Corporate espionage is nothing new in the United States, and American industrial titans have long attempted to protect their valuable trade secrets from duplication by firms abroad. For the most part, however, the agricultural industry was assumed to be immune from the high-tech world of industrial spies. In the past two years, however, several agricultural companies uncovered plots by Chinese spies and hackers – attempts to steal research results and patented genetic information that helps give American farms a productive advantage on the global export market.
The latest indictment of a Chinese corporate spy came in December of 2013 – when Mr. Mo Hailong of the Beijing Dabeinong Technology Group was caught up in an FBI dragnet that targeted him and several of his colleagues, according to The New York Times. The story of Mr. Mo's capture seems like something out of a spy novel, but it underlines the technological complexity of the American farming industry and the pains that agricultural companies go through to protect their genetic portfolios.
Theft and espionage
It started in 2011, when a manager at DuPont's (NYSE:DD) massive research farm in Iowa noticed that two Chinese men were digging plants up from the field and placing them in a bag. Security on these large research farms has been increased markedly since 9/11, but these two men claimed to be from the local university before jumping in their car and speeding away.
Research farms are the center of massive breeding and genetic testing operations, where American agricultural companies develop new strains of plant. Whether genetically modified, hybridized, or open pollinated, each plant variety represents millions of dollars in potential revenue – with the most successful plants greatly increasing the ability for the company to compete in the national seed market.
While China has frequently been implicated in concerted efforts by corporate entities to steal trade secrets in other American high-tech sectors, this was one of the first times that the FBI was able to conclusively prove Chinese involvement in agricultural espionage. In this case, the defendants visited several different seed company test fields – even buying land in Illinois where they stored pilfered seeds and stolen information, reported the Times.
International pressures on American agriculture
One of the reasons that American agricultural companies like DuPont retain such a large competitive advantage in global agriculture is their massive investment in research and development. For any given breed of corn that goes to market, hundreds more are tested and studied in labs and test fields throughout the country.
Companies that produce a strain of high-value crops like corn or rice with nutritional improvements or disease resistance can practically monopolize the market for that crop overnight – since the agricultural industry in this country is relatively consolidated into a small number of epic-scale fields.
Stealing agricultural technology has the net effect of letting international firms reap the rewards of this research investment without the years that go into the development of each strain. In this case, the spies were caught passing special strains of rice back to their biotechnology firm in China, rice that was designed for medicinal/nutritional improvement and faster growth – and would allow the Chinese biotechnology firm to produce advanced hybrids at a lower price than the firms that had actually made the investment into the research and development, according to Chinese Industrial Espoinage: Technology Acquisition and Military Modernization.
Chinese agricultural espionage
China imports more than 80% of the seeds that it currently uses to feed its growing population. With land productivity falling due to long-term heavy metal pollution and smog, it is vital that Chinese farmers multiply plant production and shorten growing cycles with imported hybrid seeds.
With the pressure on Chinese biotechnology firms to produce new rice variants, it's likely that the Chinese government is directly complicit in some of the industrial espionage that has taken place in the agricultural sector, according to a report by MMLC Group. Seed producers in China simply do not have the time or the means to produce new seed variants that can compete with the more expensive imported seeds, so they encourage corporate espionage as a way of taking a shortcut to increased production without the years of research necessary to do so internally, the report states.
Chinese agricultural researchers in the United States have also been implicated in plots to pass collected information and patented seeds back to their home country. In one case, Customs agents found genetically engineered rice seeds in the luggage of a governmental agricultural delegation sent from China, reported Newsweek – seeds that were stolen from the Arkansas company that the delegation toured earlier that day.
Impact on American business
Monsanto (NYSE: MON) is the single largest seed producer in the United States, with a $42 billion market cap and a market penetration that is almost entirely dependent on the closely guarded secrets underpinning its higher-yielding seeds. With seed exports accounting for nearly half of Monsanto's revenue, each individual strain that the company loses to thieves (and thus loses its competitive advantage on) represents millions in lost revenue and research and development.
Companies that deal in pesticides and nitrogen products (fertilizers and soil additives) for export to China might also feel the burn from the increased use of hybridized and GMO seeds stolen and used in large quantities within China – since these seeds are specifically bred for hardiness and decreased need for nitrogen products and pest control.
International law and litigation
Industrial espionage is a tricky field of international law – because prosecutors in the victimized country (such as the United States) are only able to directly prosecute those members of the international corporation that are caught actively spying.
For example, while Kexue Huang was hired by China's Hunan Natural University to misappropriate the trade secrets, according to the Associated Press, the university hasn't faced any international sanctions as a result. Huang was charged under the U.S. Economic Espionage Act of 1996, an act designed to prosecute individuals and has little power to reach abroad to punish corporations and nation-states. Economic sanctions are a more likely consequence for nations that harbor industrial espionage programs, or a general reluctance on the part of high-tech companies to sell goods to those nations for fear of reverse engineering or patent fraud.
Brian Wu has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.