Hughes And Loral: Too Eager To Help China?

Tips from the two companies may have led to better missiles

On Dec. 21, 1992, a rocket exploded 48 seconds after liftoff from Xichang Launch Center in western China, the first of a string of high-profile failures by Chinese rockets carrying U.S.-made satellites. The mishaps put China's nascent launch industry in jeopardy and set off a scramble by two leading U.S. satellite companies to save face--and save a business on which they depended.

Now, as the Justice Dept. studies whether General Motors Corp.'s Hughes Electronics unit and Loral Space & Communications Ltd. broke the law--and ponders whether to prosecute them--the satellite-export business is at a standstill.

The State Dept., the Pentagon, and a special House panel headed by Representative Christopher Cox (R-Calif.) have all concluded that the two companies gave Beijing analytical knowhow that could improve both commercial launchers and ballistic missiles, such as the Dong Feng-31, a missile with a 4,500-mile range that China tested on Aug. 2.

The U.S. companies also offered tips on fixing problems with welding and rivets, which they dismiss as low-tech matters. But "if you help someone figure out why the rocket does not work, that's a violation," says a government source familiar with the case. "It doesn't matter whether it's soldering or chewing gum."

At first blush, it looks like an open-and-shut case for Justice: Hughes and Loral studied the launch failures and didn't obtain separate State Dept. licenses to give their results to the Chinese. But prosecutors must weigh more than that. Hughes, for example, got approval from two key government overseers before it shared information with the Chinese. And while Loral concedes that it helped the Chinese with a post-crash assessment, it says its actions were sloppy, not criminal.

If criminal charges are brought, company officials involved could face up to six years in prison. The companies could be subject to hefty fines, bans on their high-tech exports, and a curb on sales to the U.S. government if Uncle Sam decides to bring a civil case, which several experts believe is the likely route--if one is taken at all.

BITTER DISPUTE. Moving the case forward would also put America's schizophrenic export-control policy in the dock. To promote U.S. satellite exports, Uncle Sam has--ever since the Reagan Administration--encouraged satellite makers to use Chinese launchers. But for national security reasons, Washington bars companies from assuring that the rockets are reliable. Some control over satellite-export policy had been shifted from State to the trade-promoting Commerce Dept. by the Bush Administration. Under pressure from the satellite industry, the Clinton Administration in 1996 completed the shift in control to Commerce. Last fall, the GOP Congress toughened up the rules again by returning satellite-export licensing to the State Dept., which treats satellites as weapons.

It was State, however, that was in charge of licensing satellite sales for the first two of the three failed launches. When the initial explosion occurred in 1992, a part of the Hughes satellite on board reached orbit. That fact led China to conclude that the rocket worked and the satellite was the problem. But Hughes blamed the fairing, the part of the rocket that shields the satellite in fiberglass. The bitter dispute would last for years.

By April, 1993, Hughes officials had learned from State that giving China technical data about fairing flaws would require a new license. And it wouldn't be granted if the data would help Beijing's missile program. Still, finding the cause of the explosion was crucial if Hughes and China were to satisfy insurers, who were fretting about the next launch.

Without the license, Hughes sent China faxes that contained recommendations for repairs. A June 25, 1993, fax that Hughes provided to BUSINESS WEEK suggested putting stronger rivets in the fairing and making other changes. A company spokesman says it didn't need a license because the faxes were approved by Air Force Lieutenant Colonel Allen D. Coates, then assistant for aerospace technology at the Defense Technology Security Administration and a launch monitor. Coates also O.K.'d meetings between Hughes and the Chinese to discuss data on the flight's performance. Coates, now retired, doesn't recall the approvals, although he says his signature is genuine. While nontechnical data can be transferred, he notes that "any time you suggest a change to a piece of Chinese equipment, that's a no-no."

Despite arguments over the failed launch, China did in fact alter the fairing. But not enough. In January, 1995, a rocket with another Hughes bird on board exploded 50 seconds after launch. The incident rekindled the angry debate over who was at fault.

NO LICENSE. While this second launch was licensed by Commerce, Donald L. Leedle, then coordinator of technology-export controls at Hughes, told the Cox panel he understood that anything concerning the rocket still was in the State Dept.'s purview. But Hughes failed to get a license from State when it sought to share yet more information with the Chinese.

With a go-ahead from E. "Gene" Christiansen, a Commerce licensing officer, and from his boss, Jerald R. Beiter, Hughes sent China a 106-page report on the failure. The confidential report, which BUSINESS WEEK obtained, points out shortcomings in China's diagnostic analyses. The report also says Hughes and Chinese engineers discussed analyses of payload behavior in Beijing. The Defense Dept. believes that information could be useful to the People's Liberation Army, particularly for launching military satellites. Procedures for analyzing launch failures could be applied to ballistic missiles as well. The Hughes report suggests that China needed help. The company can't simply assume, the study states, that because the Chinese "are in the launch business, they know their job."

HEFTY CLAIMS. By the time of the third failure--the February, 1996, crash of a rocket carrying a Loral-built Intelsat satellite--insurers had paid out close to $500 million in claims, and China had lost all credibility. So insurance companies demanded a review of China's conclusion that defective soldering on the guidance system was at fault. China asked Wah L. Lim, then a Loral senior vice-president, to head the probe. A fluent Mandarin speaker whose family fled from China to Singapore when the Communists took over, Lim is a well-regarded engineer. He now works for Hughes.

Lim faced a tight deadline: Loral needed an answer within weeks so it could decide whether to launch another satellite in China. (It successfully did so.) At an April, 1996, meeting of Loral's government-approved security advisory committee, panel member Stephen D. Bryen, a technology-security consultant, said the company should contact State if a report were issued. But Loral claims no one told Lim, who was not at the meeting. By May 7, a report had been written, and Lim ordered it faxed to China. When Loral lawyer Julie B. Bannerman saw the report on May 9, she thought it might need State's O.K. But she was too late.

Lim declined to talk to the Cox panel after Justice rejected a grant of immunity. Lim's lawyer, George B. Newhouse Jr., says Lim is the target of a criminal probe but did nothing wrong.

The Cox panel and the company disagree about the importance of the Loral report, which Loral declined to show to BUSINESS WEEK without government permission. Loral does say that its report merely agreed with China that the guidance system was the problem. That's all that was needed to keep insurers on board because a different guidance system was to be used on the next launch. To Loral, telling the Chinese after a crash that they had quality-control woes and should review all flight data was stating the obvious. "I don't know what the Chinese equivalent of `duh' is," says a Loral official.

But the Cox Committee says Loral pinpointed the defective part of the guidance system--which could be adapted for use on the Dong Feng-31--and helped with quality control, which also could benefit the PLA. And some wonder whether Loral protests too much. Last June, it ran ads in major newspapers proclaiming that it had voluntarily told State about the transmission of the report. In fact, it made the disclosure after government prompting.

Still, Justice may have difficulty pursuing the case: Twice in April, 1996, Loral claims that it told government officials about the launch probe and that the CIA even requested a copy of the report. In addition, on July 15, China said it had solved the problems itself--and had withheld data from the Americans. Indeed, Loral contends that the Chinese were so sophisticated that there was little they could have learned from the U.S. (though this conflicts with the Hughes report's assessment of China's capabilities). The upshot: Some analysts think it won't be easy to win convictions if Justice goes ahead with indictments.

While the companies' legal fate is unclear, what's not in dispute is that, with the State Dept. in charge, the American satellite-export business is going nowhere. The entire industry is already paying dearly for the information, however valuable, that Hughes and Loral disclosed to the Chinese.

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