China's Sneak Attack

Steadily increasing Asian investment in American start-ups (especially those pioneering artificial intelligence) is spooking the U.S. government

China Investment U.S. Technology Startups

This year, Chinese investments in American companies have already reached $100 billion. This is double the amount in 2015.

As a reaction to this outsize growth, members of Congress entreated the CFIUS (Committee on Foreign Investment in the United States, created in 1975) last year to better scrutinize these investments. Their main issue is the frequent connection—often discreet—between Chinese private businesses and their government.

Reuters writes that, “Under former President Barack Obama, CFIUS stopped a series of attempted Chinese acquisitions of high-end chip makers.” Still, critics say CFIUS efforts are failing.

Alarms sounded once again in April, in wake of Ant Financial’s intended $880 million acquisition of MoneyGram, the money-transfer enterprise that comes with a trove of personal data that’s ripe for a cyberattack. The Chinese government owns at least part of Ant Financial, which the MIT Technology Review claims is “secretly an AI company.” CFIUS is still reviewing the proposal.

chart courtesy CB Insights

There is even deeper concern about access to IP, manufacturing, cybersecurity protocols, and in some cases, American-company networks could give Beijing a military edge. Many companies claim to safeguard this access from investors. However, without a formidable insider-threat security program, it’s hard to imagine how effective those defenses would be. Thus far, Chinese investors haven’t exhibited questionable behavior. Still, the country’s all-too-recent history of flagrantly stealing sensitive information from American companies is persuasive enough to eclipse even innocent intent.

The country’s eagerness to own a piece of artificial-intelligence start-ups, in particular, has been troublesome. According to CB insights, 29 investors from the Chinese mainland have invested in AI companies over the past five years.

Baidu, a Chinese search-engine company controversially poached its COO from Microsoft, where he was an AI expert. A few months ago, Baidu expressed its desire to acquire xPerception, an American robotics-VR company. Meanwhile, Neurala, an AI company which works with the Air Force to optimize its robots, received investment money from the state-run Haiyin Capital. The latter also invested in the spacecraft and engine producer XCOR Aerospace, which has ties to NASA.

chart courtesy CB Insights

“Chinese firms have become significant investors in American start-ups working on cutting-edge technologies with potential military applications,” says the New York Times. “The start-ups include companies that make rocket engines for spacecraft, sensors for autonomous navy ships, and printers that make flexible screens that could be used in fighter-plane cockpits.”

This could be an innocent attempt by China at turning profits and expanding its economy past manufacturing. But the U.S. government is more concerned with their access to sensitive information, than it is about their profit margin. “In August, the state-run China Daily reported that the country had embarked on the development of a cruise missile system with a ‘high level’ of artificial intelligence,” said the New York Times. “The new system appears to be a response to a missile the United States Navy is expected to deploy in 2018 to counter growing Chinese military influence in the Pacific.”

Currently, the CFIUS is reviewing cases across several companies, Politico reports, “involving a range of industries to include security-related software, telecommunications and other more traditional American companies such as railroads.” Many of them are Chinese.

Can you play a game of Monopoly with your military rival? Given the speed at which China is planting stakes in American technology organizations—and the latter’s perceived lack of insider-threat protection—the U.S. government better figure that out quickly. If necessary, companies must also be prepared to react to this as they would any other highly consequential security risk.