Can Wuhan's state-owned giants adapt?

 

Watch Damian report from the industrial town of Wuhan, where one giant state firm employs 80,000 people

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Through the grime and pollution that hangs over the city of Wuhan there are days when the sun barely shines. It's just a yellow disk.

This industrial city that sits on the Yangtze river in the middle of China is home to more than six million people.

In the grey murk the tower blocks on the far bank of the Yangtze look like shadows. Ships steam downriver laden with containers full of goods.

Wuhan is a pretty good place to take the temperature of what's happening in China's economy.

On the face of it things look good, China has just announced growth picked up a little at the end of last year to clock in at 7.8% for 2012. But that is well below the average of 10% China has recorded for the past decade.

Massive old iron and steel industries helped build Wuhan's economy. Wuhan Iron and Steel Corp (WISCO) is one of the biggest iron producers on the planet, among the biggest 500 firms in the world.

WISCO employs 80,000 people. The giant ironworks occupy 20 sq km of the city. It's a vast complex of factories and workshops. Giant piping criss-crosses the site, towers belch out smoke and steam pours from vents in the ground.

BBC News grab of steel factory in Wuhan Tens of thousands are employed by Wuhan's state-owned giants

Molten steel pours from giant furnaces to be used in everything from cars to boats, railways to buildings. Huge slabs of it are piling up in warehouses, along with giant rolled sheets.

You'd think this firm would be booming given China's incredible economic growth. But despite sales worth billions of dollars every year WISCO is making a loss on its iron and steel, its only profits come from other businesses it has expanded into.

Map

"The economic problems we're facing this time are more serious than the Asian crisis in 1998," explains Sun Jin, the firm's director of international communications. "It's like the steel business has entered a deep winter, it's probably going to continue for three to five years."

As China boomed many iron and steel mills were opened. But for much of the past two years growth has been slowing and even for an economy growing at nearly 8% a year there's just too much steel being produced - oversupply means WISCO can't make profits.

"To get through this winter we have to first strengthen our steel-making, to adopt new technologies and make higher quality steel," says Mr Sun. "We also aim to diversify into new businesses." WISCO's boss has even talked of going into pig farming.

Drive to urbanise

Part of the problem is that WISCO is a giant state-owned enterprise. The government has ordered it to cut production, but it is not allowed to shed large numbers of jobs to save money.

It's China's problem too, giant state corporations still dominate parts of the economy. Many are inefficient and need to change if China is to create new, more profitable jobs for its workers.

Despite the problems at its biggest employer, the city of Wuhan is booming. It's province of Hubei, home to more than 60 million, is now among the fastest growing in China. Last year it expanded by around 12%.

The industrial city of Wuhan, in smog, on 14 January 2013 Construction is under way across the city of Wuhan

The growth is, in large part, down to China's relentless drive to urbanise, which has now shifted from the coastal cities to inland areas like Wuhan. The whole city is dotted with construction sites, giant tangles of motorways have been built. Last month saw the opening of a new high-speed rail line and the city's first subway.

Wuhan is copying the formula that's been successful in places like Shanghai. But China's new generation of Communist leaders, headed by Xi Jinping, know this building spree can't continue forever. China's economy needs to reform.

That's why they have said China needs to switch from chasing high GDP growth as an end in itself to creating better-paying jobs that will lift incomes.

Urbanisation will continue to drive China forward, moving people from the countryside to the cities like Wuhan where they can earn more. But new jobs need to be created too.

So to replace Wuhan's grimy old industries, the city is doing its best to encourage new, higher-tech, innovative firms.

On a science park, workers in spotless white overalls are making screens for mobile phones.

Zhou Yunzhi is deputy general manager at Tianma Microelectronics. "China is making changes to its economic growth. We want some old industries to fade out and to develop new and high-tech industries," he says.

And he adds: "China is losing its advantage in labour-intensive industries. In the past we could rely on mass production, low quality but low cost. But we can't compete like that in future. We need to upgrade. So for the next 10 years we are going to go through a process of change."

New future

Along part of Wuhan's river frontage you can see the aim taking shape. Han Street, a new, upmarket shopping district is being built, housing Western brands like Marks and Spencer from the UK, C&A, Zara and Uniqlo.

This is the new consumer economy China's new leaders want to grow. They want their country to rely less on exports and massive investments in construction projects as it does now, and develop instead China's own, domestic economy.

The idea is that a new middle class, with rising incomes, will spend more. Service industries will create more jobs, and the economy will be more sustainable.

It'll mean making deep changes to old industries like Wuhan Iron and Steel, reforming China's giant state-owned enterprises. It'll require changes to policies that restrict the ability of people to migrate permanently to the cities.

Bank and financial reforms are needed, changes to the way governments in places like Wuhan earn their revenues, and better provision of healthcare and pensions.

The goal is clear, but getting there, finding a way through the murk and smog that hangs over cities like Wuhan, and forging a future based not on steel but a different type of economy - that's the hard part.

 
Damian Grammaticas Article written by Damian Grammaticas Damian Grammaticas China correspondent

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  • rate this
    -1

    Comment number 19.

    Anybody can write a report. Very few bother to think when they write or report. Take the case of pollution in China. When you move masses of people to the town and provide them with a western style standards of living, pollution must accompany such progress. Take the case of profits. When you produce low cost and low margins goods with low labour productivity, you must end up with low or negative profits. Sure you can fire them to raise your profits but then you are passing the social problems that arises to the State. Rural serenity is no consolation either.

  • rate this
    +4

    Comment number 18.

    It rather makes me question the point of my little trips to the bottle bank to save humanity.

  • rate this
    -5

    Comment number 17.

    Oh dear, Grammaticas hasn't really done his homework has he. China suffered a downturn in SOEs in the early 90s, where the SOEs then made major redundancies and efficiency reforms - resulting in millions being made unemployed.

    To counter the supposed inefficacies of SOEs (Grammaticas omits to mention that the SOEs are profitable) all the CCP has to do in unleash a new wave of reform. Much less brutal then capitalism's creative destruction.

    Get a clue Damian.

  • rate this
    +4

    Comment number 16.

    For years & years China prevented the west from selling it goods while it copied our goods and sold them to us as cheap imports which undermined our industries and those in the EU & USA. Now they want to do the same to our high tech industries by stealing their ideas and buying our companies and mass pirating our software on an industrial scale. I hope the UK govt take the same attitude the yanks are and say no to purchases of strategic UK businesses and slap massive environmental taxes.

  • Comment number 15.

    All this user's posts have been removed.Why?

  • rate this
    +2

    Comment number 14.

    They've seen everyone else do something similar. Massive industrialisation leads to massive lift in average income, leads to desire for better life, leads to a small bunch of people selling lies to a much greater number of credulous people, leads to slowly reducing average income and slowly reducing hope and ever greater commissions and rents for the few. And then there's hideously violent social unrest before it all starts again.

    It's a historical cliché that China will play out pretty much the same as everybody else does.

  • rate this
    -2

    Comment number 13.

    Re 8: It is not really ''Eurasian plan''. It is just good-old Russia and a part of European oligarchies resenting the ruling European oligarchies that are for the last century collated to the US-British ones. It is the good old game, the Great Game, the one and only primary game of the last 250 years following the 7 years war.

    Re 12: First you forget that Russians were also in the grip of communists. Russians now have a different outlook. Totally different as it does not come with ideological mumbo-jumbo - might not convince Poland but may convince many others even non-ex-communist countries.

  • rate this
    -3

    Comment number 12.

    1.sieuarlu

    "...China...will not be economically successful unless it changes..."

    ===

    Now let me see...where to begin...

  • rate this
    -1

    Comment number 11.

    8 I don't think Russia will convince former slave colonies in Eastern Europe anytime soon to quit their alliance with the US and fall under the Russian boot. Can anyone imagine Poland, Czech Republic, Hungary who were all victims of the USSR trusting Russia? I don't think so. Given the propensity for holding grudges, I'd say it will be at least a century before anyone there even thinks about it.It's why they wanted to join NATO so quickly. China will view Russia's vast underpopulated lands with greedy eyes. The border between them has been disputed before.Japan too resents Russia's land grab

  • rate this
    +1

    Comment number 10.

    China's culture does not foster the independent thinkig and creativity need for true innovation that is they key to a competitive advantage.It does not attract foreigners to emigrate to China bringing their ideas, only foreign investment to exploit its cheap labor,non existant laws, and corrupt government.It does not have the warewithall to ever compete agaist the USA.False indicators such as GDP especially adjusted for PPP are entirely deceptive.China's aging population, social instability, unquenchable thirst for resources, and reliance of export of cheap products are liabilities.

  • rate this
    -2

    Comment number 9.

    China is making $250B/year investment in human capital. Chinese Govt is using large subsidies to educate tens of millions of young people as they move from farms to cities. Aim: change current system, in which a tiny, highly educated elite oversees vast armies of semi-trained factory workers & rural labourers. China wants to move up the development curve by fostering a much more broadly educated public, one that more closely resembles the multifaceted labour forces of US & EU.
    Better-educated labour force could help China become an ever more formidable rival to the West.

  • rate this
    -3

    Comment number 8.

    Absolutely!
    Eurasians want to de-link US from EU & NATO allies, specifically France & Germany. The Eurasianist strategy in the Kremlin still has plans for cooperation with the EU & for incorporating several European states into the Russian alliance with China and Iran. This also includes the objective of merging EU within a broader geo-political Eurasian entity.
    Once the distrust between the Eurasians is fully overcome, America and its partners will have no choice, but to give up their dreams of control over Eurasia or resort to acts of war.

  • rate this
    0

    Comment number 7.

    6 Correct.One of China's many problems is that it has far too many people.India too.Limited arable land forces populations to live in highly congested small percentage of the total land area.The resources needed to sustain them and meet their expectations are beyond comprehension, beyond the capacity of the entire planet.The recent growth rate cannot be sustained indefinitely.It's a subject nobody wants to talk about but it's the root cause of many ills including catastrophic climate change. Fixing it may already be beyond human capability.We may have passed the so called tipping point.

  • rate this
    0

    Comment number 6.

    One day someone is going to twig, that as a species, perpetual growth is not possible or desirable, especially given that we dwell on a planet finite in size & resource. But the problem is that day is already here, but we seem hell bent on destroying ourselves & the planet. Terribly sad, tragic & shameful.

  • rate this
    0

    Comment number 5.

    The keeper of the peace in east Asia remains the US, especially the US Navy.The US has a mutual defense treaty with Japan and must come to its aid in war.It also has strong ties to the Phillipines and increasingly to others such as Vietnam.Should Japan feel increasingly threatened by China and N Korea it has the technology and ability to quickly become a major nuclear power.This would be regarded with alarm.China had better back off both directly and through its surrogate N Korea.That said Japan needs to educate its people to the full truth about what happened during the 1930s and 1940s.

  • rate this
    -2

    Comment number 4.

    China's aggressive militaristic policy is more than a waste of money on useless expenditures (unless China is foolish enough to contemplate actual military engagement with any of its neighbors which would be economically disasterous for it.) China will alarm, suppliers, customers, potential investors with this policy.They will consider taking their business elsewhere.The emotional pumping of chauvanistic attitudes will take its toll if it continues.It's the wrong path for China but sometime these factors outweigh rational self interest.Modern China remains an experiment by Kissinger and Nixon.

  • rate this
    0

    Comment number 3.

    Focus on GDP by economists and politicians gives a distorted picture of true economic well being.GNI (gross national income) and GNI per capita are what count.GDP only tells you how much was produced on your territory, not how much you keep. GNI is what you keep plus what you earn overseas you repatriate.By that measure China is still a very poor country keeping only a tiny fraction of the profits.Very uneven distribution of wealth can lead to social unrest especially if prospects for more equitable distribution at some future time look poor.The long term outlook for China is very bleak.

  • rate this
    -2

    Comment number 2.

    Corrupt inefficient government owned and run industrial enterprises often place people in control based on political considerations rather than management or technical skills.Only through wasteful government subsidies can these companies survive.Inefficiency is further compensated for by keeping labor costs low, paying subsistance wages and lower.As demands for better pay, working conditions increase social unrest may be possible.An aging population that will face severe health problems with an inadequate health system infrastructure further makes life in China for many miserable.

  • rate this
    -1

    Comment number 1.

    As an engineer just out of school I worked at what was once the largest steel mill in the world.Steelmaking is a dirty dangerous business that's expensive to make clean and safe.That's why we exported it to developing countries.Corporate management philosophy was maximum decentralization, move power and responsibilitiy as close to each job as possible.Empowerment and accountability.China is eactly the opposite and will not be economically successful unless it changes.Subsidies, central control, lack of safety and environmental improvements is what keeps the steel industry alive there at all.

 

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