Page 1 of
2 China
tangled up in industrial
espionage By Peter Lee
It looks like someone got their hands
caught in DuPont's cookie jar. The jar in question
was DuPont's closely-held knowhow in the
manufacture of titanium dioxide.
According
to a criminal indictment unsealed in US federal
court on February 8, USA Performance Technology
Inc (USAPTI), a company in Oakland, California,
conspired to sell DuPont's trade secrets and a
major Chinese state-run corporation, Pangang
Group, conspired to acquire them.
The
criminal indictment represents an escalation of
DuPont's complaint from a civil suit that had been
percolating through the US courts in 2011. That
means 2012 will see a high-profile, election-year
criminal case encapsulating a plethora of
hot-button issues that can be summarized with the
phrase "Chinese
government engages in
industrial espionage to rip off US companies".
Titanium dioxide is one of DuPont's
workhorses, contributing some US$2 billion to
DuPont's annual sales of $40 billion and a
disproportionate amount of net income, perhaps
$300 million or more per annum, to DuPont's bottom
line. The chemical is a pigment that makes things
white, especially paints, paper, and plastics, but
also many other things, like toothpaste. It is
responsible for the unnatural whiteness of the
filling in Oreo cookies, for example.
Titanium dioxide is extremely dirty,
unpleasant, and costly to make. Using the
traditional sulfate process developed in the early
20th century, production of one ton of titanium
dioxide can generate over 60 tons of acid-tainted
wastewater. Or the sulfuric acid can be recovered
from the wastewater - at a cost three times
greater than that of virgin acid.
Through
decades of experimentation and production and
technology licensing, DuPont came up with a
chloride process that is significantly less dirty,
unpleasant, and costly than the traditional
sulfate process, and became the world's biggest,
lowest-cost producer of high-grade titanium
dioxide.
Instead of sulfuric acid, the
DuPont process employs hot chlorine gases that are
highly corrosive and extremely toxic, a bad
combination for productivity and safety. DuPont's
unique achievement, jealously held in the form of
proprietary knowhow, has been in the design,
selection of components, and operation of the
titanium dioxide process in a way that keeps the
line functioning and the workers alive.
Meanwhile, China has emerged as a major
producer of titanium dioxide, at 1.5 million tons
per year (tpy), and exporter (over 350,000 tpy),
by largely using the traditional sulfate method.
The nameplate capacity of China's dispersed,
polluting, and inefficient industry is over 2
million tons - the largest in the world. Still,
China imports over 200,000 tpy of high-end
titanium dioxide, known as rutile titanium
dioxide, produced by DuPont and a handful of other
companies using the chloride method.
The
Chinese industry would appear to be ripe for
restructuring and rationalization - and chloride
technology. However, DuPont was unwilling to
license the technology and attempts to develop it
domestically were unsuccessful - with one
exception.
Jinzhou Titanium Industry
Company, in Liaoning Province in Northeast China,
is the proud operator of two 15,000 tpy chloride
process titanium dioxide lines.
In 2010,
it held a seminar for the trade to advertise its
achievements:
For more than two decades'
persistent and dauntless struggle, Jinzhou
Titanium Industry Co, Ltd, has overcome multiple
technique difficulties, making the whole process
operate smoothly. The company continuously
optimized the process and the key equipment,
obtaining high level achievement which was never
reached before. With excellent application
properties, the CR serial titanium dioxide
products developed by the company are
continuously replacing some imported products in
Chinese market ... [1]
Those
achievements are now under a cloud. Jinzhou
Titanium Industry Co, before it was spun off in
2010, was a subsidiary of Pangang Group, the
Chinese corporation named in the criminal
indictment for conniving at the theft of DuPont's
trade secrets.
The indictment lists three
contracts involving the misappropriation of DuPont
technology: a 1998 $5 million transaction with
Chengde Iron & Steel Corporation, a
second-tier mill in northern China whose
transaction appears to have vanished into the
mists of time; a $6 million deal in 2005 involving
the 30,000 tons of capacity at Jinzhou; and a
$17.8 million contract in 2009 for a 100,000 tpy
titanium dioxide project in Chongqing for Pangang
Group.
According to the indictment, about
$13 million monies under the 2009 contract had
been paid out. Pangang Titanium's website showed a
picture of the June 8, 2010 groundbreaking and
stated:
The technologies are from Jinzhou
TiO2 [the chemical symbol for titanium dioxide]
Pigment plant, Pangang has the certain share in
this plant ... It's planned to commission the
plant in the end of 2012. [2]
While
embroiled in the civil suit, the principal of
USAPTI labored to demonstrate that the services he
provided to China had been generated without
DuPont knowhow.
However, the indictment
paints a picture of a relationship over 13 years
between USAPTI and a retired DuPont engineer;
proprietary documents - including a 407-page Basic
Data document for DuPont's titanium dioxide plant
in Kuan Yin, Taiwan - with various DuPont stamps
and confidentiality instructions getting passed
around; and the retired engineer providing
photographs and technical assistance to USAPTI to
scale the Kuan Yin documentation up to the
capacity envisioned for the Pangang plant.
As for the question of how deeply the US
government can sink the hook into the Chinese
side, the final indictment did not pursue
ex-Politburo Standing Committee member Luo Gan,
who was named in a motion filed with the court on
February 2 as the honcho who tasked USAPTI with
bringing chloride technology to China. Presumably,
the US government did not feel it had a chance of
proving that Luo had knowingly demanded the theft
of DuPont's trade secrets.
Insofar as
conscious collusion on the Chinese side in the
theft of DuPont trade secrets is concerned, the
final indictment states (names of individuals
omitted):
During … technology exchanges,
PANGANG GROUP employees, including XXX and an
official from PANGANG GROUP TITANIUM, asked XXX
and XXX for DuPont blueprints and the names of
former DuPont employees who would work on the
project... .
On or about June 2, 2008,
employees of PANGANG GROUP companies, including
XXX, agreed that PANGANG GROUP would work with
XXX and XXX if they employed former DuPont
employees and possessed blueprints for DuPont's
titanium dioxide plants. On or about July 15,
2008, XXX and XXX informed PANGANG GROUP
TITANIUM that their drawings would replicate
DuPont's DeLisle plant.
Only one
Pangang Group employee, "Vice Director of the
Chloride Process Project Department", is mentioned
by name in the indictment.
"Vice Director
of the Chloride Process Project Department",
although important to the execution of the
project, is presumably not an officer of Pangang
and his indictment will probably not bring the
Pangang edifice crashing down.
The United
States may not get an opportunity to place him in
legal jeopardy within the US and strengthen its
case against Pangang by getting him to trade up
and implicate his superiors in return for kinder
treatment.
On the US side, the prosecution
has a lot more levers at its disposal. The civil
suit against one of USAPTI's employees has been
dropped, and he is only mentioned in the criminal
indictment as a victim of attempts to intimidate
him into being quiet, also known as witness
tampering. One can presume he is cooperating with
the prosecution.
The civil suit
proceedings also apparently yielded an obstruction
of justice criminal indictment against the
principal of USAPTI and the DuPont engineer:
After DuPont filed the federal civil
complaint, XXX ... emailed materially false
information about the source of the information
used for USAPTI's projects in the PRC and
specifically stated that no information from
DuPont's Kuan Yin plant was used in the USAPTI
designs, which was false and known to be false
to both XXX and XXX.
The conviction
for witness tampering alone can carry a sentence
of 20 years, even before the government gets to
the industrial espionage and theft of trade
secrets counts.
One may safely assume that
the principals and associates of USAPTI may have
been willing to endure the wrangling of a civil
suit, but are not prepared to endure 20 years of
jail time under a criminal indictment for the sake
of their technology business and their customers
in China, and at least some of them will cooperate
with the prosecution.
It would perhaps be
prudent for the Chinese government to settle this
case quickly and amicably, both for the sake of
its battered international reputation and its
peace of mind.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
