China Strikes Investors Down Again

Now that American Superconductor (NAS: AMSC) has reported earnings, details are starting to emerge on what exactly happened at the company. And it isn't pretty.

According to reports, Sinovel, once American Superconductor's biggest customer, bribed former employee Dejan Karabasevic into handing over sensitive software code that would essentially deem American Superconductor worthless to Sinovel. After being demoted, it was a great way to get back at the company and make a quick buck in the process.

There were just two problems with Karabasevic's plan: Sinovel didn't pay him what it promised and American Superconductor could easily identify who sold the code. As a result, Karabasevic is already getting cozy in an Austrian prison.

It appears that American Superconductor knew its weakness and did its best to protect intellectual property by keeping only a small list of employees in the loop and designing equipment so it needed proprietary code. But Sinovel was able to circumvent those protections with a little inside information.

As you can imagine, after all that, American Superconductor and Sinovel aren't on speaking terms.

Never, ever do business in China
If we've learned anything this year, it should be "Beware of China." We've seen stolen intellectual property at American Superconductor, the buyout/fraud debate at Harbin Electric (NAS: HRBN) , and fraud (or at least accusations of fraud) at RINO International, China MediaExpress, and Sino-Forest (Toronto: TRE.TO) to name a few.

Why do we even try to invest in China again?

A question of survival
Now the questions move to survival of the once-high-flying American Superconductor. As I pointed out earlier this week, the company has a strong balance sheet (for now) but cash is burning quickly and the new management team is still settling in. $100 million in new orders should help, but they're spaced out over the next two years and more orders will be needed to stay afloat.

This also brings up questions for legitimate companies in China and political relations. Senator John Kerry has lobbied the State Department, U.S. Commerce Department, and Federal Trade Commission on behalf of American Superconductor, but they don't have a lot of power in this case.

A lawsuit has been filed in Chinese court, but your guess is as good as mine as to how that will end.

This is an ugly situation that has pushed American Superconductor to the brink and cost investors a lot of money. I'll think twice about buying another stock that relies on China, operates in China, or has ever thought about doing business in China. U.S. investors' money seems to evaporate at soon as it reaches China's borders.

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At the time thisarticle was published Fool contributor Travis Hoium owns call options in American Superconductor. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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