WASHINGTON — A report commissioned by the U.S. Department of Defense was circulated among senior Trump administration officials this week, stating that Beijing has been encouraging Chinese companies to invest in American startups.
According to the report, Chinese firms with strong ties to China's government have increasingly been investing in companies with cutting-edge technologies, many of which have potential military applications, reported The New York Times.
According to three people knowledgeable about its contents, who spoke to The New York Times on the condition of anonymity, U.S. government controls that are intended to protect critical technologies are not working.
These critical technologies include companies that make rocket engines for spacecraft, sensors for autonomous Navy ships and printers that make flexible screens for possible use in fighter plane cockpits, in addition to companies researching artificial intelligence.
"What drives a lot of the concern is that China is a military competitor," James Lewis, a senior fellow at the Center for Strategic and International Studies who is familiar with the report, told The New York Times. "How do you deal with a military competitor playing in your most innovative market?"
The investors could strike deals that give them access to intellectual property and the company's technology development process, while also having access to the startups' data on facilities and personnel.
The report was commissioned during the Obama administration by Defense Secretary Ash Carter. Some Republican lawmakers, as well as Trump administration officials, have expressed interest in expanding the authority of the Committee on Foreign Investment in the United States, or CFIUS.
According to two of the people who spoke to The New York Times about the report, Carter commissioned Mike A. Brown, the former chief executive of the cybersecurity firm Symantec, to lead the inquiry.
A Pentagon spokesman stated that DoD "will not discuss the details or components of draft internal working documents," according to The New York Times.
In 2015, Chinese firms invested $9.9 billion in startups, four times what had been invested the previous year, according to CB Insights. The details of the deals made with startups, however, are unclear, as the companies are under no obligation to disclose them.
With an increase in foreign investment activity, the caseload for CFIUS is increasing, too. The total number of caseloads CFIUS covered from the three-year period of 2012-2014 was 358, up from 318 over the previous three-year period. China had the most cases, 68, up from 39 for the three years prior.
Christopher Brewster, an attorney with Washington-based Stroock & Stroock & Lavan, told Defense News that China's portion of the caseload is expected to be high, as their dealings received extra scrutiny from CFIUS.
"Any investment that would result in control of businesses in the national security sector by China is going to be reviewed by CFIUS," he said.
Neurala, a Boston-based AI startup, is one of the companies to receive funding from China, taking a minority investment from a Chinese fund called Haiyin Capital. Haiyin Capital receives support from the Chinese state-run Everbright Group.
Before the investment, Neurala had been pursued by the U.S. Air Force, demonstrating their technology to the service’s secretary, then Deborah Lee James. They used a ground drone from Best Buy in their tech demonstration, programming the drone to recognize and follow around James.
"We were told by the secretary of the Air Force: ‘Your tech is awesome, we should put it everywhere,’ " Neurala CEO Max Versace said. "No one followed up."
Versace said his company has taken major precautions to prevent Chinese investors from having access to source codes and other important information.
In 2014, analysts pointed out that China’s new J-31 stealth fighter closely resembled Lockheed Martin’s F-35 Joint Strike Fighter. The consensus in the defense industry has remained that Chinese hackers breached Lockheed’s programs to gain information on the plane, as well as long-range air surveillance radar systems.
Other notable startups receiving Chinese investments include Quanergy, a company making light-detecting sensors for driverless cars; Kateeva, a Silicon Valley-based company making flexible screens that could be used in fighter jets; and XCOR Aerospace, an aerospace and commercial space travel company that works with NASA. XCOR also received funding from Haiyin Capital.
Ken Wilcox, chairman emeritus of the high-tech investor Silicon Valley Bank, told The New York Times that he was approached by three different Chinese state-owned firms. They wanted Wilcox to be their investment agent in Northern California — an offer he declined.
"In all three cases they said they had a mandate from Beijing, and they had no idea what they wanted to buy," Wilcox said. "It was just any and all tech."
