[The Chinese deals can pose a number of issues. Investors could push start-ups to strike partnerships or make licensing or hiring decisions that could expose intellectual property. They can also get an inside glimpse of how technology is being developed and could have access to a start-up’s offices or computers.]
By Paul Mozur and Jane Perlez
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Neurala’s
office in Boston. The company, an artificial intelligence start-up,
received
an undisclosed sum from an investment firm backed by a state-run
Chinese
company. Credit Kayana Szymczak for The New York Times
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HONG
KONG — When the United
States Air Force wanted help making military robots more perceptive, it turned
to a Boston-based artificial intelligence start-up called Neurala. But when
Neurala needed money, it got little response from the American military.
So Neurala turned to China, landing an
undisclosed sum from an investment firm backed by a state-run Chinese company.
Chinese firms have become significant investors
in American start-ups working on cutting-edge technologies with potential
military applications. 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. Many of the
Chinese firms are owned by state-owned companies or have connections to Chinese
leaders.
The deals are ringing alarm bells in
Washington. According to a new white paper commissioned by the Department of Defense,
Beijing is encouraging Chinese companies with close government ties to invest
in American start-ups specializing in critical technologies like artificial
intelligence and robots to advance China’s military capacity as well as its
economy.
The white paper, which was distributed to the
senior levels of the Trump administration this week, concludes that United
States government controls that are supposed to protect potentially critical
technologies are falling short, according to three people knowledgeable about
its contents, who spoke on the condition of anonymity.
“What drives a lot of the concern is that
China is a military competitor,” said James Lewis, a senior fellow at the
Center for Strategic and International Studies, who is familiar with the
report. “How do you deal with a military competitor playing in your most
innovative market?”
The Chinese deals can pose a number of
issues. Investors could push start-ups to strike partnerships or make licensing
or hiring decisions that could expose intellectual property. They can also get
an inside glimpse of how technology is being developed and could have access to
a start-up’s offices or computers.
Trump administration officials and lawmakers
are raising broad questions about China’s economic relationship with the United
States. While the report was commissioned before President Trump took office,
some Republicans have called for tighter regulation of foreign takeovers by
giving a broader mandate to the Committee on Foreign Investment in the United States.
Known as Cfius, the committee reviews foreign takeovers of American companies,
but critics say that its scope does not include smaller deals and that it has
other weak spots.
Ashton B. Carter, former secretary of defense
under President Barack Obama, had tapped Mike A. Brown, the former chief
executive of Symantec, the cybersecurity firm, to lead the inquiry into the
Chinese investments, according to two of the people aware of the white paper’s
contents.
A spokesman for the Department of Defense said
it “will not discuss the details or components of draft internal working
documents.”
The size and breadth of the deals are not
clear because start-ups and their backers are not obligated to disclose them.
Over all, China has been increasingly active in the American start-up world,
investing $9.9 billion in 2015, according to data from the research firm CB
Insights, more than four times the level the year before.
Neither the high-tech start-ups nor their
Chinese investors have been accused of wrongdoing, and experts said much of the
activity could be innocent. Chinese investors have money and are looking for
returns, while the Chinese government has pushed investment in ways to clean up
China’s skies, upgrade its industrial capacity and unclog its snarled highways.
Proponents of the deals said American limits on technology exports would still
apply to American start-ups with Chinese backers.
But the fund flows fit China’s pattern of
using state-guided investment to help its industrial policy and enhance its
technology holdings, as it has recently done with semiconductors. China has
also carried out efforts to steal military-related technology.
Still, some start-ups — especially those
making hardware rather than money-drawing mobile apps like Snapchat — said
Chinese money was sometimes the only available funding. But even a company
struggling for money can ultimately come up with a big breakthrough.
Chinese investors have a bigger appetite for
risk and a willingness to do deals fast, said Neurala’s chief executive, Max
Versace.
To demonstrate his software’s capabilities to
the Air Force, Mr. Versace said, Neurala used its software on a ground drone
from Best Buy to make it recognize and follow around the service’s secretary,
then Deborah Lee James, during a meeting.
“We were told by the secretary of the Air
Force, ‘Your tech is awesome, we should put it everywhere,’” he said. “No one
followed up.”
Neurala finally took a minority investment
from a Chinese fund called Haiyin Capital as part of a $1.2 million round, Mr.
Versace said. He did not disclose the size of Haiyin Capital’s commitment.
Haiyin Capital is backed by a state-run Chinese company, Everbright Group,
according to a statement from one of its subsidiaries.
American military officials have “figured out
a very good way to give $10 billion to Raytheon,” he said. “But to give a
start-up $1 million to develop a proof of concept? That’s still very, very
hard.”
Late last year, a research firm called
Defense Group Inc. argued in a report prepared for Congress that the Neurala
investment could give China access to the company’s underlying technologies. It
also said the deal could create enough uncertainty that American officials
would steer clear of Neurala’s technology, effectively wasting any American
money that had gone into the firm.
Mr. Versace of Neurala said the company took
pains to ensure that the Chinese investor had no access to its source code or
other important technological information.
To address concerns that it was not tapping
innovations from start-ups, the Pentagon in 2015 set up a group called Defense
Innovation Unit Experimental to enable investments into promising new
companies. While at first it struggled, in 2016 it helped carry off a barrage
of deals. The unit also prepared the white paper.
In May 2015, Haiyin Capital also invested an
amount it did not disclose in XCOR Aerospace, a Mojave, Calif., commercial
space-travel company that makes spacecraft and engines and has worked with
NASA. XCOR did not respond to requests for comment.
In an interview in Chinese media, Haiyin
Capital’s founder, Yuquan Wang, said that part of its goal is to build Chinese
industrial capabilities and that it can be hard to get space technology into
China because of American export controls.
About the fund’s investments, Mr. Wang said,
“We strive to get a portion of research and development moved back to China so
that we can avoid China being only a low-end manufacturer.” Haiyin Capital did
not respond to a request for comment.
Quanergy, a company that works on the
light-detecting sensors used in driverless cars, raised financing last summer
that included funds from the partly state-backed Chinese venture fund GP
Capital. A few days later, Quanergy purchased people-tracking software from
Raytheon for an undisclosed amount. Alongside a wide array of commercial
technology, it makes sensors for military driverless vehicles and a security
system billed as “the most complete and intelligent 3-D perimeter fencing and
intrusion-detection system.”
Quanergy did not respond to requests for
comment. Its investors also include foreign automakers and South Korea’s
Samsung.
Chinese investors have also made a push in
another industry, flexible electronics. The technology, which the National
Research Council has said is a priority for the American military, can help
make electronics lighter and easier to attach to anything from a uniform to an
airplane.
In 2016, a Silicon Valley start-up called
Kateeva that makes machines that print flexible screens raised $88 million from
a group of Chinese investors. Three took board seats, including Redview
Capital, a spinoff of a firm run by the former Chinese premier Wen Jiabao’s
son, Wen Yunsong.
Kateeva’s chief executive, Alain Harrus, said
that while investors in Silicon Valley had begun looking more at hardware
companies, raising big rounds for capital-intensive technology can be tough.
Kateeva ultimately raised money where its customers were, in China and South
Korea. Mr. Harrus said he believed more should be done in America to figure out
the best way to nurture and fund core next-generation technologies.
Ken Wilcox, chairman emeritus of Silicon
Valley Bank, said in the past six months he had been approached by three
different Chinese state-owned enterprises about being their agent in Northern
California to buy technology, though he declined.
“In all three cases they said they had a
mandate from Beijing, and they had no idea what they wanted to buy,” he said.
“It was just any and all tech.”
Cecilia Kang contributed reporting from
Washington.
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@paulmozur and @JanePerlez.