Pay-for-Output Incentive Plans Sprout in China : Industry: Many state-run enterprises lose money. Model factories like a profitable MSG operation in Canton show workers the way.

One of China’s most successful state-owned factories churns out MSG--the additive that puts the zing in Chinese cooking--and has a line of slogans that is just as rousing.

“Less Hot Air, More Hard Work,” reads one. “Quality First, Production Second,” says another.

Eye-catching slogans are daubed across the walls of the Guangzhou Gourmet Powder & Foodstuff Factory, one of a rare breed of Chinese state-run enterprises that makes money.

The factory in Canton, in southern Guangdong Province, has found a formula for success that Chinese leaders want to export around the country.

It could play an important part in Beijing’s greatest challenge--to save lumbering socialist industries that are the creaking mainstay of the national economy.

Manager Sheng Zedong, a 47-year-old Communist Party member, explains the theory:

“Do more, earn more. Do less, earn less. Do nothing, earn nothing,” he said, quoting a factory motto. “We’re against egalitarianism here.”

For years such slogans have been heresy in Chinese state-owned factories, where workers have grown lazy by being guaranteed a paycheck and benefits for life under the so-called Iron Rice Bowl system.

But effort and reward is the new orthodoxy in China’s model province, whose state enterprises are nevertheless as dismal as any in the country.

About 40% of Guangdong’s state-run industries are losing money--roughly the same proportion found in provinces burdened by massive money-losing enterprises such as coal and oil.

The reform of state industry has alarmed millions of Chinese workers, who stand to lose salary--and even their jobs--in the current campaign to “Smash the Iron Rice Bowl.”

And if Sheng’s factory is a model for China, they have good reason to worry.

With a work force of 740, Sheng said, the enterprise turns out more monosodium glutamate than competitors with up to 3,000 on their payroll. And while others are propped up with government subsidies, Guangzhou Gourmet turns a tidy profit.

“Unemployment encourages efficiency,” said Sheng, a bundle of energy who bounds around his tidy factory leaving assistants panting in his wake. “In China we boast that everyone has work. That’s not good.”

China’s Communist leaders know mass layoffs could spark revolt, so they are trying to soften the blow when it comes by setting up an unemployment benefit system--a task that could take many years.

Until then, they count on factories such as Guangzhou Gourmet to shake up old ways.

All the workers in Sheng’s factory are part of a “contract-responsibility” system. They form production teams that negotiate annual deals with management to produce goods at a fixed cost and specified quality.

By keeping costs low, workers earn more money, a system that keeps the factory lines humming. Production value this year is forecast to rise by 50%.

“The idea is put cash in people’s pockets,” Sheng said.

Each day hundreds of government and party officials from all over China troop through the factory looking for management tips to carry back home. But Sheng is far from convinced their enthusiasm is genuine.

“I look at some of them and shake my head,” he said. “Their thinking is backward. They can’t make the leap.”

Central government is debating a number of plans for transforming state factories, which resemble shambling welfare agencies that provide everything from housing to medical care. The goal is to give them greater independence and make them responsible for their profits and losses.

There is widespread agreement that China needs a free housing market, with individual ownership, and a social security system separated from the factories.

A mobile labor force is also seen as vital if China is to maintain its economic growth.

Since Chinese leader Deng Xiaoping visited Guangdong last January to push market-style capitalism, stocks and shares have become the rage. Two fledgling stock markets are booming in Shanghai in eastern China and Shenzhen, two hours by train from Canton.

Like other successful state companies, Guangzhou Gourmet plans a listing and has big plans for expansion.

“We want to get into property, shops, hotels, fast foods--anything you can think of,” Sheng said. “The only thing we won’t touch is heroin.”