The great escape
Why Du Shuanghua could be the emblem of modern Chinese capitalism
22 Jul 2011
Week in China
Every few months, China's newspapers shudder with concern about the state's 'advance' and the private sector's 'retreat'. But frequently the two sides of Chinese business depend on one another, as the story of one of the country's richest tycoons shows.
Buccaneering steel man Du Shuanghua has recently partnered with a second state-owned firm in need of turnaround. In this respect, private and state sectors hope to advance together.
Hebei-born Du could be called the quintessential Chinese entrepreneur, prospering not so much in spite of state intervention but because of it. In fact, China's economic system worked so well for Du that his wealth peaked during the 2008 financial crisis (at $5.1 billion according to Hurun), making him then the nation's second wealthiest man – at just 43 years of age.
On the face of it, Du's steel career doesn't make much sense. Not only did he start out with very little capital (in a capital-intensive business), but he also managed to build his firm at a time when China's leaders have tried repeatedly to cut back on steel-making overcapacity. Du also survived mention in the 2009 'Rio Tinto Four' corruption trial, as well as a subsequent takeover attempt by a local state-owned rival.
So what is his secret? One answer is his connections. Du's real genius has been to leverage his father's relationships to build one of the country's largest privately-owned steel firms.
Du's father was no ordinary steel man – he was a sales director for state-owned Shougang Group, a company favoured by Deng Xiaoping. So when young Du left high school he took a job at his father's firm instead of going to university. That introduced him to the industry early and by 1991, when he was just 22, Du had started his first steel firm. Paying for the Beijing Xinghua Welfare Steel factory wasn't as hard as you'd think, reports China Economic Weekly magazine. Du was allowed to pay for the land, equipment and materials as money came in from the business. He then moved back to his hometown in Hebei, and started the HengShui Jinghua Steel Pipe Company two years later. By 2003 his combined businesses were making $125 million in profit and reportedly had half of the national market for steel pipes.
What came next would catapult Du into the ranks of the very rich in just five years. In March 2003, he cut a deal with the city government of Rizhao in Shandong to build a world-class steel mill. And access to credit was once again the order of the day – Du is thought to have stumped up just $24 million to build the mill, with the remaining 90% of debt supplied by local banks.
Cooperation between state-owned and private enterprises should not be mutually exclusive.
Rizhao Steel's location and technology were not the only reasons for its subsequent success. Critically, it also managed to access inexpensive iron ore in spite of its lack of an importing license. That advantage was revealed during the trial of four Rio Tinto employees in August 2009. Local media said Du's written deposition admitted paying one of the defendants (Wang Yong) at least $9 million – allegedly in order to receive relatively cheap ore.
No charges were brought against Du himself but he was soon struggling to fend off rivals' interest in his empire. In the following weeks he signed over two-thirds of Rizhao to the local government-backed Shandong Steel, in what looked like a forced sale.
But the Shandong Steel bosses reckoned without Du's guile (a story WiC has written about before, see issue 99). He managed to postpone any asset transfer until a price could be agreed (and with a reported valuation of $6.1 billion, that's looking increasingly difficult in the current financial environment). To make it sufficiently difficult to 'purchase' Rizhao, he also injected 30% of the firm into Hong Kong-listed Kai Yuan Holdings (in which he's also a significant shareholder).
Since then Du's gone on to broaden his connections and income streams – by working with state-owned firms. In March we wrote about his deal to reform struggling steel plate maker Yingkou Medium Plate (a subsidiary of China Minmetals). By June he'd also agreed to take on machine-maker CERI (Yingkou) Equipment Development and Manufacturing (a subsidiary of China Metallurgical Group Corporation).
It's possible that turning around state-owned companies buys Du political leverage (and time) in his ongoing negotiations with Shandong Steel and the provincial government. But it turns out that it's profitable as well. Four months after Du and his team took Yingkou Medium Plate (YMP) under their wing in February, it is already claiming nearly $8 million in profit. That's not too bad considering YMP lost almost $150 million last year.
China Weekly magazine says Du got Minmetals to agree to the deal by simply promising: "If you let me do it, I'll bear the losses alone and we'll split the profits." Minmetals appears to have been as good as its word. According to the magazine, Du ended up with a 32% stake in YMP through Rizhao Steel. (A business associate of his holds an additional 20%).
YMP's troubles started in 2008. "Before the economic crisis [it] had been a good business, putting more emphasis on market efficiency," an employee told China Weekly. Then the crisis hit, and YMP struggled to adapt to plunging prices. After arriving, Du lifted morale by raising wages and scored a quick win by shifting to cheaper (but lower grade) ores from India.
That was the easy part. Much more difficult was to reshape the company's sales and purchasing departments. "To get rid of accumulated long-term structural defects, we are bound to affect entrenched interest groups," admitted a surprisingly frank Rizhao Steel press release, as Du decreed that raw materials no longer needed to be sourced exclusively from Minmetals affiliates. He's also expanded the marketing team and brought in a culture of sales targets.
The partnerships between Du and the state-owned firms may be unusual in terms of how they're structured, but that's probably all. "Cooperation between state-owned and private enterprises should not be mutually exclusive," Du says.
All told, Du's reputation locally is starting to resemble something of a cross between the late British corporate troubleshooter, John Harvey-Jones and 19th century steel industry baron Andrew Carnegie. And with his ability to escape from seemingly impossible situations – virtually all assumed Shandong Steel would swallow Rizhao – perhaps add in Harry Houdini too.
Week in China
Week in China helps keep you up to date with the key business news from the world's fastest-growing large economy. It is produced on an exclusive and complimentary subscription basis for HSBC's corporate and institutional clients.