DECEMBER 22, 2000 VOL. 26 NO. 50 | SEARCH ASIAWEEK

Gearing Up for Battle
Shanghai's Baosteel gets ready for WTO entry
By ALLEN T. CHENG Shanghai

Zhao Kun remembers his first day as boss. "When I first came here, I decided to cut the staff from 1,300 to 700," says the chairman of Shanghai Baosteel Yichang Steel Strip Co., part of the Baoshan Iron & Steel Group, or Baosteel, China's largest and most profitable steel conglomerate. "Many were not happy with the layoffs," Zhao, 45, recalls. "But they helped save the company." The former People's Liberation Army paratrooper isn't done: "My goal is to cut 200 workers by the end of next year, when I have a fully upgraded, modern facility."

It's easy for Zhao to talk tough: in 1998, economic reform czar Premier Zhu Rongji instructed Baosteel to make Yichang profitable, and Zhao was brought in to make it happen. Yichang is one of Zhu's pet projects: he is trying to cultivate tough resolve in managers of China's state-owned enterprises. Tens of thousands of SOEs are losing billions of renminbi a year and sorely in need of restructuring. The upgrading of Yichang dramatizes the challenges facing such enterprises; most will never make profits. But with powerful financial and political backing, a determined management team can turn a losing state-owned enterprise around. Efforts at the steel mill and at parent Baosteel also show how serious China is in making its steel industry strong enough to face competition under the World Trade Organization, which China is scheduled to join next year.

Like countless other state firms struggling with outdated equipment and a bloated workforce, Yichang had lost money from the day it was founded. But it is lucky too: Premier Zhu set it up in 1989 when he was Shanghai mayor, and he has taken an interest ever since. He thought quality cold-rolled steel, a raw material for everything from appliances to cars, was indispensable to China's industrial drive. Zhu could provide only limited funds for Yichang, which had to settle for 1950s technology. But upon becoming premier in 1998, he ordered Baosteel to take over and fix Yichang.

Zhao wasn't keen to take over as Yichang's new boss. But the executive, who has a doctorate in construction and materials management from Shenyang's Northeast University, grit his teeth and went to work. "I asked for full latitude to make decisions," he says. He knew that in other Shanghai steel plants, retrenchment led to worker resistance — and reprisals against bosses.

Yet less than six months into the job, Zhao let go 500 workers — two-fifths of Yichang's labor force — while raising production fourfold and slashing prices. "My goal was to make money as soon as possible," says Zhao. "It was that or a bleak future." Three months after the initial wave of layoffs, Yichang was making money. Last year it recorded its first profit: $1.5 million on sales of $204 million. For 2000, turnover is tipped to reach $268 million, and net income $2.4 million.

Shattering the iron rice bowl that has guaranteed employment for workers under China's socialist system isn't easy. To dampen unrest, Yichang helped many of those laid off with seed money to set up grocery stores, restaurants and other small businesses. When sales and profits leapt, the company boosted pay by 30%. To improve attitudes, Zhao has held regular staff lectures on new management techniques, stressing the need for initiative, dialogue and individual performance. "One must get the management right first," Zhao says. "The money comes later."

Yichang's guardian angel still looks out for his project. The State Council, which Zhu heads and which owns Baosteel, has rewarded the subsidiary with $83 million in low-interest loans. That is part of $110 million that Baosteel is spending on Yichang — $60 million for two state-of-the-art cold-rolling lines from Mitsubishi Heavy Industries and $1.6 million on a cleaning system from Rockwell Automation of the U.S., to minimize defects in its product. Zhao saw the latter at a fair in California last year, recounts Scott Summerville, managing director of Rockwell Automation in China. "Not every Chinese manager sees the need for automated systems. Mr. Zhao did."

Beijing wants to turn Baosteel into one of the strongest steel conglomerates in the world, says Sun Jian of U.S. consulting firm A.T. Kearney. The group of more than 30 plants has raised $930 million in the largest listing in Shanghai. With the money, it will acquire and restructure more mills, as mandated by the State Council. Shanghai alone has more than a dozen steel plants on the verge of bankruptcy, including several under Shanghai Metallurgical Holdings.

Ultimately, state-ordered mergers may drag competitive players like Baosteel down. Privately, Baosteel executives grumble about taking over badly run, poorly equipped plants. They expect to spend up to $5.4 billion in the next five years on acquisitions and new facilities. Analysts doubt that they can raise that kind of money from the markets. Despite the 46% surge in Baosteel's share price on its Dec. 12 debut, it has delayed listings in Hong Kong and New York. Even with state support, gearing up industries for global rivalry isn't easy. The steel sector faces a global glut, too.

To address both the need for capital and the threat of competition, Baosteel is selling a stake to Korea's Posco, the world's largest steelmaker, and will be talking with Nippon Steel, the global No. 2, about a similar link when its chairman visits Japan next month. For Yichang, meanwhile, Zhao predicts that "we can grow our sales fourfold by 2005. I want to hit $1.2 billion." Going global, it seems, brings with it some world-sized ambitions.

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