Chen Dehong, manager of the Southwest Flour Mill in the cityof-Chongging, is a man in a hurry. He needs to find a buyer for his faltering mill or it will go bankrupt.
"We welcome any buyer: private businessman, Hong Kong investor or Western company," he says. His mill, built in 1993 with an investment of Yn90m, has lost Yn19rn over the past four years and has acquired debts of Yn60m. It has cut annual production. from a peak of 30,000 tonnes in. 1996 to the current 20,000 tonnes. Many of its 250 workers have been sent home, for there is not enough work to go around.
Chen's factory is one of the hundreds of state firms in this heavily industrialised city struggling to stay afloat. Local officials are giving foreign visitors brochures with details of state companies looking for investment. So desperate are they for new capital that Mayor Pu F laiging said last September that he would sell even. the city's most profitable and largest state firm, Chongqing Steel Plant, if there were an attractive offer.
Signs of decline
State enterprises all over China are in severe difficulty, thanks to stronger competition from foreign and private firms as well as- weaker domestic demand. In. the foggy mountain city of Chongqing the problem is especially acute.
Chongqing is an old. industrial base, with rusty machines, conservative workers .and a rigid management structure unable to deal with the country's fast-changing market. its state sector accounts for more than 70 per cent of the city's industrial output, much higher than in southern and- eastern China and a sign of the shortage of prix ate entrepreneurship.
State factories were relocated from the coastal provinces in the 1950s tyhen paramount leader Mao Zedong prepared for oar with Taiwan and the LOS. Involved in defence-related production, many of these firms have been unable to turn themselves into successful commercial businesses.
That is why Chongqing's industry has lagged. behind the rest of the nation. In 1995 its industrial output amounted to i n65.44bn, ranking 22nd among China's 26 provinces and three municipalities. Once a key economic base in south-vest
China, Chongqing's per capita GDP of Yn.3,375 in 1995 was significantly below the national average of Yn4,766.
Chongqing's decline is evident every-where. There are only a few new sky-scrapers, dwarfing the many old small. ss'ood and brick houses built decades ago on the hills. People are not as well-dressed as in Shanghai and Beijing and there are fewer public amenities. A park was recently opened near the train station. Visitors have to pay Yn20 each to enter because the government has to recoup its investment, local. officials explain.
Another reason why Chongqing is hoping to revitalise its state sector quickly is that it needs to create more jobs for its much-expanded population. Its largely urban population. of six million was increased overnight in March last year to 30 million, when it was elevated into a municipality, an. administrative status granted to only three other cities, Beijing, Shanghai and Tianjin. Its boundaries also were expanded, from 22,314 sq km to 82,400 sq km, to include neighbouring rural counties in eastern Sichuan. The new Chongqing citizens are mostly peas-ants living in the mountains. This gives Chongqing the status of the Chinese 'city with the biggest rural population.
Some of the impoverished can be seen at the dockyards of Chaoti.annien (Gate Facing Heaven), at the confluence of the Yangtze and Jialing Risers. Carrying loads of vegetables, they make their daily commute by boat from neighbouring villages to the city's food market.
Making Chongqing's task even more daunting is the need to resettle the one million people dislocated by construction of the massive Three Gorges Dam on the Yangtze River. With their villages flooded by the dam, these long-time Yangtze residents need government heap to build new homes, schools and factories.
Beijing has offered Chongqing favourable policies and tax concessions as compensation for its heavy burden. The city now has a greater say in pursuing big-ticket projects and in. raising funding over-seas. It also can provide foreign investors with the same concessions as those offered by Pudong, the newly developed commercial centre of Shanghai. More important, Chongqing is to retain most of its taxrevenues for five years. Such concessions helped Guangdong and Shanghai take off in the 1980s and 1990s respectively.
Much of the new money has gone into improving the municipality's dilapidated infrastructure. In July 1997 the largest fly-over in south-west China was completed. in the o est of the city. It is also building new bridges across the Yangtze and Dialing, to ease traffic congestion that has worsened in a city built on the sides of mountains falling into the rivers. Another source of pride among local people is a four-lane ring road running along the shore of the rivers. "We no longer have to make so many big bends to get to places that are difficult to reach because of the mountainous terrain.," says a local government official..
Even with the improved infrastructure, increased autonomy and cash compensation, Chongqing faces an uphill battle to turn around its state sector. Most state firms are in. the red and already 420,000 of the one million workers have been laid oft. These unemployed, many of whom have worked. all their life in the same factory, are paid. a basic living allowance of about Yn200 a month. In cases where both the husband and wife are laid off, they are exempted from paying school tuition fees for their children. As for medical fees, the state firm helps when the worker has a major illness but not for minor ailments.
Ruthless approach required
Even Chongqing's pillar industries of automobiles, metallurgy and. chemicals are in trouble. In. the automobile sector; for example, Chang An vans, Jialing and jianshe motorcycles and Qingling light trucks are all losing national market share.
In a recent article entitled 'New positioning, new strategy', the Beijing-based f,lliva Economic Times said Chongqing's pillar industries lack economies of scale, support from parts suppliers and research and. development. 'Chongqing needs to be ruthless in giving up manufacturing of products in which it no longer has an edge, even though production still seems substantial at the moment,' the newspaper wrote on. February 2 this year.
Chongqing's light industries look equally miserable, with local brands fast disappearing in the domestic market of electrical appliances. In department stores the shelves are tilled with Little Swan washing machines from Wuxi, Haier refrigerators from Qingdao and. Spring Orchid air-conditioners from Jiangsu.
Why have state firms in Chongqing done so badly? Chen's factory provides some answers. Funded by a. bank loan and government investment, the mill bought state-of-the-art Italian equipment but was managed in the traditional socialist way. 'There was a surplus of workers and management was lax. The mill survived when the flour market was closed to non-state firms but, when the monopoly was lifted in 1992, it began to lose money.
Other new mills are more efficient. Chen. cannot cut costs bs" tiring his 250 workers, even though he needs only 100 of them for the reduced production. A bigger workforce means a bigger pension. and medical bill, expenses mainly borne by the employer as insurance is underdeveloped in. China. "The workers are used to relying on their darr a'ci [work unit]; they continue to come to us to solve their. problems," says Chen. Despite the national directive of last September, laying off staff can still be a difficult process. In taking such a step, Chen would have to secure agreement from the local grain bureau, 55 hich owns the mill, and the local government. The workers would also need to be consulted.
Under the old planned. economy, Chen's factory would have survived, even if it was bleeding with losses. 'The government would have given subsidies and cheap loans to the mill, so that it could continue hiring the workers and prevent them from taking to the streets. But the decision taken at the 15th Party Congress last September to push. for rapid reform has put an end to what is now regarded as a vicious circle of subsidies and 'inefficient production.
What Chen's factory needs is a total restructuring ?like that of Mei Hou Food Products Company, a joint venture run by a former state mill north of Chongqing and the Chengd a-based 1-lope Group, China's biggest private group and top producer of feedgrain with five per cent of the national market share. Hope has already acquired 40 state plants and claims to have brought them. all into profit.
When Hope's manager Zhang Tao took over the state mill under a new joint venture with the local grain bureau, he slashed the workforce from 300 to 150. He fined workers who were late and linked -wages to productivity. Within four months of the takeover in July, the plant moved into the black and monthly output in December reached 3,000 tonnes, three times what it had been a year earlier. "I told the workers that, it they work hard, business will improve and everyone will benefit," says ]hang.
Looking to private enterprises
The Chongqing government is counting on. private enterprises like Hope to rescue state firms. Local officials say the city' needs to further develop more into the non-state sector, so that it will reach 50 per cent of total output by the year 2000. In. 1997 private firms in Chongqing bought 160 state and collective companies and leased another 2,000.
In recognition of the efforts made by private businessmen, the city has chosenfor the first time a self-made millionaire as one of its members of the national parliament, the .National People's Congress. lr Liao Changguang runs a Yn1OOm conglomerate of hot pot restaurants, hotels and holiday resorts. He was close to acquiring two state firms but abandoned the plan because the government imposed tough conditions. "-Leaders at the top are supportive of private businessmen, but low-to-middle-ranking officials are making life tough for private businessmen," he saes.
Domestic private companies aside, Chongqing is also counting on. foreign investors to provide new r capital for ailing state companies, but with limited success so tar. Between 1983 and October 1997 foreign companies pledged to invest US$2.5bn in Chongqing, a small fraction of the LS$45.3bn they have committed in Shanghai. Last October the government led a high-powered delegation. to 1–long Kong to promote the municipality's business plans and claimed to have signed contracts ,worth L S$S()Om with foreign companies.
But taxi driver Li Hong is not waiting for foreign money. Laid off by his steel company, Li took driving lessons and began driving a taxi, making YnI,000-1,500 monthly, two or three times what he used to earn. "People used to rely on their state employer as their rlaishan [a famous mountain in China]. But such thinking has changed, as state firms can no longer supply us with housing, medical .fees or even our basic pay" he says.