Surprisingly, the U.S. Department of Justice indicted five Chinese military officers for computer hacking, economic espionage and other offenses earlier this week. The indictment alleges that the defendants conspired to hack into American entities, to maintain unauthorized access to their computers and to steal information from those entities that would be useful to their competitors in China—including state-owned enterprises. Among other things, it also alleges that in some cases, the conspirators stole trade secrets that would have been particularly beneficial to Chinese companies at the time they were stolen.

 

It has been known that such activity was taking place. Last year, a report by cybersecurity firm  Mandiant Corp. attributed cyber espionage attacks against 141 companies to a clandestine Chinese military unit known as Unit 61398. Mandiant says it traced computer penetrations to Unit 61398 by digital signatures left in malware, the use of Shanghai phone numbers, and social networking information posted by some of the hackers. The report said Unit 61398 had stolen “technology blueprints, proprietary manufacturing processes, test results, business plans, pricing documents, partnership agreements, and emails and contact lists.”

 

The five suspects the Justice Department named this week allegedly worked from the same building.

 

“The range of trade secrets and other sensitive business information stolen in this case is significant and demands an aggressive response,” the U.S. Attorney General, Eric Holder, said at a news conference. “Success in the global market place should be based solely on a company’s ability to innovate and compete, not on a sponsor government’s ability to spy and steal business secrets.”

 

Predictably, a response was quick. China promptly summoned the U.S. ambassador and warned Washington it could take further action, the foreign ministry said in a statement.

 

The U.S. Ambassador to China, Max Baucus, met with Zheng Zeguang, assistant foreign minister, on Monday, when Zheng “protested” the actions by the U.S., saying the indictment had seriously harmed relations between both countries, the foreign ministry said in a statement on its website. Zheng also told Baucus that depending on the development of the situation, China “will take further action on the so-called charges by the United States.”

 

“The Chinese government and military and its associated personnel have never conducted or participated in the theft of trade secrets over the Internet,” the foreign ministry quoted Zheng as telling Baucus.

 

At the same time, U.S. officials maintain that Washington draws a clear line between economic and security-related cyber activity.

 

The question in all this becomes, “Well, what happens now?” Which is a good question for companies to ask if they are doing business in China, or with suppliers or partners in China. It stands to reason though that doing business in China could now get even tougher, although any retaliation may not be immediate or obvious, industry analysts and executives say in an article on Reuters.

 

“U.S. companies were having difficulty anyway,” says Howard Anderson, a senior lecturer at MIT’s Sloan School of Management in the article. “This will give them more difficulty. The Chinese will use any excuse to turn to internal suppliers.”

 

While one would indeed believe it may consequently become problematic for U.S.-based companies to do business in China, it also is time the U.S. government acted. As Eric Holder, U.S. Attorney General, said the Administration will not tolerate actions by any nation that seeks to illegally sabotage American companies and undermine the integrity of fair competition in the operation of the free market.

 

What are your thoughts on the situation? Is it time the U.S. acted on cyber espionage and other crimes carried out by the Chinese government, military or both? Secondly, what impact will these actions have on international supply chains?