Workers in China Fail As Owners of Factories Managers, Investors Are Taking Over
By Philip P. Pan Washington Post Foreign Service Wednesday, December 4, 2002; Page A01 DAYE, China -- It was a deal that reflected China's socialist past as well as its capitalist future. The Jing Wine Factory, property of the state for nearly half a century, was sold to its workers, 700 men and women who were given shares of stock - and a chance to save their company. The trouble started soon after the 1997 sale. Employees began skipping work, or sneaking out early in the afternoons. Salesmen awarded themselves unusually large bonuses and padded their expenses. Workers challenged their supervisors, reminding them: "We're shareholders!" On the factory floor, a large tank of wine was discovered empty, apparently drained by staff during lunch breaks. Wu Shaoxun, the no-nonsense factory director who had run Jing Wine for more than a decade, appeared to have given up and was rarely seen in the office. But even as the company's losses mounted, its new owners, the workers, never tried to replace the manager. Wu, on the other hand, was plotting to replace the owners. In 1998, he got his chance. Several local factories sold to workers were doing poorly; some teetered on the edge of bankruptcy. Communist Party officials in this modest city 450 miles southwest of Shanghai decided to back Wu's takeover bid, pressuring workers to sell him their shares and lending him all the cash needed to close the deal. "I didn't even have to spend my own money," Wu said, grinning as he explained how he came to own what is now a thriving wine and beverage manufacturer with $35 million in annual sales. Wu's takeover of Jing Wine from the workers is part of a far-reaching transformation of China's industrial landscape: Tens of thousands of state-owned businesses that once formed the backbone of the Chinese command economy -- and the foundation of Communist power -- are gradually being transferred into the hands of private individuals. This massive sell-off of troubled factories, mines and other firms began quietly in the early 1990s and accelerated after 1997, when Beijing decided to allow the privatization of all but the largest state enterprises. In the chaotic process that followed, local officials were left to answer the key question: Who should the new owners be? At first, local governments favored the workers, who felt entitled to the factories. After all, their long years on the assembly lines at low wages had helped build these enterprises, and the government had promised them lifetime job security, a promise now being broken. Politically, selling to workers was the safest choice, less likely to result in layoffs or labor protests, and more acceptable to party conservatives worried about the rise of a capitalist class. But from interviews with Chinese officials and visits to nearly a dozen factories in five provinces, it appears these worker-owned businesses have encountered serious difficulties. At some factories, workers have been unwilling to make the radical changes needed to improve efficiency, and have blocked layoffs, for example. At others, they have little real power over managers and are unable to demand better results or stop embezzlement. As a result, China appears to be undergoing a second, more wrenching round of ownership change. This time, managers and outside investors are taking enterprises away from workers, almost always with the support of local officials and often through corrupt or questionable methods. The failure of worker ownership presents Chinese officials with a dilemma. If they continue selling state enterprises to workers, these factories might all go under. But if they let managers or outside investors take over, it could mean more layoffs and worker frustration in a country where labor unrest is already seen as a threat to social stability. 'We Would All Be Owners' The streets of Daye buzz with motorized pedicabs, little three-wheeled vehicles operated by laid-off workers who scratch out a living on 25-cent fares. Day and night, they zip through town, passing shuttered factories, crumbling worker dormitories and long rows of lampposts decorated with bright yellow ads for Jing Wine, an alcoholic drink the Ministry of Health says is good for you. This high-proof brew of grain alcohol and traditional Chinese medicine is the best-selling product of one of Daye's largest taxpayers, the Jing Brand Co. The company's headquarters features a gleaming new science and technology building and modern assembly lines that produce dozens of varieties of juice, soda, wine and Chinese liquor. The place was entirely different when Wu Shaoxun first arrived in 1987. The state-owned factory was losing money and deep in debt, and having trouble even paying its employees. Wu, a Daye native who rose from chauffeur to manager at a textile factory, was hired to turn Jing Wine around. But the harder he tried, the more he realized he would never succeed while it was owned by the state. "As the manager, you're supposed to run the enterprise according to economic rules," said Wu, a slim, energetic 46-year-old who speaks so quickly he often interrupts himself. "But you couldn't, because you had to do things for political reasons." Then he saw a better way. As private businesses emerged as an economic force in China, Wu realized they represented the future. Twice in the early 1990s, he tried to quit Jing Wine and start his own company. Each time, his superiors in the Communist Party persuaded him to stay. Finally, the party allowed him to go into business on the side, and he invested in a mining firm and a construction company. He said he also used Jing Wine to lend money to private entrepreneurs at high interest rates. "That wasn't allowed, but nobody knew about it," he said, laughing. By the mid-1990s, China's state factories were threatening to drag down the entire economy. Party officials began considering the taboo possibility of privatization, which they carefully referred to as "clarification of property rights." Daye joined other cities across China in sending a research team to the eastern town of Zhucheng, where officials were pioneering the sale of state firms to workers. The team returned convinced that if managers and workers became owners, they would have an incentive to improve factory performance and share in the profits. By the end of 1997, every state enterprise in Daye had been sold to its employees. Jing Wine was one of the last to go. The city assessed the factory's net value at $3.1 million, but, as was standard practice, it set a much lower sale price, $1.7 million, to ensure that employees could afford to buy it, company officials said. Only employees could purchase shares, and they were not allowed to transfer them to non-employees. Workers were asked to invest $600 each, mid-level managers between $2,500 and $6,000, and senior managers between $10,000 and $20,000. Wu said he purchased about $121,000 worth of stock, or less than 8 percent of the total shares. The government was the largest stockholder, with about 18 percent of the shares. At some state factories, workers resisted buying stock because they believed it was a bad investment. But at Jing Wine, workers said they were happy to invest. It was a lot of money for people making about $500 a year, but almost everyone borrowed from friends or relatives to buy shares. There was a sense of excitement about the deal, in part because outsiders -- including local officials -- were trying to buy shares from employees under the table. "Of course, we all thought it was great," said Zhou Yuzhu, 33, a worker in the bottling division. "We would all be owners, sharing in the profits. We believed the factory had a bright future, and we had confidence in manager Wu." Leadership Problems But Wu wasn't optimistic. He never liked the idea of selling Jing Wine to its employees. Instead, he had asked city leaders for a loan to buy the factory himself, but they refused. When the workers gathered in an auditorium to elect a board of directors for their new company, Wu tried to skip the meeting. A deputy party secretary eventually tracked him down, and forced him to attend. Wu knew the company was in trouble when the votes were tallied. The workers named him chairman, but rejected his senior managers and instead appointed four mid-level managers to the board. "The workers picked people who would go easy on them," said Yu Dunwen, one of the men Wu failed to get on the board. "They didn't like tough managers like me. I had offended too many of them." Yu said running the factory became more difficult after the workers became shareholders. "Workers would say to me, 'How can you tell me what to do? I'm a shareholder!' " he said. Once, he recalled, inspectors found dead flies in a batch of wine. Yu said he tried to fire four careless employees who were responsible, but they said he had no right to do so, and it took nearly a month of shareholder meetings to get them dismissed. Wu compared the situation to the "iron rice bowl" of job security and benefits that had been promised to workers in state factories. After privatization, he said, workers enjoyed a "golden rice bowl." "They owned stock now, so they felt their position was even stronger," he said. Employees said absenteeism and theft of company property increased. In one memorable incident, a large tank of Jing Wine was discovered empty. Managers searched staff lockers and found several two-liter soda bottles they suspected were used to slowly steal the wine over a period of months. But there was no proof, and no one was punished. After a while, even the toughest managers gave up trying to make a difference. "Often, you wouldn't see anybody in the factory at all," Yu said. "So sometimes, I'd go and play poker, too." Wu said the main problem was that he didn't have the authority to make important decisions. He couldn't lay off workers, though he believed there were many who should go. He couldn't spend money on developing new products and adding or replacing equipment. "Under the old system, I needed the approval of party officials. Under the new system, I needed the approval of the workers," he said. "But the workers weren't interested in capital investment. They just wanted their dividends." At the end of the year, Jing Wine reported a loss. Wu clashed with the rest of the board members, who wanted to distribute dividends anyway. Eventually, the board outvoted Wu and paid the dividends. Wu said the company had to borrow to make the payments. Wu acknowledged he was so frustrated that he was no longer trying to do his best. Other employees said Wu was often out of town. "To be honest, I was relatively negligent that year," Wu said. "My heart wasn't in it. When performance fell, frankly speaking, I had something to do with that." But the company's owners, the workers, never tried to replace or discipline Wu. They didn't fully understand the factory's finances, nor did they believe they should get involved. Jing Wine had been privatized, but its new owners had no notion of corporate governance and lacked the mechanisms needed to keep an eye on managers. Accounting and disclosure requirements were weak, and there was no agreement even on the duties of the board of directors. "What issues should be decided by the board, what decisions Wu could make on his own -- it wasn't clear," said Zhu Jie, a board member still working at Jing Wine. "To be honest, we all had our jobs, and we were busy. We didn't have time to go around and understand the company's situation." "The stocks gave us all power, but we didn't know how to use it." A Change in Plans All of the former state factories in Daye were having problems. With the looming threat of a chain of bankruptcies, anxious city officials began to have second thoughts about worker ownership. They decided to back Wu's plan to take over the factory. The opposition was intense, both inside the factory and within the government. "Each of us had purchased shares, and now they wanted to dismiss the board and make us give all the shares to one person," Zhu recalled. "Everyone wondered, 'Isn't this a trap?' Our shares were being expropriated, and it was happening without our consent, by order from above. So the vast majority of people were against the sale." But party officials began holding long meetings at the factory, arguing that selling to Wu was the only way Jing Wine would survive. During one meeting, workers said, the officials refused to break for lunch until every worker had taken a position in public about the sale. "There was a lot of pressure," said Tian Huanzhang, a board member who has since left the factory. "The officials said we needed to continue and deepen reform in our factory. And you know the workers. They always listen to the leaders and officials because they're afraid." Many workers were worried because the officials threatened to sell the factory to outside investors who would almost certainly cut jobs. At least two companies had expressed an interest in taking over Jing Wine, they said. "The workers trusted me more," Wu said. "Because I had been at the factory for so long, they believed I wouldn't fire them easily. They realized reform was going to happen eventually, and it was better to let me do it than someone they didn't know." One worker wept as she cast her vote in favor of the sale. "I trusted manager Wu, but he was buying out our decades of work," said Xia Shuizhen, 48, who had started at the factory when she was 17. "Now we were just his laborers. The factory wasn't ours anymore." Wu said he paid every worker the face value of their shares plus 10 percent, and bought the government's shares for the same price. He also agreed to pay each worker $360 to $3,600, depending on how long he or she had worked at the factory, to compensate them for losing the job security associated with state employment. In the end, Wu got a great deal. State banks lent him the money he needed, a total of about $2.4 million, he said. That was about 20 percent less than the factory's assessed value. In addition, unlike other privatization deals in China, officials in Daye set no limit on the number of people he could lay off from the factory. Party conservatives attempted to overturn Wu's takeover, but Beijing eventually cleared the sale, and Jing Wine appears to have flourished since. Wu said he laid off perhaps a dozen, mostly older employees, but the company now employs three to four times more workers than before. Wu also said he paid back all the money he borrowed. But several other former state firms in Daye went bankrupt, some while under worker ownership, others after management takeovers. Thousands of workers lost their jobs in the privatization process, said one local official, and at least 3,000 operate pedicabs now. Nationally, the number of state enterprises has dropped by more than 40 percent over the past seven years, and at least 40 million workers have lost their jobs. In Zhucheng, the city held up as a model for worker ownership, managers and outsiders now control 80 percent of the city's former state firms. "If you sell shares to the workers, and in the end the enterprise fails, their jobs are gone and their capital is gone," Wu said. "What's the point of selling shares then? If you want to help workers, the most important thing is saving the enterprise."
