Extruder and machinery supplier face off in court

When Walter Wang, owner and CEO of the world's largest plastics pipe manufacturer, decided to expand into mainland China in 2012, he never thought his new business would be impacted by his longstanding extrusion equipment supplier in a way that would end up in court.

The heir to the Taiwanese conglomerate Formosa Plastics Group and owner of Los Angeles-based pipe extruder JM Eagle embarked upon a grand mission — to make tap water in China safe to drink, a revolutionary concept for the country's 1.4 billion residents. As a first step of his “Eternal Spring” initiative, Wang decided to invest $440 million to build a pipe plant in northern China.

He named the new company Hebei Quanen High-Tech Piping Co. Ltd.

Fast forward four years, Quanen has fallen behind on its original schedule, and the cause, according to the company, was extrusion machinery supplied by Bad Oeynhausen, Germany-based Battenfeld-Cincinnati Extrusion Holding GmbH.

On May 24, three months after Battenfeld-Cincinnati allegedly missed a deadline to resolve all machinery issues, Quanen filed a lawsuit against Battenfeld-Cincinnati in the California Superior Court in Los Angeles for a number of complaints — design defect, breach of warranty, negligence, intentional misrepresentation, and negligent misrepresentation.

The civil case — involving machinery made in Germany, the United States and China, for a U.S.-owned company working on a major Chinese government project — may be a case of plastics industry globalization gone wrong.

Battenfeld-Cincinnati denies Quanen's allegations.

“Battenfeld-Cincinnati does not publicly comment on pending legal matters, but we can tell you that the allegations are without merit and we intend on vigorously defending ourselves if necessary,” Gerold Schley, CEO of Battenfeld-Cincinnati, said in a July 15 statement

“As a company, we stand behind the quality of our products and ensure that our manufacturing practices comply with all applicable laws and contractual requirement,” Schley said.

A trial date has not been set.

Lawsuit filed in Los Angeles

In the suit, Quanen says it chose to file the complaint in California because the essential terms of the contract between Quanen and Battenfeld-Cincinnati were negotiated and agreed to at a meeting in Los Angeles on Aug. 24, 2012.

According to the lawsuit, Quanen agreed to grant Battenfeld-Cincinnati $75 million of total business, and in return, then Battenfeld-Cincinnati CEO Jurgen Arnold agreed to extend a 40 percent discount. In a phone interview with Plastics News, Quanen CEO Franco An, who also participated in the meeting, said the 40 percent discount is “common practice” in the industry. “Just a numbers game.”

In September 2012, as part of the $75 million deal, Quanen ordered 16 polyethylene pipe production lines and nine PVC pipe lines — totaling annual capacity of more than 200,000 metric tons — for its Hebei plant, with a total price of $38 million.

Quanen's An said the plan was to start with the Hebei plant and then replicate the project in other locations such as Chengdu — which would have meant buying more machines from Battenfeld-Cincinnati as part of the $75 million deal.

According to the suit, Battenfeld-Cincinnati decided to make some parts in Europe and/or the United States, and other, more basic parts, in China.

The plan was to assemble finished machines in Hebei, using components made at multiple Battenfeld-Cincinnati factories. According to the lawsuit, Battenfeld-Cincinnati had never built extrusion lines that way, assembling them at the customer's plant without integration and final runoff at the machinery company's plant.

Quanen's sister company JM, the world's largest plastics pipe extruder with estimated sales of $2.45 billion, has been a Battenfeld-Cincinnati customer for several decades, purchasing “tens of millions of dollars” of extrusion equipment, according to the suit.

However, a slew of serious problems started to emerge with the Quanen project, according to the lawsuit.

To begin with, when the parts arrived at Quanen, Battenfeld-Cincinnati technicians had “numerous difficulties integrating the parts for the various lines, causing substantial delay,” according to the suit.

“The problem was exacerbated by the fact that, as the Battenfeld Cos. later acknowledged, some of the parts made in China as a cost-cutting move malfunctioned or did not work as intended, creating additional delays,” Quanen said in the lawsuit.

Installation begins

PE pipe extrusion lines were installed beginning in 2013 and PVC lines beginning in March 2014. Quanen said the commissioning process — testing after installation — revealed design flaws including problems with the sizing sleeve, saw design errors, puller design issues, cooling system issues and gearbox leakage, among others.

Quanen said it has tried to work with Battenfeld-Cincinnati to resolve the issues, with numerous calls, emails, face-to-face meetings, and equipment trials that generated substantial scrap material and incurred other costs, according to the lawsuit.

Battenfeld-Cincinnati worked to solve the issues, including sending its chief engineer to the Quanen plant, but many issues remain unresolved, according to the suit.

“To this day, the PE lines remain plagued with problems that frequently require work-arounds and that often cause shut-downs and other delays, generating substantial additional costs for Quanen, posing safety concerns at the plant and jeopardizing its relationship with its customers,” Quanen said in the lawsuit.

The PVC lines “have never been ready for production,” according to the suit, which adds: “There is significant doubt that these defective lines can ever be made operational so as to approach the promised output of 2.5 metric tons per hour.”

An said the PVC lines cost more than $18 million. As of today, the Hebei plant essentially has no PVC pipe capacity, he said.

Quanen said the equipment has caused “enormous disruption” in Quanen's business relationships. One of its largest customers, the Chinese government, ordered 13,123 meters of 1,200 millimeter diameter PVC pipes. But the pipes produced on one of Battenfeld-Cincinnati lines exploded on two occasions during pressure tests on the job site, according to the lawsuit.

Quanen had to replace the failed pipes with more expensive PE pipe, causing additional cost of more than $1.5 million. The business relationship was also “severely damaged,” according to the lawsuit.

Quanen said Battenfeld-Cincinnati has acknowledged that it designed and manufactured the machinery according to U.S. testing standards instead of China's GB testing standards. And that is a “major likely cause” of the issues, according to the suit.

“We could have bought similar equipment from Chinese machinery makers that would cost a small fraction of the Battenfeld-Cincinnati price,” An said, “but we trusted Battenfeld and purchased complete lines from them.” He added that the extruders were made in the U.S. and in China, and the dies were manufactured in Germany.

“I don't understand,” he said, “we have done everything we could to work with them to resolve the issues, modifying the screw, changing the resin formula, but there have not been any [effective] solutions.”

An said the payment terms for the $38 million order for the Hebei plant was 30-50-20, meaning 30 percent in down payment, 50 percent to be paid after installation and as testing begins, and 20 percent after successful commissioning. Quanen has paid $34 million so far, he said.

Quan is suing for compensatory damages as well as exemplary and punitive damages. “Two years of business and projects,” An said.

Senior reporter Bill Bregar contributed to this report.