A Chinese Tale That Americans Know Well

China’s economic reform, a vast undertaking to restructure the operations of socialist state enterprises by reducing staff and shutting down uneconomical operations, is in many ways a story familiar to Southern California, which only yesterday endured the downsizing of aerospace companies.

China is going through its own acquisition binge and at the same time is discovering the value of small business.

China’s reforms didn’t begin in cities such as Shanghai, a sprawling metropolis of 13 million, but in villages in rural areas as long ago as 1978. That was the year Deng Xiaoping, the late leader whom every Chinese official now cites as a reference point, started the long march to a market economy.

“Deng was acute,” says Professor Zhou Dun Ren, an economist at Shanghai’s Fudan University. Deng didn’t start by attacking the large state enterprises but by encouraging cooperative enterprises at the village level.

Village cooperatives didn’t suffer as much control from the central government, Zhou explains, so they could produce more efficiently. Soon they were supplying parts to state enterprises. Then towns and cities set up their own small companies to manufacture products.

Decisions were still made on a political basis, but by smaller, more local units than the central government.

And now all that is changing again. Business is being organized in what we would recognize as companies with shareholders but also with government influence. Two examples--one an electrical-parts producer and the other a start-up company in business services--reflect the growing power, and also the struggles, of small business in China’s economy today.

Shanghai Jin Ling Co. was a producer of radios from 1958 until 1992, when its sales reached $12 million. The local government decided Jin Ling would be the lead company in restructuring some Shanghai electric component manufacturers.

Other companies, a municipally owned maker of power plant instruments, for example, and the union fund of its own workers, bought shares in Jin Ling.

The government of Shanghai took formal share-holdings, too. And 6 million shares, representing 12% ownership, were sold to individuals through the Shanghai stock exchange.

Today Jin Ling sells $212 million worth of electrical components annually, and individual public shareholders own 25% of the stock.

What happened? The company grew by acquisition, taking over semiconductor plants, other radio companies and component makers. In 1996, it acquired Shanghai Micromotor Factory, which was bankrupt, and took to restructuring it. The process is no kinder in socialist China than it was in the Rust Belt in the ‘80s or Southern California in the ‘90s.

“We acquired Micromotor when it was bankrupt,” says Zhong Zong Yao, Jin Ling’s vice chairman. “It had 1,556 employees. Now it has 480. It had [$6 million] revenue in 1996, and next year it will have [$13.4 million].”

Where did the people go? “We retrained them for service industries,” says Zhong, a wiry, intense engineer. Jin Ling owns a taxi company, he says, so the laid-off workers can drive cabs.

“Or they can work in restaurants or help couples by cleaning homes, taking care of children,” Zhong says.

Not all factory workers are pleased to be converted forcibly to domestic servants. On a recent Saturday, a workday, a laid-off worker invaded Jin Ling’s complex in the city’s Pudong area, where skyscrapers are being thrown up in hopes that international banks will come and turn Shanghai into a financial services center.

Shouting and cursing his fate, he berated former fellow workers in the lunchroom until they gently but firmly hustled him off the premises.

“He thinks he was let go unfairly, but he’s wrong,” Zhong says impassively.

Zhong has other concerns. He has to raise money to expand the company to attract joint-venture partners from Japan and the United States. General Electric took a look at one of Jin Ling’s operations several years ago but found it too small. Now GE is coming back, Zhong says.

How does he raise money? At one time, a company in China received financing automatically from the state bank--one reason China’s state banks are stuck with about $200 billion in bad loans.

But Jin Ling raises money by selling the state’s shares to the investing public. And to do that, it must qualify by earning a return of more than 10% on its shareholders’ invested capital, which now amounts to $21 million. The company has been meeting its return on capital target and selling shares to the public, which is why individual ownership has risen to 25%.

Yet in a pattern similar to the U.S. Midwest in the ‘80s, Shanghai is seeing higher returns on capital but more unemployment--more than 200,000 jobless at present.

Like many U.S. cities, Shanghai’s response to unemployment is to look toward the service industries. So the Shanghai municipal government and several city agencies--the foreign trade office, the import-export office--are launching a start-up service company called East Best International.

East Best hopes to offer advertising, printing, consulting and, most of all, employment services to foreign firms coming to Shanghai. “The greatest need here is for skilled personnel,” says Wang Lie, executive vice president of the new firm, which started business only in November.

Will Shanghai succeed in evolving to a service economy? Time will tell, but with China, keep several things in mind.

Economic reform is no guarantee of political reform. The now-revered Deng who started economic reform also imprisoned Wang Dan, the Tiananmen demonstration leader.

On the other hand, economic progress always helps. China’s economy, still relatively poor, needs foreign investment to develop. That’s one reason there is so much eagerness for President Clinton’s visit in June and why Wang was just released from prison.

And for the long term, it must be said that experiments with small business and growing numbers of public shareholders, reveal a society learning new and better ways.