Boeing Nixes Satellite Deal Amid Concerns The U.S. Buyer Was A Chinese Government Front
The controversial deal is only the latest example of China trying to circumvent U.S. export laws or outright steal sensitive technology.
Boeing says it has canceled a controversial satellite order from a U.S.-based startup, which had received the bulk of its funding from a Chinese-government owned financial company. The deal, which critics warned could give China access to sensitive technology, comes amid a period of especially acrimonious relations between Washington and Beijing over a host of issues, including industrial espionage and intellectual property theft.
The Chicago-headquartered aerospace company announced its decision, which it said was only because of non-payment on the part of the customer, to nix the deal, worth more than $200 million, on Dec. 6, 2018. Two days earlier, the Wall Street Journal had published an expose detailing the links between the official buyer, Global IP, and a string of Chinese government operated entities and individuals with significant connections to China’s Communist Party and military establishment.
“When we resigned over a year ago, we informed Boeing of the reasons for our decision,” Emil Youssefzadeh, one of Global IP’s founders, told the Journal, referring to concerns about China's involvement and a hope that the company would be able to shake off worrisome Chinese government influence. “It’s unfortunate that this did not happen at the time.”
Some of the first inklings that there might be problems with the satellite sale came when Youssefzadeh and co-founder Umar Javed resigned from their own California-based company in 2017. They subsequently lodged a suit in federal court alleging that the Chinese government had effectively taken control of Global IP.
U.S. law prevents any American company from selling satellites or certain related technologies directly to the Chinese government or companies based in China. This appears to have created a loophole that authorities in Beijing sought to exploit with the deal through Global IP.
Global IP’s own goal was to procure the satellite, known as GiSAT-1, to help expand affordable internet coverage in areas of the African continent. In 2015, China Orient Asset Management, a wholly-government owned entity, approached the founders with a financing offer.
What followed was a meeting between Global IP's Javed and China Orient’s president in Beijing, along with Geng Zhiyuan. Geng, who is the son of a former top leader of the People’s Liberation Army (PLA), is an influential businessman and member of the Chinese Communist Party, with links to present Chinese President Xi Jinping. China Orient has also publicly touted its links to the PLA, according to the Journal.
The resulting arrangement saw at least $200 million funneled from China Orient to Global IP through Dong Yin, a Hong Kong-based subsidiary of the Chinese financing firm, to a shell company in the British Virgin Islands, called Bronzelink Holdings Ltd. The Chinese investors reportedly assured Youssefzadeh and Javed that Bronzelink was independent of Chinese government influence.
The former Global IP executives say that this turned out not to be the case. Instead, China Orient, through its subsidiaries, effectively owned a 75 percent stake in the company, which is formally headquartered in the Cayman Islands, but has a wholly-owned subsidiary in Los Angeles, and gained the right to appoint four members to its board of directors. The Chinese then demanded to see the contract with Boeing and technical details about the satellite.
Bronzelink and the present leadership of Global IP deny the allegations, citing, among other things, a legitimate export license from the U.S. Commerce Department for the satellite. They also dispute the assertion that they should have at least alerted the Committee on Foreign Investment in the United States (CFIUS), an inter-agency board that reviews deals with foreign funding to ensure that there are no national security risks. The panel can then recommend the U.S. government block deals based on those concerns.
Boeing had initially indicated its intention to proceed with the deal, though it has now finally abandoned the contract in the face of new public scrutiny. Without the Journal's reporting, it may have gone ahead as planned. The future of the satellite itself, which is nearing completion, is also unclear, though the company will almost certainly begin looking for another buyer. SpaceX had also been under contract to launch it and that deal will almost certainly be terminated now, as well.
The entire episode highlights long-standing issues for American businesses dealing with sensitive technology, who are often eager to enter Chinese markets and are attracted to lucrative financing offers from the Chinese government or Chinese government-adjacent entities. Those same deals have historically been fraught with controversy over potential intellectual property theft and the ability for the repressive totalitarian government in Beijing to set terms or demand additional concessions as times goes on.
In 2011, General Electric faced similar criticism over plans to cooperate with Chinese companies on aircraft projects involving jet engine development, which continue to this day. More recently, Google and Facebook have faced growing criticism over their cooperation with Chinese authorities to block access to certain parts of the Internet and turn over information regarding dissidents and activists.
The Boeing satellite case also comes as concerns are growing about threats to U.S. military space-based assets, including terrestrial interceptors, “killer satellites,” and electronic and cyber warfare attacks. The Chinese are also pushing to expand their own presence above the Earth’s atmosphere, further emphasizing their likely interest in acquiring advanced satellite technology by any means available.
In October 2018, Jeff Gossel, the head intelligence engineer within the Space and Missile Analysis Group, part of the U.S. Air Force’s National Air and Space Intelligence Center, warned that otherwise innocuous Chinese communications satellites circling the moon could actually be space-based threats. China says these satellites are part of its Chang’e 4 lunar research mission.
Beyond that, President Donald Trump’s administration’s foreign policy agenda has focused on curtailing dubious U.S.-Chinese deals, China’s industrial espionage, and other Chinese trade practices that don’t align with U.S. interests. The two countries have been locked in a bitter trade row for months now. Despite a general agreement between Trump and Xi during the G20 conference in Argentina earlier in December 2018, there is no guarantee the two parties will make any progress on that any time soon.
Hopes for a successful resolution of the situation have already been tempered by Canada’s arrest of Meng Wanzhou, CFO of Chinese communications giant Huawei and daughter of its founder Ren Zhengfei, at the U.S. government’s request. The United States alleges that Huawei, under Meng’s direction, skirted U.S. and international sanctions against Iran.
On top of that, in August 2018, Trump signed the latest National Defense Authorization Act, which barred the U.S. military from dealing with Huawei, as well as it major Chinese competitor ZTE, primarily over fears that Chinese intelligence could exploit those links. In addition, Huawei has been accused in the past of intellectual property theft by major tech companies, including Microsoft and Dell.
This is the latest in a string of such incidents. In October 2018, Belgian authorities extradited a member of China’s Ministry of State Security (MSS), the country’s top intelligence agency, to the United States over efforts to infiltrate the American aviation and aerospace sectors and steal technology, especially related to modern jet engines.
In September 2018, the Federal Bureau of Investigation (FBI) detained another Chinese national, Ji Chaoqun, on suspicion of helping the MSS recruit engineers and other individuals in high technology industries for industrial espionage purposes. A month earlier, the FBI had arrested Xiaoqing Zheng for stealing documentation on power-generating turbines from General Electric, but reportedly only to support the work at his own company rather than at the direct behest of the Chinese government.
In June 2018, The Washington Post reported that China had stolen data related to a top-secret U.S. Navy missile program called Sea Dragon. These are only some examples of China's well-known espionage efforts.
“Worst of all, Chinese security agencies have masterminded the wholesale theft of American technology – including cutting-edge military blueprints,” U.S. Vice President Mike Pence declared in a speech on Oct. 4, 2018. “And using that stolen technology, the Chinese Communist Party is turning plowshares into swords on a massive scale.”
So, while Boeing may have ended this one particular deal, there seems to be little doubt that the Chinese will continue to explore all the options available to them to secure sensitive air and space technology to support their own development efforts.
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