Auto Giant Being Reborn after Reform

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Last updated at: (Beijing Time) Friday, September 13, 2002

Auto Giant Being Reborn after Reform

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Once a heavily-burdened enterprise, the Changchun-based First Automotive Works Group (FAW)recently merged with the Japanese joint venture Toyota, re-establishing itself as a giant Chinese corporation.

The joining completes the biggest merger in China's automobile history and provides an example of how many struggling state-ownedenterprises are being reborn after economic reforms.

"FAW just spent four years to accomplish what takes some multinational auto companies decades," said Liu Shijin, an expert with the China Development Research Center of the State Council.

In 1998, FAW, despite being the producer of China's first autocar, was thrown into a lurch when the number of its redundant staff topped 100,000 and its profits dropped in successive years.

New life has been given to FAW after four years of knuckle-downreforms, reducing 80 percent of its staff and boosting profits sixfold by 2001.

The auto company's story is a vivid illustration of the changesand unprecedented obstacles faced by many state-owned-enterprises in China as the country transforms from a planned to a market economy.

In 1997, many of China's large and medium-sized SOEs reported deficits. At the end of the year, the Chinese government set a goal for these enterprises to climb out of poverty and establish amodern corporate system within three years. By the end of 2000, 70 percent of China's large and medium-sized SOEs had built up a corporate system, and the proportion hastopped 85 percent among those ranked as national key enterprises.

The International Monetary Fund (IMF) released a report at the beginning of this month, giving its approval of the SOE reform initiated by China, and saying that success in this sector will help promote a sustained development in other industries, as well as in the finance sector.

Over the past few years, the Chinese government scrapped all industrial departments in charge of SOEs, leaving market competition to decide their fate. It waged a three-year campaign to help 13 of the 14 key industries to reverse losses and begin tomake profits. Other undergoing reforms are designed to modernize the corporate system and strengthen corporate governance.

President of the World Bank Group James D. Wolfensohn praised the tenacity and resolution of China's leaders in pushing forward the SOEs reform, though the process is full of difficulties.

Lu Zheng, director of the Institute of Industrial Economics under the Chinese Academy of Social Sciences, said the SOE reform is like building a skyscraper from scratch. Over the past two years, the emergence of asset management companies and debt-for-stake swaps helped the SOEs cut their debt-asset ratio to below 50percent. Experiments with the corporate governance mechanism also succeeded and spilled over into wider areas.

As international competition intensifies with China's joining the World Trade Organization (WTO), SOEs have accelerated the process of forming large conglomerates with international competitiveness. The Qingdao Hair Group Co. boosted its overseas operation revenue to 60 billion yuan (7.3 billion US dollars) in 2001, 48.3 percent more than in the previous year.

Despite such setbacks as unemployment, Chinese leaders never hesitated to push forward the reform. Chinese President Jiang Zemin toured the country and met with local officials and enterprise executives in 1999, urging them to reach the goal of reversing most of the money-losing SOEs within three years.

Now the SOEs have become the mainstay of the economy, accounting for half of the country's industrial output. Though thetotal number of the SOEs drops, their total assets have swelled tomore than 16 trillion yuan (two trillion US dollars), mostly located in the infrastructure and key industrial sectors such as oil, transport and telecommunications.

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