ancient, distant not only geographically, but also in lifestyle, China has
amazed the European world from the time when two civilizations met, and
continue to amaze right up to today. China has given Europe many reasons for
amazement, particularly in the last half a century, when this huge,
impoverished country after a long period of wars and revolutions, suddenly
started to forge ahead in the international market and in global projects.
Perhaps the mystery of the “Chinese wonder” can be unraveled faster, if we look
at the destinies of particular people who have made these great changes. Today
we will tell you about the story of one enterprise and one man – the company
Shagang, and Mr. Shen Wenrong.
The model of
southern province Jiangsu
In the middle of the 1970s, the model for Township and Village Enterprises was a result of the economic reform in the Chinese province, Jiangsu. It was a collective model of economy, based on the small mills, basically formed of farmer communities established for specific production activities. A large number of similar enterprises was formed in Jiangsu and for several years they maintained high growth rate. From 1982 till 1986 the gross output of the Township and Village Enterprises in Jiangsu increased 6.42 times. The leaders of the province acknowledged the Township and Village Enterprises model as an example of socialistic collective economy.
In comparison with public enterprises, the Township and Village Enterprises had a number of disadvantages, primarily regarding the working conditions. As opposed to state workers, small farming enterprises could not afford fair wages and labor protection for the workers. Therefore, many of these farming companies tended to transform into a state form of ownership. Shagang, a small steelworks rolling mill, was one such company. However, the state didn’t rush to take up management of the mill under the Township and Village Enterprise, and gave the cold shoulder to Shagang’s Chief Executive, Shen Wenrong. Then, in 1979, he gathered his workers and said with much regret, “The state doesn’t want to take us in, we are still farmers as before”. That was a rough time for Shagang, the production was carried out on obsolete equipment, inefficient technologies were used, and the level of power consumption and pollution was very high. The working conditions were also awful, and the company’s top management was constantly facing difficulties because of the lack of knowledge in management and technology of the steel industry. But Mr.Shen was counting on reasonable labor expenses and flexible high-performance sales in comparison to less productive and inflexible public enterprises that gave Shagang a head start. The Chinese proverb says, “Small boats cast easily” and it fairly reflects the advantages of Shagang at the beginning of production.
High hopes were laid on the model of the southern province Jiangsu, but gradually their disadvantages were revealed. The collective ownership as a form of management didn’t explicitly allow for dealing with the set of problems connected with the enterprise’s policy and capital regarding the right of ownership. The activity and vitality of the enterprises were drastically decreased by the contradictions in management; moreover, investors and buyers primarily channeled their attention to extensive economic units. “Small boats” turned out to be vulnerable to severe storms and their potential advantages gradually turned out to be risky. The huge difference in the system of management in towns and villages also influenced the difficulties for the rural enterprises. And finally, small enterprises spent a great deal of resources in the fight against competitors and internal problems.
At the beginning of the 1990s, the situation changed dramatically; many enterprises in the southern part of Jiangsu province began to break up because of debts. After 1994, the state began to control the scale of many enterprises and their capital. However, by that time, some workers and employees of some successful enterprises had already had an injection of capital, and thereby sometimes contradictions with the state policy occurred. In Jiangsu, the production cost and the growth scale began to decrease drastically in the Township and Village Enterprises and the annual average dropped by 14%. The state began to officially reorganize the Township and Village Enterprises, but in reality it just left them with hard times ahead.
At this point, Mr.Shen Wenrong made decision to change Shagang into a joint-stock cooperative enterprise, i.e. to keep the collective ownership. At that time, the company’s capital was more than 100 million Yuan. Since then Shagang has changed its legal form many times due to the legislative requirements, or its own entry on the new levels of development, but the essence of the company remains the same, it was then and is now a private enterprise, built up by the community of farmers, relying on themselves and their own labor forces, and their leader.
The estimation across two oceans
Shaghang is unique in the fact that, until 2002, it has used only its own savings without resorting to either public investments or bank loans. It is a peculiar model, there is nothing like it in the world, and its entry on the international market created a sort of stir.
In 2001, Mr. Shen started to plan the optimization of the production profile of his company. There was a need to enter the “long” production line that would include all the stages of production, from the ore treatment to the high-quality metal yield. The Hong Kong’s company “Honfa” was the first foreign partner, but then a question about finding partners around the world arose, those who could deliver high-quality metallurgic equipment to China at a moderate price.
Mr. Shen was forecasting that steel’s consumption will increase in the coming years, especially high-quality steel that met the world’s requirements. While big public enterprises were investing large sums of money in creating new production capacities, that would take 7-8 years, and Shagang could not afford such an input for such a long term. Mr. Shen started to search for a complete manufacturing unit so to launch it earlier than public enterprises and to be the first to enter the growing market.
A reasonable offer was surprisingly found in Dortmund, Germany. The corporation, ThyssenKrupp, was shutting down a huge metalwork complex and was selling it as scrap iron. It is an interesting fact that the German factory that had stood for two centuries and which had supplied Prussia, and then two German empires during two world wars, was also being sold on the basis of an economic forecast that was exactly opposite to the Chinese one. According to German estimates, the likelihood of the market for steel to fall was strong, making production unprofitable. Besides, new environmental requirements made matters worse while they were influencing costs, “dirty” steel production didn’t meet the requirements, and political decisions were made to transform Dortmund from steel’s capital into an eco-friendly zone. The manufacturing lines of ThyssenKrupp that produced steel for motor-car construction, mechanical engineering and the arms industry were all stopped.
The key factor in Mr. Shen’s decision to buy a mill in Dortmund was a fact that at that moment not that many enterprises in China had production technology for automotive sheet metal. Furthermore, Shagang was located not far from Shanghai, where the corporate group office of Volkswagen was, and it was then using the products of ThyssenKrupp as a raw material for production. The opportunity to purchase the metal that meets the world’s requirements in China would enable Volkswagen to drastically reduce the costs associated with the importing of steel sheets.
In 2001 the international prices for steel have fallen noticeably, and it created a favorable situation to buy steel production assets. The crisis on the international market has given an unexpected chance to the Chinese entrepreneur to become the first in the high-quality sheet steel market in China. The transfer of the huge factory complex was an advanced project, but similar situations have already been resolved, when large-sized metallurgic equipment was delivered to China, although not in such a quantity. However, Mr.Shen knew that it was basically possible.
First of all, the leaders of Shagang were planning to selectively purchase just part of production machinery from ThyssenKrupp, but after careful examination of the German equipment, Mr. Shen has decided to transfer the whole factory. It would give him a chance to build up a cyclical turnaround, including ore agglomeration, iron smelting, steelification, steel casting, and steel rolling.
The deal value after negotiations was 33.8 million Euros, even though the initial cost of the equipment was estimated at 2000 million Euros. Shagang was excited they had managed to conclude the contract before a potential competitor could, and German side had a good deal, but they were confused about the buyer’s profit. It was hard to imagine at that time that two years later the price of steel would increase so dramatically, and the metallurgic enterprises that were closed during the crisis would start working again. Mr. Shen will later say, “If I missed such a chance, then I would have to pay 5-6 times more. In order to do what I had to do, I had to sacrifice everything.”
In April 2001, Mr. Shen received a message that all the equipment was ready for sale at the mill in Dortmund. In May he was already with his team in Germany, but he faced different challenges. It was expensive and impractical to bring almost 1000 people, including engineers, to Germany for dismantling the unit. So some people were registered as official delegates, other people were registered as experts from the communist party, and the rest had to come by touristic visas and Mr. Shen had to pay for each day they remained after the visas had expired.
In February 28, 2002, the dismantling of the mill and the largest industrial move in post-war Europe began. At that time for many citizens in Dortmund the shutdown of the factory was like their personal loss. It was a part of their life while many generations in several families had worked in this factory. The depression prevailed in the city, the youth was moving out and the older generation could not imagine what to do without mill. The mill’s director, during his speech at the ceremony on the occasion of the move, was talking as if he was bidding farewell to his family. The workers were coming to the mill to say good-bye to the blast furnaces, to rusty equipment. Some German specialists were giving guidance to the Chinese during the dismantling, explaining the subtleties of equipment utilization. The engineers from Dortmund wanted their factory to start working again, even in the Far East.
The dismantling project turned out to be a complex process. The weight of the transported factory was 250 thousand tons, including a converter 60 m high, cumbersome equipment for agglomeration and another large pieces of equipment. 4000 approved containers were used for shipment. Along with the “steel”, all the documentation was also taken, the assembly’s detailed description and the description of the start-up operations. The workers marked the dismantled parts, assigning unique number to each and registering this number in the computer base. The equipment was placed in the wooden boxes, then embarked in the container on to the ship, and then sent to China.
In order to reduce expenses and costs, the Chinese people were working for 12 hours a day, 7 days a week; they were living in tents in the grounds of the mill. When the Germans asked the Shagang’s leaders to give at least one day off for the Chinese workers, Shen Wenrong met this need, understanding that it was dictated by the political requirements. At that time in Germany there was a trade union fight for the improvement of working conditions for the German workers, and Chinese guests created an unfortunate precedent. However, soon after, the German labor safety service noticed that even on Sundays the Shagang workers secretly performed some work, like packing equipment, or labeling and moving boxes.
Shortly before the Chinese departure, the Chinese ambassador invited them to come to Berlin. He said, “Everyone thinks that the Chinese in Germany only wash dishes and own restaurants. When our companies want to do business here, sometimes we have to work hard to persuade the local entrepreneurs just to meet us. But everyone has seen your work, and now people will treat us differently”. And Germans, indeed, were surprised by the diligence of the Shagang workers, their creative approach in solving the hardest engineering tasks and the ideas they possessed.
According to German estimates the whole process of dismantling and moving should have taken 3 years. The Shagang company has first planned the works over 2 years, but eventually it took only one year. Everyone realized that the earlier the mill started to work in China, the smaller the costs would be and the earlier the enterprise would start making a profit.
Only brown earth was left from the metallurgic mill, comprising 25 football fields. After that the Germans spent 6 months and 500 million US dollars transforming the site. The apartments and the commercial center with artificial lake were planned to be built on its place. In memory and as a part of the city’s history 2 blast furnaces were left on the site of the former factory.
At this time, in the creek of Yangtze River the boats were moored, and the equipment was transported to the construction site of the new metallurgic center of the Shagang Company, which subsequently gave a new lease of life to Jingfen city. The mill was built in 4 years after the purchase and got off the ground with an annual production of 6.5 million tons. If the mill had not been transported, but planned and created from the ground up, it would have taken 8 years to build according to estimates.
On July 5, 2005, the balloons were hanging, fireworks were set off, and the music was playing at the Jingfen sheet steel mill. The first steel sheet was produced at the new mill. The project was finished, the production was in a full swing, the Shagang Company moved to a new level and was acknowledged as one of the 10th best metallurgic companies in the world.
The history continues
In the following years, Shagang didn’t reduce its development rate, in the beginning of 2000 it appeared on the pages of Forbes magazine, it was purchasing production in other countries, and was attempting to enter the international stock market. You couldn’t say that enterprise’s existence was trouble-free, the Shagang Company has had enough problems and the more time that passes, the harder they become. Shen Wenrong’s talented of management allows for solving challenges calmly , but some of them can’t be overcome.
That is, first of all, the widespread situation around the world relating to human resources, while experienced workers are getting old and retire, and the young people are not qualified enough, the salary in the factory is lower than average, that is why employment turnover is very high, and there is a lack of qualified specialists. Secondly, the form of organization and enterprise’s management lag far behind the rate of the company’s growth and they often slow down the working process. The traditional family relations are still kept. For many years, Mr.Shen started his working days by meeting and greeting all the workers at the entrance control post, but now the company is too big for such a type of management.
The next step in the development Shen Wenrong sees neither as an increase in steel production nor in capturing new markets, but in the building up of new, effective form of working environments with human resources, an improved company organizational culture, implementation of the objective estimation method, encouragement and retention of talented staff in the company.
Jin Shenhua, a professor at the Beijing Normal University, suggested that China needs a Bill Gates. He says, “The day, when a person like the super-entrepreneur of the world, Bill Gates, will appear on Chinese land, will be the beginning of new times for China in the world’s history”. Who knows, maybe China’s Gates is waiting in the wings, only he hasn’t approved himself; but China has its own Andrew Carnegie, with whom Shen Wenrong had sometimes been compared.
A converter for wrought steel is all that is left from the metallurgic company in Dortmund, Germany.