Murder Bares Worker Anger Over China Industrial Reform

By SKY CANAVES and JAMES T. AREDDY

TONGHUA, China -- When Chen Guojun took over last week as general manager of Tonghua Iron & Steel Group, it was supposed to be a step forward for China's government-backed effort to consolidate its massive steel industry.

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On Wednesday, broken glass and other debris littered the hallway outside the room where he was killed.

Instead, he became a tragic symbol of the challenges facing Beijing as it tries to remake its overbuilt industrial landscape.

Last Friday, after learning that Mr. Chen's privately owned employer planned to take control of government-controlled Tonghua Iron & Steel, thousands of workers who were worried about losing their jobs staged a protest that shut down production at their factory, located in a soot-covered district of this city in northeastern China.

As rumors swirled that Mr. Chen's employer, Jianlong Group, planned to shed workers, a group of them found the 41-year-old executive and beat him severely, battering his skull. Workers blocked streets near the factory and hurled bricks, preventing police and paramedics from reaching Mr. Chen.

Local government officials announced on television that night that the plan for Mr. Chen's company to take control of the steelmaker had been scrapped. But by the time the protests calmed and authorities were able to reach Mr. Chen, about six hours after the attack, the father of two was dead.

As police continued to search for Mr. Chen's killers on Wednesday, workers cleared debris from the dormitory where he died, sweeping shattered glass, broken furniture and ruined televisions into heaps. The door to the room where Mr. Chen died was shut, its frame damaged. There were holes in nearby walls and doors, apparently punched through by angry workers.

The fury unleashed in Tonghua has sparked an intense discussion in the Chinese media and among experts about how workers should be treated when control of companies changes hands.

Luo Changping/Caijing Magazine

Chen Guojun, the newly appointed general manager of Tonghua Iron & Steel Group, was beaten to death last Friday by marauding workers.

"This case rang a necessary alarm," says Li Xinchuang, vice chairman of China Metallurgical Industry Planning and Research Institute, a state think tank that helped draft the government's policy for the steel industry. Before the Tonghua riot, restructurings "were concerned only with benefits of local governments and companies," he says. "But the interests of employees should draw a lot more attention."

In an editorial, the official government Xinhua News Agency faulted local-government officials, asking: "Wasn't the Tonghua incident really a matter of failing to consider the interests of workers during the restructuring process?" Provincial-government officials declined to comment on the matter.

Even before the incident, China had been struggling to make headway in its push to consolidate the industry. The nation's steel industry is the world's largest by far, accounting for about 38% of global production last year. That share has grown during the global recession. China's production rose about 6% in the first half of this year, even as global output slid 21%.

Fragmented Industry

But the industry in China is fragmented among as many as 800 producers. Shanghai Baosteel Group, long China's biggest producer, accounted for less than 5% of the roughly 500 million metric tons of steel China produced last year. By contrast, South Korea's Pohang Iron & Steel Co., or Posco, accounted for just over 60% of that country's steel production last year.

Chinese steelmakers have hefty payrolls. Shanghai Baosteel has more than 108,000 employees. By contrast, Japan's Nippon Steel Corp., far larger by output, employs around 17,000. China's central government has blamed smaller producers, owned by provincial and local governments, for weak environmental standards, inefficient use of electricity and other valuable resources, and for flooding the market with poor-quality products.

Despite their enormous output, many Chinese steelmakers lose money. Government figures show as much as one-quarter of production capacity is unused, which partly reflects how fast companies are adding capacity.

The industry has relied increasingly on exports, leading to growing friction with major trading partners. In April, U.S. steelmakers filed an antidumping suit against Chinese counterparts, claiming their product was being priced below cost. This week, European Union trade officials approved penalties on imports of steel pipe from China. Beijing, meanwhile, has launched its own dumping probes into steel from the U.S. and Russia.

Beijing has said it wants to remake the domestic industry so that there are just 10 or fewer globally competitive steelmakers. A consolidated industry might be able to negotiate cheaper prices for imported iron ore, a critical ingredient in steel. The government has unveiled similar consolidation plans for other industries that are plagued by overcapacity, from car making to coal mining. But its efforts have made little headway.

Its plans for the steel industry have met resistance from the local governments that own the companies, which see steel plants as a major source of tax revenue and jobs. When mergers do occur, says Thomas Wrigglesworth, a Citigroup analyst in Hong Kong, they often don't result in reduced production.

Steelmaking has long been core to China's identity. Mao Zedong made the industry a central part of his efforts to make China a Communist powerhouse. Deng Xiaoping, the former leader who ushered in the current era of market-oriented reforms, created Shanghai Baosteel as part of his push to modernize the economy. Today, the company is the world's No. 5 steel producer, with customers including General Motors Co. and China's space program.

Local officials built steelmakers too, with varying degrees of success. In recent years, brash entrepreneurs have moved in to buy them.

While violence like that in Tonghua is unusual, labor experts say workers are becoming more assertive when they feel their interests threatened.

Tonghua sits in a region known as China's "rust belt," which went through a round of unrest a decade ago when efforts to retool the state-owned industrial sector left tens of millions of workers without jobs. Today, the city still bears signs of the pre-reform era, when state firms provided all sorts of benefits to workers. Schools, hospitals, gymnasiums and a television station are still marked with the Tonghua Iron & Steel logo, even though few of those entities are still controlled by the steelmaker. Its flagship steel mill shows every bit of its 51 years.

Tension in Tonghua has been building for years. In 2005, the provincial government sold a 36% stake in Tonghua Iron & Steel to privately owned Jianlong as part of a restructuring.

Jianlong was founded by Zhang Zhixiang a decade ago, when private ownership was relatively rare in China's steel industry. The 41-year-old Mr. Zhang, a native of eastern China's Zhejiang province, began trading steel in his late 20s, quickly expanding his business to a dozen Chinese cities. In 1999, he took control of his first steel mill, in northern China. Today, his net worth is estimated at $1.97 billion, according to Shanghai's Hurun Report, making him one of seven steel magnates who are U.S.-dollar billionaires.

When Mr. Zhang bought the minority stake in Tonghua Iron & Steel, he pledged to transform it into a modern, profitable enterprise modeled on the world's best-run steel mills. To head one of the company's subsidiaries, he tapped Mr. Chen, a factory manager who had risen through Jianlong's ranks to run a company joint venture in Jilin province.

Mr. Zhang grew frustrated that government-appointed managers at Tonghua Iron & Steel blocked his efforts to improve efficiency at the company and expand its capacity, according to Chinese media reports and a Jianlong official.

Mr. Zhang couldn't be reached for comment. The Jianlong official said the restructuring of Tonghua Iron & Steel "is led by the government. It is the government who has organized it. It is impossible for us to control the process."

Worker Disappointment

For workers, Jianlong's involvement was also proving disappointing. "They promised lots of new equipment, but it never arrived," says an employee of the company's coking plant, who provided only his surname, Zhang. "They didn't invest in production. They didn't even maintain the equipment that was here before." Wages improved immediately after the Jianlong investment. Mr. Zhang, who has been a laborer at Tonghua Iron & Steel for more than 20 years, says his monthly pay doubled to about 2,000 yuan, or about $293, in 2006. But the raise proved to be short-lived, he says, and his pay gradually declined.

The situation worsened last year, as the entire Chinese steel industry entered a serious financial slump amid the global recession. Incomes for some workers at Tonghua fell back to their 2005 levels -- a decline for which workers say they blamed Jianlong. By early 2009, Jianlong was fed up with continued losses and indicated it planned to dump its stake, according to Chinese media reports and the company official.

Then, a few months ago, China's economy began to take off again, thanks to a $585 billion stimulus package announced by the government late last year that poured money into infrastructure and construction projects that require steel. Tonghua Iron & Steel reported a profit in June. Jianlong reversed course and structured a deal with the local government designed to increase Jianlong's stake in Tonghua Iron & Steel to a majority one.

The about-face angered workers. "It's like someone comes to your home to get something, and when they're about to leave, they find out that you're really rich, and then they try to stay," says Mr. Zhang, the coking-plant employee. "We can't accept this."

Mr. Zhang and his colleagues at the plant had received bonuses of 200 yuan a month as the company returned to profitability. Mr. Zhang says he feared that Jianlong would suspend the bonus scheme if it took over the company. Even worse, he says, there were rumors that Jianlong planned to lay off all workers who had been with Tonghua for more than 25 years, replacing them with outsiders. There are few other job prospects in this remote, hilly corner of the nation, 35 miles from the North Korean border.

Last Friday, Mr. Chen took over as general manager of Tonghua Iron & Steel and held a meeting with company executives. On the plaza outside, workers began gathering around 8 a.m., upset about the sudden takeover announcement and fearing that their jobs might be at risk, says Qiao Yukui, a 59-year-old company retiree who witnessed the protest.

Rumors Circulate

Rumors began flying that Jianlong planned to build a new steel plant in another city and replace existing Tonghua workers with recruits from there; that Mr. Chen planned to slash thousands of jobs and shrink pensions; that he was earning three million yuan, about $438,000, or more a year.

Around 5 p.m., Mr. Chen was cornered by angry workers in a dormitory office and beaten. At about 9 p.m., with Mr. Chen still missing and feared injured, the government announced that the deal was off. By the time rescuers got to Mr. Chen at 11 p.m., it was too late.

On Wednesday, the streets around the plant were relatively quiet. Several workers living in the dormitory where the killing took place denied having been at the scene on Friday.

A committee of Communist Party, government and company officials investigating the incident has been moving from hotel to hotel in Tonghua in order to hold meetings in secret, says Zhou Wei, a party propaganda official in Tonghua. No suspects have been detained, officials say.

Government officials say there were no plans for layoffs at Tonghua Iron & Steel after the Jianlong takeover. Yin Chunping, an official in the provincial agency that still holds a controlling stake in Tonghua Iron & Steel, says the only personnel changes in the acquisition plan involved executives.

—Gao Sen in Tonghua, China, and Ellen Zhu and Bai Lin in Shanghai contributed to this article.

Write to Sky Canaves at sky.canaves@wsj.com and James T. Areddy at james.areddy@wsj.com

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