Boss killed by workers in clash – The risks of taking state-owned companies private

By Huang Daohen

The greatest challenge for any private company is to take over a state-owned counterpart.

The private sector was reminded of this sad truth again last Friday, when an attempted restructuring of a state steel company in Jilin Province led to a workers’ riot. The workers beat their executive to death when they learned about proposed job cuts.

The slaying was another embarrassment in the privatization of state-owned enterprises.

Workers clashed last Friday, killing their manager to vent frustrations over job cuts.

Tonggang event

Workers clash

In a dispute over who would own and operate the Jilin steel maker Tonghua Iron & Steel Group (Tonggang), Chen Guojun, the newly appointed general manager, was beaten to death by Tonggang workers on July 24.

Chen was sent by the private Beijing Jianlong Heavy Industry Group (Jianlong) to take over the state-owned group.

A day earlier, Jianlong and Tonggang’s owner, the State-owned Assets Supervision and Administration Commission (SASAC) of Jilin Province, reached a restructuring agreement that declared Jianlong would assume conrol of Tonggang.

Jianlong previously attempted a takeover, but backed off at the start of the year when Tonggang’s performance dropped. When Tonggang rebounded from its losses, Jianlong resumed its quest for control. The move was not welcomed by Tonggang workers.

The financial crisis, which began last year, directly aggravated the conflict. Local media said the average salary for a Tonggang worker had fallen to 300 yuan per month since the recession.

The clash began when workers learned Chen had come to slash 25,000 jobs at the factory of 30,000.

Last Friday morning, 1,000 workers gathered at Tonghua’s factory demanding Chen come out, Xinhua reported They refused Chen’s orders to return to work, and began pummeling him with their boots, eventually pushing him from a second-floor window, the report said.

Workers blockaded his office, preventing emergency medical staff from reaching Chen. He died at 11 pm, the report said.

A Jianlong official, who refused to state his name, confirmed Chen’s death and status as an employee. He refused to give further details.

Takeover halted

On Monday, the Jilin provincial government ordered Beijing-based Jianlong to abandon its buyout.

The order, which came over Jilin’s television, also required Jianlong to never again take part in any restructuring of Tonggang.

Jianlong had been Tonggang’s second-largest shareholder since 2005, according to its Web site. In 1999, Jianlong began to acquire steelmaking, shipbuilding and machinery businesses. The company ranked 158h in a 2008 list of China’s 500-largest companies, with 40.79 billion yuan in sales.

Tonghua produces 7 million tons of steel a year. It ranks at 244th on the same list and posted a profit of 42.8 million yuan in June.

Calls to the company’ head office in Changchun went unanswered.

Analyst: Merger policy

Managing the country’s rapid transformation from a backward socialist-style economy to the world’s third largest has been a major challenge for the govement. Official policy is to promote mergers and acquisitions in industries burdened with old technology and a surplus of workers.

Takeovers involve constructing modern plants and slashing workers from the payrolls of state-owned firms, while promoting highly paid executives trained in capitalist finance, Wen Yijun, an industrial analyst with Oriental Securities, said.

The steel sector recently came into the cross-hairs of privatization, Wen said.

China is the world’s top producer and consumer of steel, but it has too many rusting plants. The government needs to consolidate firms into big enterprises capable of challenging multinationals, Wen said.

But workers have resisted the selling of state-owned assets to private individuals. Few are willing to see their lucrative bonus packages go, Wang said.

In Tonghua and Jianlong case, there was bad blood from the start.

Reuters reported that Jianlong’s local unit secured a minority stake in Tonghua in 2005 in return for a cash infusion, during a restucturing of local state-owned metallurgical firms.

That takeover generated a lot of ill feeling, as did news that Chen earned 3 million yuan last year while Tonghua retirees received 200 yuan per month.

Jianlong pulled out of Tonghua after the global financial crisis buffeted steel markets late last year.

But after markets started to recover and Tonghua posted a profit, Jianlong decided to buy back in – this time with a 65 percent conrolling stake.

Background: Private companies’ dilemma

Private firms have become one of the driving forces behind rapid economic growth during the past decades, but a number of institutional problems must be addressed to further their development, Zhao Xiao, an economics professor at a local university, said.
The lack of a legal framework to protect private firms and match official policy is most problematic, he said.

In traditional Marxist ideology, private firms are equated with capitalism. In the past, private firms were subjected to various restrictions, if not totally forbidden.

The situation has improved since the government began an economic policy of opening up in the late 1970s, but the policy has yet to be codified in law.

Insufficient protection has held back many entrepreneurs who would otherwise reinvest and expand their businesses, Zhao said.

Private firms are also blocked from entering a number of business fields open only to state-owned companies, Zhao said.

Even in areas where private firms are allowed to enter, they face discrimination and protectionism. Private firms must accept hard-to-swallow terms regarding technology, personnel and financing to get government approval to enter a market.

In the steel sector, entrepreneurs must make inroads by buying ailing state-owned groups, he said.

Furthermore, restrictions on financing also hinder private sector development.

The four major state-owned banks continue to dominate Chinese banking, and their lending goes almost exclusively to state-owned companies, making it difficult for private firms to raise enough money to conduct business, Zhao said.

Zhao said the government should work quickly to grant equal treatment to the country’s private firms.