China's largest canned mushroom producer and exporter, Zhangzhou Canned Food Factory, is in trouble after running into an uneven playing field with foreign-funded and township enterprises. The factory only managed to break even in the past few years although it remains the 'big brother' in the sector. Last year, it had turnover of 140 million yuan (about HK$131 million). Zhangzhou is China's largest mushroom-growing base accounting for 40 per cent of the country's total production. Director Ye Jiqiang said China's canned mushroom exports had been hit by both internal and external factors in recent years. The United States Food and Drug Administration claimed the canned mushrooms were contaminated and banned them from being imported in 1989. Fujian province resumed exports to the US in 1992, but the industry was in chaos the following year when the Ministry of Foreign Trade and Economic Co-operation relaxed export controls, increasing competition. When Zhangzhou Canned Food was founded in 1956, it was the only one of its kind in the city. Now there are at least 240 factories, including 24 approved by the state. Since the export relaxation, all canned food stated-owned enterprises (SOEs), like Zhangzhou Canned Food, tumbled. 'To lose the advantage of a monopoly is a fatal blow, but another reason is that SOEs and non-SOEs are competing on an uneven playing field,' Mr Ye said. 'It is not because our products are not good enough. Actually, the quality of SOE products is still the best because of government supervision. But foreign-funded ventures enjoy lots of preferential treatment like a lower tax rate and tax holidays. 'Township enterprise operations are more flexible than ours as a state enterprise. They have no big payroll and social burden and are excluded from the government's quality supervision.' SOEs pay 33 per cent profit tax while joint ventures pay 24 per cent in coastal open cities like Zhangzhou. Last year, tax contributed by the foreign-funded enterprises only accounted for 6.7 per cent of Zhangzhou city's tax revenue, party secretary Cao Degan said. After being in operation for 40 years, Zhangzhou Canned Food had a large number of retired workers. A total of 3,500 people are on the payroll but only 1,944 are working. 'If our factory was not a state enterprise we would have had only 500 workers with the same facilities for the same capacity,' Mr Ye said. 'We might even have fewer workers with automated machinery. But as an SOE, our role is much more than just a production entity. We are also responsible for social stability.' Mr Ye said many problems had emerged as China moved from a centrally-planned to a market-oriented society. 'To solve these problems, enterprises themselves have to face up to the market, while the government mechanism has to be changed to cope with the demand,' he said. Zhangzhou Canned Food has changed its strategy from merely selling to foreign buyers to producing tailor-made products according to buyers' requirements. The factory has begun to make jars of mushrooms, under the US brand Giorgio, and has produced canned lychees for Del Monte since 1994. Mr Ye said that to win the orders the factory allowed US buyers to send inspectors to supervise its production procedures and health standards. 'What we got was not only orders but market information, international recognition and reputation. 'We also secured capital for production because Giorgio paid us US$3 million in advance when they placed orders in 1994.'