The Chip That Launched a Hundred-Billion-Dollar War

We have the greatest technology in the world. People copy it and they steal it, but we have the great scientists, we have the great brains, and we have to protect that, and we’re going to protect it.

That’s what Trump told lawmakers in Washington earlier this year.

It’s no wonder why the Broadcom-Qualcomm deal never went through.

Qualcomm is a very important American telecommunications designer. They design and patent several chips that power smartphones and other devices.

The last thing Trump wants is for more US tech to fall into Chinese hands.

We want to have our jewels. Those are our great jewels. That’s like United States Steel from 70 years ago, these companies. We have to protect these companies. We can’t let people steal that technology,’ Trump added.

But is China really stealing US technology? Or is old Trumpy looking for reasons to validate his trade war?

I’m sure there are many who believe the latter. Trump is a bit erratic after all. Sometimes he says things without thinking. But according to new reports, Trump might not only be right, his words might not be harsh enough.

According to anonymous sources, China has gone to extreme lengths to spy and steal from the US military and their most successful companies.

There are many who deny these claims, but continue reading and see for yourself…

Elemental’s business model

It all started back in 2006.

A group of engineers had a great idea for a new business.

Demand for video streaming was going to be HUGE, they thought. Not only would we all be streaming content, a lot more video content will run right to our mobile screens.

Now remember, this is 2006. A year before Apple, Inc. [NASDAQ:AAPL] came out with the first iPhone. Rather than create a platform (smartphone) to stream this content, the engineers had a better idea.

They wrote code that adapted superfast graphics chips used for high end video. The software drastically reduced the time it took to process large video files.

The engineers packaged up their software into custom built servers and slapped the name Elemental Technology on the front.

Their first customer was the Mormon Church. They used the server to beam sermons across the globe. And as video streaming become common, Elemental saw names like CNN, HBO, Foxtel and Warner Bros. come through the door.

Then in 2015, Amazon.com, Inc. [NASDAQ:AMZN] comes along. The Everything Store was expanding their video streaming service (Amazon Prime Video) and was considering acquiring Elemental.

Now, before Amazon ran its ruler over Elemental, the video server business gained a lot of work with US spy agencies. Bloomberg Businessweek writes:

In 2009 the company announced a development partnership with In-Q-Tel Inc., the CIA’s investment arm, a deal that paved the way for Elemental servers to be used in national security missions across the U.S. government.

Public documents, including the company’s own promotional material, show that the servers have been used inside Department of Defense data centres to process drone and surveillance-camera footage, on Navy warships to transmit feeds of airborne missions, and inside government buildings to enable secure videoconferencing.

NASA, both houses of Congress, and the Department of Homeland Security have also been customers.

With such a resume, Amazon decided to have a third party check out Element’s security. And what they found was almost unbelievable…

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How China used a chip to spy on US companies

Businessweek continues:

In late spring of 2015, Elemental’s staff boxed up several servers and sent them to Ontario, Canada, for the third-party security company…Nested on the servers’ motherboards, the testers found a tiny microchip, not much bigger than a grain of rice, that wasn’t a part of the boards original design.

Amazon reported the discovery to U.S. authorities, sending a shudder through the intelligence community.

Elemental’s motherboards didn’t come from the US. They all came from a Taiwanese company called Super Micro Computer, Inc.

Multiple people familiar with the matter say investigators found that the chips had been inserted at factories run by manufacturing subcontractors in China,Businessweek added.

Investigators also believe the chip allowed stealth doorways. Meaning whoever put them there had access to US corporate and government security secrets.

Even Apple, when they considered purchasing Elemental servers, found the same chips planted on motherboards.

Yet all parties involved now act like nothing has happened.

Amazon for example said ‘It’s untrue that AWS knew about a supply chain compromise, an issue with malicious chips, or hardware modifications when acquiring Elemental.

Apple even said they were ‘unaware of any such investigation’ into Super Micro.

When Businessweek asked Chinese officials to comment, what they got back was hardly a denial. ‘Supply chain safety in cyberspace is an issue of common concern, and China is also a victim.

So what’s going on here?

This was never about balancing trade

If you believe the reports, you, me and everyone else are clearly out of the loop. Officials have us on a need to know basis. And right now they don’t believe we need to know anything.

Trump has alluded to China stealing secrets. I’m sure this incident in 2015 is a contributing factor to the trade war we now find ourselves in.

Trump continues to kill Chinese mergers and takeovers (see below). Computer hardware, including motherboards have made it onto the tariff list.

MoneyMorning 08-10-18

Source: Bloomberg
[Click to open new window]

As usually, things could get worse before they get better. That goes for security measures and security prices alike.

Stay strong.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: How to get in on high-risk tech plays with massive potential. Find out here.


Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. There are two questions Harje likes to ask of any investment. What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Money Morning readers 5 days a week.. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home among Matt’s incredibly exciting income plays.


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