By staff reporters Luo Changping, Zhang Boling, Ouyang Hongliang and Zhang Bing

Related article: Details of Steel Executive's Death Emerge
                     Slaying Scraps Tonghua Steel Takeover Plan
Editorial:         For Reform's Sake, Give Workers a Voice

(Caijing Magazine)Time seems to stand still in Tonghua, a gritty factory city in an isolated corner of Jilin Province, near the Chinese-North Korean border. Bypassed by highways, an antiquated railway is the city's most important link to the provincial capital Changchun, eight hours away.

Life's pace has changed little over the past half-century. Work generally revolves around the only major employer, the state-owned Tonggang steel mill controlled by the provincial government through Jilin Tonghua Iron & Steel Group.

Former Chinese soldiers settled in Tonghua in the 1950s after the Korean War. Many became steelworkers, and their sons and daughters followed in their footsteps. Today, most local jobs are either at the mill or revolve around smaller companies feeding off the mill's payroll and expense account. The mill is also a major revenue source for the local government.

So perhaps it was understandable that this tight-knit community with generations of steelworkers would react with mixed feelings when investors from outside Jilin arrived and promised to lead Tonggang into the 21st century. Mill workers – and top managers – opposed and even resisted the proposed takeover by investors from Jianlong, a private steel group based in Hebei Province.

One day, those suspicions turned violent. Opposition to the takeover contributed to the beating death of Chen Guojin, 40, a Tonggang manager and father of twins, during a worker protest July 24.

Now, the repercussions of that brutal murder in a steel mill office have forced the time-warp city of Tonghua to evaluate its present and confront its future. The incident has also raised questions about the flow of public information in China's one-factory cities, where rumors can spread fast, and why what could have been a successful privatization ended in catastrophe.

Struggle for Control

A Caijing investigation in the wake of Chen's death at the hands of unidentified killers uncovered an often antagonistic network of competing business interests and investors involved in Jianlong's botched attempt to buy Tonggang.

Caijing learned that the transaction – which was canceled just a few hours after the murder -- would have ended the basically unlimited managerial control of Tonggang by An Fengcheng, 58, the steel mill's chairman and Communist Party secretary.

There is no evidence to suggest An's involvement in Chen's death. But two weeks after the incident, he was sacked and stripped of all power by the Jilin provincial government. No other details of his removal were announced.

An rose to the top after following his steelworker father to the mill gate. Like many peers, he started at the bottom after joining Tonggang as a teenager. But he headed higher after making friends with company managers during leisure hours on the basketball court. He became the mill's deputy manager in 1996 and chairman in 2002.

An kept his position even after a first-stage restructuring at Tonggang in 2005 brought Chen to town as Jianlong's representative. A professional steel manager, Chen was dispatched by the investor to serve as Tonggang deputy general manager and join its board of directors.

Led by An, however, local company officials refused to cede to the newcomers from Jianlong. Chen was given one of only two board seats available to Jianlong, while Tonggang regulars held the other seven.

Jianlong did not buckle under the resistance but continued working for a level of power equal to the amount of money it was pouring into Tonggang. Chen was appointed general manager in 2006, although he still had to report to An.

By July 2009, however, the old guard was up against a wall. Jianlong and Jilin authorities inked a deal to create a board that fairly represented the shareholding structure – a move aimed at finally toppling An.

At the same time, a years-long publicity campaign backed by An suddenly came to a halt. The chairman had regularly fed the local media with sound bites aimed at showing his ambitious determination to turn money-losing Tonggang into a prosperous mill.

Rumors started filling the information vacuum. The city buzzed with stories about An's fierce opposition to Jianlong's effort to expand its Tonggang stake. Word was that he had threatened to resign.

After Chen's death, Tonggang management information vanished from all local print and broadcast's coverage of the tragedy.

An spoke with Caijing six days after the murder, explaining that he was working at the Tonggang headquarters in Changchun on the day of the beating. He declined further comment. But a week later, he was cleaning out his desk in his spacious office.

Communication Gap

Jianlong's proposed acquisition of Tonggang had been forged slowly and carefully since 2005. It was not a privatization marked by hasty, under-the-table deals. Each significant change in equity stakes followed at least months of negotiations.
 
Moreover, company managers drafted a detailed plan to inform and calm fears among the mill's tens of thousands of workers before the proposed takeover was to close in late July.

But the plan to inform workers failed to get under way in time. Instead, workers fearing job losses spoke among themselves and then started rallying against the takeover.

A group of demonstrators apparently attacked Chen while others prevented police from reaching the scene. Officials say the attackers watched him breathe his last before dispersing.

Tonggang resumed normal operations two days later. But Jianlong had already announced a pull-out.

Rescue Effort

Closely held Jianlong had hoped to save Tonggang. The Hebei company produces more than 18 million tons of steel a year and ranks among China's top 10 steelmakers, according to its Web site.

Jianlong took a first step by buying a 36 percent stake in Tonggang in September 2005 from the Jilin branch of the State-owned Assets Supervision and Administration Commission (SASAC), which afterward remained the largest shareholder with a nearly 47 percent stake.

But that capital injection alone could not resolve all of Tonggang's problems. A wave of layoffs followed Jianlong's entry. Sad stories about abandoned and unemployed steelworkers fanned emotions in Tonghua. Even many who kept their jobs were disgruntled – often for good reason.

In one incident during the cold winter of 2008, all heating at the mill was cut off for 20 days because the company failed to pay its utility bill. Ironically, the heating company had been an arm of Tonggang before restructuring began.

Tonggang's books show that salaries have risen steadily over the past three years. But workers told Caijing a different story.

One engineer said his monthly salary of 1,450 yuan had not changed for three years. Other workers who earned 1,000 yuan a month said their pay had been affected by the global economic downturn since 2008.

Jianlong said it did not cut salaries. Besides, the investor said, there was no reason to reduce the payroll. Ren Guoliang, a Jianlong official who served as Tonggang's deputy manager, noted that steel is a capital-intensive industry, and that salaries account for only 3 percent of Tonggang's costs.

Still, plenty of layoff-related misery struck fear in the hearts of Tonggang's remaining workers, making them extremely sensitive to any sign of further job cuts.

At the same time, the company's channels of communication with workers and Tonghua residents remained under the control of the mill's local management team. These managers also oversee the labor union and another body representing workers.

Neither SASAC nor Jianlong had direct communications access to the workers. As a result, they never got a chance to clearly explain the business plans or their intentions.

Not that the biggest shareholders were blind to the communications gap. Indeed, they tried to do something about it by sending Chen, another Jianlong official, and representatives of Jilin SASAC to meet Tonggang workers face-to-face. They hoped to explain the restructuring and calm fears.

What they did not know before arriving for the proposed rap session in July was that negative rumors had been spreading around Tonghua for days. Locals were abuzz with stories. Some said Jianlong would dispatch 200 new managers to replace Tonggang's old guard, while others said Tonggang would leave Tonghua altogether. The gossip mill also said people over age 45 would be fired, and that thousands of jobs will be cut.

Chen and the other officials said they were surprised that so many mill workers thought massive layoffs and salary cuts would ensue after a restructuring. By the time the Jianlong-SASAC team arrived for the talks, worker fears had intensified to the point of protest, ending in death.

Overdue Overhaul

Regardless of how locals reacted in Tonghua, however, financial realities at Tonggang pointed to a company that had been begging for restructuring for a long time. For years, however, the key players had delayed the inevitable.

Tonggang's first overhaul step actually dates to 2001, before Jianlong got involved. In a deal arranged by the provincial government, the state-owned assets management company Huarong assumed a 17.16 percent stake in the steel mill and took over several burdensome, non-steel operations with a combined 1,500 employees, including a real estate management company, schools and hospitals.

During a second stage in 2005, Tonggang turned over another 17 schools, seven police stations and 33 affiliated organizations. The move cost 1.57 billion yuan and reduced Tonggang's payroll from 35,000 employers to 19,606. Again, the provincial government helped by footing the bill.

These restructuring steps, although painful, were aimed at helping Tonggang shed its traditional, planned economy role as a cradle-to-grave company. The steel mill also wanted to attract outside investors.

In fact, Tonggang executives met with representatives from global industry giants such as ArcelorMittal and Russia's Severstal about possible tie-ups. But the mill's location, underdeveloped transportation system and heavy debt stood in the way.

The next major blow to restructuring came after Chen died, when government officials announced that Jianlong would permanently abandon the Tonggang acquisition.

After that, the protesters dispersed and fireworks were set off in the factory's residential courtyard. Workers celebrated what they thought was job security. What they didn't know was that Tonggang's finances remained in critical condition.

Tonggang's return on equity was a negative 16.55 percent in 2008, 18 percentage points below average for China's steel industry. That rate plummeted to minus 23.46 percent in the first quarter 2009.

Banks had lost confidence in Tonggang long ago. The company's debt to capital ratio snowballed to 80 percent in October 2008, with the company's oldest mill in Tonghua losing 1.35 billion yuan in 2008. But a mill originally run by Jianlong that was transferred to Tonggang as part of a 2005 investment deal earned 167 million yuan in the same period.

Jianlong had demanded a controlling share in Tonggang from the start in 2005. But the Jilin government persuaded the investor from the outset to take a two-step approach: minority stake first, controlling stake later.

During stage one, Tonggang's debt soared. Jianlong reacted by again demanding a controlling stake, saying it wanted the driver's seat before Tonggang rolled off a cliff. But the request fell on deaf ears.

Jianlong was confident that its steel industry experience could be used to heal ailing Tonggang. Launched in 1998 by businessman Zhang Zhixiang, Jianlong had already successfully rescued several dying, state-owned steel mills in Hebei, Helongjiang, Liaoning and Jilin provinces by introducing modern corporate governance procedures and fresh capital.

Zhang along with Chen, the boss' right-hand man, were savvy about building rapport with local governments involved in these takeovers. They showed patience and paid attention to thorny issues such as employment and worker benefits.

Tonggang was supposed to be their biggest deal and help Jianlong become a nationwide steel conglomerate.

Early this year, Jianlong tried again to get full control of Tonggang. It laid two choices for Tonggang on the table: accept new investment for a controlling stake, or bid goodbye to the investor.

Jilin officials hesitated. The provincial chief and party secretary, Wang Min, visited Tonggang in January and February to research the situation. Eventually, officials decided to let Jianlong go, but not before a new investor was found.

Jianlong started pulling its troops from Tonggang in March. Chen was then transferred out of Tonghua.

Running parallel with Jianlong's retreat was a task force set up by Jilin SASAC officials and Tonggang management to seek new investors. Industry giants such as Baosteel in Shanghai and Angang in Liaoning were contacted. But after four months, Tonggang officials had to face a cold fact: No one wanted to buy the company.

Defeated Jilin officials crawled back to Jianlong. And on July 22, provincial officials agreed in principle to reduce the government's stake to 34 percent.

Jianlong's restructuring plan called for pumping another 1 billion yuan as well as other equities into Tonggang. Based on the current value of the steel mill, Jianlong's stake could have risen to 54 percent.

Jianlong made a series of pledges as part of the new restructuring plan. It promised no job or salary cuts, said the headquarters would not be moved, and agreed to parcel dividends to shareholders. The investor also pledged to boost the mill's capacity to 10 million tons by 2010.

There were strings attached: Jianlong wanted a management overhaul, including enlarging the board to 11 members from the current nine, with four appointed by Jianlong, three named by Jilin SASAC, one from minority shareholder Huarong, and three seats for independent board members.

Jianlong set a clear timeline for the plan. It said opinions from Tonggang management and workers would be invited, and then the final decision would be based on votes by Tonggang shareholders and worker representatives.

No doubt the biggest losers would have been the old guard managers at Tonggang, who actually had benefited from previous company restructuring moves but apparently were hungry for more.

Cashing In

In 2005, Jilin SASAC set an annual target for the mill of 10 million tons of steel and promised to reward management as well as workers with company shares. The target was missed, but the shares were handed out anyway.

Jilin officials capped annual management bonuses at 99.9 million yuan between 2002 and '04, ignoring Tonggang's lackluster financial performance. An received at least 30 million yuan in that period.

The rewards were in the form of equity. Caijing learned that the old guard managers had demanded high price for their shares in Tonggang during talks with Jianlong.
 
Another factor tied to the Tonggang drama was the steep price that the company paid for theft. Mill insiders routinely stole scrap from the mill and sold it to nearby recyclers. Transportation companies and other small entrepreneurs benefited as well.

Investigations have exposed thieves who profited from lax internal controls at Tonggang. In 2008, for example, authorities said a criminal gang earned 16 million yuan through illegal steel trading. And in May, a former deputy police chief of Tonghua was connected to a gang that sold goods to Tonggang.

Since coming to Tonghua in 2006, Chen had been on the front lines in the fight against criminals. He hired armed police officers to guard the factory gate and investigated scrap sellers. Moreover, he urged the local government to probe 74 scrap shops near the mill, eventually leading to shutdowns for about 50 that lacked proper licenses.

Untimely Death

On July 24, Chen rose early and went to Tonggang with several colleagues. His mission was to communicate with mill workers about the restructuring plan. Talks held over the previous two days had gone nowhere.

As Chen arrived, he was greeted by a banner hung by a retired worker in front of the Tonggang office building. It said, "Jianlong, Get Out of Tonggang."

Chen started a morning meeting mid-level managers and workers. Meanwhile, Tonghua workers started blocking a railway to prevent supplies from reaching the mill, forcing the company to suspend production for several hours.

Around noon, the man who hung the banner quarreled with others who wanted it down. The tension spread to other protesters, who started moving toward the building where Chen was holding meetings.

Throughout the day, some people were handing out ice-cream, cigarettes and bottled mineral water to protesters, and the factory's cafeteria was open for lunch, without charge.

An initial investigation revealed that the attack came in two stages. The first occurred at about 11 a.m., after which Chen left the scene under protection of security staff. He hid in an office building at the coke plant, and the security staff locked him behind two iron doors. But more than 200 people attacked the building. At 4:38 p.m., sources said, someone found Chen hiding in the office and the doors were forced open.

According to a report filed by a Jilin official at the scene, the attackers included "people who were not former or current Tonggang workers." Some witnesses told Caijing that many people who did not wear company uniforms were among the rioters attacking Chen. They may have been tied to the area's "gray business" iron and steel operations.
 
Police were informed that Chen was in danger, but they were unable to rescue him. Rioters blocked police, ambulances and government officials who tried to reach the victim.

Inside the office building, according to a source, someone cried out, "Chen must die." And between 6 and 7 p.m., the deed was done. An autopsy determined that he suffered a skull fracture and brain hemorrhage.

Chen's body was cremated seven days after his death. A funeral was held in his hometown in Hebei, attended by about 200 mourners including his widow and their twins, a daughter and son.

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