Kate O’Keeffe
WASHINGTON—U.S. officials forged an uneasy compromise to let DuPont sell its sustainable-materials business last year to a Chinese company while ensuring the technology behind it never left the U.S.
The arrangement hasn’t worked as planned, according to people familiar with the matter, exposing flaws in a national-security review process on the front lines of a battle over technology between the U.S. and China—and ultimately prompting an investigation by the FBI.
Divisions on the cabinet-level committee that screens sensitive deals involving foreign buyers were so deep that the government review took more than a year, including an unsuccessful appeal for President Biden to intervene. And the solution members ultimately settled on was undermined in just a few weeks.
At issue was a DuPont technology used to make a key component of a more sustainable version of nylon. After initially describing the invention as revolutionary, DuPont decided a few years ago to sell the business. It found a willing buyer in China, prompting DuPont to apply for permission to proceed from the Committee on Foreign Investment in the U.S., or Cfius. The panel, led by the Treasury Department, includes representatives of the departments of Defense, Justice, Energy and Commerce and other agencies.
The Biden administration early on identified Cfius, whose job is to ensure that such deals don’t end up putting sensitive U.S. technology, data or real estate in hostile hands, as a linchpin in plans to square off with the world’s second-largest economy and reorient the U.S. economy away from China. In another prong of those efforts, the administration on Wednesday banned U.S. investments in some Chinese semiconductor and quantum-computing companies starting next year.
On DuPont, members of Cfius were split on how to proceed. The reason: a U.S. intelligence assessment that byproducts from one of DuPont’s manufacturing processes could theoretically serve as a high-quality base for fuel used in cutting-edge weapons. That had the potential to aid China when Washington is deeply concerned over Beijing’s military expansionism.
Treasury Secretary Janet Yellen and Defense Secretary Lloyd Austin disagreed about whether to block the DuPont deal. PHOTO: TOM WILLIAMS/CQ ROLL CALL/ZUMA PRESS
Defense Secretary Lloyd Austin argued in a tense video call with Treasury Secretary Janet Yellen and others that the deal should be blocked. Treasury didn’t agree. The agency found those concerns too abstract, and believed that scuttling a transaction on such grounds would amount to improper market interference.
Officials on the Cfius panel reached a complicated compromise to approve the sale, which closed in May 2022. But no sooner had it been signed than Cfius was told its effort to protect the industrial secret involved hadn’t worked. The process of figuring out what went awry is still under way.
Cfius deliberations are confidential. This article is based on interviews with people familiar with the discussions of the companies and government agencies involved in the transaction and its aftermath.
‘Sustainable Nylon’ Is Born
DuPont got its start selling gunpowder to the likes of Thomas Jefferson, and grew into a titan of U.S. industry in the 20th century with inventions such as nylon by scientist Wallace Carothers and Kevlar by Stephanie Kwolek.
The company also became the largest employer and philanthropist in Delaware, developing a decadeslong relationship with Joe Biden and shaping his views on the American economy before he became president.
DuPont scientist Wallace Carothers’s research in high polymers in 1928 led to the development of nylon. PHOTO: HULTON ARCHIVE/GETTY IMAGES
In 2007, with a British partner, DuPont opened a $100 million factory in Tennessee to use corn to produce an ingredient called BioPDO to make everything from makeup to a replacement for petroleum-based nylon.
The U.S. energy secretary, at the launch, said the facility would build on U.S. efforts to reduce its reliance on imported oil and fight climate change.
DuPont’s innovation involved taking bulk corn grown in the Midwest, crushing it, mixing it with enzymes and creating a sugar. That sugar could be fed into a fermentation tank with bacteria bioengineered to produce the unique liquid known as BioPDO. The substance could then be used to make products such as cosmetics and detergents, and to produce pellets that could be spun into fibers.
One of the resulting products was marketed as “Sorona” and used in clothing and carpeting. While polyester is stiff and cheap and nylon is resilient but expensive, Sorona appeared to have the best of both, including just the right amount of stretch. “We talked about it as the ‘billion-dollar kink,’ ” said Ray Miller, who led the development of the product and retired from DuPont in 2011.
In 2017, under pressure from activist shareholders, DuPont merged with Dow Chemical, and then the combined company split into three. The biomaterials business didn’t fit into the new structure, and DuPont sought buyers. It settled on the Huafon Group of China, a private industrial concern that is one of the world’s largest manufacturers of polyurethane materials.
DuPont announced the deal without disclosing the buyer in the fall of 2020 and sought the blessing of Cfius.
A model shows off her nylon stockings in 1955, and another model, in 2019, wears a faux fur coat made with Sorona fibers.
Established in 1975, Cfius began scrutinizing Chinese deals more aggressively during the Obama administration. That focus sharpened during the Trump administration after Congress in 2018 expanded the panel’s powers. But the committee still struggles to be effective at times. It is at the center of a messy, yearslong review of the popular Chinese-owned social-media app TikTok.
In cases when Cfius approves a deal with conditions, compliance largely depends on the companies themselves. When parties violate a Cfius agreement, they are rarely punished: The panel has announced only two fines for noncompliance.
Deep internal divisions among its members are a challenge. The Pentagon and other departments that focus on security issues often push for a broader interpretation of foreign threats. The Treasury and Commerce Departments, tasked primarily with championing U.S. industry and economic interests, tend to take a narrower view.
Pentagon officials wanted Cfius to push DuPont to sell the business to an American buyer. Given the intelligence assessment, they worried about the possible military implications of the biomaterials technology moving to China, where laws mandate that private companies comply with Chinese Communist Party demands.
The officials also wanted to know why DuPont would agree to a deal with Huafon despite earlier misadventures with Chinese partners, including intellectual-property disputes involving Sorona that prompted Chinese authorities in 2017 to raid DuPont’s Shanghai offices and demand passwords to its research network.
Huafon’s chairman has described the deal as part of the company’s strategic efforts to strengthen its supply chain in biomaterials.
DuPont’s corporate headquarters in Wilmington, Del., in 2015. PHOTO: MARK MAKELA/GETTY IMAGES
Some U.S. officials suspected that DuPont selected Huafon to curry favor with Beijing as DuPont sought greater access to China’s booming electric-vehicles market. The U.S. officials considered any such arrangement an unsavory quid pro quo.
A DuPont spokesman said the Huafon deal wasn’t part of any attempt by the company to gain greater market access in China, adding that by the end of the sales process there were no U.S. bidders interested in the purchase.
Treasury and Commerce officials found their counterparts’ concerns around the intelligence assessment overblown, and they deemed considerations such as DuPont’s possible motive for the sale irrelevant. They also thought the idea of trying to engineer a sale to a U.S. buyer was inappropriate.
The disagreements, often tense, dragged on for months.
Cfius officials pushing to block the deal asked to meet with Biden to break the stalemate. The White House declined, instead offering a meeting with Jake Sullivan, the national security adviser. Sullivan said he agreed the deal presented substantial risks but directed the departments to work it out among themselves.
A Complicated Compromise
The compromise Cfius settled on was to allow the purchase to go ahead with a major condition: Huafon wasn’t to gain access to the proprietary fermentation process DuPont used to make the corn-derived product, BioPDO, at its Tennessee plant.
To meet the condition, Huafon created a new U.S. holding company called Covation Inc. Under that umbrella, two more entities were formed: Covation Biomaterials, which holds the majority of the assets from DuPont’s biomaterials business; and CovaPDO, a small carve-out that Huafon wasn’t permitted to access because it holds the secrets of the BioPDO production process.
Huafon and the three Covation companies signed what is known as a national-security agreement with Cfius pledging to honor those terms. With Cfius’s blessing, DuPont and Huafon then closed the $240 million deal in May 2022.
A month later, as Defense Department officials were planning a trip to China to ensure that the key technology hadn’t made its way to Huafon, they got some very unwelcome news: CovationBio employees found information on their servers that should have stayed within CovaPDO, meaning the Cfius effort to ringfence the sensitive technology had been undermined.
FBI headquarters in Washington, D.C. PHOTO: TING SHEN FOR THE WALL STREET JOURNAL
Some “slippage,” as it is known among specialists who work on company integrations, isn’t uncommon. But Pentagon officials were furious and suspected the potential breach of the Cfius agreement was deliberate, following a preliminary investigation into the matter. They, with the support of their Energy Department counterparts, called in the Federal Bureau of Investigation, which launched a criminal probe, the status of which couldn’t be determined. The FBI declined to comment.
In the aftermath, DuPont and Covation, in statements to the Journal, traded blame on who was responsible. Covation said DuPont transferred the information to the wrong corporate entity; DuPont said it acted at Covation’s direction.
Covation said that after its employees noticed the problem, it locked down the relevant information and hired an auditor who reports to Cfius to investigate. It added that the investigation hadn’t found evidence that the information was accessed by anyone outside Covation or the U.S., and said Huafon hadn’t sought or received access to the technology at issue.
In September, in a move prompted in part by difficulties in handling the DuPont deal, Biden issued an executive order heightening scrutiny of deals that may give China and other adversaries access to critical technologies.
The order, the White House said at the time, was meant “to ensure that Cfius remains an effective tool to combat these threats now and in the future.”
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