What pushed the steelmaker to this drastic action? Some observers say it could be connected to past technology leaks to China and South Korea.
At stake is electrical steel sheet, a key material for electrified vehicles.
For Nippon Steel, electrical steel sheet brings back bitter memories of its treasured tech being leaked to Asian rivals.
In April 2012, the Japanese steelmaker sued a former engineer and South Korea’s Posco for stealing trade secrets in electrical steel sheet technology.
The lawsuit surprised many. Although technology leaks through retired engineers had long been pointed out, few cases had been brought to court, owing to the difficulty of proving the industrial theft.
Nippon Steel was able to sue rival Posco because of shocking court testimony by a former Posco employee in a different case in South Korea.
The case involved the ex-employee’s illegal sale of electrical steel sheet technology to Baoshan.
“I am innocent,” the former employee told a Korean court.
“The secret information Posco alleges I stole was originally technology that Posco itself stole from Nippon Steel,” the former employee said. “I merely handed it over to Baoshan.”
The employee was found guilty by a high court in South Korea in 2008.
The testimony gave Nippon Steel the evidence it was looking for. And with it, the Japanese steelmaker sued its former engineer and Posco in Tokyo District Court.
Nippon Steel also sued Posco in the US, while the Korean steelmaker countersued in South Korea, denying the allegation.
In September 2015, the dispute was suddenly settled, with Nippon Steel announcing an out-of-court settlement with Posco.
Given that the South Korean company agreed to pay ¥30 billion, the most ever received by a Japanese company in a settlement of an intellectual property dispute, it is fair to conclude that there had been industrial espionage committed by Posco.
The alleged patent infringement by Baoshan this time is related to nonoriented electrical steel sheet, which is different from the conventional electrical steel sheet that Posco acquired back then, according to the Japanese steelmaker.
Despite technological differences, however, there could be connections. Nippon Steel has been conducting research and development in electrical steel sheet since the 1980s.
In light of the espionage described by the former Posco employee, it may be the case that the technology that was passed from Nippon Steel to Posco and then to Baoshan constituted the basis of the nonoriented electrical steel sheet in question.
Nippon Steel declined to comment on the possibility of technological leakage to Baoshan.
From the 1970s to the mid-2000s, Japan led the world in the number of patent applications. It has since dropped to third place, with fewer than 300,000 applications in 2020. China filed about 1.4 million, while the US filed 650,000.
Patent lawsuits, meanwhile, numbered about 170 in Japan for 2017 – less than a twentieth the US figure and roughly a hundredth of China’s.
The number of lawsuits in Japan is small not because there is less infringement, but because disputes are often settled out of court.
Japanese companies tend to avoid disputes with customers. Even with rivals, they often opt for cross-licensing agreements to mutually recognise intellectual property rights out of fear that both sides might end up unable to produce goods once they go to court.
A legal battle between Nippon Steel and Toyota, leaders of the Japanese steel and auto industries, therefore, is quite extraordinary.
One reason may be that electrical sheet is used in motors for electrified vehicles and is a key technology in the age of decarbonisation. It is expected to become vital to economic security, like semiconductors.
Requiring a specialised manufacturing process, production of the sheet is difficult. Manufacturers need proprietary technology and know-how. Nippon Steel sees the sheet as something that cannot be readily made by other companies.
For Nippon Steel, which is exposed to cost-cutting competition from South Korea and China, electrical steel sheet is an important high-value-added product.
It was unacceptable to Nippon Steel that Baoshan continued producing the sheet in violation of its patent and had even won a supply order from Toyota.
That the top Japanese steelmaker sued not only Baoshan, but also Toyota, was possibly aimed at keeping other carmakers in check.
“It is highly regrettable that we have been sued because the latest lawsuit should be addressed between the material suppliers,” said Jun Nagata, an operating officer at Toyota.
“On the electrical steel sheet in question, we confirmed with the producer that there had been no infringement of other companies’ patents before concluding a contract,” he said.
The battle over the key technology has blown the lid off a tradition of big Japanese companies avoiding open disputes.