When Wei Zhang, founder of Yuanhao Capital, a Shanghai based investment firm, visited Shanghai Pujiang Cable a few years back, the state-owned enterprise was in dismal shape, unable to pay back its bankers the money it had borrowed from them.
But Mr Zhang’s driver was impressed. “I asked him why he thought this company was so impressive,” Mr Zhang recalls, surprised the man had a view at all. “He told me, did you see the parking lot where the management park their cars? There are at least 20 luxury cars there!”
Where the driver saw prosperity, his employer saw a symptom of the general dysfunctionality of most of China’s state-owned enterprises. At the time, the top tier of Shanghai Pujiang’s staff earned only about Rmb3,000 ($450) a month. It was predictable then that virtually every major supplier to the manufacturing company was headed by a relative of senior management; almost everyone in a position to engage in related party dealings did so and padded their expenses generously. Nobody gave a thought to the fact that customers often did not pay their bills for years, let alone made an attempt to collect the money owed.
“Everyone cheated, many receipts are fake,” Mr Zhang remembers. “You can even find diaper receipts among business expense claims. Everyone was ripping off the company.”
Today, the seemingly intractable lack of profitability of the state-owned enterprises, particularly in heavy industries such as steel, is giving rise to widespread despair.
Steel is among those sectors that generate returns below their cost of capital, according to a study on Chinese productivity from McKinsey Global Institute. Chinese “steel production has become completely untethered from real market demand and is now more than double the combined production of the four next leading producers”, says a recent report from the European Union Chamber of Commerce in China, giving a sense of the magnitude of the problem. Europe’s steel industry, including ArcelorMittal, the world’s largest steel company, has been among those suffering from the excess capacity of mainland steel firms.
Even the news that two of China’s largest and most modern steel producers — Baosteel Group and Wuhan Iron & Steel — may merge in an effort to rationalise production has not dispelled investor gloom.
Mr Zhang, however, is not among the hand-wringers. His experience after buying Shanghai Pujiang is instructive. By raising salaries and changing the incentive structure, he gave his managers much less motivation to rip off the company. “Everyone steals,” he says. “They needed to understand that they are stealing from themselves.”
Mr Zhang had much to work with as he sought to turn around the company. The group was good at its core business of making cables for bridges that span both China’s rivers and those outside the country. Shanghai Pujiang won the international contract for the restoration of the San Francisco-Oakland Bay Bridge, handily defeating Nippon Steel, partly by citing a price that was 30 per cent lower but also because its quality was sufficiently high.
Mr Zhang is a rare creature, an optimist about mainland prospects on both a macro and micro level. He believes that before President Xi Jinping’s anti-corruption drive, misbehaviour and self-dealing were rampant. The private sector firms in which he invested were barely profitable because they spent so much money on banquets for officials and under-the-table red envelopes of cash, he says. Now, such behaviour has ceased.
Yet few business people in China today feel as positive as Mr Zhang. They fear that what started as something laudatory has descended into witch hunting and persecution reminiscent of the Cultural Revolution. Perhaps it is because so many fortunes started in irregular ways that don’t bear exposure to the sunlight. Fear of being seen to be corrupt has also made government and party bureaucrats more reluctant to take decisions, making it harder for businesses to move ahead with their plans. The impact has been devastating for China’s already slowing economic growth. And there is still little consistency in how rules are enforced — who is allowed to take money out of the country and who is not, who gets a loan and who does not — these things remain unfathomable to people in the system and to those outside it.
But the story of Shanghai Pujiang is at least heartening whether it is exceptional or not.
Source: Next.ft