02 June 2004 00:00
Russia tries to sell capitalism
ByLine: James Kynge
Both were the children of communism, each nurtured on socialist welfare. But the first acquisition of a Chinese
company by a Russian competitor was anything but a marriage made by Marx.
Free market economics was the prime mover when Acron, Russia's leading exporter of chemical fertiliser, bought
58 per cent of Shandong Red Sun for $27m in 2002. As soon as the deal was done, the Russians began transferring some of
the lessons from their own wrenching experience with privatisation.
"It was not easy," says Valery Kotov, head of Acron's China operations. "At the start, the
factory felt that it was them versus the foreigners."
The first dilemma facing the Russians was that which confronts many a foreign company buying state enterprise assets
in China - how to break the "iron rice bowl" of lifetime employment and vague accountability without
alienating the management and workforce.
In this, the Russians had personal experience. They sold 7 per cent of their stake at concessionary rates to the
existing top management to show their commitment and inculcate a sense of shared rewards for success. They told the
managers that none of them would be fired but put all of them on three-year contracts that would be renewed only if they
were successful.
"These negotiations were tough. It took six months to put this contract system in place. They were used to
expecting a job for life," Mr Kotov says.
They then ensured that the workers, who owned 35 per cent of the company even before Acron arrived, would actually
receive the dividends due to them. "This is how Acron is managed in Russia," says Mr Kotov.
The board itself was reconfigured. Four Russians were brought on to match the four Chinese but all of the main
executive positions, including general manager, were left in the hands of existing Chinese staff.
The most senior hands-on Russian is a young man who lives on site in Linyi, in a remote corner of the eastern
province of Shandong. He is sometimes homesick but is learning Chinese and finds his job as a deputy to the sales
director exciting, Mr Kotov says.
Yet, in spite of the attention that Acron has invested in the Chinese subsidiary, conditions have started to
deteriorate. It is not the corporation's internal dynamics that threatens to undo them, but rather that China
remains too much of a command economy for former communists to handle.
The price of sulphur, potash, phosphate, ammonium and other ingredients used in making fertiliser have risen sharply
over the past several months. But Beijing, concerned about inflation and the burden on its huge farming population, also
capped the price of fertiliser earlier this year.
Each province is setting its own maximum price for fertiliser according to a decree that it should not exceed the
price on April 20. For Acron, this means that one tonne of sulphur-based NPK, a common type of fertiliser, cannot be
sold for more than Rmb1,600 ($194).
To cut costs, the Russians decided to emulate the course that many Chinese competitors have taken. They tried to buy
a phosphate mine to reduce the price of this key raw material. They tried to invest in a coal mine. They tried to build
a short rail link to the nearest trunk line, reducing reliance on expensive road haulage.
But they have been told that all of these areas are off limits to foreigners, meaning that their Chinese competitors
have a built-in advantage. "The government is returning to a state-regulated market," Mr Kotov says. "It
is not healthy for foreign investment."
Red Sun, named after a symbol of Chinese communism, was making a profit when Acron acquired it. But now margins are
razor-thin and the company stands to lose money unless it is freed from the strictures of state-mandated pricing and
allowed to invest upstream to secure its supply.
As corporate Russia's first significant venture into China's acquisitions market, there is more riding on
its progress than merely the fate of a fertiliser company. Since it was privatised in 1993, Acron has emerged as a
leading Russian exporter and an example of how former state companies can be transformed into successful
multinationals.
The level of this success may now depend in part on Chinese state planners.
[FT.com site] |
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