DEYANG, China—In this verdant city deep inside China, one of the country’s oldest state-owned companies has built a 10-story-high machine that Chinese leaders hope will help it take on Boeing , the U.S. Air Force and even the U.S. space program.
The mammoth closed-die hydraulic press forge—which went into operation last year—is the largest in the world. It makes highly resilient components—such as aircraft landing gear—from titanium and metal alloys that are pressed into shape by its 80,000 tons of force.
Long term, China sees it as part of an effort to curb its dependence on foreign firms to meet the country’s strategic goals in aerospace, technology and other important areas.
Sinomach, a company controlled by Beijing and instrumental in everything from China’s military build-up to its space ambitions, runs the forge. But a close look at Sinomach’s business here shows it is bleeding red. The forge’s home—a sprawling, Cold War-era campus of almost 12,000 people that makes everything from artillery to parts for nuclear reactors—is dependent on a river that at times of the year is too shallow to transport its products. It also faces intense competition from other state-run firms that are closer to customers in an industry dealing with a capacity glut.
As China’s investment-led economic model shows signs of sputtering, Beijing is looking for ways to turn its state sector into a driver, not a drag on growth. Companies that serve as vehicles of national and Communist party ambition and stand at the commanding heights of the economy are increasingly expected to be market-driven.
At the end of 2013, China had about 155,000 firms owned by central, provincial and local governments, according to the Ministry of Finance. Beijing itself directly controls less than 120 of the biggest and most strategically significant industrial companies, which are responsible for building the world’s largest nuclear reactors and most extensive high speed rail network, buying up mining and agricultural resources overseas, and spreading Chinese goodwill with infrastructure projects across the developing world. To do so, they get access to cheap credit and a raft of other subsidies.
A joint report published early last year by the World Bank and China’s Development Reform Commission, a Beijing-connected think tank, warned that the privileged status enjoyed by state-owned firms serves to “jeopardize fair competition, efficiency improvement and innovation, and thus could be an obstacle for an economy trying to...join the club of high-income countries.”
According to Credit Suisse, more than a quarter of industrial state-run companies posted a loss at the end of 2013. And since the global financial crisis, the sector has piled on debt, even as private-sector borrowing has remained fairly stable.
Many smaller state-owned firms make goods with no obvious strategic significance, like spirits and toothpaste, and the government has signaled that it intends to raise the state sector’s efficiency by opening it up to private investment in the hope of injecting a degree of accountability and entrepreneurialism. A number of major firms have rolled out plans to take on private investors, including Sinopec Corp. , one of China’s biggest oil companies, which in September sold off a 30 per cent stake in its gas-station business.
But Beijing still closely shields companies it considers strategically important—firms that can help it reduce or even do away with its reliance on foreign companies, in industries ranging from semiconductors to software and parts for its nuclear reactors. For those companies, any relinquishing of control is off limits.
Formally China National Machinery Industry Corp., Sinomach already has 40 units that make up a grab bag of Beijing’s strategic interests. One built the components that allow the Shenzhou space capsule to connect with China’s space station. Another built housing worth almost half a billion dollars for government workers in resource-rich Zambia. A third had 300 staff involved in building infrastructure and apartments in Libya when the revolution hit in 2011, which China had to evacuate.
Last year, the Chinese government bailed out the forge’s parent company, called Erzhong Group, by folding it into Sinomach. The new company will “become China’s GE, Mitsubishi and Alstom , ” Sinomach’s internal, Communist Party-controlled newspaper said.
“Maintaining Erzhong’s healthy and stable development is everyone’s responsibility,” said Ren Hongbin, chairman of Sinomach, according to the newspaper. He added that China’s State Council, the equivalent of its cabinet, was watching the company’s management “very closely.”
The old Erzhong factory makes massive metal components needed by modern industry—turbines for power stations, cylinders for nuclear plants, and parts to make entire steel mills—that are so big they can weigh up to 1,000 tons, and dwarf their human handlers.
The Erzhong factory is located in China’s far west, which in the 1960s was comfortably remote when Beijing feared an invasion from the Soviet Union. But today it is far from the country’s industrial heartland—and Erzhong’s customer base. Its products typically have to travel 155 miles along a specially reinforced road, to a small concrete port on a tributary of the Yangtze River. There, components are hoisted from a towering, orange steel loader onto barges before embarking on a three-week trip to the coast.
But that’s only possible when the water level is high enough. During the winter and fall the water drops so low that the river barges typically can’t take anything that weighs more than 500 tons, and sometimes no more than 100 tons.
The solution: Erzhong has built another facility near the east coast in Jiangsu province, budgeted at 5.2 billion yuan (US$846 million) so that the company can assemble smaller components made upriver. That price tag is in addition to the 2 billion yuan it took to build the big press forge. At the end of 2013, Erzhong’s debt increased to 12.4 billion yuan from 5.6 billion at the end of 2008. Erzhong hasn’t posted a profit since 2010.
“The Zhenjiang facility (in Jiangsu) allows us to ship anywhere, but there just isn’t enough business,” said Liu Shiwei, an official with China Erzhong Group Deyang Heavy Industries Co., a unit of Erzhong listed on the Shanghai stock exchange. “We’ve made the investment, but there’s too little demand.”
Not far down the Yangtze river from China’s one-time capital Nanjing, Erzhong’s Zhenjiang facility looks semi-abandoned. Roads inside the factory compound are pockmarked with holes that fill with water when it rains. Stray dogs wander through the wild grass that grows taller than the few workers milling about. The main entrance, a grand sandstone affair, has yet to be connected by road to the rest of the facility, and is marked up with cellphone numbers of truck drivers looking for work. And the factory’s dock on the river is used by local salt traders as a mooring for their barges in between shipments.
Meanwhile, people at Sinomach say there haven’t been many orders that make use of the 80,000-ton forge, although a spokeswoman from French aerospace firm Safran SA, said a unit that makes landing gear and brakes for aircraft has signed a contract with Sinomach to provide $20 million worth of components annually by 2020. Sinomach publications say the new forge will produce the components.
“The issue was not whether the forge would be fully utilized, but ensuring that when it came to producing military components China is not dependent on the will of others,” said Shi Changxu, a former professor of metallurgy at the Chinese Academy of Sciences, explaining the rationale behind the forge’s construction. Mr. Shi ran the feasibility study for the forge in 2006. “Others cannot make what we can now make.”
Mr. Shi was speaking at the launch of the forge in April last year, according to a Sinomach internal newspaper. The 94-year old Mr. Shi couldn’t be reached.
Sinomach has tried to drum up new business for the old Erzhong by inviting the leaders of state-owned aviation, rail and steel firms around for a tour of its factory, according to Erzhong and Sinomach’s internal newspapers.
On a recent steaming day at the Erzhong factory in Deyang, Sichuan province, old men sat squatting on the internal rail tracks used to transport components between factory hangers. At noon workers headed home on their bicycles, followed 15 minutes later by people in cars, for their two-and-half-hour lunch break.
Despite China having passed through more than three decades of reform, Sinomach’s Erzhong unit—set up by China’s Red Army in 1958—still adheres to many of the traditional customs of the country’s major state-owned firms. It still pays retirees a living stipend, and runs a sports center with two swimming pools and a television station. Staples of the station’s programming, which is only available on the factory grounds and to people living in residential zones once owned by the company, include a U.S. English teaching program from the early 1990s and training programs for operating and repairing machinery and electrical equipment.
Party members account for more than 60 per cent of the unit’s 13,000-person work force. On public holidays, local residents and the company’s internal newspaper say, party members set up stalls outside the factory’s east gate and offer free services to local residents: haircuts, car washing, knife sharpening, bicycle, wrist watch and clothes repairs, as well as classes on fire prevention and family planning.
Party members, grouped into 170 different organizations that exist parallel to management, regularly meet internally to discuss items like important essays by China’s President Xi Jinping , according to the company’s website.
Some retirees who live in the dusty but leafy neighbourhoods immediately outside of the factory walls, grumble that Erzhong’s financial problems mean they no longer get bonuses at Chinese New Year. But for employees, so far there haven’t been job losses, and layoffs seem unlikely.
Speaking at the forge’s launch, Chen Xinyou, Deyang’s mayor, said that Erzhong serves a higher purpose. The forge “changes China’s long reliance on imported components, passive reliance on others, and helps us realize self-sufficiency.”
After creating world’s biggest press forge, state-run Sinomach lacks customers.
