The Alarming Message for Chinese Cement Industry Behind the Shanshui Cement Drama
Zhang Caikui and Zhang Bin, the figures once controlled Shanshui Cement, were excluded from the management board in its re-constructure of leadership board last year. However, they tried every means to keep the new management board from taking on the control of the company, especially by occupying the headquarters of Shanshui in Shandong and important administrative documents. On February 1, 2016, the new Shanshui Cement board declared the ownership of the headquarters in Shandong and 3 Shanshui affiliate companies, finally putting to an end the Shanshui Cement fight that has lasted nearly one year. In the past few months, former Shanshui CEO, Zhang Bin illegally retained the company’s important administrative documents; on December 27, 2015, former executive Chen Xueshi and hired gang members forcefully entered into the new Shanshui headquarters to destroy valuables in the office and attack Shanshui employees, resulting in a scene resembling Hong Kong mafia films. Now the Shanshui headquarters in Shandong are under the control of the new Shanshui leadership, and the Zhang father and son are finally exiled from Shanshui Group. The new Shqnshui leadership only needs to follow the legal procedures to reproduce the official seal. Now what is left is the official seal, which the new Shanshui can reproduce following legal procedures.
However, Shanshui Group is still in deep trouble: they will soon default on their debt of approximately 10 000 million RMB, the third in a line of unpaid debts of Shanshui Group. To make matters worse, they face several lawsuits sparked by their shareholders in Hong Kong.
The origins of the Shanshui battle come from Tianrui Group’s large-scale buy up of Shanshui stock on the secondary market.
From April 2015, Tianrui and its associated companies started buying Shanshui Cement’s stock on the secondary market, and became its largest shareholder on April 16, having acquired 28.16% of its total shares. While Tianrui is one of Shanshui Cement’s largest competitors, it had failed to inform the latter of in advance of its aggressive purchase of shares.
In Chinese media, Tianrui has previously been reported to always “empty up” the companied that they acquired by exploiting the acquired company to serve the needs of the production lines of the main company, resulting in significant unrest from the Shanshui Group leadership and its large group stakeholders.
While we cannot confirm whether or not Tianrui intends to empty up Shanshui Cement, it has become clear that since Tianrui became the biggest shareholder of Shanshui Cement, it has already started looking for chances to restructure the firm’s management board. The former Shanshui leading figures, Zhang Caikui and Zhang Bin are on the list figures set to be removed from the Board. Naturally, such a move was strongly opposed by the Zhang father and son and the other two biggest shareholders, China National Building Material Company and TTC International Holdings Ltd.
The fight between the Zhang father and son has been the main storyline between the first half of 2015 and the Chinese New Year of 2016: Events unfolded with Ernst & Young’s temporary entrust of Shanshui Cement, followed by the company’s bankruptcy crisis and a debt default. After they were ousted from the Management Board the Zhang father and son got their hands on important confidential documents while the former executive hired gang members to attack Shanshui’s new offices. The drama finally came to an end with Shanshui, under a new Management Board, taking over the original Shanshui headquarters in Shandong. In effect, Tianrui Group has finally reached its goal of changing the management board of Shanshui Cement.
Shanshui Cement : prospered because of Zhang, failed because of Zhang
Shanshui Cement used to be one of the best Chinese cement companies, however now its development has been badly hampered by the drama that unfolded over the past year. How did the CEO of Shanshui, Zhang Caikui, formally dubbed the “good leader of a State Company”, come to appear on a list of banishment from the company? If we trace this story a little further back, we can see that the real reason behind Shanshui Cement’s problems runs deeper than just its management board.
Back in the day, Shanshui Cement was an example of a state company performing poorly for a prolonged period of time, while Zhang Caikui came to be known as the vital figure that radically transformed it and placed it on the fast track for development. By 2001, Shanshui Cement had already reached a profit of more than 100 million RMB and in 2011 and 2012, it gained 2.3 billion RMB and 1.6 billion RMB in profit, respectfully. Behind those brilliant margins were the reforms initiated by Zhang Caikui, who successfully adapted to the phase of Chinese economic development. As a result Shanshui Cement prospered under the context of the great leap in the Chinese economy.
However, two crucial decisions made during the breakneck pace of Shanshui Cement’s development eventually became the reason of today’s drama.
Gaming on the Financial Market
The company had its IPO in Hong Kong in 2008. Ever since, manipulation of the stock market became the main tool for the Zhang father and son to accumulate personal wealth. They manipulated the conditions of stock ownership clauses, allowing only the two of them to reserve all the decision making power over the shares of Shanshui Cement. Other employees of the company only discovered this in 2013, when the Zhang father and son decided to purchase back everybody’s shares at a very low price, paid with the future dividends of the Shanshui employees. People realized that they were fooled and became angry about the decision, and sued the Zhang father and son in Hong Kong.
Facing this situation, the Zhang father and son plotted to strengthen their control of the company, therefore selling a large number of shares to an ally, China National Building Material Company, at a preferable price. This was how Tianrui managed to gain access to an even larger number of Shanshui shares on secondary market, and finally became the biggest shareholder of Shanshui. The Zhang father and son jumped right into their own trap of financial market manipulation.
After the Shanshui Group was reformed into a private company, the Zhang father and son have been centralising their power over its interests. Especially after the IPO of Shanshui Group, the company has become the personal kingdom for Zhang Caikui. Their manipulation plot on the financial markets deprived Shanshui employees of their interests as a share of company stock, while Zhang Bin, Zhang Caikui’s son was granted ridiculously high perks when he succeeded his father’s place.
In terms of the company’s management and investment strategy, both Zhang’s took an authoritarian decision making methods. They invested in inferior quality projects and bought raw materials from inferior suppliers, which was exposed and denounced in the Shanshui Anti-corruption Site, a web site initiated by Shanshui workers. The Zhang’s acted unreasonably by putting their own interests before that of the company and the workers, and it is the reason for their failure today.
Due to the sub-optimal business decisions made by the Zhang father and son, Shanshui has often had significant environmental problems. In 2014, they were forced by the government to tackle their pollution problems, especially the emission of NO2, which is 8 times higher the standard level. In January 2016, Shanshui was criticized by the government for not stopping their production during the winter, when air is more easily polluted. Individuals have also taken to online forums and blogs to criticize the deteriorating air conditions near the Shanshui production plants. In addition, according to the latest statistics, Shanshui is one of the world’s worse offenders in terms of CO2 emissions per annum, which is as high as 57 876 kt.
The centralizing reforms of the Zhang led to the butterfly effect that was the reason for today’s difficult situation of Shanshui Cement. The factors such as their manipulation of production projects, over-expansion, manipulation on financial market, internal fight over the management board, employees discontent with Zhang Caikui and the recent difficulty of its funding chain all intertwined to make the once legendary company fall into the situation today.
The Lesson for Chinese Cement Industry
The essential reason for the Shanshui drama today is the lack of innovation in the company’s management methods. In modern China, whose economy has always been on a fast track, it is not possible to manage a modern company in medieval ways. Outdated management methods breed corruption, which was exactly why Shanshui employees have established a website to denounce the corrupt lifestyles of the Zhang’s, whose luxurious personal temple was especially drawn attention to.
Now, according to the Chinese Communist Party, the Chinese economy has entered a New Development Phase, and innovation has become essential in helping the old Chinese industry survive. As a traditionally heavy polluting sector, the Chinese cement industry urgently needs reforms and innovation in both management and production to keep in line with the standard of the Green GDP initiative of the Communist Party. This is a critical time for the Chinese cement industry, and companies can choose to follow the Communist Party’s initiative of greenness and innovation to transform old companies into “Made in China 2025”, or to die quietly.