Tech Giants: Starting from Bankrupt Companies

67: Chapter 67: The Tragedy of the Industrial Machine ToolJuly 1, 2017, 3:00 PM, Xinghuo Headquarters top-floor conference room. A deputy director from SASAC led a team to visit Su Chen in person.

The atmosphere in the conference room was unusual.

There were six people from SASAC, led by Deputy Director Xu Jianguo. He was fifty-eight years old, with graying hair combed meticulously, and wore old-fashioned black-rimmed glasses. Behind him were two department heads, one division chief, and two middle-aged men who looked like technical experts.

There was no small talk, no pleasantries. The first thing Xu Jianguo said after sitting down was, ”Mr. Su, I apologize for taking up your weekend. But this matter cannot wait until Monday.”

He signaled to his assistant to turn on the projector. The screen lit up with a video clearly shot on a mobile phone; the camera was shaky, and the image quality was not very clear, but for that very reason, it felt exceptionally real.

The camera swept across a massive workshop. Sunlight leaked in from the broken skylights on the roof, forming beams of light in the air that illuminated dancing dust motes. In the workshop, rows of machine tools lay silent like dormant beasts, some covered in canvas, others exposed, their surfaces covered in thick dust and rust.

The camera zoomed in. On the control panel of a boring machine, the Russian labels from the Soviet Union era were blurry, and the plastic casings of the buttons were cracked. A propaganda sign on the wall was half-detached, and the red characters ”Industrial Learning from Daqing” could still be made out, though half of the character ”Qing” was missing.

The camera turned outside the window. The factory roads were cracked, and weeds grew from the gaps. The basketball hoop on the court was crooked, and the paint on the backboard had peeled away completely. In the distance, a five-story dormitory building stood, clothes hanging on the balconies fluttering in the wind like a row of faded flags.

The video was only three minutes long, with no music and no commentary. After it finished, there was silence in the conference room.

Xu Jianguo took off his glasses, wiped them with the corner of his shirt, and put them back on. He did this slowly, as if organizing his thoughts.

”Mr. Su, Ms. Lin, colleagues at Xingchen,” his voice was low, carrying a heavy weariness. ”What everyone just saw is the Shenyang Machine Tool main plant, the reality as of last month. We aren’t here today to discuss policies or projects; we are here to ask for help on behalf of the Chinese machine tool industry—or to put it more bluntly, on behalf of the foundation of Chinese manufacturing.”

The assistant switched the PPT. The first page contained shocking financial data:

Shenyang Machine Tool Group (2016 Annual Report Summary)

Operating Revenue: 2.87 billion yuan (down 43% year-on-year)

Net Profit: -1.94 billion yuan (seventh consecutive year of losses)

Total Assets: 31.2 billion yuan

Total Liabilities: 58.2 billion yuan (Debt-to-asset ratio: 186.5%)

Outstanding payments to suppliers: 3.12 billion yuan

Outstanding wages and social security for employees: 480 million yuan

Cash Flow: -730 million yuan (less than 50 million yuan available in book funds)

Lin Wan gasped. As COO, she had seen many struggling companies, but this was the first time she had encountered such a severe financial black hole.

”This is just the tip of the iceberg,” Xu Jianguo continued flipping the pages. ”Technologically: Shenyang Machine Tool’s main products are currently the CAK series of standard lathes and the XK series of milling machines, with technology stuck at the 2005 level. They have attempted to develop five-axis linkage CNC machine tools since 2008, initiating projects three times, investing over 3 billion yuan in R&D, and failing every time.”

He pulled up a comparison chart: on the left was a five-axis machine tool from Germany’s DMG Mori, and on the right was a prototype from Shenyang Machine Tool that was scrapped in 2015. ”The reason for the last failure was that the stability of the self-developed numerical control system was insufficient; after working continuously for 48 hours, it would experience pulse loss, and the machining accuracy would deteriorate from 0.005 mm to 0.1 mm. The solution provided by the project team at the time was—’We suggest users shut down and perform maintenance every 40 hours of operation.’”

A few suppressed chuckles echoed in the conference room, but they quickly faded. This wasn’t a joke; it was a tragedy.

”Regarding talent,” Xu Jianguo’s tone grew heavier. ”From 2014 to 2016, over three years, Shenyang Machine Tool lost 487 technical backbones, including senior technicians and senior engineers, which is 78% of the original total. Among them, the apprentice of Old Master Craftsman Liu Weiguo—you will see his name later—a 35-year-old CNC programming expert, went to a German-invested company in Suzhou last year, and his annual salary jumped from 80,000 to 400,000.”

He paused. ”The most cruel part is the market data. In 1998, Shenyang Machine Tool held 35% of the domestic machine tool market share and was the absolute leader. By 2016, that number was 7.8%. In the field of high-end CNC machine tools, the market share is... 0.3%. It is almost negligible.”

Xu Jianguo turned off the projector, and the conference room lights came back on. He looked around at everyone on the Xingchen team, his gaze finally resting on Su Chen.

”Mr. Su, I know these figures are ugly. But please understand, Shenyang Machine Tool is not an ordinary company. It was born in 1953 and was the only machine tool project among the 156 key projects of the ’First Five-Year Plan.’ It produced China’s first standard lathe, first CNC milling machine, and first machining center. The technicians it trained are spread across the machinery industry nationwide, and the industry standards it established are still in use today.”

His voice trembled slightly: ”It has 30,000 active employees, and including retirees, over 80,000. Behind it are 80,000 families, mainly concentrated in the Tiexi District—a place where it is common to find three generations of a family working in the factory. But its greater value is the bloodline of the machine tool industry that China has accumulated over seventy years. Although...”

Xu Jianguo took off his glasses, but this time he didn’t wipe them; he just held them in his hand. ”Although this bloodline is now almost drained dry.”

The conference room was so quiet that one could hear the sound of the air conditioning vents.

A department head from SASAC took over, his tone bureaucratic but the content shocking: ”Mr. Su, after multiple rounds of research and verification, we believe that the only possible plan to save Shenyang Machine Tool is for a private enterprise with technology, capital, and market vitality to take over completely. And Xingchen Heavy Industry is currently the most suitable choice in the country.”

He put forward the specific plan: ”SASAC proposes that Xingchen Heavy Industry fully acquire Shenyang Machine Tool Group, assuming all its assets, debts, and personnel. As consideration and support, the state can provide the following assistance: First, all bank debts will be extended for ten years, with only interest paid and no principal for the first five years; second, corporate income tax will be fully exempted for five years after the acquisition, and VAT will be refunded immediately upon collection; third, provide a special technical renovation fund totaling no more than 5 billion yuan; fourth, unconditionally transfer all existing military qualifications of Shenyang Machine Tool to Xingchen Heavy Industry; fifth, provided that regulations are met, the military and military industry group’s machine tool procurement will be tilted toward Xingchen over the next five years.”

The terms were generous. Generous to the point of being unreal.

Su Chen had been silent. Only then did he speak slowly: ”Director Xu, Department Head Xu, leaders. These terms sound very good, but I have a few questions.”

He looked directly at Xu Jianguo: ”First, regarding the 58.2 billion in debt for Shenyang Machine Tool, even with a ten-year extension, the principal still needs to be repaid. Xingchen Heavy Industry’s current annual net profit is less than 5 billion; how many years will it take to fill this hole? Second, 30,000 employees with an average age of 48, whose skill structure is stuck twenty years ago—how should they be resettled? Third, those old pieces of equipment have mostly passed their depreciation period; where is the value in restoring production?”

The questions were sharp, striking at the core.

Xu Jianguo did not evade: ”Mr. Su, you are right about everything. So this is not a financial calculation, at least not entirely. This is a strategic calculation. The state could inject another 20 billion or 30 billion, but that wouldn’t solve the fundamental problems—the system, the mechanisms, the concepts; these chronic illnesses cannot be cured by money. We need fresh blood, a whole new set of genes.”

He leaned forward, resting his hands on the table: ”Xinghuo has proven one thing in the past three years: you know how to turn technology into products, products into markets, and markets into profits. And that is exactly what Shenyang Machine Tool lacks most. The craftsmanship of those Old Master Craftsmen, the accumulation of military manufacturing processes, the complete industrial chain layout—they haven’t disappeared; they are just trapped by the archaic system and need someone to liberate them.”

Su Chen was silent for a long time. So long that Lin Wan gently nudged his leg under the table.

Finally, Su Chen raised his head and said something that stunned everyone: ”Director Xu, you are asking me to carry a mountain on my back while climbing a mountain.”

Xu Jianguo was taken aback, then nodded with a wry smile: ”That metaphor... is very vivid. But Mr. Su, what if there is a gold mine buried in this mountain? What if this mountain itself stands on the highest strategic high ground of Chinese manufacturing?”

The negotiations were temporarily adjourned. The SASAC team was arranged to go to the lounge, and the core team of Xingchen stayed in the conference room.

Once the door closed, Lin Wan spoke up immediately: ”Su Chen, this is absolutely impossible. 58.2 billion in debt! Selling the entire Xingchen Heavy Industry wouldn’t be enough to fill it! And there are 30,000 employees; if we calculate the resettlement cost at 200,000 per person, that’s another 6 billion! Not to mention the old equipment; restoring production would require an investment of at least 10 billion—and these investments might never be recouped!”

She pulled up the calculator on her phone and tapped rapidly: ”Xingchen Heavy Industry’s projected net profit this year is 6 billion; if we take all of it to pay off the debt, it would take 10 years. During this time, we still need to invest in R&D, expand production capacity, and deal with competition... This is financial suicide!”

Zhao Qing adjusted his glasses, his tone relatively calm: ”But those military qualifications are very valuable. Especially the access qualifications for aerospace and the weapons industry; normal applications take three to five years, and there’s no guarantee they will pass. If we get them directly, Xingchen can immediately enter the high-end military manufacturing field. The profit margin and stability of that market are far higher than the civilian market.”

Chen Zhiyuan had been silent. This 52-year-old machine tool expert was staring at the photos of the old equipment on the projector just now, his eyes complex.

”Engineer Chen, what do you think?” Su Chen asked.

Chen Zhiyuan took a deep breath: ”Mr. Su, I have been to Shenyang Machine Tool. In 2005, when they introduced the German production line, I went for a technical exchange. At that time, those German machines were at the world’s top level. If... if we can restore those machines, if we can reactivate those Old Master Craftsmen...”

His voice choked up a little: ”I’m not looking at the problem from a financial perspective. I just feel... it’s a pity. Such a pity.”

Silence fell in the conference room again.

Su Chen stood up and walked to the window. Outside the window, the skyline of Shenzhen glittered in the afternoon sun. This was the forefront of reform and opening up, synonymous with efficiency, speed, and innovation.

And 2,000 kilometers away, Shenyang was another world.

”Make arrangements.” Su Chen did not turn around. ”Next Tuesday, no, Monday. We will go to Shenyang. To see for ourselves just how heavy this mountain is, and whether there is really a gold mine inside it.”