Curious Capitalist

Red Steel City: What China’s Oldest Steel Factory Says About the Nation’s Future

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Darley Shen / Reuters

This article is the first in Foroohar’s series on Chinese business developments and their effects on the global economy; find the rest of the series here.

If you want to understand the history of modern China, a good place to start is the Wuhan Iron & Steel (Group) Corp., with headquarters in Wuhan, a centrally located city of 10 million that is often called the Chicago of China. At the entrance of the 27-sq-km campus is a museum that documents the history of the company, beginning with its founding after the Qing dynasty’s Opium Wars, when it was decided by the provincial governor that China should enhance its “learning of advanced technology from the West to resist the invasion of Western countries.”

That meant making steel — a lot of it. WISCO is the oldest steel plant in China and has churned out the metal used to make everything from the rifle that fired the first shot in the 1899–1901 Boxer Rebellion to the rolled steel used by up-and-coming Chinese automotive makers such as BYD and Cherry, to the high-performance metal that created the stunning Bird’s Nest Stadium for the Beijing Olympics. At the entrance to the factory campus is a large statue of Mao, who famously proclaimed, “Nothing in the world can defeat us as long as we have two things — one is food; the other is iron and steel.”

Of course, Mao’s willingness to put the latter before the former was the cause of the Great Famine, which killed as many as 43 million Chinese between 1958 and ’61. (In a surge of nationalistic fervor, the Great Leader commanded all peasants to stop growing crops and start making steel.) But in general, the history of WISCO has been one of the rise of China. Pictures in the company museum show several decades worth of smiling Politburo members and leaders from Mao to Deng to Jiang Zemin, Hu Jintao and Xi Jinping, visiting the factory grounds, consulting with Soviet technologists, cutting new steel-trade deals with Brazilian officials and, more recently, announcing major overseas expansions (WISCO now owns and operates mines and steel facilities in places like Canada, Brazil, Liberia, Madagascar, and Australia). The company, which is No. 351 on Fortune’s Global 500, churns out 40 million tons of steel a year, making it the fourth largest producer in the world.

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It is also an archetypal example of the Chinese state-owned enterprise (SOEs), giant Communist Party behemoths that have come to exercise huge power within the Chinese economy (SOEs represent only 4% of the companies in Wuhan, for example, but 50% of its economy). As the recent cyberhacking scandals around the world have illustrated, the lines between the government and global corporations are blurring everywhere. But in Wuhan, the two are truly one. WISCO’s annual report shows pictures of both its president and the provincial party secretary. Some 70,000 workers and their families, over 300,000 people in all, live on site in Red Steel City, an ecosystem with its own sports teams, cultural performances, newspaper (with 43 employees!), and group weddings. The massive campus, far superior to most of China’s private export-oriented factory sites, is dotted with parks and trees where workers can lounge or lunch beneath four giant smelters. (Given the proximity of those smelters, the air is surprisingly fresh seeming — a result of a new party push to upgrade environmental conditions at many factories.) Outside one major plant, hedges have been trimmed into exotic topiary animals. Nothing in the U.S. steel industry compares — you’d have to go to somewhere like Ford’s massive River Rouge automaking complex in Dearborn, Mich., to see something even remotely similar.

The history of Red Steel City can be divided into three parts. Between 1955 and ’73, as the area was transformed from wetlands to a megacity, WISCO’s job was to churn out as much steel of any quality as possible. From 1973 to 2004, it was about going upscale — developing new techniques, creating efficiencies, and importing technologies from the West. From 2005 onward, the mandate has been globalization. As the company brochure spells out in inimitable English, “Since 2008, subtly grasping the favorable time when financial crisis brought out great changes in the worldwide economy, WISCO has obtained the mine ore resources at relatively low prices which were impossible to get at skyrocketing cost before the crisis.” Translation: WISCO has been and will continue buying more and more Western assets on the cheap.

It’s a trend amongst most cash-rich Chinese SOEs, as evidenced by the recent Chinese bid for Smithfield’s, America’s biggest pork producer. The large and protected home market gives SOEs a leg up in global acquisitions — they have huge cash hordes that they can easily deploy abroad. But whether or not Western governments will begin demanding tit-for-tat access to Chinese markets in return for allowing such deals is a big question. The power of the protected state sector in China has been growing, rather than shrinking, over the past decade, and many foreign businesses feel that the playing field has grown increasingly uneven.

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The Chinese are acutely aware of the delicate position they are in as they try to move abroad and increase the global reach of their state-owned firms. When I asked Chen Yongzhi, the p.r. director of WISCO, whether the company would potentially be in the market to make a U.S. acquisition, he said delicately, “It’s a sensitive question. I have been to Pittsburgh, and the iron and steel industry there is very advanced. We would like to carry out candid, friendly cooperation with any overseas companies for a win-win situation.”

Of course, one reason that Pittsburgh produces a lot less steel than it used to is that Wuhan ate the American industry’s lunch. Yet Wuhan itself may soon be facing the pressures that U.S. industrial cities have already experienced. While steel production is still relatively high, it has been falling in recent years as China attempts to move its economy more upmarket, into higher-end goods and services. And there’s increasing pressure from Beijing on SOEs to clean up their environmental act and to improve their labor and management standards. “We are still a developing country,” says Chen. “We still have a lot of improvements to make.”

That argument — that China is still a poor country, and one that the U.S. need not be afraid of — is in some ways true. Nearly all of WISCO steel is consumed in China, as the country continues to build its enormous infrastructure. Its entry onto the world stage has really just begun. Yet as China and its state-owned enterprises, which continue to operate by their own set of rules, gradually become more integrated with the global market, there will inevitably be both opportunity and increased tension in areas like trade relations. The era in which Deng advised the Middle Kingdom to “bide its time and hide its brilliance” is coming to an end, and with it a new chapter in the history of Wuhan, Red Steel City, and China, is being written.

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