China Attacks: Bloomberg Bombshell Is A Wake-Up Call

Written by Jason Simpkins
Posted October 5, 2018

Bloomberg dropped a bombshell Thursday morning, with a massive cover story it called “The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies.”

There is no sugarcoating it. The report was alarming.

And it confirms everything I’ve been saying for months about cybersecurity stocks.

To summarize, this is what went down...

An estimated 30 companies, including a major bank, government contractors, and tech giants Apple and Amazon were using servers — computer hardware — with secret microchips hidden by the Chinese army.

These chips let the hackers alter how the affected device functioned, without leaving any single trace of infiltration.

The scope of the operation is mind-boggling.

And at the heart of it is Supermicro, a leading manufacturer of server motherboards. Supermicro’s annual revenue was expected to total more than $3 billion this year, but it was delisted from the Nasdaq on Aug. 23 after missing several filing deadlines.

We now know why it's been having so much trouble.

Supermicro is based in Silicon Valley, and it has assembly facilities in California, the Netherlands, and Taiwan. However, virtually all of its motherboards are manufactured by contractors in China.

Indeed, many tech giants outsource manufacturing to China to take advantage of cheap labor and lax regulation. By some estimates, China produces 75% of the world’s mobile phones and 90% of its PCs.

This hasn’t gone unnoticed by the People’s Liberation Army, which has a top-secret unit that specializes in hardware attacks. Prior to yesterday’s report, the existence of this unit was unknown to the public, though a government official acknowledged: “We’ve been tracking these guys for longer than we’d like to admit.”

In any case, these Chinese spies approached plant managers claiming to represent Supermicro, or in other cases, the government, and requested changes to the motherboards’ original designs. To help things along, they offered bribes, or threatened inspections that would shut the plants down.

Once inside, they implanted tiny microchips the size of a grain of rice on the motherboards. The motherboards were then built into servers assembled by Supermicro. And ultimately, they made their way to data centers around the world.

It’s not an understatement to say these corrupt servers went everywhere.

Supermicro motherboards can be found at major banks, hedge funds, cloud computing providers, web-hosting services, defense contractors, the government, and even the U.S. military.

Yes, these servers are used inside Department of Defense data centers to process drone and surveillance-camera footage. They’re on Navy warships transmitting feeds of airborne missions. And they’re inside government buildings to enable secure videoconferencing.

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

It’s a gaping vulnerability and one that goes far beyond the kinds of software attacks that have been used to steal passwords, identities, and even money.

That’s child’s play compared to what these chips do.

Since they’re implanted into the hardware, the chips are capable of taking over and manipulating whole systems.

We’re talking about long-term stealth access to valuable corporate secrets and key government networks.

It’s a sensational, far-reaching, and extremely effective attack that one hardware hacker likened to “a unicorn jumping over a rainbow.”

And this is why I’ve been beating the drum for cybersecurity stocks for months now.

Not just cybersecurity stocks, in fact, but defense stocks in general.

In July, I launched an entire investment service based around security companies ranging from drone stocks to munitions manufacturers to cyberwarriors. And that portfolio is off to a strong start. One stock that I recommended in August is already up 42%.

More gains are coming.

So if you haven’t checked out my cybersecurity picks or The Wealth Warrior, do it now.

We’re still offering charter pricing, but only for a limited time.

Fight on,

Jason Simpkins Signature

Jason Simpkins

follow basic@OCSimpkins on Twitter

Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

*Follow Outsider Club on Facebook and Twitter.


Investing in Marijuana Without Getting Burned