Shanghai Tyre's Rocky Road


A decade ago, Beijing decided that listing state-owned Chinese companies on the Shanghai and Shenzhen stock exchange was a handy way to help reform the nation's economy. But the travails of Shanghai Tyre & Rubber -- one of the first to be listed in 1992 -- shows how far that grand scheme has fallen short of success.

An unforeseen market downturn and a series of management blunders led to a lost decade at China's largest tire manufacturer. And despite a new president and a tie-up with French tire giant Michelin, Shanghai Tyre & Rubber now faces the increasing competitive pressure that is expected after China's entry into the World Trade Organization next year.

RAY OF HOPE? Many investors see the $200 million deal with Michelin, which was announced in March, as a potential godsend for Shanghai Tyre. They pushed up the company's A-shares to $2.95, the highest level since 1997 (though the price has since fallen back somewhat, in-line with the rest of the market). Investors are betting that profits from the venture will help Shanghai Tyre pay down its massive debt and return it, eventually, to profitability. But the company will have to overcome a long legacy of mistakes before that happens.

Indeed, the story of Shanghai Tyre is a cautionary tale for those who think a stock-market listing, or foreign investment, will heal China's sickly state-owned sector. The company's new president, Fan Xian, who was installed by the Shanghai government in September, 2000, to turn around the deflated tire company, is charged with making the deal work. Fan previously helped revive Shanghai Soap, a cosmetics company also owned by the Shanghai government. But the Michelin investment won't help Shanghai Tyre get rid of money-losing assets that are weighing it down. And the new president will still answer to a government, not shareholders. As long as the state remains in the driver's seat, real reform will be difficult.

Initially, the outlook looked rosy when Shanghai Tyre & Rubber's shares were first listed. But rather than plow the $28 million proceeds of the share issue back into the company, management sought to become real estate moguls by building an apartment building and an office tower that came on the market in 1993-'94 -- just when Shanghai's real estate boom was beginning to bust. The listed

company later transferred 95% of the failed real estate investment back to the parent company, which has yet to fully reimburse it.

RASH OF BAD LUCK. Even investments more closely linked to the company's business were losers. In 1996, Shanghai Tyre sunk $9 million into a bankrupt tire factory in south China's Hainan province. Now the company can't even give the money-losing plant back to the Hainan government. Hoping to get the jump on foreign competition, in 1998 Shanghai Tyre became a shareholder in Xuzhou Tire Group, a medium-sized tire manufacturer about five hours west of Shanghai. The company lost $1.45 million last year. When Shanghai Tyre tried to lay off workers, the Xuzhou government balked, unwilling to assume the social-security burden. Now, Shanghai Tyre is trying to gradually withdraw from the investment.

Despite these setbacks, Shanghai Tyre's hapless execs ploughed on, buying 60% of a tractor maker in the northern city of Luoyang later in 1998. But the market for tractor tires turned sluggish, and the hoped-for sales didn't appear. Admits Zhou Jianhui, Shanghai Tyre's secretary of the board: "Our investment in Luoyang didn't live up to its billing."

External factors also conspired to pull down Shanghai Tyre. In 1994, an 10% tax was imposed on radial tires. Meanwhile, the Asian financial crisis devastated tire sales generally. In 1998, the once profitable company began running in the red, and in 2000, Shanghai Tyre lost $56.7 million, up 50% vs. 1999, on sales of $411 million. Now, just paying the interest on $350 million in debt is a crippling burden on the company's balance sheet.

BAD NEWS, GOOD NEWS. As if those problems weren't enough, in 2000, a dozen of the company's state-appointed officials were charged with corruption and bribery. The Shanghai municipal government, which owns 68% of Shanghai Tyre, sacked the president and installed Fan. An executive at another Chinese company calls Fan "a savvy businessman" but questions his ability to resurrect Shanghai Tyre. "He doesn't have a free hand," says this exec. Nor does Fan have much free time since he is still serving as president of Shanghai Soap. Neither Fan nor another Shanghai Tyre executive showed up for a scheduled interview to discuss the company's future.

The Michelin deal does offer a ray of hope for Shanghai Tyre. The company's former president, Yu Guowei, sought out Michelin in August, 1999. "They realized they had a gap in technology," says Victor Hanuska, president of Michelin China. The French company decided to invest in Shanghai Tyre because its Warrior brand tires are the best sellers in China, and Michelin wanted the brand equity, Hanuska says.

Michelin also wants to offer multiple brands to China's growing passenger-car tire market, which is expected to grow by 10% to 660,000 units in 2001. Michelin knew about Shanghai Tyre's financial troubles before investing, but "we're not buying" the whole company, Hanuska points out. He figures the 70% Michelin-owned new company, Shanghai Michelin Warrior Tire Co., will start making money in two years.

NO QUICK FIXES. Still, Shanghai Tyre isn't out of hot water. It owns just 30% of the Michelin venture, which represents only about 25% of Shanghai Tyre's business. Even that factory, which Hanuska praises as one of the best-equipped in China, with workers that are eager to learn, isn't turning out world-class tires yet. "We need to invest a lot a lot in training -- they need R&D knowledge, and they need total quality management," he says.

As for its other investments, the Xuzhou government is making it hard for the Shanghai tire maker to withdraw from the province. The Luoyang tractor company also is losing money, but Shanghai Tyre has decided to tough it out, says Zhou. And while the Michelin money will whittle down Shanghai Tyre's debt load, which equaled 76.6% of its assets in 2000, the company still can't meet China Securities Regulatory Commission requirements to issue new A-shares to help pare debt even more. "We're facing some difficulties," admits Zhou.

One advisor to the parent company sees foreign help as the key to a turnaround. "I am confident that with the technology, brand image, and management imported from Michelin, Tyre & Rubber will have a better future," he says. But given its legacy of miscues, there is no likelihood of a quick cure for what ails Shanghai Tyre. By Alysha Webb in Shanghai


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