A model of enterprise

Salvation for tens of millions of workers and cadres toiling unprofitably in China's numerous loss-making state-owned enterprises lies among the smokestacks of Handan, a grubby and obscure town in Hebei province.

This year the Communist Party declared Handan's iron and steel works, known as Han Gang, to be the industrial model for the entire country. In 50 years, the only precedent is the Da Qing oilfields in Heilongjiang province. In those alternately mosquito-infested and freezing swamps, Maoist proletarian heroes like Iron-man Wang sacrificed everything to create China's first oilfield in the early 1960s.

Once all Chinese knew that in agriculture they must learn from model commune Dazhai and in industry, they must follow Da Qing.

But since January they have been following a new model, the 'Han Gang experience', which is all about making money, not heroic self-sacrifices at the frontline of socialism.

For the past 2,000 years, nothing of great note happened in Handan, now a company town of 100,000. Yet in the past six months, 10,000 Chinese factory managers have trekked here to discover its management secrets. The local government is now even planning to open an airport and build hotels and shops to profit from pilgrims.

More are bound to come. Every few days, the national TV news trumpets yet another province or some giant plant which has applied the lessons of Han Gang, saving billions in state subsidies. The People's Daily has even started running a column called Han Gang in the Eyes of the Leaders.

'Han Gang is a model of invention and reforming the enterprise system, a model of strictly scientific management and a model of the stress on two civilisations,' said Hui Liangyu, governor of Anhui province, this month.

Guo Shichang, vice-governor of Hebei province, said: 'The essence of the Han Gang market simulation and cost veto experience is its suitability for the establishment of the socialist market economy and thus an active exploration to change the economic development pattern from an extensive to an intensive development one.' The true fount of all this gobbledygook is the plant's president and general manager, Liu Hanzhang. A tall man with craggy features, who has been at the plant since it was built in 1958, Mr Liu is now a star in great demand, rushing from one corner of the country to the next to give lectures. And like so many successful American management gurus, modesty is not his strong suit.

'This is a unique management system, unlike any others in the world, and I personally thought it up. Now even people in Japan and Germany are studying it,' he boasted in an interview. Mr Liu was helped by a two-month management course at the University of California in 1988 and has made repeated study trips to Germany but believes his ideas are peculiarly tailored to China's situation.

His method was given a final blessing by the Party in March at a conference presided over by deputy prime minister Wu Bangguo .

Mr Liu began developing it after 1990 when China seriously set about integrating the state sector into the blossoming market economy. Beijing ended the dual-pricing system, lifted price controls over all but a few commodities and began introducing a new company tax system.

Until then, state industries operated under a plan which set all costs and prices. In the early 1980s, profits were fixed in advance, although later, factories could sell extra output, often just five per cent of their total production, on the open market. By 1995, the majority like Han Gang, had been pushed to sink or swim in the free market, and were selling 95 per cent of their output for whatever it would fetch.

At least a third of the 100,000 state-owned enterprises might have gone under if not for China's unwillingness to tolerate widespread bankruptcies. Some found they could not compete because of where they were or what they made. Others had antiquated equipment and could not raise new investment capital.

Most of all, plant managers and party secretaries found themselves locked in paralysing power struggles over two questions. Did the plant have the right to boost profits by sacking unwanted workers? And could it drop its responsibility for pensions, housing and other social costs? At Han Gang, propaganda chief Zhang Jiangping said the transition was painful, the plant lost money hand over fist and virtually all its products were uncompetitive. Life in the marketplace was unpredictable.

The free market price of steel has been on a helter-skelter, jumping to 4,000 yuan ($3,710) a tonne and then dropping to 2,600 yuan.

Steel customers were also no longer tied to suppliers and some chose to buy steel from private or collectively-run steel works which sprang up.

At the same time big state buyers defaulted on their payments, creating notorious debt triangles when the state curtailed public lending.

'It was a very difficult situation in which to survive but the biggest problem was the cost of production,' Mr Zhang said.

Seeking ways to make state enterprises like Han Gang act commercially, the Communist Party looked abroad to Britain, which started the world-wide fashion for privatisation, to America with its down-sizing, and at Russia where huge factories were sold off amid a massive distribution of coupons.

Before 1989, then Party Secretary Zhao Ziyang leaned towards a mass privatisation but his successor, Jiang Zemin , has been determined above all to preserve the Chinese Communist Party from the fate of its older brother in Moscow.

In Russia, Yeltsin's reformers had set out to privatise industry not so such to boost productivity but to destroy the political power-base of the Communists. In China, Jiang Zemin's priorities are the opposite, to maintain power.

'We oppose issuing shares. We are proud to be state-owned. The path we have taken shows that there are good reasons not to privatise because we have demonstrated how state-owned enterprises can be reformed,' Mr Liu said. 'We believe the proletariat are still masters and should play the role of masters so I think in state enterprises, unlike joint ventures or private factories, they must take the leading role,' he added.

In other words, the party wants to ensure that managers like Mr Liu, a member for 36 years, are not kicked out as they would be if the plant was taken over and down-sized by capitalists. This does not mean all factories will be saved from bankruptcy but Mr Liu's importance is that he claims to have a way of allowing over-manned state-enterprises to respond to market forces without first having a change of ownership.

His management manual is called Simulation Market Accounting - Letting Workers be the Masters and do the Accounting. It describes how he raised productivity by forcing the company to follow market forces by introducing internal cost accounting without actually privatising its various divisions.

'What we do is find out the market price for everything and then work backwards,' he said. Workers are motivated to save money because their wages are tied to performance. Workers keep 40 per cent of the saved cost and are fined 20 per cent of increased costs.

His book describes how in one workshop, workers recycled 40 barrels of used oil and saved 50,000 yuan. Even rags, brooms and towels were calculated under this system of 'catching the ox nose' of strict cost accounting.

From all over the country come accounts of its success. Workers at the Xuanhua steel works sealed off 117 motor vehicles used for private purposes by managers. At the Yaohua plate glass factory, workers are even saving screws.

'This proves how much can be done by rationalising internal management and operating methods,' China Daily declared.

Mr Liu's book says that at first, workers found it 'quite painful because they were used to the comfortable days when people could squander money'. Yet although Han Gang, with 30,000 workers, has streamlined its management and raised productivity, Mr Liu says he has not been forced to fire anyone. This is because the factory entered a virtuous cycle of higher profitability, more investment and expanded production.

In five years, steel output more than doubled to 2.15 million tonnes and losses turned into a profit of US$84 million (HK$653 million). Customers now pay cash up front or get no steel. All debts are commercial borrowings and yet Han Gang has invested 2.4 billion yuan in buying new and used machinery from Germany and France.

Mr Liu is confident he can propel Han Gang from 11th to 8th place in the ranking of national steelmakers within four years.

But most national models do not last long. In 1994, Beijing's giant Capital Iron and Steel works, Shou Gang, was promoted as a national model. Last year it came close to collapse and its leader was dismissed in disgrace after launching a reckless expansion programme. In the 1980s, Gu Xinsheng, another model director of the Haiyun state shirt factory in Zhejiang met a similar fate after he boosted profits, sacked lazy workers and had to hire bodyguards to protect himself.

'The most lethal reason why other earlier models failed is because they became conceited, self-satisfied and stopped making progress,' according to People's Daily.

In the same paper, Chen Qingtai, deputy director of the State Economic and Trade Commission, warned readers against cynicism. 'There are still some people who think the Han Gang experience is only a method of accounting with nothing much new in it, but this idea is completely wrong,' he warned. Factory managers should not take a wait-and-see approach 'hoping for a miracle'.

'They should not expect that the government will come to their rescue,' Mr Chen said. He added that those factories which fail to adopt the Han Gang method could expect no mercy.