Mr. China Page 17
By the mid-1980s business was good and Shi started to make a bit of money. The little business borrowed to buy more technology from a Japanese company introduced by his old friend. This was progress but there was a problem. The rubber available in China was of poor quality. It wasn’t good enough to make the new products and difficulties in importing good rubber threatened to strangle the business. At that time, China’s economy was tightly controlled and access to foreign currency was restricted. No one abroad would accept renminbi. As a solution, Shi set up another factory. In a hook of the river, a stone’s throw downstream, he built a new factory that made simple car jacks. Although they would never make fat profits, the jacks could be exported to America for much-needed dollars. Through his jack factory, Shi had ingeniously created a currency exchange.
In the following years, the business won many awards for quality and Shi’s reputation spread far beyond the valley. By 1990, sales were several million dollars a year and he started to export to his old friends in Japan.
Then, after Deng’s Southern Tour, when the State banks opened up the coffers, Shi grabbed the opportunity. With a hugely ambitious plan, he tried to quadruple the factory’s output at a stroke and started building a gigantic facility on the opposite side of the river. He did this by taking out short-term loans that could be approved locally under China’s bizarre rules of central planning. These were meant only for working capital, but Shi invested the money in a huge building and lots of new equipment. By early 1994, just at the time that we raised our first fund, it looked as if China was overheating and the government took fright. It tried to rein in the exploding economy and called in short-term loans. Shi had to repay the money. He was caught with his checked trousers round his ankles and embarrassing discussions with the bank commenced. This gave us our chance. We had the cash to give him a way out.
The negotiations to buy a share in the business were straightforward. Shi always knew his mind and made quick, precise decisions. He was flexible and only dug his heels in on two points: our cash had to come quickly and he was to remain in charge. After a couple of meetings, we agreed a handshake; twelve million for 60 per cent of the new business. Accountants and lawyers were dispatched to work out the details. That was the time when Shi suddenly came up to Beijing and persuaded Pat to sign the investment contract.
Despite the explosions from the Board in New York and the mess with the accountants and lawyers, it had all been sorted out in the end. On 8 September 1994, we made our first investment and the money was wired across to Shi’s account in Ningshan.
We got off to a good start. The joint venture was officially opened with a fusillade of Chinese firecrackers that lasted several minutes. After a tour of the factory, during which one of our factory rats dropped a cigarette on the ground and Shi pointedly bent down and picked it up, we withdrew to hold the first board meeting. Shi was relaxed and in good form, but at precisely the moment when he declared the meeting open a huge landscape painting, twelve feet in length, fell from the wall and crashed to the ground. There was an uncomfortable pause.
1995 was a happy year and the honeymoon endured as the seasons turned. 1996 was even better. Newly acquired plant and machinery had been put to work. Revenues doubled, profits trebled, new products started to flow and everybody was happy. On visits to the factory, I could feel the place humming. Shi bought himself a Mercedes and was enjoying his success.
The careers of local Party officials often benefited from a big foreign investment and ours was by far the largest in the whole prefecture. As his friends in the Government rose up the political hierarchy on the back of his achievements, Shi’s reputation grew. He was appointed as a People’s Deputy in the Provincial Assembly. The road between Zhongxi and Ningshan, the main town of the county, was repaired and Shi gave a handsome donation to the Village Committee for a new office building. His influence waxed and, stirred by these successes, the seeds of wider ambitions grew silently in his mind.
During the summer, there are often heavy rains in central China and that year was no exception. The river that ran through the factory compound rose to dangerous levels and finally burst its banks in the small hours of the morning of 16 July. Muddy water surged into the dormitories and the factory buildings, submerging large areas and damaging equipment. For several days beforehand, the workers had desperately shovelled sand and ballast on to the banks but finally the flood had been too much. Exhausted, they retreated up the hills and waited miserably until it receded.
The next day, one of our junior managers telephoned Shi from Beijing and pressed him on details of the insurance cover. I was horrified when I heard. It made us look indifferent to the human side of the disaster and as though we were only interested in recovering our losses. Pat asked Ai to visit Shi in an attempt to atone for the blunder and he found him greatly upset. His niece had been badly hurt in a traffic accident on the road up into the mountains and her friend from the village had been killed. Ai Jian met with Shi very early in the morning in his office. A tear had appeared as Shi turned his face to the wall and said waiguoren meiyou renqing gam ‘Foreigners have no human feeling.’ It had been a dreadful blunder.
1997 saw slower growth but we were preoccupied with the problems in Harbin and Zhuhai. The business in Ningshan was still profitable after all. But I had an ominous conversation in April. Shi had received permission from the Central Government to take his company to the stock market in Shanghai. This might net him a huge profit but in order to list he needed more than 50 per cent of the business. He had already sold 60 per cent to us so he wanted to know if he could buy back some of the shares. When I declined the conversation became tetchy. He complained vigorously about the performance of the other factory directors. ‘Most of them are just old state-run bureaucrats, like Pang in Harbin,’ he said, ‘but the others, you foreigners don’t know how to control them. Now that Wang has stolen your money in Zhuhai, you don’t trust any of us.’ When Shi had signed up with us, he thought that he had found a strong financial partner who could give him all the money that he needed. He had readily bought into Pat’s strategy of buying up many businesses in China and building a national company but by then he felt that he was being dragged backwards by the problems at the other businesses.
Although the relationship was a little strained on the surface, whenever I spent time with Shi he was immensely reassuring. The business was running smoothly and Pat brought in a large US partner with modern technology. Shi seemed happy and the future still looked promising.
Then, suddenly, Shi arrived in Beijing. He said that the rubber business no longer needed his undivided attention. Several senior officials from the Prefectural Government had recently paid a visit and they needed his help. Many of the state-owned businesses in the area were making losses and unemployment was a big headache for the Government. They hoped that Shi might buy some factories and turn them around; the government might even get some cash in the transaction. Shi was interested in a paper factory in the nearby town of Guangde but he needed money. Would we buy another 20 per cent of the joint venture from him? He was looking for $10 million.
As the months rolled on, we talked round and round. There was a dilemma. If we refused, we might further alienate Shi. He was our best manager so switching horses at that stage was not an option. But if we bought more of his shares, he would only be left with 20 per cent and he might lose interest. After much debate, we agreed to go ahead. The price was eventually bargained down to six million. But we had one absolute condition where we would not compromise: Shi had to sign an agreement promising that he would not use the money to compete with us. The papers were drawn up and on 17 December we became 80 per cent shareholders. By the end of the year, Shi had another six million in his bank account. We were pleased with the result. We had kept our management team happy and motivated, and we had an extra 20 per cent for a good price. The future looked rosy and any uneasiness about Shi was put on the back burner. A couple of months afterwards, I went to France.
When I went down to Ningshan after recovering from my illness and first heard about Shi’s second factory, I wasn’t sure what to believe; there were plenty of stories but not much hard evidence. I raised it with Shi, but he was blandly reassuring. ‘China is always awash with rumours,’ he said, ‘but you should be able to work out the truth.’
When the time came to leave the factory at the end of that trip to Ningshan, I remember that the car was a little late. I walked out on to the perfect lawn in front of the factory. The green of the grass was cool and almost luminescent in the late-afternoon sunlight. I looked around me and took in the neat office building, the workers’ dormitories, the rows of magnolia trees, the clipped hedges, the sound of the river, the mountains and the birds around me. The scent of viburnum drifted over from the river bank. I felt a profound sense of calm and order. Workers in uniform chatted contentedly as they went quietly about their business. In the distance, the garden of Shi’s apartment was bright with the blossoms of the fruit trees. I dismissed the rumours. Nobody could be so stupid as to risk all this.
Pat went to Ningshan a month later and came back saying that the meetings had gone well. However, I heard later from Li Wei that Pat had arrived at the factory at about one o’clock and wanted to meet Shi as soon as he got there. But Shi had left instructions that he didn’t want to be disturbed from his lunchtime nap until three. He kept Pat waiting and when Shi eventually walked into the room his hair was uncombed and he yawned and stretched ostentatiously. It was not a good omen.
Six months on, again without warning, Shi arrived in Beijing. We all met with him in Pat’s large semicircular office. Shi said that he had been thinking about the future and that he was no longer so interested in the rubber business. His whole demeanour had changed; his manner was impatient and bored. It was as if he found talking to us a laborious chore and he made little effort to conceal his feelings. As he spoke, he pointedly lapsed into the familiar form of address in Chinese and said that he would be prepared to carry on but only if we changed the arrangements. He would pay us some interest on the money that we had invested, but he would keep the profits. From then on, we would have nothing to do with managing the business but he would send us the occasional set of accounts. ‘It’s the norm nowadays in taking over state-run companies,’ he said. He then announced that if we didn’t agree, he would simply leave and his people would go with him. We would be welcome to the empty buildings. Then he left.
I was shocked and angry but I knew that we had to react cautiously. After several anxious discussions, we decided to stall for time. Li Wei and Ai Jian went down to Ningshan to commence phantom negotiations. We had to put Shi to sleep and buy some time to think.
We were in a hole. We had eighteen million stuck up in the hills, in the clutches of someone who was by then in open revolt. I wasn’t sure what to do, but I knew that we couldn’t let this become another Harbin. With all the other factory directors watching from the sidelines, there was no way we could buckle in to Shi’s demands. It would lead to similar claims from all our other factories across China and then we would have a revolution on our hands. I needed a man of steel, a man of unbending obstinacy, tough enough, maybe even reckless enough, to take on Shi on his own ground.
I met Chang Longwei through an agent. She sent me a copy of a two-page article from Time magazine, about the reform of China’s state-owned enterprises up in the northern rust-belt city of Shenyang. A local bus factory had been chosen as the example of a success story. It was called the Jinbei Bus Factory.
In the early 1990s, after years of massive losses, Jinbei had been taken over by a Hong Kong group and, just after Deng’s Southern Tour, it became the first Chinese company ever to list in New York. The bus factory used the money from the Stock Exchange to buy new technology from Toyota and its new minibus had grabbed over half the Chinese market in three years. The man behind the turnaround, so the article said, was Chang Longwei.
Chang was born in Beijing in 1946. In his late teens, he had been sent to Datong to work in a state-owned gearbox factory. Datong was in Shanxi Province, not so far from the place where Ai Jian had worked with the peasants. I had been there when I had been studying at the university in Beijing. I remember an overnight train journey that seemed to move several hundred miles northwest and fifty years backwards. Outside the train station there were rows of people squatting around red plastic buckets and eating. When I got close, I saw that they were gnawing on rabbit heads. Datong is in China’s interior coal-mining region so not only was it poor, it was black. Coal dust had worked itself into every pore of every face. It clung to buildings and windows, it hung in the stairwells and clogged the drains. Chang had emerged from the gearbox factory after twenty years with iron in his soul.
The Time article included a picture of Chang over the caption: ‘New Revolutionary at his Jinbei Factory.’ It said that ‘when the plant, burdened with seven thousand workers making shoddy cars no one could afford, foundered in the early 1990s, a Hong Kong company took over. It went out looking for a mainland manager and found Chang.’ Chang was quoted as saying: ‘Management is the key. Subject to the Board, I can make all the decisions. I don’t always have to listen to the Government.’ Workers were shocked when he downgraded the first lazy mechanic. ‘If you don’t work hard here,’ he said, ‘you can work hard finding another job.’ His managers also had to shape up and he sent them on training courses at Toyota. The article reported that corruption still plagued the Jinbei plant, but also said that Chang was determined to stamp it out. ‘If I hear of it, I fire them,’ he said, ‘no matter if they are a Party member or whoever. The highest cadres can’t be corrupt, because if they are the rest are.’ When he was asked about the Party, he replied, ‘Oh, our work has no relation to all that!’
I didn’t take to Chang on first meeting. He was like the Chinese equivalent of a northern mill-owner and seemed to treat me with an earthy disregard despite the fact that I was meant to be interviewing him. Gradually I became more impressed. I could detect an immense strength of will in his rugged features and lumbering gait. He seemed an extraordinary mixture of obstinacy blended with a thirst for learning new things. More importantly Jinbei was a well-known company, a success story and the biggest problem with removing Shi was coming up with someone who would be remotely credible as his replacement. We needed a real heavyweight. Although Chang was clearly a handful, I thought that he was just the man we needed at Ningshan. So we drew him in, and finally he agreed to go up to the mountain valley. It was quite a coup.
The stage was set. We held a planning session in Beijing in great secrecy. As at Harbin, our contracts allowed us to dismiss Shi if we could hold a board meeting, but for that to happen Shi would have to attend personally. If his suspicions were aroused, he might refuse to come.
In the middle of November, we formed a team of eight to take over the factory. Chang had persuaded a few loyal colleagues to move over from Jinbei, including an engineer called Yang Bai. She was thirty-six when she came down to Beijing to meet with me. During the interview, I asked her whether she thought that a woman might have particular difficulties managing workers in a place where traditions remained strong. She looked at me scornfully and asked whether I really thought that a bus factory in Shenyang was so easy. I liked the reply and she joined the next week.
The team carefully laid plans for seizing control of bank accounts, stabilizing workers and lobbying the local government once Shi was out. The whole operation required meticulous attention to detail. We drafted several different notices for posting on the factory gates, each one anticipating different reactions from Shi: one in case he agreed to resign, one in case we had to fire him. We even hired our own transport in case Shi ordered his drivers to refuse to take us to the factory – or, worse, to take us off in the opposite direction. Finally the date for a board meeting was set. It was 2 December 1998.
We had insisted on holding the board meeting in Hangzhou in order to avoid confronting Shi on
his home ground. We had to pull him off his mountain perch. After a very bumpy flight, we arrived with our nerves frayed. The air around Hangzhou was extremely turbulent and the aircraft shook violently before going into an unusually steep descent immediately prior to landing.
Characteristically, Shi came alone. I remember catching sight of him in the restaurant the night before the meeting and feeling an irrational twinge of sympathy for this solitary and complex figure. In spite of what he was trying to do to us I could not completely suppress my admiration for what he had built.
The meeting was held the following day in a little side room containing a slightly greasy table and a few cracked teacups. Pat said that he hadn’t slept all night but I felt curiously calm now that the moment had arrived after so much planning. Shi arrived early and we chatted away about nothing in particular before the others arrived and we got down to business.
Shi started with a report about the state of the business, blaming the poor results on a general downturn in the rubber industry and high import prices. No one was listening, but a tape machine turned silently on the table in front of us. When we came to the restructuring of the business that Shi had proposed, the mood changed abruptly. Pat said that we had thought about his ideas but that we had made an agreement in 1994 and we should stick to it. We weren’t going to be pushed out. The first signs of puzzlement came across Shi’s face but he didn’t react except to light up another cigarette. Pat went on but Shi soon lost patience. He repeated the same threats that we’d heard in Beijing. There followed a long silence as we stared at each other across the table.