Applied Materials
Applied Materials

US Chip Engineers Charged in Theft Scheme for Chinese Firm

Dec. 8, 2017
The engineers are accused of downloading data from Applied Materials’ internal engineering database and plotting to lure investors to fund a U.S. and China-based startup that would compete with their former employer.

Four former engineers at Applied Materials Inc. were charged by the U.S. with trying to steal chip designs from the semiconductor equipment giant to sell them to a Chinese startup, which may fuel fears the world’s second-largest economy is resorting to illegal tactics to break its dependence on chip imports.

Liang Chen, Donald Olgado, Wei-Yung Hsu and Robert Ewald are accused of downloading data from Applied’s internal engineering database, including more than 16,000 drawings, and plotting to lure investors to fund a U.S. and China-based startup that would compete with their former employer, prosecutors said Wednesday in a statement.

The stolen specs detailed Applied’s processes for high-volume manufacturing of chips used to light and electrify flat-screen TVs and smartphones.

If convicted, the four face as long as 10 years in federal prison for each of 11 counts of possessing stolen trade secrets. They’re scheduled to be arraigned on Dec. 15 in San Jose, Calif.

“Applied Materials vigorously safeguards its intellectual property from theft or unlawful use," a spokesman for the company said.“We support the legal action in this criminal case to ensure that anyone who obtained our trade secrets illegally is brought to justice. We cannot comment further on pending legal actions.”

Contact information wasn’t immediately available for attorneys for the four men.

Intellectual Property

Applied plays a pivotal role in the chip industry as the largest supplier of the machinery needed to manufacture the vital electronics components. Much of the expertise and intellectual property value that chip companies have is derived from their mastery of the process technology that goes into producing chips, something that’s becoming increasingly harder as the limits of conventional materials like silicon are reached.

China is the largest consumer of semiconductors as an end market and very little of that demand is met by domestic companies. The government of the world’s most populous country is budgeting billions to build a local industry. Attempts to acquire U.S. chip companies by China-related entities have been blocked by regulators.

Imported Chips

There are no Chinese companies on the list of the world’s top semiconductor makers. While plants are increasingly being located in China, they’re owned by companies from other countries. China’s imports of chips have periodically exceeded the value of its spending on oil, according to Sanford C. Bernstein & Co. research.

Counterfeit goods, pirated software and theft of trade secrets cost the U.S. economy as much as $600 billion a year, according to a 2017 study by the Commission on the Theft of American Intellectual Property. It alleges China is the world’s No. 1 “IP infringer” and the source of almost 90 percent of counterfeit goods entering the U.S. China’s IP practices are a barrier for U.S. companies to invest and access consumer markets.

“China continues to obtain American IP from U.S. companies operating inside China, from entities elsewhere in the world, and of course from the United States directly through conventional as well as cyber means," according to the commission’s report.

The alleged criminal scheme that netted the four former engineers is tied to the complex process of growing crystalline layers on chips called metal organic chemical vapor deposition, technology developed by Applied after “years of research and testing, and millions of dollars in investment,” according to the indictment. Applied’s “Paragon” project led to the development of a consumer product called NLighten, which the engineers allegedly tried to replicate and build on.

Competing Company

Sometime while they worked together at Applied from July 2000 to December 2012, the four employees conspired to steal the MOCVD technology and use it to create a competing company called Envision, according to prosecutors. Using their personal email accounts to detail plans, they allegedly tasked lower-level employees with helping them download confidential material, then stored it on a Google drive account, while physically removing the MOCVD technology from Applied’s offices in Santa Clara, California.

‘Under Wraps’

Late in 2012, they attempted to recruit investors to fund Envision in both the U.S. and China, according to the indictment. Prosecutors cite an email in which Olgado shared with his co-conspirators the need to keep their project “under wraps,” especially among prospective investors who’d independently identified the source of their technology.

The charging papers don’t detail the value of the theft or the amount the engineers sought in funding.

In the final days of President Barack Obama’s term, his administration warned that China’s push to develop its domestic semiconductor technology threatened to harm U.S. chipmakers and put America’s national security at risk. A Chinese dominated semiconductor industry threatens both American military and economic security, according to the report.

China’s goal to achieve a leadership position in semiconductor design and manufacturing, in part by spending $150 billion over a 10-year period, requires an effective response to maintain U.S. competitiveness in the industry, according to the report.

“We found that Chinese policies are distorting markets in ways that undermine innovation, subtract from U.S. market share, and put U.S. national security at risk," according to the report. “’Only by continuing to innovate at the cutting edge will the United States be able to mitigate the threat posed by Chinese industrial policy and strengthen the U.S. economy.”

By Kartikay Mehrotra and Ian King

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Licensed content from Bloomberg, copyright 2016.

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