Toshiba’s Big Technology Export Scandal

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I recently read an interview with ASML's (now retiring) CEO - Peter Wennink - about the issue of banning Dutch exports of lithography machines to China.

In it, he talked about the notion about ASML restricting exports of older, DUV lithography machines.

> Maybe they think we should come over the bridge, but ASML has already surrendered. We are no longer allowed to supply EUV to China. And EUV is half of our turnover ...

He also pointed out that the lithography ban directly benefitted American semiconductor equipment makers of items not covered by the bans:

> If China still wants to do something with advanced chips, they have to buy very advanced deposition and etching machines to 'shrink' even more. And they mainly come from the US.

His feelings illustrate the delicate, difficult challenge of keeping valuable, militarily powerful dual-use technologies out of the hands of the enemy.

The China semiconductor issue is not new. The United States and the West have long encountered these same fractures and sentiments during its long engagement with the Soviet Union.

In 1987, a massive scandal broke in Japan that illustrated how weaknesses in the system caused a major lapse.

In this video, we are going to look at one of the most serious geopolitical technology scandals of the 1980s: the Toshiba-Kongsberg Incident.

Beginnings

World War II greatly stimulated Soviet industrial capacity. One can argue that - even despite the titanic war damage - the Soviet economy was stronger after the war than before it.

The reason for this expansion in industrial and economic capacity was technology acquisition. Before the War, trade with Europe was tiny - just 1% of GNP.

The years during and immediately after the war, however, the Soviet Union acquired and received a wave of Western technologies via the American Lend-Lease Act, reparations and the wholesale confiscation of German assets.

Lend-lease provisions alone infused the Soviet Union with over a billion dollars worth of modern American equipment. This equipment played a significant role in building up the Soviets' indigenous technological base and military after the war.

Post-War

Export controls in the United States date back to 1917 during World War I, but it was during the Second World War that they became what they are today.

During the 1930s, they were used to enforce American neutrality. Moral outrage over Japanese bombing of civilians in China disallowed the exports of military equipment or related industrial supplies to warring nations.

After World War II ended, the United States rapidly began normalizing its wartime restrictions, moving back towards free trade.

In 1944, there were 3,000 restricted items in the United States. Three years later in 1947, just 352 restricted items.

But various parties including the American military grew concerned that unrestricted free trade would enhance a growing competitor.

One particularly nasty issue regarded the export of American petroleum. In February 1947, those became unrestricted and Russian tankers showed up to California, loading up over 600,000 barrels of oil.

This evoked memories of pre-war oil shipments to Imperial Japan, a tender subject. Furthermore, it fanned inflation concerns due to the potential of domestic shortages.

Anti-communist feelings were building in congress. Various Congressmen wanted to end what they called the "economic appeasement" of the Soviet Union, and repeatedly attempted to pass legislation on their own.

The 1948 Prague Coup - in which a Communist Party captured absolute power in Czechoslovakia - and the Berlin Blockade only intensified these feelings.

This eventually led to the Export Control Act of 1949. It carried over many wartime powers into peacetime - creating a licensing system to protect national security and advance foreign policy objectives.

Marshall Plan

Imposing export controls solely on American nationals would weaken their effectiveness and disadvantage American businesses. So Europe had to get on board. Luckily, there was a mechanism.

In 1947, the Marshall Plan was about to head into action, bringing over $12 billion of reconstruction aid to sixteen European countries.

The USSR rejected this aid - which was obviously not being done out of the Americans' good hearts - and proposed their own trade bloc. This would eventually become the CMEA and include Bulgaria, Czechoslovakia, Hungary, Poland and Romania.

American policymakers saw this rejection as a reason for wide ranging export controls. Why give aid to any country that traded with the Soviets?

The Americans drew up several lists for controlled items and sought voluntary export restriction agreements from the countries receiving Marshall Plan aid.

Rather than negotiating with each of those countries in a multilateral forum, they decided to first pass it to the British and ask them to build up support amongst their European allies.

COCOM

The United Kingdom circulated the list amongst representatives of the Organisation for European Economic Co-operation or OEEC.

The OEEC was formed for administering Marshall aid and is the forerunner of today’s OECD.

The biggest concern amidst the representatives was the American request that Marshall Aid recipients impose export controls against non-Marshall Aid recipients - essentially the CMEA.

For what it is worth, the actual items on the lists back then - things like bismuth metal and broaching machines, which can be used to create patterns in metal - weren’t a huge concern.

The biggest holdouts were Sweden and Switzerland, who valued their neutrality. France, the Netherlands, and Belgium were also concerned.

But developments in Communism caused new alarm. The explosion of the first Soviet nuclear bomb. Shortly after that, the end of the Chinese Civil War and the establishment of the People's Republic of China. All of this reinforced the notion that an economic blockade was necessary for the containment of Communism.

Thusly, representatives of seven countries came together in November 1949 for a meeting - Belgium, Canada, France, Italy, Norway, the United States, and the United Kingdom.

Here begins the informal international export control group called the Coordinating Committee for Multilateral Export Controls, or COCOM.

A titanic victory for the Americans and one that could not have happened without Marshall Aid. As one official grumbled, "Western Europe sold out their trade principles for good American cash".

Effectiveness

Unlike NATO, there was no formal treaty for COCOM and it was all voluntary. As in there was no enforcement mechanism. So as you might expect, the whole thing was like herding cats.

Even after COCOM formed, it took the outbreak of the Korean War in 1950 for the United States to get consensus on a second, less controversial list of some 200 items.

Over the next few years, COCOM expanded to include Denmark, Portugal, West Germany, and more. After Japan regained its sovereignty in 1952, they requested to join and were accepted.

Despite the addition of these new partners, the United States was always at COCOM's heart - the driving force of its effectiveness.

Managing export controls is a balancing act. People love exports, and serious differences can develop between allies over it. Excessive restrictions can lead to cynicism and laxity in enforcement.

On the other hand, technology transfer strengthens strategic enemies. Lenin once said, "The imperialists are so hungry for profits that they will sell us the rope with which to hang themselves." He wasn't wrong.

Evading COCOM

Unbeknownst to the West, the Soviet Union over time developed countermeasures to COCOM. They have an incentive to. Acquiring advanced western technologies saves them millions of dollars of R&D and years of research.

Better yet from the Soviet perspective, integrating stolen Western technologies forces the Americans to spend even more resources to figure out ways to counteract their own handiwork.

The Soviets have legal and illegal methods to acquire this stuff. Legally, this can be through scientific or technical exchanges and conferences as well as open literature and trade.

Illegally, they can divert legitimate trade to new locations or use espionage. Or they can just purchase technology through dummy corporations, middlemen or foreign actors.

This must have worked well as the Soviets employed nearly 2,000 such agents, smugglers and middlemen for this task.

A Propeller Milling Machine

In the 1970s, the Soviet Union received information through a network cultivated by the convicted spy John Walker Jr.

Walker Jr. was an US Navy chief warrant officer and communications specialist who started spying for the Soviets in 1967. Mostly for financial reasons, it seems.

Walker told his Soviet handlers that the United States was capable of accurately tracking Soviet submarines through the excessive noise from their propellers.

The Soviets now knew that they needed quieter propeller blades. Propellers are cast out of bronze or steel. But to reach their final finished state, they need to be milled - meaning ground down with a power tool.

Usually, such a thing would be done by hand. But a precision milling tool would save a lot more time and offer a great deal more precision. This was exceptionally difficult - the Americans did not expect the Soviets to do this for several more years.

As was their preference, the Soviets searched the West for an equipment provider to help them along with it. They found a great one: Toshiba.

Toshiba

The Toshiba Machine company is a subsidiary of the Toshiba Corporation.

They are one of the world's biggest providers of manufacturing equipment - generating some $700 million in sales in 1986. Communist countries made up some 12% of their total export revenue.

Part of their portfolio were machines critical to producing very quiet submarines: Propeller milling machines.

In late 1979 or early 1980, the Soviet foreign trade organization Tekmashimport contacted a small Japanese trading firm with a presence in Moscow.

They told this firm - Wako Koeki - that they wanted to acquire Toshiba's MBP 110 nine-axis propeller milling machines.

Let me briefly explain this "nine-axis" concept. In these machines, a numerical controller sends commands to an automated milling machine, telling it where to move its milling head along its path.

The more axes the machine is capable of, the faster and more precise the milling can be done.

Toshiba's initial response was that these milling machines cannot be exported to the Soviet Union. But soon after they began looking into whether or not it was possible to temporarily modify the milling machines to evade the export restrictions.

Toshiba and the Soviets also reached out to a second trading company in Norway - Kongsberg Vapenfabrikk - so to purchase computer technology. They wanted to combine the Norwegian computers with the Japanese milling machines. This was all banned for export by COCOM.

A few months later in March 1980, Toshiba's president met with his export sales manager. The sales manager told him that in order to close this sale, Toshiba might have to violate COCOM regulations in Japan.

The president told him to "do what had to be done to get the business". Everything they did thereafter was done knowing that it was illegal.

Resentment

You might be wondering why Toshiba - a large, storied company - was so willing to do this.

It goes back to resentment over lost sales in the past. Back in 1974, the Soviets were looking to buy from Toshiba older propeller milling machines that were less sophisticated - capable only of two-axis simultaneous control.

The Soviets asked for something more sophisticated - more axes - which Toshiba declined to fulfill due to COCOM export trade restrictions.

Toshiba then later learned that the Soviets managed to acquire ten such multi-axis milling machines anyway from a French company called Forest Line. France, if you recall is also subject to CoCom restrictions.

Toshiba eventually determined that these export controls were being more rigorously enforced in Japan than they were in France. This put Japanese companies at a disadvantage. So in order to properly compete for Soviet orders, they needed to violate COCOM.

Japanese businessmen saw COCOM as a joke - a restriction unilaterally imposed onto Japan by the Americans. The prevailing feeling was that you couldn’t help violate COCOM if you wanted to do business in the Soviet Union.

Those feelings had some merit. Other countries did violate COCOM - even the British. For instance, the UK's Rolls Royce in 1975 sold its Spey engines to the People's Republic of China without considering COCOM.

The Sale

In order to get this illegal sale done, Toshiba built up an elaborate scheme.

Toshiba and Kongsberg needed an export license from the Japanese government - MITI. Their license application contained several false statements - including that the exports will not be sold to Communist bloc countries and that the machines will not be used for manufacturing military technologies.

Toshiba presented a document - stamped with the President's own seal - misrepresenting the machines' capabilities and certifying that the exports were appropriate.

MITI employs about 30 export control inspectors and they have to review some 200,000 applications a year. The MITI inspector approved the Toshiba application - Japanese newspapers said that the inspectors themselves recommended ways to evade COCOM - and by December 1983 the two MBP-110 machines were installed in Leningrad.

Toshiba earned $17.4 million for this first sale. The Soviets purchased a few more machines after that in 1984 for another $10.7 million.

Discovery

Three years later near the end of 1986, Hitori Kumagai (熊谷独), former chief Moscow representative at the Japanese trading company Wako Koeki resigned and informed the United States government of the transactions.

The Americans had recently noticed abrupt and unexpected improvements in the quietness of the Soviet Union's nuclear submarines and determined that the sale of these propeller milling machines was the cause.

They reached out to their counterparts in the Japanese government, who did an initial investigation. Toshiba stuck to their story and the investigators accepted it - determining that no export violation occurred and everything was fine.

Then in March 1987, things changed. The story broke in the American and Japanese national media, bringing a great deal of heat onto Toshiba.

Amazingly, Toshiba's president was at first defiant, saying:

> "When we received these charges before, it was found that we were innocent. All exports receive the approval of MITI. There was no violation of COCOM. Why are they bringing this up now? MITI also took the position that "There was no violation. The case is closed."

The chairman of the Japanese Machine Tool Industry Association echoed this sentiment:

> What has brought this problem back is the deterioration of relations between the US and Japan ... [This investigation is] a human sacrifice due to American pressure. It is a false charge.

Consequence

The news was a big loss of face for the Japanese government - which launched a more thorough investigation. Various senior executives were arrested. Toshiba's chairman and several presidents under him resigned their posts.

Prime Minister Yasuhiro Nakasone had to formally apologize, saying that the government would pass new legislation to make sure that it never happens again. But such laws lacked teeth. Toshiba's fine for its $17 million sale was a tiny $14,000.

They did however revamp the export licensing process - increasing staff to 100 inspectors, raising the budget five times, and computerizing the licensing process.

Furious, several American congressmen proposed aggressive measures against the Japanese, arguing that these quieter propellers put American seamen at risk and that $30 billion would be needed for equipment and new subs to detect these Soviet submarines.

They proposed heavy legislative measures, including import sanctions against Toshiba - including barring the entirety of the Toshiba group from bidding on American contracts.

It was delicate times for US-Japan relations and the Reagan Administration intervened. They instead got a lighter sentence including a 1-year ban on Toshiba sales to the Soviet Union. The US Army also canceled the purchase of a Toshiba missile system.

Toshiba Corporation ran a large public relations program apologizing to the American people for their error. It worked.

Norway did an arguably better job than the Japanese. Perhaps because Kongsberg was state-owned. They banned Kongsberg from any future sales to the Soviet Union and did a deep dive Coffeezilla style investigation.

In it, they discovered that French, Italian, West German and British companies also sold sophisticated milling machines to the Soviets and China in the 1980s. This in turn triggered a chain reaction of investigations by the French and so on.

Aftermath

Toshiba-Kongsberg not only demonstrated the weaknesses in COCOM's systems - which were loosened after the detentes of the 1960s and 1970s - but also the breadth of the Soviet technology acquisition machine.

The end of the Soviet Union eliminated much of COCOM's reason for being and it was eventually dissolved in 1994. It was replaced by the much looser Wassenaar Arrangement, where members of one country cannot influence exports of another.

One last thing. In light of recent events, it is interesting to see how the United States and its western allies loosened COCOM controls on the People's Republic of China in the 1970s and 80s.

This not only included dual use items but also direct military equipment like jet engines, ground attack aircraft, rapid gun systems, and computer systems.

This was because of the Sino-Soviet Split. The United States sought to strengthen China and bring it closer to the West as an ally against the Soviet Union. Just found that interesting.

Conclusion

The debate over COCOM's effectiveness was and remains voluminous. There have been hundreds of takes of all kinds and from all angles. Many of these debates are re-emerging in the wake of the recent chip technology bans.

The actions behind Toshiba-Kongsberg show us why international trade restrictions are so hard. Players feel unfair treatment when they are subject to such restrictions, often bringing up questions of sovereignty.

It is why the United States went ahead with the chip sanctions first without any agreements from its Western allies - a demonstration that this was no ploy to win sales for American businesses.

But more work needs to be done. Toshiba-Kongsberg showed that it is not enough to place sanctions and licensing. In order to be effective they need to be fair, backed with deep investigation and resources, and seriously enforced.