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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

In a Sorry State

Strategies in salvaging state firms


THE EXPERIENCE IS APPARENTLY more common in China these days. A medium-sized U.S. manufacturer nears a joint-venture deal with local interests. Just before the signing, the Chinese want to include another state company. The new partner turns out to be a dog -- a seriously overstaffed government enterprise awash in red ink. “This isn’t the first time I’ve heard this,” says David Seabrook, managing director in Hong Kong of Ray & Berndtson, an international executive search and consulting firm. “The Chinese are getting very inventive about solving the problems of their state companies.”

And well they should. Amid stunning and sustained economic success for China as a whole, loss- making state-owned enterprises (SOEs) represent a huge drain on government coffers and, warn economists, a significant future threat to economic health. The World Bank estimates that China subsidized its SOEs in 1993 to the tune of $14.4 billion, against a $7.8-billion budget deficit that year. It is widely believed that at least half of government firms in China are losing money.

An international consultancy, AT Kearney, has completed one of the most in-depth management studies yet done on business in China (see main story, page 50). One aim was to shine a light on China’s management problems in SOEs. Researchers studied 15 government corporations on management and personnel issues. The group reflects the problems in many industries including textiles, petrochemicals, electronics, consumer goods and industrial equipment.

All 15 SOEs interviewed reported overstaffing. Eight said that excess employees “not assigned any responsibilities within the enterprise” were more than 8% of the total workforce. It would have been worse, the study adds, “if overstaffing takes into consideration personnel who are underemployed.” Many economists believe SOEs have about a third more employees than necessary.

Which is why Beijing is looking to share the problems with foreign companies as the price of entry to the Chinese mega-market. But some problem SOEs won’t attract interest from even the keenest multinationals. Take Anshan Iron & Steel Works. Han Xiulan, senior researcher for the Institute of Industrial Economics, says the state firm uses only 190,000 of its half-million employees. She says the staff should really be cut to 100,000. But, for China’s leadership, such a reduction is unthinkable for its impact on social stability.

In the absence of such a drastic step, Beijing is attacking the problem with several more moderate actions. Transferring the burden to foreigners sometimes works. Majdi Abulaban heads a joint venture producing automobile wiring harnesses. He says the JV has completely remodeled its partner’s former manufacturing plant and installed a state-of-the-art assembly line worth $12 million. It is too soon to say for sure because the enterprise was formed only at the end of 1995, but results so far, he says, have been encouraging.

For SOEs that have not been paired off with foreign suitors, diversification is sometimes the best option. Ye Xinghu is assistant general manager of the Shanghai Foreign Service Co., a state enterprise that used to be the sole official provider of Chinese employees to foreign representative offices in the city. He says the firm needed to expand to survive after losing its monopoly in 1994. Ye ticks off some of the SOE’s new businesses: “Foreign trade, real estate, travel, advertising, consulting, restaurants -- we can’t rely on just one business anymore.”

AT Kearney found other strategies. Some SOEs encourage early retirement. Others develop new products -- and thus new jobs. Han says Qingdao’s Double Star Industrial Group used to produce only rubber boots for the People’s Liberation Army. After the plant started faltering in the 1980s, it diversified into athletic shoes and regained profitability. A few SOEs have set up training centers to raise the ability of their own managers, and some retrain workers and help them obtain transferable skills that will help them get jobs elsewhere

However, virtually all the solutions require one human commodity especially scarce in China these days: qualified managers. SOEs face particular challenges in hiring executives, having trimmed the costly benefits -- housing, pension, medical care, education, to name a few -- that once made up for low pay.

At the same time, the government has made it easier for SOE managers, especially lower-level ones, to transfer to the private sector. Ye, 47, recalls that in the early years of China’s reform it was impossible for the Shanghai Foreign Service Co. to free many desirable managers from their state employers. “Many foreign companies couldn’t understand why, in a city the size of Shanghai, it took six to eight months for us to find a candidate,” he says. But now, it is much easier to go private. SOEs now offer higher salaries, but while they’ve become more competitive with foreign companies, a gap remains. For one thing, a socialist ethic against salary disparities remains powerful. “In a country such as ours,” says researcher Han, “huge pay disparities are bound to raise social protest.”

The best solution for state enterprises, say experts both inside and outside China, is to improve management training and thus the pool of workers capable of coping with the challenges. Although some 26 Chinese universities have launched MBA programs in recent years, a Sino-European joint venture remains the only accredited one.

Seabrook says he has heard rumblings in support of a stopgap solution: bring in foreign managers to help reform state companies. “However, many in the government are opposed to doing anything like that,” he says. So state-owned enterprises just have to slug it out with foreign companies for the limited pool of Chinese managers.

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