Concrete Lessons in Reform

Hong Kong's Shui On is reviving cement plants across China

Managers at Di Wei Cement, a run-down factory on the banks of the Yangtze in central China, faced a heap of problems. The plant's supply of limestone from nearby quarries was dwindling. Equipment was aging. And a central government edict to close old, polluting, state-owned factories threatened its survival. Then in stepped TH Group, a joint venture backed by Hong Kong entrepreneur Vincent Lo, to buy 80% of the company for $25 million.

Since the investment 19 months ago, Di Wei has gotten a new lease on life. TH plans to invest another $24 million to upgrade the plant. New equipment will cut pollution while doubling the plant's annual capacity, to 3.5 million metric tons, by the end of next year. And work is almost finished on a $12 million bridge across the Yangtze that will give Di Wei access to a new quarry with more limestone. Best of all for locals, TH hasn't laid off any of the plant's 3,200 workers -- and promises not to. In fact, TH has even let workers and managers keep an equity stake in the operation.

Di Wei is just one link in a network of cement factories Lo is building up throughout central China. Hoping to capitalize on the infrastructure boom as China lays out billions of dollars to develop its western provinces -- the so-called Go West project -- Lo's Shui On Construction and Materials Ltd. has spent more than $100 million to buy 12 cement companies in China's heartland since 1993. TH Group is a 50-50 joint venture between Shui On and Hong Kong entrepreneur Paul S.P. Tung, who has moved to Chongqing to oversee day-to-day operations of the plants. "We were making money from Day One," Lo says of his cement operations. "Peasants are queuing up every day with cash to buy cement from us. It's like a candy store!"

Lo is best known for his development of Xintiandi, a down-at-the-heels Shanghai neighborhood that he transformed into the city's premiere entertainment and retail district. But until recently, Shui On made the bulk of its profits in Hong Kong property and by selling building materials in the territory. As Hong Kong's construction business slowed in recent years, the company slipped into the red -- which had Lo looking to the mainland to turn things around.

Cement is a gritty, low-margin business -- hardly the stuff of a corporate Cinderella story. But with China pouring concrete for dams, roads, and skyscrapers so fast that existing factories can barely keep up, Lo figured a big, well-run cement business would be a source of steady earnings. Shui On doesn't release detailed financials on its mainland cement operations, but company execs say they had revenues of more than $100 million last year and turned a profit. Shui On "professionalizes the management, produces high-grade cement, keeps employment going, and also cleans up the environment," says Stuart Cook, a vice-president at J.P. Morgan Securities Asia who has followed the company for years. "I think they will make a big success of this."

Lo believes he can be successful if the price he pays is right -- and so far, it has been. Lo snapped up Di Wei for less than $20 per ton of capacity, or about a third of the cost of building a new cement plant in China. Even after the cost of low-interest loans and bank guarantees -- $75 million so far in its various cement operations -- taking over old plants is significantly cheaper than building new ones. And by buying an ongoing concern, even if it needs renovation, Shui On can start producing and selling cement faster.

Lo cashed in on cement with his first investment, in Yanjing, an hour north of the western city of Chongqing. The plant has seen its sales nearly quadruple, to more than $25 million, since Shui On took over in 1995, company officials say. Better yet, earnings have shot up, to $4 million last year from less than $500,000 in 1995. Much of the newfound profitability came from simply being freed from the yoke of central planners. Before the joint venture started, the Chongqing Planning Commission gave the plant production orders, and sales were handled by the municipal Construction Industry Materials Bureau, at prices set by the local Price Bureau. Now, none of those agencies has power over the factory. "We had no capital, no technology, no management capabilities, no money," remembers Wang Yongsheng, the plant's manager. "We feel lucky to have this joint venture."

That's not to say there haven't been problems. TH has had to lean on customers to collect payments more rapidly than is the norm in China, where bad debts often pile up. And in Chongqing, Shui On has added so much capacity that prices have fallen to $25 per ton, from $43 since 1995.

Those falling prices have Lo scrambling to find new markets where there's less supply and more demand. His latest expansion is in the impoverished province of Guizhou, on the southern border of Chongqing. Since 2000, he has snapped up a half-dozen cement plants there. Due to a cement shortage in the province, plants haven't been able to keep up with demand -- which means Shui On can charge higher prices than it can in Chongqing.

So far, Shui On seems to have the right formula. Its combination of hands-on management, a no-layoff policy, and investment in upgrading the plants is paying big dividends. The central government had better hope that Lo's success will encourage others. The country still has some 180,000 state-owned companies, many of them as destitute, dilapidated, and desperate as Di Wei and Yanjing were.

For many Chinese, Lo's no-layoff policy is key. While local officials generally want to see the companies in their districts turned around, they're wary of cutthroat foreigners who might come in and fire hundreds or thousands of workers. They have good reason to worry: Nationwide, employment at state-owned enterprises fell to 71.6 million last year from 110.4 million in 1997. "This investment has given us a lot of help," says Zheng Ho, party secretary of the Jiulongpo district in central Chongqing, home to another TH cement plant. "It improved our economic competitiveness and supplies a lot of jobs and tax revenues."

If Lo has the management resources and capital to keep going, he won't run out of potential takeover candidates anytime soon. China's 6,000-plus cement companies are mostly small, highly polluting, and underfunded -- exactly the sort of company Lo likes to buy. "We can take over the entire domestic market," Lo says. Hyperbole, perhaps. But his success is further proof that it will be China's entrepreneurs, not the government, that drive reform forward.

By Mark L. Clifford in Chongqing

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