US did not cede manufacturing and design efforts wholesale to the USSR; the Russians had to employ economic espionage (see also B.R. Inman's Senate statement) to get technology and equipment otherwise embargoed to them.
  • In the case of the Japanese, the US had an exceptionally strong commercial competitor periodically balanced by a pro-US government that recognized its privileged place under a US defense umbrella which allowed it to devote its GNP to commercial pursuits; when it was essential to US interests, Tokyo would intervene on our behalf. See Refining a China forecast. (It was an unwritten rule of the Nixon administration that the Japanese were to be allowed to dominate electronics markets in return for their unwavering support of US diplomatic initiatives.)

I submit that the PRC will continue to strengthen the independence its own strategic supply chains, a condition that the US/EU have aided by seconding wholesale the manufacture, now design, and in the offing, unique product standards, to the Chinese. A current example of this effort is the gaining of indigenous, as opposed to Taiwanese owned, semiconductor device fabrication capacity from wafer fab through deposition, removal, patterning, and properties modification.

As for the US/EU, the de facto 'sole sourcing' of much of the US and elements of the EU industrial base to China has already rendered its manufacturing base into Chinese hands at multiple tiers, many of which, as noted above, are opaque to the top tier, integrator and ultimate buyer. Similarly, the export of much of its design process for future products to China-based R&D hives have increased the potential for IP predation and the appearance of peer Chinese competitors before the US/EU products reach market.

 

Just as the Soviet Union pointedly pressed Japan over its commercial and military partnership with the US, so will China both direct its domestic suppliers to comply while pressing Taiwan, Japan and Singapore when any of those states significantly work against Chinese Interests.

 

We have already seen two examples of that pressure, one in Japan and the other in the US. Japan squelched what it described as a 'national security' IP theft from Denso, which is itself a repeat of the humiliation that Cisco received at the hands of Huawei and the PLA, i.e., suppress litigation or your commercial interests in China suffer. In each case, once matters became public, and in the case of Cisco went litigious, the Chinese were able to apply commercial pressure on Cisco and Toyota-Denso to relent or suffer immediate penalty. See two items: Prediction: the Cisco-Huawei IP debacle repeated itself with Denso, and likely for the same reasons and A tipping point in intellectual property protection?

 

I submit that both the US government and private industry would find it instructive to receive the equivalent of the Russia's gas embargo to the Ukraine who surprised all by continuing to tap their allotment, thereby plunging the EU into shortage. European energy sourcing directions shifted in the moment with reliable sourcing and self-sufficiency rising in relation to cost as prime issues.

 

I further submit that the US needs to adopt the Toyota/Denso model of retaining the capacity to design and manufacture a portion of the annual buy of everything that they purchase. Toyota/Denso is the only significant automotive OEM to retain that capacity which also gives Toyota leverage with its suppliers by its understanding the technological, design, manufacturing, component pricing and supply chain tier structure of what it procures.

 

This process was proposed, at least for the defense sector in the 1980s but was not acted upon. In the interval, the US, much like the other automotive OEMs has already surrendered much of its process technology in the form of joint ventures, outsourcings and tier manufacturing, leaving the Chinese only to target mathdata and key design efforts not sourced to the tier base.


Chicken Little's sky may be falling but it is does not fall uniformly


If at a macro level it is plausible that the US/EU are subject to systematic supply chain interruption/embargo by the PRC at the commercial and dual-use level, what is the status for defense items given the near misses of Desert Storm? How do we validate (falsifiability) and prioritize investigation in order to identify the most essential chain elements? Even the salient works of the 1980s-early 1990s were imprecise on granular means of analysis. DoD has been providing guidelines "for evaluating, on a case-by-case basis, the need for Government action to preserve industrial capabilities vital to national security" for some time. Witness the 1996 Assessing Defense Industrial Capabilities handbook. The problem was then, and appears to remain, one of data, rigorous trigger thresholds and chain transparency below the DoD vendor.

It is with some interest that DoD appears to believe that its key systems are intact. A three year 2006 National Research Council effort on Critical Technology Accessibility attempted to answer two questions:

  • What products/components/technologies currently being solely procured from foreign suppliers could significantly disrupt U.S. defense capabilities if access to them were denied (through conflict, embargo, treaty, etc.)?
  • What emerging technologies/products that, if the United States chooses not to pursue domestic production, could significantly disrupt U.S. defense war fighting capabilities if access to them were denied?

In which the NRC Committee:

looked for but did not find an existing, exhaustive database of foreign products/components being procured by the Department of Defense (DoD) and decided to not attempt to develop such a database on current foreign sourcing across the vast numbers of DoD systems. Nor did the committee assess, for each foreign component, the impact of denial on operational capability or try to understand the particular mitigation opportunities and consequences. Finally, it did not develop a collective assessment of the technological and industrial trajectories of emerging technologies that promise to be key to our nation's security. The size and scope of such an effort would have exceeded the time and resources available to the committee, and it became clear from the information provided to it and from its deliberations that this was not the right approach.

In the absence of data, the NRC committee:

did listen to government plans and perspectives, discussed the issues with recognized experts, and independently reviewed source material and past literature. In addition, the members of the committee arrived with substantial background, service, and expertise in these matters.

Without intending to flip, they guessed, or as you prefer, SWAGed. Without data, chain transparency, metrics and algorithmic analyses, how could they do better? We find Fortune Fifty firms in similar predicaments with their supply chains.

Despite these limitations, the NRC Committee was confident that:

Based on the information they received and their own knowledge, committee members were unable to identify any product or technology currently being exclusively procured from a foreign supplier that could significantly disrupt U.S. capabilities or operations should it suddenly become unavailable...

 

If the ]US] were to become strategically dependent on a foreign industrial base for items that are critical or for which the regeneration of a U.S. industrial base would take a long time, the risk would be unacceptable. The committee does not see any signs of that at this time, but the possibility should be taken into account when determining what the U.S. industrial base needs to be for defense purposes. The committee identified four areas of future technological and industrial advancement that warrant discussion: (1) information technology (IT) components; (2) IT services, which include many forms of the capability to manipulate, store, and exploit data and information; (3) nanotechnology; and (4) biotechnology. The committee also identified another area of concern, systems integration capabilities.

The 2006 NRC Committee text strongly echoed, and possibly accepted the findings of, a 2004 Study on Impact of Foreign Sourcing of Systems that "contacted a total of 806 prime contractors and first and second tier subcontractors in order to collect and evaluate information" for systems:

shaped by the recent experiences in Operations Enduring Freedom and Iraqi Freedom. Those operations were conducted largely as "come-as-you-are" conflicts with the combat platforms already deployed to our forces; and they consumed significant quantities of precision guided munitions. As a result, this study is focused on those items that were or would be in high demand and/or consumed during similar future operations.

In the absence of rigorous means and metrics coupled with our case work in supply chain analysis, we question the findings of that 2004 effort:

  • Foreign sources provide limited amounts of materiel for the identified programs.
  • Utilization of these foreign sources for these programs does not impact long-term readiness.
  • Utilization of these foreign sources does not impact the economic viability of the national technology and industrial base.
  • In most cases, domestic suppliers are available for the parts, components, and materials provided by the foreign sources.
  • The results of this study are consistent with recent related studies.

This voluntary survey went down to tier two, identifying a total of "73 first, second, and third tier foreign subcontractors" from Austria, Belgium, Finland, France, Germany, Israel, Italy, Japan, Malaysia, New Zealand, Netherlands, Russian Federation, Singapore, Spain, Sweden, Switzerland, Turkey, and the UK. (DoD has been habitually comforted by UK subs, after that NATO and friendlies.) This analyst is pleased that the questionnaire went to tier two, but the report seems to treat 'tier two' (from any country) as the edge of the world after which one needs to look no further.

Also the test characteristics seem vague, looking to the past ("Supply disruption is not likely since the current suppliers have demonstrated reliability in the past..."), rather than to the future. There was also a repeated implication that if the dollar amounts were small that the risk was low as opposed to cessation of component access regardless of cost. ("Collectively, foreign subcontracts represent about four percent of the total contract value and less than ten percent of the value of all subcontracts for these programs.")

 

The report did not reveal or imply any further granular analysis. Based upon our supply chain analysis, this analyst would want more rigorous analysis, look at lower tiers and other chain characteristics before issuing a similar pronouncement.

Returning to the 2006 NRC report, its recognition of the changing nature of the supply base harkens back to the good works of the 1980s:

The impact of component denial is not a static estimate. The risks entailed in depending on a foreign-produced component are embedded in the strategy of supply management and the diversity of the impacted operational system or force. The size and power of the globalized commercial marketplace are such that we must find a way to exploit the marketplace's value for our security. The risks and benefits of this exploitation are at least as much an issue of acquisition and logistics strategy as they are of estimating foreign intent. The viability of the future assured domestic supply of critical components for the DoD is dependent on the health of the U.S. industrial base in these sectors.

Its recommendations to Under Secretary of Defense for Acquisition, Technology and Logistics (USD(AT&L)) and DIA are interesting, although some are unworkable while others are likely to be ineffective:

  1. [D]evelop a system for monitoring the risks of component unavailability within the procurement and operating elements of DoD... [ICG comment: Having not worked before, and with no better tools and metrics on offer, how will it work now?]
    • A self-certification approach by USD(AT&L) should direct the services and defense agencies to annually prepare a product and supply chain assurance report that identifies important vulnerabilities, potentially significant operational consequences, and recommended mitigation actions... [ICG comment: Self-certification rarely, if ever, works as bureaucracies are loathe to mark themselves deficient; even less likely without clear means and metrics.]
    • [A]nalyze these annual reports to identify DoD-wide vulnerabilities that might not be detected by the individual services and agencies and to warn of worrisome trends in the integrity of the supply chain, ensuring it is not compromised by foreign supply sources... [ICG comment: Unlikely to work as the certifications are suspect, and no metrics are proposed.]
    • [ICG comment: There are, however, some useful questions which could lead to metrics:
      • Where there is a lack of war reserves or stockpiles.
      • Where a weapon system is uniquely in the U.S. inventory and therefore cannot tap into worldwide depots.
      • Where developing an alternative source of supply requires significant lead times.
      • Where the DoD has developed sole-source, single-solution capabilities.

      • Where critical technologies have migrated offshore or been developed there in their entirety.

  2. [D]evelop a system for monitoring U.S. industrial health in strategically important global commercial market sectors that are critical to the availability of components for DoD... [ICG comment: Fine, but how and by what means and metrics?]
  3. [O]organize a systematic method of assessing the health of military systems integration in and for the DoD as well as that of potential coalition partners and adversaries... [ICG comment: Again, how and by what means and metrics?]

The foreign dependency analysis that this analyst would like to see is a Joint Logistics Commanders' 1986 report, A Study of the Effect of Foreign Dependency, summarized in GAO/NSIAD-90-48, that "reviewed 13 DOD weapon systems and found dependencies1 on foreign sources in 8 of them with severe problems in 6. According to the study, these dependencies could result in a total cut-off of the production of these items as early as 2 months into a war mobilization effort for a period lasting from 6 to 14 months.":

To obtain information regarding the lower subcontractor/vendor levels, for 12 of the 13 weapon systems reviewed, the project team performed a limited survey of the market structure supporting the systems. That is, for each of the 12 systems, program officials were asked to identify 5 subsystems and components at the next lower production tier meeting certain criteria2 and this identification continued through the lower production tiers down to the level of basic materials. For the other system, the Sparrow missile, a complete vertical tier analysis was done.3

 

1 A foreign dependency, as defined in this study, is an immediate, serious logistics support problem that affects the combat capability of the United States because of the unavailability of a foreign sourced item.

2 Each subsystem or component had to be (1) complex enough so that the program officials were unable to categorically state that it did not contain any foreign manufactured items and (2) critical enough to production, and complex enough to produce, so that its loss would pose serious problems in meeting production schedules

3 A vertical tier analysis identifies critical items acquired from foreign sources for an individual weapon system down through the tiers of suppliers and evaluates possible production constraints at each level.

Going forward, RAND's effort to assess industrial impacts identified a typology of "cross-border business relationships and activities" then, and still, prevalent in the defense aerospace industry:

  • Cross-border shipments of finished platforms, systems, or major subsystems
  • Licensed coproduction
  • Foreign Military Sales (FMS) coproduction
  • "Partnership" coproduction
  • Codevelopment

All five were supported primarily by "prime/subcontractor [by far and away the leader], marketing agreement, team, joint venture, and parent/subsidiary" structures while the latter three usually involved "relatively greater level of collaboration among participating firms."

 

RAND also segmented USAF objectives relevant to globalization into three categories (economic-technological, political-military and national security-viability) and identified program characteristics it said showed "the most promise for promoting the potential military-political and economic benefits of globalization." This analyst notes that those same characteristics also made it possible to individually and incrementally transfer the US technology base. Note that the primary driver is the defense firm not the government; all other drivers follow:

  • voluntarily structured and often initiated by defense firms rather than by governments on the basis of internal business calculations of market conditions and best business practices.
  • painstakingly structured to satisfy the existing U.S. arms export and technology security regulatory regime and CFIUS.
  • often focus on promoting existing products or modifications thereof, or on specific product market sectors.
  • frequently focus on subsystems, munitions, or discrete components or areas rather than on large, complex programs for the development of entire weapon system platforms.
  • designed to gain and expand active reciprocal market access through new programs.
  • often motivated by a desire to add to a company's product portfolio a highly competitive product in a market sector dominated by another firm or firms.
  • characterized by mutual perception of balanced and complementary bilateral market access opportunities and technology transfer.
  • most aggressive and innovative among these relationships depend on continued reform of the U.S. export control regime in order to achieve their full potential.

RAND’s defense globalization conclusions from 2001 have only accelerated (while they have exploded exponentially in the commercial sector):

  • Numerous innovative cross-border strategic market sector agreements initiated by U.S. and foreign companies are emerging.
  • U.S. aerospace firms are not significantly increasing their acquisition of wholly owned subsidiaries of foreign defense aerospace firms.
  • Teaming and joint ventures with non-UK and non-Europe-based firms are increasing.
  • U.S. industry collaboration with one country's firm increasingly means collaboration with many countries' firms.
  • Consolidated European and other foreign firms mean potentially more equal partners as well as stronger competitors.
  • European and other foreign firms seek U.S. market access but resent barriers.
  • European and other foreign firms view the acquisition of U.S. firms as the most effective means of penetrating the U.S. market.
  • Non-European foreign firms are forming strategic relationships with European and U.S. firms, potentially enhancing competition but complicating standardization and interoperability objectives.
  • European and other foreign industry consolidation present U.S. government and industry with unprecedented opportunities as well as risks.

Yet all of the above are drivers and characteristics which may yet yield metrics, but do not now offer the analyst an actionable means of identifying trigger thresholds.

 

Where are the metrics?

 

Metrics in open source have been difficult to obtain. An effort was made by King and Cameron in 1974 and updated in 1977. Their work was reprised, and remains online, in Appendix A of Strategic Materials: Technologies To Reduce U.S. Import Vulnerability.

 

A more intriguing effort, Conservation, Integration and Foreign Dependency: Prelude to a New Economic Security Strategy, was done by David Leech, then at TASC, now Northrop Grumman, in 1993. His was the sole search result on "foreign vulnerability index." Leech proposed the use of Herfindahl-Hirschman Index normally used in anti-trust litigation to "measure the worldwide supply concentration of items, both overall for firms and with firm market shares grouped by country of origin." Along with risk factors it is one of the methods noted in INDUSTRIAL BASE: Assessing the Risk of DOD's Foreign Dependence, GAO/NSIAD-94-104.

 

This author found Leech's approach of sufficient interest to post a fair use excerpt of the GeoJournal piece, with footnotes, dealing with its Foreign Vulnerability Index (FVI). I believe it reasonable to say that Leech believes that:

  • The King and Cameron approach, as with many engineering approaches, will not pass the test of falsifiability.

  • Moran's 4/4/50 rule, which states that if four foreign firms or four nations control more than 50 percent of an international market, that market is considered "vulnerable" and should be monitored, might be a Herfindahl threshold value.

  • The essential problem of assessing the potential for 'concerted effort' in the anti-trust realm is analogous to the essential problem of assessing 'concerted effort' by nations and their industries to deny the US access to their products, services or technologies.
  • Vulnerability is a narrow consideration having to do with tightly defined markets for products and services.

It remains to be seen if Leech's approach falls victim to the problem we frequently see in supply chain analysis, namely that the complexity issue is so great that cost effective, perishable data is not available. I fear that may well be the case, hence the value of inserting a Design Basis Threat (DBT) analysis as we must have actionable values in a low data environment and be able to defend them. See:

Still, Leech is the strongest approach to metrics that this author has seen and deserves exploration anew.

 

Postscript: The Appendices (actually Vol. 2 issued in 1990) of the 1985 Strategic Materials analysis had a specific case study of the strategic value of the carbon fiber market, Case Study: The Advanced Composites Industry.

 

Leaping forward to the present, we see aviation/aerospace, industrial, sporting goods and automotive driving a robust market:

Over the last several decades, the global market for carbon fiber has grown about 12%. Industry experts expect this market to reach $0.9 billion by the year 2010 (around 50 million lbs), with the market for finished carbon fiber reinforced composites parts growing to $9.9 billion. The price of carbon fibers is expected to reach around $5/lb in 2008, a significant reduction in the $150/lb price in 1970 when the market was only around several million lbs.

 

Aerospace markets have led recent demand and are expected to grow at a 19% compounded annual growth rate (CAGR) through 2010. However, industrial applications are taking off, too, with a total combined CAGR of 14% through the end of the decade (this segment currently accounts for around 60% of the current demand). Sporting goods CAGR is estimated at 5% over the same time period, resulting in a total overall projected growth rate of a robust 13%. Wind energy could become the second largest market sector after aerospace by 2010. The following table summarizes some of these applications.

In this thriving environment, the last principal US producer of Acrylonitrile (AN or ACN), the precursor to Polyacrylonitrile (PAN) (See carbon fiber value chain) which is the basis for all aerospace/high end carbon fiber, has passed into foreign hands.

 

Apocryphal stories to the contrary, frogs are smart enough to jump from water whose temperature is elevating; in this skill of self-preservation, frogs are smarter than governments, corporations and self-interested political elites who will stay in the water until it is too late. Once again, low cost has proven not to be low risk.

 

Bibliography Note: While the following list of citations is not exhaustive, I submit that they reasonably constitute a four decade record on globalization and are a good jump point for further investigation.

 

Crafting A Contractor PBL Organization

By John Kotlanger & Ron Giuntini

Performance Based Logistics

29 April, 2008

 

PRC still expanding sub fleet: analysts

THREAT: Many security experts say that China's main objective in upgrading its submarine fleet is the ability to delay or deter US intervention on behalf of Taiwan

NY TIMES NEWS SERVICE, BEIJING

Taipei Times

Tuesday, Feb 26, 2008

 

Strategic Materials

Final Report, Spring 2007 Industry Study

The Industrial College of the Armed Forces, NDU

2007

 

'Power by the Hour': Can Paying Only for Performance Redefine How Products Are Sold and Serviced?

Sang-Hyun Kim, Morris A. Cohen, and Serguei Netessine

Wharton School, University of Pennsylvania

Knowledge@Wharton

February 21, 2007

 

Critical Technology Accessibility

Committee on Critical Technology Accessibility, National Research Council

National Academies Press

2006

Appendix C - Previous Reports on Globalization and the U.S. Military Industrial Base

 

PERP Program - Acrylonitrile

New Report Alert

Nexant

November 2006

 

Letter from China: Is it a 'peaceful rise'? U.S. shouldn't bet on it

Howard W. French

IHT

APRIL 20, 2006

 

Russia and Ukraine Reach Compromise on Natural Gas

By ANDREW E. KRAMER

New York Times

January 5, 2006

 

Measuring National Power

Gregory F. Treverton, Seth G. Jones

Intelligence Policy Center (IPC), RAND National Security Research Division (NSRD)

ISBN: 0-8330-3798-6

2005

 

Measuring vulnerability to U.S. foreign economic sanctions: focused sanctions reduce costs to business.

Askari, Hossein; Forrer, John; Hachem, Tarek; Yang, Jiawen

Business Economics

VOL 40; NUMB 2, pages 41-55

April/1/2005

MIRROR

 

Sanctions Assessment Handbook

Humanitarian Information Centre (HIC)

UN Office for the Coordination of Humanitarian Affairs

2004 last update

 

VALUE CHAIN OF CARBON FIBERS: Issues associated with production, conversion, and supply of PAN carbon fibers into high volume applications.

Presented by: Martin Kokoshka

Grafil Inc.

March 2004

 

Study on Impact of Foreign Sourcing of Systems

Office of the Deputy Under Secretary of Defense for Industrial Policy

January 2004

 

Speed Kills: Supply Chain Lessons from the War in Iraq

by Diane K. Morales and Steve Geary

Harvard Business Review

November 2003

OPEN SOURCE MIRROR

 

Positioning Your Company for Defense Department Work

Helping Remanufacturer's of Service Parts Capture A Highly Profitable New Source of Revenue Through Performance Based Logistics (PBL)

John Kotlanger

November 2, 2003

 

Background Paper of the Millennium Project Task Force on Science, Technology and Innovation

Smita Srinivas et al

United Nations Development Programme (UNDP)

April 18, 2003

 

Going global: U.S. government policy and the defense aerospace industry

Mark A. Lorell, Julia Lowell, Richard M. Moore
RAND MR-1537

ISBN 0-8330-3193-7

2002

 

Certain Issues on China Countering Future Economic Sanctions

By Jiang Luming

The (Chinese) National Defense University

Military Economics Study, November 2001

 

Was America hunting for a new killer submarine?

Global Intelligence Update/Asia Times

April 6, 2001

 

Measuring National Power in the Postindustrial Age

By: Ashley J. Tellis, Janice Bially, Christopher Layne, Melissa McPherson

RAND

MR-1110-A

2000

 

Analyst's Handbook - Measuring National Power in the Postindustrial Age

By: Ashley J. Tellis, Janice Bially, Christopher Layne, Melissa McPherson, Jerry M. Sollinger

RAND

MR-1110/1-A

ISBN/EAN: 0-8330-2803-0

2000

 

Interpreting China's Grand Strategy: Past, Present, and Future

By: Michael D. Swaine, Ashley J. Tellis

RAND

MR-1121

2000

 

How Long Do Economic Sanctions Last? Examining the Sanctioning Process through Duration

Sean M. Bolks, Dina Al-Sowayel

Political Research Quarterly, Vol. 53, No. 2, pp. 241-265

DOI: 10.1177/106591290005300202

2000

ABSTRACT

PDF

 

Task Force on Globalization and Security

Defense Science Board

December 1999

 

The Impact of Economic Sanctions on Health and Well-being

by Richard Garfield

Relief and Rehabilitation Network (RRN)

Overseas Development Institute

RRN Network Paper 31

ISBN: 0-85003-435-3

November 1999

 

Overview and Analysis of the Economic Impact of U.S. Sanctions With Respect to India and Pakistan

James Stamps, Project Leader

U.S. International Trade Commission

Investigation No. 332-406

Publication 3236 September 1999

 

Assessing Defense Industrial Capabilities

DoD Handbook 5000.60-H

Under Secretary of Defense for Acquisition and Technology

April 1996

 

INDUSTRIAL BASE: Assessing the Risk of DOD's Foreign Dependence

Report to the Chairman, Subcommittee on Defense Technology, Acquisition, and Industrial Base, Committee on Armed Services, U.S. Senate

GAO/NSIAD-94-104

April 1994

 

Conservation, Integration and Foreign Dependency: Prelude to a New Economic Security Strategy

David P. Leech

The Analytic Sciences Corporation (TASC)

GeoJournal

Volume 31, Number 2, October, 1993

pp. 193-206

Abstract and order info

FAIR USE excerpt of its Foreign Vulnerability Index (FVI)

 

US Procurement of Weapon Components from Foreign Sources: Policy Implications

Guy J. Fritchman

Major, US Air Force

USAF Research Associate

Program in Arms Control, Disarmament, and International Security

January 1993 (written during spring 1991)

 

Building Future Security: Strategies for Restructuring the Defense Technology and Industrial Base

Office of Technology Assessment

OTA-ISC-530

NTIS order #PB92-208156

June 1992

 

A CALL TO LIFT ECONOMIC SANCTIONS AGAINST IRAQ

Henry B. Gonzalez, (TX-20)

(House of Representatives - June 24, 1991)

[Page: H4929]

 

Industrial Base: Significance of DOD's Foreign Dependence

Report to the Chairman, Subcommittee on Technology and National Security, Joint Economic Committee, U.S. Congress

House of Representatives

GAO/NSIAD-91-93

January 1991

 

The Globalization of America's Defense Industries: Managing the Threat of Foreign Dependence

Theodore H. Moran

International Security, Vol. 15, No. 1, pp. 57-99

Summer 1990

 

Technology and Competitiveness: The New Policy Frontier

B.R. Inman and Daniel F. Burton, Jr.

Foreign Affairs

Spring 1990

 

Holding the Edge: Maintaining the Defense Technology Base - Vol. II, Appendices

OTA-ISC-432

NTIS order #PB90-253345
January 1990

 

Industrial Strength Defense: A Disquisition on Manufacturing, Surge and War

Martin C. Libicki

National Defense University

ADA228966

1990

 

Arsenal of Democracy in the Face of Change: Economic Policy for Industrial Mobilization in the 1990s

D. J. Bjornstad, ORNL Principal Investigator, et al
OAK RIDGE NATIONAL LABORATORY
ORNL/TM-11271
December 1989

 

Industrial Base: Adequacy of Official Information on the U.S. Defense Industrial Base

Report to the Chairman, Subcommittee on Legislation and National Security, Committee on Government Operations, House of Representatives

GAO/NSIAD-90-48

November 1989

 

Holding the Edge: Maintaining the Defense Technology Base

Office of Technology Assessment

NTIS order #PB89-196604
April 1989

 

US Industrial Base Dependence/Vulnerability. Phase 2. Analysis,

Martin Libicki,; Jack Nunn, Bill Taylor

Mobilization Concepts Development Center

National Defense University

ADA189330

NOV 1987

 

US Industrial Base Dependence/Vulnerability. Phase 1. Survey of Literature,

Roderick L. Vawter

Mobilization Concepts Development Center

National Defense University

ADB118637

DEC 1986

 

A Study of the Effect of Foreign Dependency

The Joint Logistics Commanders

Department of Defense,

(Contact No. F33600-85-C-0293), March 1986

Item is often cited, but no direct citation appears.

Brief summary of its foreign dependency analysis contained in: Industrial Base: Adequacy of Official Information on the U.S. Defense Industrial Base

 

Strategic Materials: Technologies To Reduce U.S. Import Vulnerability

Office of Technology Assessment, OTA-ITE-248

NTIS order #PB86-115367

May 1985

Appendix A - Review of Previous Lists and Methods of Selection

Strategic Materials: Technologies to Reduce U.S. Import Vulnerability

Appendix E - Case Study: The Advanced Composites Industry

 

Scientific Communication and National Security

Panel on Scientific Communication and National Security, National Academy of Sciences, National Academy of Engineering, Institute of Medicine

National Academies Press

ISBN-10: 0-309-03332-2

1982

 

Appendix H: Statement of Admiral B.R. Inman for the May 11, 1982, Senate Governmental Affairs Subcommittee on Investigations Hearing on Technology Transfer (140-142)

 

Materials Vulnerability of the United States - An Update

Alwyn H. King

Strategic Studies Institute, U.S. Army War College

April 1977

Via NTIS

Order info

 

Materials and the New Dimensions of Conflict

Alwyn H. King and John R. Cameron

Strategic Studies Institute, U.S. Army War College

December 1974

Via NTIS

Order info

 

Gordon Housworth



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