02 June 2004 00:00
Russia tries to sell capitalism: When Acron bought into Shandong Red Sun the investors believed they could share their lessons in privatisation, says James Kynge:
ByLine: By JAMES KYNGE
Both were thechildren 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
Dollars 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, includ ing 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 (Dollars 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.
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