Mr. China (29 page)

I didn’t visit Jingzhou for nearly a year after the deal was done but when I eventually paid a visit the progress looked impressive. Chairman Ni, the old Chairman, had
been ousted after what sounded like a bitter, drawn-out fight and Chen was now firmly in charge. The changes outside the works were equally dramatic. Factory Number Two, the modern facility, had
been in the middle of a field the first time that Chen showed me round. But a year on it was just one of a long row of modern factory buildings on the edge of a new highway linking the two towns of
Jingzhou and Shashi.

Huge glass buildings towered on the other side of the road. A new Customs house, several banks and the local government building had shot up in less than twelve months. The road was broad,
divided down the middle with a grassy verge and mature trees that must have been transplanted from elsewhere. The whole area had the purposeful feel of the modern commercial district of a
prosperous provincial town.

The factory itself was full of new equipment, neatly arranged in lines. There were huge winding machines that wound thick copper wire around armatures as if they were wrapping cotton around a
bobbin. The workers were all busy, moving about briskly in standard blue overalls, while noticeboards showed monthly targets for production, quality-defect control and sales, with red lines
indicating actual progress. There were specially made trolleys stacked high with copper windings and when I stopped to talk to the workers they told me that they were happy and felt that the
business was going in the right direction.

Chen had won First Auto Works up in Changchun as an important new customer. This was quite an achievement; selling from central Hubei up to the north was difficult due to local protectionism.
Encouraged by his success Chen set his targets on an even greater prize: Shanghai. There was a buzz to the place, sales were going up and we were happy about the progress. There was only one
problem: the business lost money.

I never understood why the business didn’t make a profit. It was one of our larger companies in terms of sales, with good products and customers. It didn’t make
sense and Board meetings became tetchy as we struggled to understand the figures. We were never briefed properly; Chen just tossed vast tomes of badly photocopied Chinese figures across the
boardroom table when we arrived. Whenever we asked questions, different explanations would come from different members of the management team. No one seemed to be able to grasp the overall
picture.

Frustrated by the confusion, we insisted on hiring a new finance manager and after months of acrimonious discussions Chen eventually agreed to accept him. He didn’t last six months.
Ostracized and isolated in his separate office and with no one to talk to, he quickly became dispirited and left. It made me uneasy. It was difficult to recruit competent people to Hubei.

The first solid clue that something was seriously wrong came when we stumbled across a set of accounts for the Chinese partner on a routine visit to the tax office. The accounts showed that they
were making huge profits. But the Chinese partner had put all of its assets into the joint venture. How could it be generating profits when the joint venture was making losses? I went to see Chen.
He betrayed no unease at our meeting and told me that it was just a matter of accounting for some adjustments that related to the time before the joint venture. I was sceptical but he said that if
I didn’t believe him we could send in auditors to look at their books.

Shortly afterwards, we discovered an unauthorized transfer of a million dollars between accounts at the bank and demanded an explanation directly from the bank manager. After Zhuhai, we were
nervous about bank controls, so I asked the bank to explain what had happened. There was a lengthy exchange of letters in which the bank would neither confirm nor deny whether the controls had been
broken. Their replies took the natural aptitude of the Chinese language for vagueness to new extremes. Frustrated beyond endurance, we demanded that Qiu, the old accountant, should be sacked and
after several months of bitter wrangling we insisted on putting in our own man.

Little Zeng was originally from Shanghai and he thrived on conflict. All of our previous appointees had resigned within a couple of months but Zeng was keen for the challenge in spite of
Hubei’s reputation for wildness and lawlessness. He was small and wiry and had a toughness that went well beyond the point of insensitivity. He was deeply suspicious of everything and he had
an obstinacy that would never be deflected from his lifelong pursuit of accounting irregularities. His pallid complexion, the result of long hours spent poring over ledgers in dimly lit offices,
was accentuated by his habit of dressing only in black. He had the appearance of the quintessential auditor and a sense of humour to match. In short, he was perfect.

Shortly after Zeng arrived in Shashi, it became obvious that something was seriously wrong. The operations and accounts of our joint venture were hopelessly intertwined with
those of the old Chinese partner. Accounting records were conveniently merged so that an outsider could never really tell where cash receipts had gone. Managers held dual positions, money was
transferred between the two companies and we found that some of the sales offices were still operating under the Chinese partner’s name. That set off alarm bells. We’d had similar
problems in Harbin and it was a classic way of syphoning off profits.

We all took the view that the problem started at the top: Chen Haijing was the general manager of the Chinese partner as well as of our joint venture. We told him it had to stop. There had to be
a complete separation. ‘You can’t have a foot in both camps,’ we told him, ‘and you’ve now got a month to decide.’

After I came back from France, I went to Jingzhou many times. I had the job of hammering out a deal with Chen and I became familiar with the journey from Beijing. It’s a
two-hour flight to Wuhan and then a four-hour drive through the flat-lands and marshes to Jingzhou. In one stretch the fields surrounding the highway are dotted with scores of ancient oil rigs. In
the evenings, as the car sped along the raised highway, I would watch the silhouettes of the oil derricks against the setting sun. The cantilevers on top rocked back and forth, drawing up the black
liquid from far underground like some old woman stooping over a well.

That summer there was the worst flooding for decades. From the middle of July massive rainstorms lashed down in the upper Yangtse basin near Tibet. The water surged down the valleys at the
eastern edge of the highlands, gathering momentum. The geography of the region magnified the floods. When the river was forced into the gorges it became compressed into successive peaks or waves,
known as flood waves. In 1998 there were eight flood waves, one of which, at Jingzhou, was the highest in recorded history.

The flooding that year affected the whole country. A sense of crisis deepened when three key sluice gates east of the city of Harbin collapsed and the Central Government organized massive
evacuations. Confronted with a growing national calamity, the Government mobilized more than a million soldiers of the People’s Liberation Army and sent them to the flood regions to guard and
repair embankments. The entire nation was transfixed by the tales of heroism beamed across the airwaves.

Throughout the long summer, the sixty-five million people on the Yangtse flood plain lived on a knife-edge. Due to the elevation of the river bed caused by the fragile dykes, millions of people
were living in the surrounding countryside at an elevation
below
the level of the dangerously swollen river. In July, the Government declared an emergency and Jiang Zemin, China’s
State Chairman, called on the nation for a ‘do or die’ effort to control the waters.

In early August, a large section of the dykes collapsed downstream at Jiujiang City, flooding the town of half a million people. The soldiers deliberately sank eight boats and manoeuvred them
into the 130-foot wide breach in an attempt to plug the gap. More than thirty thousand soldiers and civilians toiled arounds the clock and eventually blocked the flow by adding bags of cement,
stone, coal, sand and even rice and soya beans around the sunken hulks. But the government officials barely had time to congratulate themselves before the grim news arrived that torrential rains in
the upper basin in Sichuan had caused another flood wave to form. This, the fifth wave, was the largest yet so the government drew up plans to dynamite the dykes on the southern bank of the
river.

This ancient method of flood control relied on the deliberate destruction of the dykes at key points in order to flood low-lying farm areas and relieve the pressure on the cities. It was a
simple choice: destroy vast areas of farmland to the south or risk the waters bursting into the major industrial towns on the northern bank. Wuhan, a city of eight million people, one of the main
industrial centres of China, lay on the northern bank further downstream.

More than three hundred thousand people were evacuated from the southern flat-lands, sometimes forcibly. At Jingzhou, the decision was made to blast the ditches if the water reached a height of
148.5 feet, but the final decision was reserved for China’s State Council, or Cabinet. The Prime Minister himself arrived to inspect the preparations and the television showed dramatic
footage of him plodding along the dykes and staring glumly out over the grey swirling waters. On the evening of 9 August, the river stood at 147.3 feet as the final peak water-crest surged out of
the Three Gorges, eighty miles upstream, and poured out into the flat-lands. The authorities knew that in a few hours the peak would reach Shashi. During the night the water rose to within two
inches of the limit, the highest ever recorded in history, but the government held its nerve. By the morning, the crisis had passed and the water began to subside.

More than two thousand people died that summer and forty million homes were destroyed, but the Government had responded to the crisis and an even more serious disaster had been avoided.

As the flood waters rose and ebbed, the talks with Chen dragged on. He came up with endless reasons to do nothing, chuckling all the time, showing his perfect white teeth and
moving his hands around as he spoke. But there was one point that we weren’t going to budge from. He had to decide which business he wanted to run: ‘It’s ours or the Chinese
partner’s but not both,’ I told him. We slowly turned the screws and eventually, in September, he agreed to resign from his positions on the Chinese side. We had a small celebration
after we reappointed him as General Manager of the joint venture. In the following months, the business turned to profit for the first time and even Little Zeng seemed to relax.

It seemed as if we were getting a new start but rumours soon started to filter back to Beijing that the Chinese partner was trying to go public on the Shanghai stock market. It was impossible to
know what to believe, but the experience at Ningshan had taught us about the dangers of having a Chinese partner with independent sources of money. When I questioned Chen he assured me that it was
all rumour but the word from Jingzhou got steadily louder and louder. There were stories that equipment had been transferred out to another site owned by the Chinese partner at Shihaolu. We had
reports of long weekend meetings where the Chinese management debated how best to prepare for going public.

Finally I received a fax from Zeng that changed everything. It was a notice sent out by the General Manager of the Chinese Partner. And it was signed by Chen Haijing. He hadn’t resigned
after all.

A familiar story was instantly recognizable. If the Chinese partner managed to raise capital on the public markets we would have a competitor on our doorstep. But this time it
was different from Ningshan. We were early enough to take pre-emptive action. The only option was to fire Chen and put in our own man. On the surface, it seemed an easier proposition than ousting
Shi from the tiny village of Ningshan where he was like a local warlord. Jingzhou had a population of nearly a million.

But we still needed to find Chen’s replacement. I had been interviewing an overseas Chinese manager throughout the summer. Mr Hou was in his late forties and was an engineer by training. I
had heard that he had handled some difficult situations where there had been labour problems, but he did not strike me as being particularly tough. He had been in China for nine years and managed a
number of automotive factories. He was familiar with the business and gave the impression of unflappable patience – which would probably be needed at Jingzhou. He came with a strong record of
team building and had worked in operations for many years. He was certainly no Chang Longwei but he seemed calm and capable and willing to take on the task so we signed him up and started to
plan.

Just as at Ningshan and Harbin our contract allowed us to remove Chen but we had to hold a Board meeting with the Chinese directors physically present. We had done that successfully with Shi but
had let him strike back later. This time there would be no such limp-wristedness.

We had three people working in Jingzhou together with Zeng. Little Li and Cao Ping were in exports and Zhao Xun was in sales. We called the team together and went through a rigorous planning
session. We prepared letters to change the bank mandates and agreed to post people with mobile phones outside the banks all over the city waiting for the signal to go in. Notices to be pasted up
around the factory, were prepared, announcing the change, and arrangements were made to seal off the file stores, lock the gates and impound movable assets. It would take a team of twelve people so
we drafted in reinforcements from Beijing. Zeng and his colleagues were relieved and excited that we were finally going to do something about Chen. He had made their lives miserable in Jingzhou so
I was confident that there would be no leaks.

I flew down to Hubei a day early. It was my habit to go through the topics in advance with Chen so I kept to the normal arrangements to avoid raising any suspicions. It was
surreal sitting opposite him and listening to his plans for reorganizing the factory; he described them excitedly but I knew that they would come to nothing.