South Korea gets tough on tech leaks to China

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For a Chinese semiconductor executive, the easiest way to recruit South Korean engineers is to stay outside the factory gates.

“I just go to the factories of foreign companies and stand at the gate, asking them to come to our production lines to do temporary work and earn some extra money,” the executive, who does not wish to be named, told the Financial Times.

“The ones I visit most often are the factories of TSMC, Samsung and SK Hynix, as well as the office buildings of foreign equipment suppliers,” the executive added. “Their commute time is relatively fixed, and engineers have free time to help out after they get off the job.”

The executive’s willingness to engage in unorthodox hiring practices illustrates an escalation campaign by Chinese companies amass South Korean expertise in critical technologies ranging from semiconductors to electric car batteries and industries including displays and shipbuilding.

Yeo Han-koo, who served as commerce minister in Seoul until May 2021, said efforts to acquire South Korean technology have become more aggressive as Beijing seeks to mitigate the damage caused by Washington own moves to restrict Chinese access to American technology and experience.

“The tightening of US controls on China has led Chinese companies to step up their charm offensive against Korean engineers and researchers, using both legal and illegal means,” Yeo said.

A headhunter for Chinese foundries told the FT: “Under the new US-imposed sanctions, it has become very problematic to recruit people who have been educated or employed in the US. So alternative sources of talent have become Europe, Japan and South Korea.

Experts note that what is described in South Korea as a “tech leak” can include the perfectly legal hiring of foreign talent. South Korea itself has spent many decades amassing industrial know-how from Western and Japanese companies as it transformed from a developing country to a technological powerhouse.

But there are also practices of illegal hiring, patent infringement, espionage and theft. According to South Korea’s National Intelligence Service, the number of confirmed leaks of “national core technologies” has steadily increased from three cases in 2017 to five each in 2018 and 2019, to nine in 2020 and 10 in 2021.

Data released this month by the NIS shows that three domestic core technology leaks occurred in the first quarter of 2023, one in the semiconductor, display and automotive manufacturing sectors. All three came from large companies.

Seoul takes the matter so seriously that it’s building a database of chip engineers working for South Korean companies to track their travels in and out of the country.

The government also set up several new investigative bodies to combat the leaks, passed legislation to toughen penalties, and made it easier to report suspected violations.

Those measures appear to be paying off: There were twice as many arrests related to technology leaks in the first quarter of 2023 compared to the same period last year.

But Hong Seok-joon, a lawmaker from South Korea’s ruling People Power conservative party, said even tougher rules and sanctions were still needed.

“The number of cases of technology data leaks is on the rise, but the punishment for perpetrators remains weak and measures to prevent them are still lacking,” Hong said. “Only about 6% of defendants were charged with technology leaks [in South Korea] they are doomed because it is so hard to prove.”

Ben Forney, a researcher at Seoul National University who specializes in industrial espionage matters, said most of the cases involved South Korean engineers, particularly retirees, hired by Chinese companies at salaries three to four times what they had before.

In some cases, South Korean rules requiring engineers not to join a foreign rival within two years of leaving their employment have been avoided by the creation of seemingly unrelated “paper companies” in South Korea or Taiwan that they would pay the engineers handsomely until they could be officially recruited.

“In the United States, the most common way for China to acquire expertise is by attracting or coercing Chinese engineers who are based in the United States,” Forney said. “But in Korea the problem is that our engineers go abroad. This is why it tends to be framed here as ‘leaks’ rather than espionage or theft.”

The pressure on South Korean companies is particularly acute in the semiconductor industry.

In February, seven people, including former employees of SEMES, a subsidiary of Samsung Electronics that specializes in making wafer cleaning equipment, were sentenced to prison for transferring stolen technology to a Chinese company.

“Several employees left the company to start their own and leaked the technologies to China through a Chinese broker,” said Lee Dong-hwan, who served as a state investigator on the SEMES case and now works as a patent attorney at WeFocus, a Seoul-based patent law firm.

“The wafer cleaning equipment parts were exported to the Chinese company, which assembled the parts on the defendants’ advice and sold the wafer cleaning equipment to other Chinese chip manufacturing plants.”

Lim Hyeong-joo, a partner at Seoul-based law firm Yulchon, said Chinese firms were also keen to acquire South Korean cathode technology for producing high-density nickel-rich batteries.

Nor are South Koreans solely concerned about technology leaking into China.

“There is concern that the US might take our technology because its Chips Act allows the US to inspect our companies’ facilities if it’s necessary for their safety,” People Power’s Hong said.

Authorities in Seoul have given “unofficial guidance” to South Korean battery companies with joint ventures in the United States, asking them to “allow only Korean personnel to deal with key technologies in JV plants,” said Lee Seok-hee of the study. lawyer Kim & Chang.

“The Koreans won’t just hand over their technologies to the United States,” Forney said. “At the same time, the more the two countries’ tech ecosystems intertwine, the more Korean vulnerabilities also become American vulnerabilities.”