It was the kind of entrepreneurial breakthrough that China counts on to make it a global leader in innovation. Cathay Industrial Biotech, a private company Shanghai, 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 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. ?We created a great product and they stole it,? Liu Xiucai, Cathay?s 54-year-old CEO said.
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. 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 is so evident that the Chinese have given it a nickname: guojin mintui.
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%.
Adding to Cathay?s woes, Beijing officials recently declared its particular type of nylon production a matter of ?national security? ? a designation that gives state-backed firms like Hilead even more protection and privileges and makes competing with them all the more difficult.