2004-01-20 10:40:54
Transformer maker transformed
  Author: WU YONG ,China Business Weekly staff

SHENYANG: China faces a daunting task as it tries to revive its traditional industrial base.

But there is cause for some encouragement: The restructuring of Shenyang Transformer Factory (STF) is breathing some fresh air into the process.

And recently, Xinjiang Tebain Electric Apparatus Stock Co Ltd (TBEA), considered China's dark horse, beat international titan Siemens' in a bidding duel for the transformer maker.

It's no wonder STF and TBEA have been in the limelight.

STF is Northeast China's first large-scale State-owned enterprise (SOE) to be reformed. The central government in August launched a new campaign to reform SOEs in the region.

TBEA, meanwhile, proves Chinese firms can beat back foreign rivals, who just want to take advantage of China's companies and market.

SOEs and private enterprises might pay higher prices compared with foreign companies in some special instances.

Governments in Northeast China should take the situation seriously, and take the issue into consideration, as they try to revitalize their industries, experts told China Business Weekly.

"The main reason TBEA beat Siemens ... was it recognized STF's intangible assets. Siemens did not want to pay more money for such assets," said Wang Changxu, STF's former general manager.

TBEA offers 387 million yuan (US$46.80 million) during the bidding, 30 million yuan (US$3.63 million) more than the price given by Siemens. The 30 million yuan is for the intangible assets of STF, which includes the value of the brand and techniques of STF. The bidding was conducted in Shenyang, capital of Northeast China's Liaoning Province.

"This is what we had been lacking, STF's techniques, brands and market share," said Zhang Xin, chairman of TBEA's board.

A logical marriage

For STF, the marriage with TBEA was not a surprise, as STF had spent more than five years looking for a partner.

STF had been on the brink of bankruptcy.

"The old mechanism kept this great elephant in bonds, and nearly choked it to death. This is win-win deal for STF and TBEA," Wang said.

STF was founded in 1938. It is China's oldest and largest transformer producer. It has been called the "Father of China's transformers."

However, its glory years ended in 1997, when it suffered great losses, due largely to the old management model and the nation's gloomy market.

STF's debt reached 1.6 billion yuan (US$193 million) - including 980 million yuan (US$118.5 million) in loans held by several banks - by the end of 2002.

But STF did not worry about the market or its orders because it was widely considered to have the dominant technology in China. In fact, most high-end transforming and transformer equipment were manufactured by STF.

But the company needed capital.

Shenyang's municipal government did everything possible - including investing 47.5 million yuan (US$5.74 million), to establish an advanced workshop - to help the firm.

Finding a strategic partner was at the top of the local government's agenda. Germany-based Siemens, for example, expressed a lot of interest in the firm in 1998.

"Siemens was the most ideal partner, in terms of development," Wang said.

Siemens owns advanced technology in various areas. A partnership with Siemens would have enhanced STF's capacity.

Siemens helped train many technicians for STF in past years. Siemens took it for granted it would eventually control STF.

And the local government favoured Siemens, due in part to the German firm's capital and world-famous brand.

That seemed to be an ideal marriage. STF would gain new life and Siemens could edge into China's booming transmitter and transformer market.

But it was not meant to be. The firms had vastly different ideas.

"Even different assessment companies provided similar evaluations on the land and workshops. But when it came to intangible assets, there were great discrepancies," said Lu Aibing, head analyst from Beijing-based Holy High International Capital.

This case proves there are some exceptions to every rule. Foreign companies usually pay higher prices when purchasing State-owned assets under some special conditions, but that is not always the case.

Governments must learn from this experience, and take the lesson into consideration when promoting SOE's reforms and restructuring, experts say.

The governments should also think more about domestic enterprises, they say. Experts also expressed concerns about the security of China's power system and supplies once a foreign firm has acquired a Chinese power company.

TBEA is the first company in China's transformer industry to float shares. It is also a major producer and exporter.

"We have studied STF for more than three years. But the 1.6 billion yuan (US$193 million) scared me away," Zhang said.

He decided last fall, after the Supreme People's Court ruled companies were not responsible for the debts of firms that they purchase, to compete to buy STF.

"STF is a mammoth firm in the transformer industry. We used to have some connections. But running it is another thing. The change has been too fast," Zhang said.

(Business Weekly 01/20/2004 page1)

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