Shiho Fukada for The New York Times
A Cathay Biotech factory in Shandong Province. The company makes diacid, a chemical ingredient used in nylon, the secret for which it says was stolen by a government-backed rival.
By DAVID BARBOZA
Published: December 7, 2011
Cathay Biotech, a private company here, developed a way to ferment hydrocarbons in industrial vats and turn them into advanced nylon ingredients for use in lubricants, diabetes drugs and other 21st-century marvels.The patents Cathay won prompted Dupont, a leading global producer of nylon, to become one of Cathay’s biggest customers. And the $120 million that Goldman Sachs and other backers have pumped into Cathay in recent years primed investors in China and abroad to eagerly await a public stock offering that had been planned for earlier this year.
They’re still waiting.
According to Cathay, a factory manager stole its secrets and started a rival company that has begun selling a suspiciously similar ingredient, undermining Cathay’s profits. Instead of planning to go public, Cathay is now struggling to stay in business.
In this counterfeit-friendly nation, employees run off with manufacturing designs almost daily. But according to Cathay, this was copying with a special twist: the new competitor, Hilead Biotech, is backed by the Chinese government.
Court documents show that Hilead was set up with the help of the state-run Chinese Academy of Sciences. And because the project fit national and local government policy goals, Hilead received a $300 million loan from the national government’s China Development Bank. The loan came after the company won the approval of the party secretary of Shandong Province, one of the country’s highest-ranking public officials.
“We created a great product and they stole it,” Liu Xiucai, Cathay’s 54-year-old founder and chief executive, said in an interview in his office.
In a lawsuit, Cathay has accused Hilead of patent infringement and theft of trade secrets. Hilead has countersued, claiming Cathay stole patents from the Chinese Academy. The government has taken Hilead’s side, stripping Cathay of one of its top patents.
Although the specifics of the case are in dispute, the broad outline follows what some economists and academics consider a disturbing pattern.
After more than a decade in which private companies have been the prime engine of China’s economic miracle, the Chinese government is eager to control more of that wealth — even if that means running roughshod over private companies.
Chen Zhiwu, a professor of finance at Yale University and a harsh critic of the state’s dominant role in the economy, says the Chinese government is smothering the private sector. “When the government is involved in business, it’s hard for private companies to compete,” Professor Chen said.
The usurping of private enterprise has become so evident that the Chinese have given it a nickname: guojin mintui. In Mandarin, that roughly translates as “while the state advances, the privates retreat.”
Some prominent Chinese economists are warning that the potentially corrosive effects of an approach that favors government companies at the expense of the private sector could eventually stifle innovation, saying it could stunt China’s long-term growth and quash the rising aspirations of the nation’s 1.3 billion people.
“If China doesn’t deal with this problem and strengthen the private sector, this country’s growth is not sustainable,” said Xu Chenggang, a professor of economics at the University of Hong Kong.
Hilead executives declined to comment for this article. A Chinese Academy of Sciences spokesman would say only that the lawsuit against Cathay was meant to protect his organization’s “rights and benefits.”
What is clear is that Hilead, with all its government support, has been able to slash prices. Cathay has had no choice but to do likewise, costing the company as much as $10 million in profit over the last year, a drop of at least 20 percent.
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