by Andreas Schreyer
In The Green Investor newsletter, which guides investors in developing green stock portfolios, we have been generally supportive of China, despite being the world's largest polluter, for its progressive energy policies and its massive investment in renewable energy. We have been attracted to the growth prospects of Chinese renewable energy markets and have been cautiously selecting China-related investments, but sadly, we are now forced to downgrade Chinese and China-dependent investments to the speculative risk category.
Cases of fraud, stock manipulations and intellectual property theft are not new in China, and our older subscribers painfully remember getting stopped out of RINO International Corp. when their false accounting scam was revealed. We are now finding out that the American Superconductor implosion earlier this year is the direct result of intellectual property theft.
The American Superconductor Saga
When we issued our sell recommendation for American Superconductor (AMSC) in June, the only information available was that the company was going to miss its quarterly and yearly financial expectations in a big way because its largest customer Sinovel, the leading Chinese wind turbine manufacturer, which overtook GE last year for the #2 rank in the world, was in breach of contract for refusing shipments and not paying for earlier product deliveries.
New details have emerged about what really happened between AMSC and Sinovel, and the bottom line appears to be: trade secrets gone with the wind, blatant intellectual property theft.
Yes, the risk of technology theft is always present and AMSC included heavily encrypted expiry code in the software which drove its proprietary power converters and control systems. When AMSC personnel discovered Sinovel wind turbines operating past the expiry date, they knew their customer had found a way to breach its encryption.
The legal papers filed by AMSC claim evidence that senior-level Sinovel employees engaged and paid an AMSC employee to illegally transfer proprietary source code. Just last week, the accused former employee, Dejan Karabasevic, was convicted of economic espionage by an Austrian court and is serving his time in jail. He fully confessed to his deal with Sinovel to transfer the trade secrets in return for a 5 year employment contract for $1 million, and is now cooperating with AMSC in their court case against Sinovel in China.
Now that all the bad news is out and factored in the price, should you jump back in and buy AMSC shares on the cheap? We recommend against it. Legal cases against leading Chinese manufacturers, in China, will always be major challenges with mostly hollow outcomes. More importantly, even if AMSC succeeds in moving past Sinovel, it will take years for analysts and Wall Street to forget and become bullish on the company again.
Yes, these are but two first-hand examples, but there is a long history of technology theft by Chinese companies. Some of these cases have even been tried in courts of law, but they are a small minority and the damage inflicted is never fully compensated by the settlements.
China is widely using IP theft as an increasingly effective trade barrier.
On one hand, Chinese companies which steal intellectual property are no-cost competitors. A long-standing example is the entertainment industry which has seen its trademarked, patented, copyrighted and other proprietary products widely copied in China. The Motion Picture Association of America points out that America's entertainment industry makes no money in China because virtually every movie and record is pirated.
