Friday, February 10, 2012

China tangled up neck-deep in industrial espionage, just like the French, Israelis, Brits and everyone else....

China tangled up neck-deep in industrial espionage, just like the French, Israelis, Brits and everyone else....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. 
However, US criminal prosecutions tend to acquire a life of their own, especially when witnesses desperate to avoid jail time are involved, and there is no telling where - and with what indictments, subpoenas, and warrants - this might end up. After the criminal case come the civil cases, with the awards, injunctions, liens, seizures, etc.

In addition to possible jeopardy for Pangang Group, one of the largest resource conglomerates in China, Jinzhou Titanium is now owned by CITIC, the high-rolling investment group with major interests in Hong Kong, Australia, and other court-friendly jurisdictions.

DuPont, whose civil suit set the ball in motion, has little influence in determining the direction and destination of the criminal suit. That begs the question of why DuPont, which does upward of $3 billion of sales to China per annum, decided to blow up the cozy little world of titanium dioxide.

The answer may lie in the planned explosive growth in Chinese chloride process titanium dioxide output, and the uncertain fate of DuPont's own titanium dioxide project in China, at Dongying, Shandong Province.

In addition to the 100,000 tpy greenfield project at Pangang Chongqing cited in the indictment, Jinzhou recently announced its own plans for a 200,000 tpy chloride process expansion that would make Jinzhou the biggest producer in China and the one of the five largest titanium dioxide companies in the world - hardly music to DuPont's ears. [3]

With hundreds of thousands of tons of high quality chloride-process rutile titanium dioxide pouring out of Pangang and Jinzhou's plants, DuPont's titanium dioxide business would be under intense pressure, on both sales and profits, in the Asian markets that DuPont sees at its future. At the same time that Chinese chloride-process capacity was gearing up, DuPont was having no success in getting its 200,000 ton per year world class, $1 billion titanium dioxide plant in Dongying off the ground.

In something of an anomaly for a product and technology that China considers a national priority, the Dongying agreement, signed in 2005, has been mired in the approval process.

Quite possibly, the Chinese government, bearing in mind the remarkable strides domestic industry was apparently making on its own in perfecting the chloride process, saw no objection to slow-walking the Dupont project.

According to a 2007 report in the investigative journal Southern Weekend, there was considerable unease within the China's chemical establishment about the competitive pressure that DuPont's Dongying plant would bring to bear on the domestic Chinese titanium dioxide industry.

Much of the specialist input for the article was provided by Liu Changhe, a vice president at Jinzhou Titanium who also participated in the environmental reviews for the Dongying project.

Ironically - if ironically is the right word - Liu recommended that, when considering the DuPont project, the Chinese government give full consideration to protecting the innovations pioneered by the fledgling Chinese titanium dioxide industry.

Liu told Southern Daily:
Developed countries impose various limitations (GATT agreements, technical barriers, intellectual property, chemical products safety regulations, etc.) to protect the existence and development of their national industries. Our government should adopt similar methods ... The nation should protect and treasure the achievements of forty years of independent innovation in the domestic titanium dioxide industry. [4]
Protectionism aside, there are valid reasons for thinking twice about putting a titanium dioxide plant in one's back yard.

Despite DuPont's advances in process technology, titanium dioxide production is still a dirty, nasty business. Almost 2,000 inhabitants of DeLisle, Mississippi, lined up in an attempt to sue DuPont for illnesses caused by its plant.

The chloride process, though significantly more parsimonious than the sulfate process, still produces millions of tons of tainted wastewater that are uneconomical to treat. The problem is compounded by the fact that DuPont was apparently trying to design the Dongying plant around ilmenite, a low-grade feedstock which generates the most wastewater.

In 1985, DuPont had tried to obtain approval for a titanium dioxide plant processing low-grade ilmenite in Lu Kang, Taiwan, and handle its waste problem by dumping the wastewater into the ocean. The ensuing uproar is considered the beginning of Taiwan's environmental movement. The Lu Kang plant was discarded and, after two years of process tweaking and local outreach, the plant was built at an inland site on Taiwan, Kuan Yin.

Critics in the People's Republic of China noted that, in response to local pressure, DuPont decided to run the Kuan Yin plant on a high-grade feedstock called rutile, which produces less waste; however, it was still trying to get the low-grade (presumably lower cost) and more polluting ilmenite feed approved for the Dongying plant.

Rutile is moving into shortage while there is plenty of ilmenite around the world. It is understandable that DuPont would want to build a plant that utilized the cheaper low-grade feedstock; and maybe DuPont's Chinese competitors wanted to make sure Dongying was locked into a more expensive feedstock instead.

To deal with the immense amount of waste the plant would generate while running ilemnite, DuPont proposed to inject it 3,000 meters underground. At the cost of $20 million, according to Southern Weekend, a test well was bored near Dongying to test the feasibility of the idea.

Injection is a relatively recent technology forced upon manufacturers because dumping the waste, not only acidic but also containing a stew of heavy metals and other toxins, into a river or ocean is no longer an option anywhere in the world.

Chinese concern that deep injection technology is not a magic bullet, indeed that it is a potential mare's nest of unintended consequences, is not unfounded.

In 2009, Dr John Ayers of Vanderbilt University described the unforeseen consequences of the deep injection solution in his blog that apparently occasioned its abandonment at DuPont's Tennessee plant:
[T]he acidic solution dissolves the limestone, which results in the formation of large caves deep underground. Eventually the weight of the overlying rock layers causes them to collapse, breaking into pieces, falling, and filling the caves. This shatters the confining layer and makes it permeable, so that the wastes can rise up into the aquifers. The other problem is that, as shown in the reaction, limestone dissolution produces CO2 [carbon dioxide] gas, and the pressure of that gas can build until it shatters the overlying rock and escapes. Either way, it seemed likely that the confining layer would eventually be compromised. So, to their credit, DuPont came up with a new solution that was even more environmentally friendly but (they claimed) even more expensive. Since around the year 2000 DuPont has been reacting the ilmenite with sodium carbonate, and according to the DuPont engineers the only by-product is harmless FeCO3 (the mineral siderite), which is used to make bricks for construction. However, recently it was learned that this process produces dioxin as a by-product. Pure Dioxin is the strongest poison known to man (it is the neurotoxin in Agent Orange), and the New Johnsonville Plant is the fourth-largest producer of dioxin in the US. [5]
In fact, Dupont's three US titanium dioxide plants all rank in the top dioxin polluters in the United States.

It is possible that DuPont saw the handwriting on the wall: that it was unlikely to get approval for its Dongying plant, and it was increasingly likely that Jinzhou, Pangang, and who knows who else would try to push DuPont out of the titanium dioxide market using technology suspiciously similar to DuPont's own.

To maintain its global market leadership, DuPont is adding 350,000 metric tons of capacity at its five existing plants in the US, Mexico, and Taiwan, at a cost of approximately $1 billion. DuPont's May 2011 press release for the capacity increase contained a statement of "continued commitment to the current Dongying (China) greenfield plan," but it appears the company is placing its near-term and mid-term bets elsewhere. [6]

The calculation may be that DuPont is sufficiently entrenched and localized in its major Chinese agricultural and polymer businesses to decouple them from a confrontation with the Chinese government over its titanium dioxide policy.

With the criminal indictment and cooperating witnesses in Oakland, DuPont may have enough leverage to get the Chinese government to settle in a manner satisfactory to DuPont. However, given the prospect of metastasizing criminal and civil proceedings in multiple jurisdictions, it remains to be seen if this is a situation that either side still has the power to manage.

Advanced production technique guiding the development of titanium dioxide business in China, JTC, Apr 12, 2011.
2. Click
here to view the picture.
About Us, JTC.
4. Click
here for the Chinese text.
Case study: DuPont Plant, New Johnsonville, TN, Sustainability Blog, May 4, 2009.
DuPont Expands Global titanium dioxide Production, Paint Square, May 16, 2011.