It Was A Company With A Lot Of Promise. Then A Chinese Customer Stole Its Technology

Apr 9, 2018
Originally published on April 10, 2018 12:53 pm

Massachusetts-based American Superconductor seemed to be riding high in early 2011, reaping strong sales and even praise from the White House for successfully cracking the Asian import markets.

Then, one day that April, employees were called to a meeting where they heard some very disturbing news.

Their largest customer, Beijing-based Sinovel, which provided three-quarters of the company's revenue, had refused to accept a shipment of electronic components for its wind turbines — and wouldn't pay millions of dollars it owed for them. The reasons it gave were ambiguous.

"People were shocked," says Tron Melzl, a product manager in one of the company's Wisconsin offices. "We were adding additional staff to the company due to growth in the business. We actually had some people who had been on the job for just a couple of days when this announcement happened."

It was the start of a long, painful ordeal for the company, one that would temporarily leave it in perilous financial shape and written off for dead by Wall Street.

As the Trump administration prepares to do battle over intellectual property theft by China, what happened to American Superconductor underscores the risks that foreign firms may face when they do business in that country.

Within weeks, the company concluded that Sinovel had somehow obtained the source code for its electronic components and was installing a pirated version in the wind turbines it sold.

"American Superconductor provided sort of the brains of the turbines, so if Sinovel could do it themselves, using cheaper components, yeah, they could produce these turbines more cheaply," says Assistant U.S. Attorney Timothy O'Shea, who would later prosecute Sinovel in federal court.

American Superconductor's CEO, Daniel McGahn, says what happened didn't come as a complete surprise — he knew that intellectual property theft was always a big risk when doing business in China. But the components sold by American Superconductor featured sophisticated encryption technology, and the company was pretty sure that no one at Sinovel could have cracked its source code.

Instead, someone at American Superconductor had to have illegally leaked its technology.

"We looked inward and said, 'Who would have access, motive and capability to do this?' And then we looked at the travel to China and being present and all that, and it really came down to one person," McGahn says.

A 2013 indictment alleged that an engineer at the company's Austrian subsidiary, Dejan Karabasevic, was given a multi-year contract worth $1.7 million by Sinovel to steal his employer's trade secrets. The money essentially doubled his salary, the indictment said.

"If you look at what the executives of the Chinese company made, they're offering him more money than they make themselves. And they're not doing that because they want him to be a consultant. They want him to steal," McGahn says.

Text messages sent over Skype by Karabasevic were presented in court, suggesting he was angry about his treatment by the company and wanted revenge.

"I feel like someone who failed a lot, like a loser, but I know it is temporary and all of the people who laugh now will stop laughing later when I leave," he wrote in the months before quitting, according to a Skype message presented as evidence.

Sinovel did not respond to a request for comment. But the company argued in federal court that it had severed its relationship with American Superconductor because it had failed to live up to its contract.

Sinovel also said that no evidence existed that Karabasevic had taken the source code without authorization, and that the Massachusetts company had failed to take adequate steps to protect its source code.

Still, a federal jury in Wisconsin found Sinovel guilty of stealing trade secrets on Jan. 24. The Chinese company will be sentenced in June and is likely to face a hefty fine.

Even as American Superconductor was pursuing Sinovel in court, the alleged theft led to a dramatic downturn at the company.

With Sinovel no longer honoring its contracts, revenue plummeted from more than $100 million in the first three months of 2011 to just $9 million the next.

The company's share price plunged, and Wall Street analysts predicted its days were numbered. Like a lot of startups, American Superconductor had lured employees by offering stock options, which were now worthless.

Over the next few years, the company would be forced to shut down a Wisconsin facility and move to a much smaller headquarters building in Massachusetts. It also would lay off hundreds of employees, dropping from a workforce of nearly 1,000 to fewer than 300.

"It really did shake the company up. It seemed like every month there was another layoff," says Jack McCall, director of superconductor cable systems, who had worked at the company since 2007 but eventually left to take another job. "There was just an awful lot of concern, anger. Nobody was sure their job was going to be there."

Even as it struggled to survive, American Superconductor was fighting back against Sinovel, taking its complaints about the theft to the Chinese government, part-owner of Sinovel. Nothing happened, McGahn says.The company also complained to the Obama administration and Congress.

Today, American Superconductor remains a smaller company than it was in 2011, but has survived, having successfully broken into some important new markets. It does very little business in China.

McGahn is sometimes asked by other executives about the Chinese market. He tells them China is a trap.

"The rules are set up in a way that the local brands will win," he says. "Participation in the Chinese market is for Chinese companies only. Your participation as a Western company, at least to date, is a mirage. They're there to bring you in, be able to figure a way to harvest whatever they can from you, and then spit you out when you're no longer useful."

McGahn applauds the Trump administration's efforts to get tough on China over trade issues.

"President Bush and President Obama — they had very strong words with China about intellectual property theft," he says. "This is the first time there are consequences ascribed to the Chinese behavior."

"I do understand that a lot of people think this is a trade war," McGahn adds. "This isn't the beginning of a trade war — this is the next battle in a trade war that's more than a decade old."

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MARY LOUISE KELLY, HOST:

We've been reporting a lot on the U.S. threat to impose tariffs on some $150 billion worth of goods imported from China. Beijing is promising to retaliate. One big source of tension is that the Trump administration says for too long China has gotten away with stealing trade secrets from American companies. NPR's Jim Zarroli has the story of what happened to one Massachusetts company that was nearly destroyed when a Chinese company stole its most important technology.

JIM ZARROLI, BYLINE: In 2009, President Obama wanted to encourage American companies to sell more overseas. One company in particular, he said, was doing things right.

(SOUNDBITE OF ARCHIVED RECORDING)

BARACK OBAMA: This is already happening with businesses like American Superconductor Corporation, an energy-technology startup based in Massachusetts that's been providing wind power and smart grid systems to countries like China, Korea and India.

ZARROLI: American Superconductor made electronic components for wind turbines, and by far its biggest customer was Beijing-based Sinovel. It brought in three-quarters of its revenue. Dan McGahn is the company's chief executive.

DANIEL MCGAHN: It was a very profitable business. It was profitable for them. It was profitable for us. There was basically a boom in China over wind. So they had made clear indications that they wanted our product. They needed it, and they were going to buy more and more of it in the future.

ZARROLI: Then one day near the end of March 2011, everything changed.

MCGAHN: We were notified by Sinovel that they were not going to accept the shipment that was brought to their factory and denied.

ZARROLI: Sinovel told him they had inventory problems.

MCGAHN: And they weren't very clear about what those were.

ZARROLI: And Sinovel, which is partly owned by the Chinese government, refused to pay for the components it had ordered. McGahn said the company suspected what had happened. Sinovel had somehow obtained the source code used to operate wind turbines and was building its own components. Federal prosecutor Tim O'Shea.

TIMOTHY O'SHEA: American Superconductor provided sort of the brains of the turbines. So if Sinovel could do it themselves using cheaper components, yeah, than they could produce these turbines more cheaply.

ZARROLI: American Superconductor knew its technology could be stolen. It was a risk you took doing business in China, but the products it sold were kept secret through encryption. So the company suspected that someone on the inside had leaked its source code.

MCGAHN: We looked inward and said, who would have access, motive, capability to do this? And we got down to a very small set of employees. And then we looked at the travel to China and being present and all that. It really came down to one person.

ZARROLI: Prosecutors say that person was Dejan Karabasevic, an engineer in the company's Austrian subsidiary. He was indicted in 2013, along with Sinovel. The federal indictment alleged that Karabasevic agreed to turn over the company's technology to Sinovel. In court, U.S. prosecutors presented messages sent over Skype suggesting that Karabasevic was angry at American Superconductor. In one, he said, I have slight feeling of revenge. The indictment said Sinovel offered him a multi-year contract worth $1.7 million, essentially doubling his salary. Again, Dan McGahn.

MCGAHN: I mean, if you look at what the executives of the Chinese company made, they're offering him more money than they make themselves. And they're not doing that because they want him to be a consultant. They want him to steal.

ZARROLI: Karabasevic never stood trial in the United States. Federal officials believe he is now in his home country of Serbia. The theft ended up costing American Superconductor dearly. With Sinovel no longer a paying customer, McGahn says its revenue plummeted. Wall Street analysts said the company was finished.

MCGAHN: The fix is in. These guys are going to die, which really, I think, is what the Chinese were hoping for.

ZARROLI: The company was devastated. At one time, it had almost 1,000 employees. By the end of its ordeal, fewer than 300 remained. Like many tech companies, American Superconductor had recruited employees by offering them stock options. Suddenly, they were worthless. Product manager Tron Melzl says the waves of layoffs took a huge toll on the little startup.

TRON MELZL: People made a lot of investment in the company in terms of - they believed in, you know, what was going on. So it was hard to see, you know, people who had worked hard being shown the door.

ZARROLI: Today, the company is smaller, but it has survived. It has pressed China for compensation unsuccessfully so far. Sinovel's lawyer didn't respond to a request for comment, but the company argued in court that it had severed its ties with American Superconductor because it didn't live up to its contract. And it said the company had failed to take steps to protect its source code. In January, a federal jury in Wisconsin found Sinovel guilty of stealing trade secrets. It will be sentenced in June. McGahn says he often warns other CEOs about doing business in China.

MCGAHN: Your participation as a Western company, at least to date, is a mirage. They're there to bring you in, be able to figure a way to harvest whatever they can from you and then spit you out when you're no longer useful.

ZARROLI: McGahn stresses he's not political, but he approves of the tough stance that President Trump is taking on China. He says it's the only way to prevent other companies from suffering the same fate that American Superconductor did. Jim Zarroli, NPR News.

(SOUNDBITE OF ANTI-POP CONSORTIUM SONG, "REFLECTIONS") Transcript provided by NPR, Copyright NPR.