Biz/China--J. Pomfret, The Post: "Up Against a Wall--and Pushing"
washingtonpost.com
>>> Up Against a Wall--and Pushing
By John Pomfret
Washington Post Foreign Service
Tuesday , October 3, 2000 ; Page E01
LINTONG, China –– Trident Corp. of Hicksville, Ohio, contracted two years ago to invest $3 million in a factory to make hydraulic equipment in Lintong, a county--famed for its pomegranates--that abuts the sprawling city of Xian in northwestern China.
The plan was for Xian Trident Hydraulic Products Co. to build six workshops and employ more than 300 Chinese workers manufacturing hydraulic parts for forklifts, cranes and other machinery. But today, after prolonged fights with the local government, only one workshop stands and the firm employs only 53 workers. It fulfilled only one-third of its orders last year, all from the United States.
And Duan Yuhu, the assistant general manager, has taken to growing corn in his spare time, in the yard outside the sole workshop.
"We were going to build more workshops there, but then the problems happened," said Duan, a tall, garrulous northwestern Chinese, as he stood by a pile of recently harvested corn. "So I just spread some seeds and let nature do its work. It's pretty good, actually."
Foreign investment has played a huge role in China's development. Chasing dreams of a market of 1.3 billion people and eager for a low-paid work force, foreign firms have poured more than $200 billion into China since 1978, when the country opened its doors. In 1993, foreign-funded enterprises produced 6 percent of China's industrial output. Last year, it was nearly 18 percent.
But as the Trident experience shows, foreign firms have had a rough road here. Recent government research indicates that only one-third of the 354,000 foreign-invested firms in China are turning a profit. In a survey last year by the American Chamber of Commerce, 58 percent of respondents said their companies make less money in China than elsewhere.
In some ways, the struggle of the Xian Trident Hydraulic Products Co. is a cautionary tale for Western investors as China prepares to enter the World Trade Organization. Last month, the U.S. Senate granted China permanent normal trade relations, allowing low tariffs on Chinese products and boosting China's 14-year-old drive to join the 138-nation group that regulates international trade.
The factory went without a steady source of power for two years because the firm refused to pay huge fees to the local government for a power line. The firm also rejected high water prices.
Unlike Western firms that eat losses, solve disputes by bribing Chinese officials, or--if they are mighty members of the Fortune 500--work things out by huddling with top leaders, Xian Trident decided on a public fight. It brought its case to the media. And despite a sometimes visceral anti-Americanism and a decided prejudice against wholly owned foreign ventures, China's state-run press championed the company's cause.
As a result, the central government in Beijing is paying unusual attention to the case. And so is Shaanxi province, which envelops the county and has a reputation among Westerners for tolerating corruption and doing little to create a good investment environment.
Twelve bureaus of the provincial and Xian city government completed a lengthy investigation of the case July 17 and came up with an unusual verdict: The local government was in the wrong and Xian Trident was in the right. The officials even went so far as to suggest punishing officials in the Lintong power department.
Xian Trident also is planning to sue the government for losses it incurred because the county breached its contract, said its president, Duan Jingming, who is Duan Yuhu's brother.
"Five or 10 years ago, if I did this you could call me ridiculous or naive," said Duan Jingming, a 43-year-old resident of Louisville and a graduate of University of Washington law school. "Lots of people say 'Take it on the chin and move on.' Or 'Bribe someone and keep going.' But if the total business environment doesn't change, we're going to be bribing people forever."
Michael Shaneour, Trident's president, said he actually encouraged the risky plan of confronting the local government.
"We figured the more people knew about it, the better," he said in a telephone interview from Ohio. "It was better than keeping it quiet."
After Xian Trident's woes were publicized, local governments around China began calling the firm, attempting to lure it away from Xian.
As China's local governments become more service-oriented, Western firms could benefit. "This story has lots of dark clouds," said Duan Jingming. "But it also has a silver lining."
China's central leadership approved Lintong's application to open a development zone in 1996, with low taxes to encourage investment, in the middle of what used to be cornfields. Duan, who hails from the eastern province of Shandong and was schooled in Xian, felt he could succeed where others had failed.
Under a contract signed in January 1998, Lintong County's government agreed to hook up Xian Trident with water lines and power and communications cables 10 days after the installation of machinery to manufacture hydraulic equipment. But after the machines arrived, nothing happened.
"We needed power to run our plant," Duan said. "So we got creative."
For a while the plant got by on power from lines used by neighboring farmers. But company officials continued to pressure Lintong to fulfill its contractual responsibilities and run a power line to the firm.
The government stalled. Xian Trident was forced to pay $22,000 to increase the capacity of the farmers' power line. Then the government demanded another $30,000 to run a high-voltage line to the factory.
Duan balked. He contacted a Xian firm and got a better price--$14,000. The Xian firm ran the line to the factory, but when Xian Trident asked Lintong to turn on the power, the government refused.
Duan's mistake was that he had attempted to break the local government's monopoly on electricity. Lintong's government responded by demanding that Xian Trident pay another fee.
Blackouts occurred without warning 25 times between 1999 and May of this year, once for a 45-day stretch. "The lights would just go off and our machines would die," Duan said. "And then, a few days later, everything would go back on again. It was impossible to do business."
Despite the contract, which said a water line would be hooked up for free, local government bureaus demanded $17,000 to do that job as well. Xian Trident refused. The water department then issued a document saying the firm should buy water at prices up to seven times higher than other facilities in the area were charged. It threatened to cut off all water if Xian Trident did not agree to pay.
Now the only source of water comes from a well dug by a farmer who used to inhabit the land. A large red cistern sits right outside the workshop door.
"It's yellow and sandy," said Duan, washing his hands in the brackish fluid. "When Mike, Gary and Thomas came out here from the United States," he added, referring to company executives, "they all got diarrhea. Now they basically fast all day until they go back to Xian to eat."
Not surprisingly, Xian Trident's production suffered. Last year, the factory had orders to make 2.1 million pieces but finished 700,000, Duan said.
Duan fought back, contacting Chinese journalists to explain his case. He was lucky. Just then, the central government was pushing a massive development project to transform backwater western regions into an engine of economic growth.
In May, the official New China News Agency issued two reports about the factory in publications circulated to government officials. The influential mass circulation Guangdong-Hong Kong Information Daily weighed in on July 4, saying the local government's failure to live up to its obligations raised questions about China's latest scheme to develop its dirt-poor western regions. The People's Daily--the Communist Party organ--chimed in on Sept. 28.
"Opening the door to invite in foreign investors and then closing it to beat them like a dog," read the Guangdong daily's headline.
Last week, the government finally turned the switch and allowed Xian Trident to use power from the high-voltage line. It is finishing work on attaching a water main to the plant, Duan said. "The Chinese government needs outside pressure to change," he said. "We're helping them."
Shaneour said China's nationwide crackdown on corruption, which has resulted in the execution of several prominent officials, has changed the business environment for the better.
"Now is a very good time for us," he said. "People are a little bit scared, and they realize they need to change their practices. Out in Lintong, they were operating by the old methods."
But in Xian, there is some skepticism about Trident's future. Some say Duan is brave for taking on the government. Others think his plans to sue Lintong for losses could backfire.
"He would be demanding that the court rule that the government was wrong," said a prominent journalist in the city. "Chinese courts don't do that kind of thing lightly. Since when has a Chinese government bureau ever said it was wrong?"
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