U.S government trade agencies and members of Congress are quietly weighing in on allegations of corporate espionage involving China's largest wind turbine manufacturer.

Devens, Mass.-based American Superconductor Corp. (AMSC) is accusing China's Sinovel Wind Group, the world's second-largest wind turbine maker, of stealing valuable trade secrets, copying protected software used for controlling turbines and canceling purchase agreements with the U.S. technology company.

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This series explores a case of alleged economic espionage and how difficulties in protecting manufacturers' intellectual property rights can be an expensive problem in deploying clean technology abroad.

Tied up in Beijing courts, the episode has the makings of industrial sabotage if the allegations are true, including that Sinovel had agreed to pay $1.7 million to a 38-year-old former AMSC employee based in Austria to funnel detailed trade secrets to China. It also ties into a political narrative in the United States, where business groups have pressed Washington to address concerns about Chinese piracy that range from intellectual property theft to hacking computers at the U.S. Chamber of Commerce.

"We're preparing for the arrival of Vice President Xi Jinping from China, and hope to use his visit to raise the profile of this issue with the Chinese government," said Jodi Seth, a spokeswoman for Sen. John Kerry (D-Mass.), chairman of the Senate Foreign Relations Committee.

AMSC is headquartered in a hamlet northwest of Boston, just outside a suburban ring of labs and high-tech companies that Kerry describes as a clean energy hub.

Xi, who is widely considered the Communist Party's choice to replace President Hu Jintao this year, is scheduled to visit Washington on Feb. 14 for White House meetings with President Obama and members of Congress. With the extended U.S. jobs slump dominating presidential politics, lawmakers and Republican candidates are pushing for a get-tough approach to China, blaming China's tight control of its currency and aggressive export-driven economic policies for the decline of U.S. manufacturing. Obama is brandishing the administration's trade enforcement authority.

In his speech before Congress on Tuesday night, Obama announced the creation of a "Trade Enforcement Unit" that targets China and is tasked with investigating unfair trade and commercial practices. It will reportedly include the departments of the Treasury, Commerce and Energy and the Office of the U.S. Trade Representative (USTR).

When Xi arrives here, according to sources on Capitol Hill, allegations swirling around AMSC and Sinovel are likely to be hauled out by U.S. officials as an example of brazen theft and breach of contract designed to diminish U.S. competitiveness in the global market for clean energy technology.

Will there be accountability in Beijing?

Tensions in the wind sector about the protection of secrets and patents and the shifting incentives for wind markets are thrusting companies and nations into skirmishes. U.S. and European giants that had once produced most of the world's wind technology -- General Electric, Siemens and Vestas Wind Systems -- are looking for access to Asia as demand in the West slows. Denmark's Vestas announced in early January that it planned to lay off 2,300 workers to cut costs.

All the while, China's top state-owned turbine makers, Sinovel and Xinjiang Goldwind Science & Technology Co., are creating subsidiaries to build components and to streamline the manufacturing process under a domestic umbrella that supplies China and expands exports in Asia, Europe and the U.S. market.

Energy analysts watching this play out say the trade secret dispute involving AMSC and Sinovel illustrates deepening suspicion among U.S. and Chinese companies, despite the nations' roles as global economic bulwarks. Sinovel, for its part, "was not a fly-by-night operator," one financial analyst noted, and added that evidence suggesting a well-planned international heist to steal AMSC's secrets and reproduce its technology "shocked" analysts tracking advanced technology companies supplying wind turbine manufacturers.

On its website, American Superconductor Corp. (AMSC) describes its corporate ambition to "power the world" with cleaner energy. Photo courtesy of AMSC.

"The fact that AMSC went through this horrible experience will be an object lesson to potential suppliers to Sinovel, especially Western suppliers," said Pavel Molchanov, an alternative energy analyst for Raymond James. "If Sinovel is held accountable by the Chinese legal system for what it's done, that would be a very encouraging sign."

U.S. and European business interests are challenging China's policy of granting domestic manufacturers a significant leg up on foreign competitors. The government's generous loan guarantees, grants, offers of cheap land and policies aimed at keeping the price of Chinese exports artificially low violate World Trade Organization rules, according to pending trade cases filed by a handful of U.S. solar panel manufacturers and wind turbine companies.

The Obama administration is investigating whether the United States should slap hefty tariffs on solar panels imported from China. And last week, the Commerce Department launched an investigation into whether China is dumping wind towers on the U.S. market, undercutting the price of U.S. towers by more than 200 percent.

The collapse of U.S. solar panel maker Solyndra last summer triggered a political imbroglio that forced the White House to defend a $500 million loan guarantee to the company. Solyndra blamed its bankruptcy on unfair competition from China's manufacturers. Their revved-up business of building and exporting conventional photovoltaic solar panels created a supply glut and plummeting prices, making it harder for Solyndra's alternative technology to find customers.

Money and female companionship for software

An investigation resulted in the arrest last July of a former employee of the Austria-based AMSC subsidiary Windtec on charges of economic espionage and fraudulent manipulation of data. According to court documents, Sinovel offered Dejan Karabasevic a $1.7 million employment contract, an apartment and female companionship. In September, he pleaded guilty and the court sentenced him to a year in prison.

AMSC claims he illegally obtained software codes so that Sinovel could circumvent an encryption meant to protect AMSC software used in Sinovel's 1.5-megawatt wind turbines.

In a separate copyright case filed in a provincial court in September, AMSC claims Sinovel has started selling turbines also containing closely related technology produced by Dalian Guotong Electric Co., a domestic supplier of critical power converters. "Because the Guotong converters are being used in wind turbines containing our wind turbine control software, we believe that our copyrighted software is being infringed," the company explained in a November filing with the Securities and Exchange Commission.

AMSC now has China's top turbine maker locked up in multiple cases seeking more than $1.2 billion in compensation for lost contracts and damages. Earlier this month, the Beijing Arbitration Commission postponed a hearing on AMSC's $790 million claim for undelivered wind-turbine parts. The company also filed suit in the Beijing Higher People's Court claiming Sinovel owes it $453 million for the stolen trade secrets.

Sinovel claims AMSC's grid and turbine technology was faulty and is seeking some $50 million in a counterclaim. Sinovel was unresponsive to inquiries about the cases, but it has publicly denied any wrongdoing.

"The temptation is very strong for an employee to take this stuff and spill the beans," said Thomas Moga, a China expert and intellectual property attorney for Shook Hardy & Bacon. "This is going to be the next great problem -- the trade secret issue."

Sinovel's yearly revenues skyrocketed from about $300 million in 2007 to $3 billion at the end of 2010, and the company continues expanding despite a flagging stock price on the Shanghai exchange. But the case has drawn China deeper into an uncomfortable dialogue about theft of foreign technology and the extent of China's willingness to buy from foreign suppliers.

Actions taken by Sinovel "shouldn't be tolerated," said Rep. Niki Tsongas (D-Mass.) through a spokesman. AMSC resides in her district. Tsongas called herself a "longtime supporter" of the company and said she "fully supports American Superconductor's efforts to recoup money that is owed to them as well as their stolen intellectual property."

Cautionary tale for firms courting a big customer

Tsongas' office continued, "The continued IP theft by Chinese companies threatens the ability and willingness of American companies to invest in China."

U.S. Commerce Department officials wouldn't comment extensively, but said a number of U.S. agencies are keeping an eye on this trade secret dispute. AMSC has approached Commerce, the U.S. Trade Representative and U.S. Ambassador to China Gary Locke to help it gain some leverage on Sinovel in Chinese courts.

"We're definitely not taking a backseat to intellectual property rights violations," said U.S. State Department spokeswoman Nicole Thompson.

Even with U.S. officials seemingly pressing the case on behalf of AMSC, the affair has left AMSC badly bruised and struggling to regain traction in a Chinese market it came to rely on. The company is also ensnared in shareholder litigation accusing executives of not fully disclosing information about Sinovel's patchy payments and other risks in China as they emerged in 2010 and early 2011. More than 70 percent of AMSC's business went to Sinovel in early 2011.

Meanwhile, company executives have been operating under a cloud of shareholder suspicion since announcing in April, without warning, that Sinovel had stopped accepting deliveries and the relationship had ruptured. AMSC's New York share price has fallen more than 80 percent since January 2011.

"With Sinovel gone as a customer, and revenue from smaller wind licensees not yet meaningful, cash burn remains the key metric to watch," said Raymond James' Molchanov in a report to investors in November.

"It's a black box," Molchanov said in an interview, referring to the future direction of the trade secret case and AMSC's business. "The reason it was such an interesting stock for a long time was because it allowed U.S. investors to play the Chinese market in a very direct way."

But for many, including Molchanov, AMSC is a cautionary tale for other companies about concentrating too much business in the hands of one or two big Chinese customers. The intellectual property issues are one thing, but so are guarantees that Western companies in the energy sphere often make to shareholders about China's growth and its appetite for foreign partnerships. China's economy is slowing, according to economists, and China has been inconsistent about foreign partnerships on Chinese soil that could siphon off potential job growth and profits from the Chinese market.

Red flags that nobody saw

"Investors have been looking for customer diversification to mitigate the risk attached to Sinovel," said Ben Schuman, an analyst at Pacific Crest Securities, who acknowledged being caught off-guard when AMSC reported that Sinovel had refused to accept contracted shipments at the end of March.

Few people outside of AMSC, however, appeared to recognize red flags, including AMSC's decision to loosen payment terms and mismatches between component deliveries to Sinovel and Sinovel's outgoing sales of turbines. AMSC's auditor, PricewaterhouseCoopers, also missed it. "In our opinion, the company did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2011," the auditor noted in AMSC's 2010 annual report issued in late 2011.

In one shareholder lawsuit filed in the U.S. District Court in Boston, the filers pointed to statements made by top executives starting in July 2010 boasting about its business with Sinovel, their competitive position against other suppliers of electronics to turbine makers, and their perception that Chinese manufacturers were gearing up for a big export push into Western markets.

"So right now we're in more than 25 percent of the wind turbines in China," said former CEO Gregory Yurek in a conference call with analysts in late July 2010. (Yurek later resigned.) "On a going-forward basis," he added in the conference call, "we see that going up to the 50 percent plus range."

On Aug. 10, 2010, according to the suit, Chief Financial Officer David Henry told a conference that "the relationship with Sinovel is broadening."

Henry remains the chief financial officer. But in regulatory filings, AMSC contends that it didn't mislead investors, though it acknowledges an inadequate internal process for recognizing and reporting risks associated with its Chinese customers.