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THE PRIVATE SECTOR
A Cauldron of Free Enterprise

Private entrepreneurs dominate booming Wenzhou,
south of Shanghai, and foreign investors rarely
come to risk their money here. As China's private
sector expands, this city--warts and all--is what
much of the country will look like in the coming
years

By Ben Dolven/WENZHOU
Issue cover-dated July 03, 2003

WANG ZHENTAO, 38, is dressed in black from
head to toe--black Hugo Boss shirt, black jeans, black
shoes--and he's rattling off the names of companies that
have come to visit his offices in the coastal city of
Wenzhou.

A HOTHOUSE CITY FOR
DEAL-MAKING
•
Private businesses account for
95% of Wenzhou's industrial
output
•
Costs are low, competition is
very fierce and foreign
investors scarce
•
But many small firms are
growing and they need better
management and more
transparency
•
So will their success breed
better business?

Citibank was here, trying to sell him banking services,
the bulky, brush-cut shoe tycoon says. Morgan Stanley
came too, he adds, trying to persuade him to list his
company--Aokang Shoes--on a stockmarket overseas.
Shoe firms from Italy, Spain, Japan and Russia have
done deals with him so that Aokang produces their
shoes for export. The one, however, who didn't come,
a company executive says, was Forbes magazine when
it was compiling its 2001 list of China's richest
individuals--because Wang refused to see its
representatives.

Quite a change from 15 years ago when Wang started
his company with three friends and a total investment of
30,000 renminbi ($8,000 at the 1987 exchange rate). It
was at a time when officials were publicly burning fake
shoes from Wenzhou in a crackdown that battered the
reputations of many shoemakers. The partners in
Aokang didn't take a single bank loan for the first six
years. "At the start," Wang says, "it was hard to get
myself known by bankers. Now, all these bankers are
coming to me asking if I want to take loans."

Meet the Wenzhou attitude. Wang is one of thousands
of private businessmen in this thriving business centre, a
40-minute flight south of Shanghai. Some 95% of the
city's industrial output comes from the local private
sector, estimates Xie Jian, a management professor at
Wenzhou University. As China's economy moves ever
further from its statist origins, Wenzhou--gritty and
grey, but vibrant and booming--offers clues as to where
much of it is headed.

In the far southern part of wealthy Zhejiang province,
Wenzhou doesn't resemble China's showcase
development centres such as Shanghai, where
well-funded state firms and high-profile foreign
investors rule the economy. Last year, the city's top
Communist Party official estimated total foreign
investment into Wenzhou since China opened its doors
in 1979 at $600 million--less than half what it cost to
build General Motors' single Shanghai car plant.

Wenzhou's development is different. There aren't many
big foreign investors in this city of 7.5 million people,
and the central government never paid much attention
to the place, so big state industry never developed.
What exists in Wenzhou is entrepreneurial zeal, a
chaotic, cowboy energy that pushed the city to levels of
development as impressive as any in China. With a tiny
state sector and few foreign investors, the local
government has no alternative but to support private
enterprise, says Chen Daorong, chairman of Huayi
Group, a private maker of high-voltage transformers.

What will the parts of China that follow the Wenzhou
model look like? On the plus side, Wenzhou has grown
enormously. By its official figures, the city's economy
grew 12-fold between 1990 and 2002. (Shanghai's, by
comparison, grew by six times.) Wenzhou produces
20% of China's shoes, 80% of its spectacles, 60% of
its razors, 65% of its locks and keys, and 65% of its
electricity transformers. More than 1.3 million migrant
labourers toil in its factories. Some of its companies
have grown into international players, and local and
foreign name-branded shops line its downtown streets.

On the minus side, it's an ugly, ill-planned sprawl of
construction projects and factories, chaotic and
polluted, crisscrossed by murky canals and dotted with
karaoke parlours. Business practices are all over the
map. In the city's drab Renqiao neighbourhood,
shirtless migrants crank out cheap pirated shoes in
dozens of small mills. One plant manager says he'll
make copies of Nike or Adidas sports shoes for 30
renminbi ($3.62) apiece if a customer provides a
model. (Today, he's making fake-leather men's shoes
with dozens of perforated ventilation holes for export,
he says, to North Korea.)

In many ways, Wenzhou is in the middle of a massive,
chaotic transition--one that give clues as to whether
China's economic modernization will keep bringing
boom or, eventually, bust. China optimists argue that
the growth of private enterprise in the country will
breed solid business practices, accountability and the
realization that companies need to provide a reasonable
return on investment. Pessimists contend that the system
is too corrupt to allow this transformation, and point to
a long list of investment disasters involving private firms,
which were widely considered successes before coming
under serious scrutiny for corruption.

Recent high-profile examples include Euro-Asia
Agricultural Holdings, whose founder Yang Bin went on
trial in mid-June for fraud and bribery, and the
companies controlled by Shanghai property magnate
Chau Ching-ngai, who was detained in May and is
under investigation over loans from the Bank of China.
Wenzhou has its fair share of corruption as well. In
May, authorities sentenced Liu Zhilin, the head of Xinli
Electronic Machinery, to death for evading 14.9 million
renminbi in tax receipts--one of the seven biggest tax
fraud cases in China last year.

That tension between very real growth and very real
problems is played out daily in places such as
Wenzhou. Many private ventures, which began as small
family shops, now face big-company issues: managing
expansion, forays into international markets,
increasingly complicated finances, stockmarket listings
and the fight against rip-offs of their own brands.
Whether these firms are ready to provide greater
transparency, and whether they have the depth of
management needed to handle their growth, will
determine whether Wenzhou's trajectory remains
upward.

Take Wang's company. It's the city's biggest
shoemaker, reporting pre-tax profits last year of 69
million renminbi and revenues of 1.07 billion renminbi.
In his early days, Wang struggled to build a viable
company. Now he has one and he's trying to build a
brand. He proudly displays pictures of himself burning
fakes of his own company's shoes.

This year, in addition to its other contracts to make
shoes for other companies, known as
original-equipment manufacturing (OEM), Aokang also
signed a contract with Italian shoemaker Geox, which
lets Aokang use its sales network in exchange for
producing and helping to distribute Geox shoes in
China. As with most companies on China's coast, brutal
cost-efficiency drives this process. Wang says it costs
$20 to produce and ship a pair of Geox shoes from
Wenzhou, compared with $30 to make them in the
Italian company's home base. He's setting aside two
production lines for the new brand. "By doing OEM,
we can better understand the shoe culture in these
nations," Wang says.

But managing the company is harder now that Wang
spends at least a week each month meeting partners in
Shanghai, at the same time as Aokang is setting up a
large production base in the central city of Chongqing.
That in turn produces more change. "I'm not in
Chongqing," he says. "The whole Chongqing operation
is run by employees."

Like Aokang, many growing firms in Wenzhou are
encountering new challenges. Consider Hong Qing
Ting, a competing shoemaker, which opened its doors
in 1995 and, company officials say, last year had
revenues of 930 million renminbi and more than 70
million renminbi in pre-tax profits.

The firm's founder, Qian Jinbo, didn't rely on bank
loans for the growth of his core shoe business,
according to Wei Yanxing, director of the company's
cultural centre--a sort of propaganda unit. But in recent
months Qian, sitting on more cash than he knew what
do to with, decided to invest in real-estate and
educational ventures in Shanghai and a network of retail
supermarkets in small Chinese cities. So he's begun
borrowing from banks.

Such expansion raises two key issues for firms such as
Qian's. One is the wisdom of taking a successful shoe
business and expanding rapidly, with debt, into new
areas, particularly speculative ones such as property.
The other is whether they have the management
capacity to make a success of new businesses.

But Wenzhou doesn't lack for ambition. Indeed, the
allure of the private sector has even started to draw
officials out of government. It's still rare in China for a
young, high-level cadre to drop completely out of the
public sector to solely pursue business. The usual
procedure is for an official to nurture relationships and
then retire into business. But in April, Wu Minyi, a
Harvard-educated Wenzhou vice-mayor, quit to run the
Qian-funded retail venture. Again, Wu voices the
Wenzhou attitude: "If I succeed," he says, "many more
vice-mayors may quit."

Chen, the transformer-maker, has other issues
surrounding the growth of his business. His Huayi
Group recently passed the requirements for listing on
the Shanghai Stock Exchange, which would give him
proceeds to buy a state firm, but also raise a whole
range of management and transparency issues.

Chen, a burly man of 47, flips cigarettes nonchalantly
onto the table for guests as he describes starting his firm
in 1986 with four other partners, who put in 8,000
renminbi each. Chen, a former electrical-equipment
travelling salesman, made the company's first sale on a
train in the central province of Shaanxi. He says Deng
Xiaoping's famous trip to Guangdong province in 1992,
when the paramount leader spoke glowingly of Chinese
enterprise, opened a lot of doors. After that, Chen
says, "I could expand my sales channels from private
companies and some daring state firms, because state
firms were no longer worried about this or that because
we were private."

Of course, the link between private and public is
blurred across China, including Wenzhou. Sitting next
to Chen is Li Rongguo, the company's vice-president
and party secretary. Li was previously party secretary
of Liushi county, where Huayi's original offices were
located. Chen says that when Li was in government, he
helped the company get land on which to build a
factory.

Last year, Huayi had 710 million renminbi in revenues,
and it has factories in five provinces. It makes
high-voltage transformers for provincial power
companies, and assembles them for multinationals such
as ABB and Toshiba. In an enormous month-old
factory, 45 transformers--three-metre-high boxes
priced at 1 million renminbi each--await shipment to
power stations. There would likely be more, Chen says,
if the outbreak of Severe Acute Respiratory Syndrome
hadn't slowed orders in the past two months.

A MATCHLESS SUCCESS
One of the brutal lessons that Wenzhou firms have
learned well is that competition is fierce for companies
that live solely on cost. Ask Zhou Dahu, the founder of
Zhejiang Tiger Lighter, an 11-year-old company and
the largest of the city's myriad lighter makers. In 1991,
Zhou found his niche. Operating out of his family home,
he and his wife could make metal lighters for about 9
renminbi each and sell them to exporters who could get
¥500 ($3.30 at the 1991 exchange rate) for one in
wealthy Japan. Wenzhou natives living in Europe filled
suitcases with lighters to sneak them out of China. Zhou
says he made a margin of about 1 renminbi profit per
lighter.

Then . . . whomp! Within two years, Zhou says,
Wenzhou had 3,000 lighter companies, each seeking to
do exactly the same thing. Faced with such cut-throat
competition, Zhou shut his company down for about
five months. He lay low, and watched competition
devour most of them, at which point he re-ignited his
links with German and Japanese makers and started to
manufacture for them. Last year, he says, his revenues
topped 100 million renminbi, and though margins have
narrowed in recent years, he's shipping more than 80%
of his lighters, most bearing his own brand, abroad to
premium markets such as Japan and Europe.

It's a rough business world that former Vice-Mayor Wu
is entering. His former public-sector
responsibilities--promoting hi-tech and shaping up
Wenzhou's social-security programme--have given way
to his new private-sector tasks, such as searching for
suppliers, logistics operators and land. "I thought for
some time last year that it was time to try a new
project," Wu says, before excusing himself, at 9 p.m.
on a weekday, to head out to yet another business
meeting.

THE PRIVATE SECTOR
How Wenzhou Went
Private

By Ben Dolven
Issue cover-dated July 03, 2003

In the 1950s and 1960s, Beijing paid little attention to
Wenzhou. Given its proximity to Taiwan, it was
considered too risky a place to build heavy industry,
says Xie Jian, a professor at Wenzhou University.

The city has consistently returned the favour. In the
early 1970s, it bucked the disastrous collective
agriculture policies of the Cultural Revolution. In the
1980s, the city government permitted private
companies to call themselves "collective enterprises,"
allowing thousands of small private mills to sprout up.
And in the 1990s, through years of pell-mell
modernization, the city became a haven for private
enterprise.

Perhaps because local government has proved weak,
foreign investors--who typically rely on strong municipal
authorities to pave their paths in China--have largely
given Wenzhou a miss. Total foreign investment in the
city was $80 million last year. That's small compared
with many smaller cities around the southern
manufacturing centre of Guangzhou, or with Shanghai.
Wenzhou's dingy 13-year-old airport has no
international flights, except to Hong Kong.

But to get a better sense of the Wenzhou business
spirit, visit the Wenzhou Licheng Plastic Products
factory in a large, corrugated-iron shed down a narrow
alley behind the residential blocks in the city's Hongdian
village. It was set up in 1987, and its 59-year-old
owner, Deng Jinchun, watches over a handful of
workers making small plastic gears and plastic hooks
on six small moulding machines. They press smelly
plastic goo in the machines, and then dump the shapes
into buckets of dirty water. The shed serves as factory
floor, warehouse, office and home of assorted
bric-a-brac--everything from a grandfather clock to
Teletubbies dolls.

Despite the humble surroundings, Deng says that he
exports nearly everything he makes. He says he's used
a network of friends to build ties with several export
companies. "You have to have a lot of friends to do
business," he says. Last year's revenues: 2 million
renminbi ($242,000).