China Billionaire Beats State as Summit Encourages Markets
China’s leaders sent a mixed message at a summit in Beijing this week: vowing to boost the role of markets while endorsing the state’s dominance of the economy.
The tale of two aluminum companies shows why the nation needs to resolve that paradox.
On a Martian landscape in China’s east, yellow bulldozers shovel truckloads of red dirt from a four-story-high mountain to be smelted into molten metal by China Hongqiao Group, the country’s largest private aluminum maker.
Traditional producers deliver solid ingots that customers have to spend time and money melting down again to pour into molds. Hongqiao’s trucks deliver cauldrons of hot, liquid aluminum -- smelted with cheap electricity from the company’s own power plant -- to clients who make parts for Apple Inc. iPads and Volkswagen AG cars. Such innovations helped Hongqiao reap a 5.45 billion yuan ($890 million) profit last year.
Meanwhile, about 40 kilometers (25 miles) away, a rusting plant hints of the malaise at state-owned Aluminum Corp. of China Ltd. The nation’s largest producer posted losses of 8.23 billion yuan in 2012 as aging technology added to inefficiencies. Both companies are stuck in a market that’s drowning in excess capacity as China’s construction boom slows, almost halving the price of the metal from its 2008 peak.
The contrasting fortunes of the smelters slugging it out in Shandong Province underscores why President Xi Jinping said overcapacity in state-dominated industries threatens to cause an economic crisis. Yet analysts say the Nov. 12 communique from the third full meeting, or plenum, of the party’s 18th Central Committee doesn’t explain how private businesses will benefit or state-owned companies will be turned around.
“They promised a big push on reform, and a ‘top level design,’” said Barry Naughton, a professor at the University of California at San Diego, who studies China’s economic reform. “We didn’t get a big push, and they set up a committee to work out a top level design. So clearly the plenum did not move the ball forward as much as we hoped.”
China is searching for new engines of growth after decades of expansion powered by exports and state-led investment begin to slow. The economy is expected to expand 7.6 percent this year, according to the median estimates of economists surveyed by Bloomberg News, down from 7.7 percent in 2012 and the weakest since 1999.
Entrepreneurs like Zhang Shiping, the textile tycoon who founded Hongqiao, have blazed a trail, overcoming obstacles that favor state players. To get around the high-priced government electricity monopoly, he built his own power plants.
Driven by technology investments, Hongqiao produces about 69 tons of aluminum for every employee compared with 43 tons at Chalco, according to data compiled by Bloomberg. Chalco, listed in Hong Kong and Shanghai, is majority-owned by state enterprise Chinalco.
In the first nine months of this year, Chalco lost 1.85 billion yuan even after a $529 million injection from its parent for its aluminum fabrication business.
“Chalco knows the parent will always bail it out when it gets in trouble and doesn’t feel threatened by private competitors,” said Helen Lau, a Hong Kong-based analyst at UOB-Kay Hian Ltd. “The company has no motivation to do serious R&D to improve the business, whereas a company like Hongqiao needs to innovate or die.”
Chalco didn’t respond to calls and emails seeking comment.
In total, the listed units of state-owned companies have received at least $9 billion from selling assets back to their parents over the past three years, according to data compiled by Bloomberg.
Chalco’s status also ensures lower borrowing costs, fueling debt roughly equal to the size of the economy of Cyprus. Its $24.3 billion outstanding debt is more than four times the $5.7 billion at Hongqiao and Chalco borrows at 200 basis points cheaper than its rival, according to data compiled by Bloomberg.
Chalco’s bonds are rated AAA by China Chengxin International Credit Ratings Co., two levels above the AA rating given to a unit of Hongqiao.
Those perks are a sore point for private business.
“The state-owned companies are like children, they cry and the government gives them money,” Liu Shuzheng, a manager in Hongqiao’s securities department, said over a lunch of river crab, a prized delicacy, at an on-site hotel. “Private companies like us only have ourselves to depend on. It’s up to us if we sink or swim.”
Excess capacity extends to other industries dominated by the state, including steel, flat glass, cement and shipbuilding, according to a report from the State Council published Oct. 15.
China produces almost half the world’s aluminum, after more than tripling capacity over the past decade. The nation produced 20 million tons last year despite a global oversupply of 1 million tons.
That’s driven some smelters in Europe and America out of business. Alcoa Inc. cut production in New York and Brazil and London-based Rio Tinto Group is set to close a plant in Quebec, Canada, by the end of November.
Looming over Hongqiao’s sprawling complex in the village of Zouping is the key to the company’s success: giant cooling towers venting steam from massive turbines that supply electricity to the plant. About 40 percent of the cost of making aluminum comes from the energy needed to heat the raw material, the company said.
Hongqiao has a competitive edge because it produces most of its own power, according to Christine Wong, Hongqiao’s head of corporate finance. The company supplies about 70 percent of its own electricity at less than half the price charged by government provider State Grid Corp. It also sells more than 70 percent of its aluminum in liquid form, saving customers as much as 1,000 yuan a ton, she said.
Zhang, Hongqiao’s founder, got into making metal to use up excess electricity from power plants that supplied his textile mills. He started off hauling bales of cotton in a small government-owned mill that he eventually took over and turned into the world’s biggest cotton textile producer. Now he’s worth $3.8 billion, according to data compiled by Bloomberg Billionaires Index. Zhang, 66, declined interviews with Bloomberg News.
Hongqiao has built 15 power plants since 2002 and is constructing two more to become self-sufficient in electricity by 2017, Wong said.
Like state companies used to do, Zhang has built hospitals, kindergartens and apartments for his workers.
“Working here has doubled my salary and we live a more comfortable life,” said Zhou Guoming, 30, who shared an employees’ dorm in his former job at a hotel and now has his own 98 square-meter apartment.
Zhang’s career nearly ended in 2007. An accident in one of his factories killed more than a dozen workers when molten aluminum spilled, causing an explosion. China’s State Administration of Work Safety said design and operational flaws were to blame.
The billionaire lost his seat on China’s legislature, the National People’s Congress, the next year. Zhang quickly recovered from the setback. Since then, Hongqiao’s aluminum capacity has increased more than five-fold. When Hongqiao was listed in Hong Kong in 2011, investors included billionaires Li Ka-Shing and Cheng Yu-Tung.
Still, entrepreneurs need support from officials, especially those at the local level, to prosper. Hongqiao is the third-highest taxpayer in Shandong and hires retired government officials, Wong said.
Zhang is popular with the local government and doesn’t need to use “guanxi,” the personal connections essential for business, he said in a July interview with Chinese-language Talents magazine.
Investors are backing his success. Hongqiao shares have gained 15 percent in Hong Kong this year, while Chalco’s have fallen 23 percent. Hongqiao fell 0.4 percent to HK$4.64 in Hong Kong today while Chalco rose 1.1 percent.
An hour’s drive away from Zhang’s empire, Chalco’s 60-year-old plant in Zibo stands in stark contrast to the newly built Hongqiao facilities. The plant was one of the crown jewels of Mao Zedong’s push to industrialize China in the 1950s.
Rusting pipes snake along walls and over roads beside badly faded warning signs.
“We can’t compete with Hongqiao, just look at the place, everything is old and breaks down,” said Liu Yi, a forklift operator who’s worked there 16 years. “China has changed so much since reform and opening up began. Inside the aluminum plant nothing has changed in 40 years.”
Chalco has finally begun to cut the capacity it added during China’s credit-fueled building boom. The company suspended about 380,000 metric tons of capacity in June, the first reduction since 2009.
Uniformed workers streaming out for a lunch break on a sunny September day complained of tough times making ends meet.
Shao Hongjun, 50, said he has worked in the factory for 30 years and earns about 3,000 yuan per month in the molding workshop.
“I heard Hongqiao paid more and some of my old colleagues are now working there,” Shao said. “But I am too old to move.”