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Mark O'Neill

Officials of a Hong Kong firm that bought a controlling share in a steel factory in Datong, in central China, arrive at the plant to pick up the seals and other instruments of financial control.

But dozens of factory workers force them to give back the seals and drive them off the premises. The incident, on March 7, marks the second time the Datong Steel Plant has driven away a foreign investor.

In August, 1999, Fletcher Steel, part of Fletcher Challenge, one of New Zealand's biggest companies, left the plant after a bitter three-year partnership in which it lost 265 million yuan (about HK$248.3 million).

The experience was so bad it has dissuaded Fletcher from doing business in China.

'We would not consider investing in the steel business in China any more. It would be difficult in other fields too. The whole process of business in China, the law and commerce, is difficult, especially in the west,' said a Fletcher spokesman in Auckland.

The story of the Datong steel factory, in the capital of Shanxi province, China's biggest coal producer, is a cautionary tale for investors who want to put their money into the poorer provinces of the interior, where Communist ideology and attachment to the planned economy remain strong.

The firm that took over from Fletcher has repeated the same mistakes and has lost heavily from an investment which it cannot recoup.

In September 1999, Fletcher sold its 58 per cent share of the plant to a Hong Kong-registered company named Rui Nan, which belongs to the state-owned China Council for the Promotion of International Trade (CCPIT). It was officials of Rui Nan that went to the factory last month to take ownership.

'Rui Nan is an illegal company,' said Wang Jiguang, general manager of the factory and appointee of the Chinese side. 'Its documentation is not complete, its documents are illegal. So we have no partner now.'

Rui Nan chairman Chen Yanwei said the venture was a honeymoon at the beginning, with the two sides agreeing to repair key plant furnaces. But they soon fell out.

On June 20 last year, without consultation with Rui Nan, the Chinese partner convened a meeting of senior managers, appointed Mr Wang as general manager and its own personnel to top positions.

'On the instructions of the Datong city government, I am taking the job on behalf of the 2,000 workers and the 10,000 family members who depend on them,' Mr Wang said.

'I am in charge not only of our 42 per cent of the shares but the remaining 58 per cent. Rui Nan does not hold that 58 per cent.'

From that day, Rui Nan staff have been unable to enter the plant. It has appealed for help to the Datong city and Shanxi provincial governments, to CCPIT and the Ministry of Foreign Trade and Economic Co-operation, but to no avail.

For Fletcher, it is a case of deja vu. When it signed the contract with Datong Steel in 1996, it was the largest New Zealand joint venture in China, the biggest Sino-foreign joint venture in Shanxi and the biggest taxpayer in Datong. It had a registered capital of 386 million yuan.

The plant had an annual output of 400 million yuan, accounting for 3.75 per cent of Datong's industrial output, and paid 20 million yuan in tax, 7 per cent of the city's total.

But the marriage did not work. In three years, the plant had four general managers and lost 265 million yuan.

'The partnership was not functioning,' said the Fletcher spokesman. 'The two groups had different objectives. It was difficult to trade in the market. We sold most of what we made but the price was very low. We saw no future in the venture.'

The city government had a different version of events. It said Fletcher had excluded the Chinese side from management and ran the company like a wholly owned foreign venture, not a joint venture.

Fletcher announced its departure on August 13, 1999.

A businessman familiar with the venture said Fletcher's withdrawal was bitter.

'It was hard to extract themselves. It became very nasty and personal at the end, with threats against individuals. It was not a pleasant experience.'

A month later, it sold its shareholding to Rui Nan. The Fletcher spokesman declined to give the price.



Dangers lurk for business pioneers in the wild west