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CHINA: For Tycoons, Formal Lessons in Capitalism

MBA Program Is Billed as First Partnership of a U.S. Business School, Republic's Government

by Peter S. GoodmanWashington Post
November 28th, 2003

SHANGHAI -- Inside the classroom, the heads of some of China's largest companies, many of them still owned and operated by the Communist government, examined a case study of labor relations culled from the crucible of capitalism, the United States.

Nordstrom Inc., one of America's largest department store chains, had enticed its workers to scrap the union that had represented them for decades and instead work under a new "incentive system." People would be paid according to how much they sold, with greater reward for greater profit and greater risk for all.

The professor laid out the details, then turned to his class full of corporate chieftains. "In this case," he asked, speaking Mandarin, "are the employees happy with the union? Or do they prefer the new incentive system?" The classroom resounded with affirmation. "They want the incentive system! They don't want the union!"

China may still be known officially as a People's Republic, but the recent class held here in the country's financial capital -- part of an executive MBA program run jointly by the government and the W.P. Carey School of Business at Arizona State University -- was a testament to how this supposed worker's paradise is increasingly defined by capitalist management techniques and demand for return on investment. The students, among them several high-ranking Communist Party and government officials, listened intently as their American professor lectured on the finer points of squeezing greater productivity from the workforce for less pay.

China's embrace of the free market is hardly new. Two decades have passed since the country embarked on its reformist course, shedding lifetime employment guarantees, socialized housing and health care, and other trappings of its Marxist past. But the executive MBA program, billed as the first partnership between a U.S. business school and the Chinese government on Chinese soil, underscored the keen interest of the country's leaders in completing the wrenching transition by dismantling the old state sector, shutting the doors on thousands of bankrupt state-owned companies that still employ tens of millions of people while intensifying the role of the profit motive in everyday life.

The program, which began this fall, will confer masters of business administration degrees to executives who attend two dozen weekend sessions spread over two years. Professors from several American institutions, including MIT's Sloan School of Management and the Stern School of Business at New York University, fly here to teach intensive units crammed into two consecutive weekends. Most of the professors are ethnically Chinese and fluent in the Mandarin, which is China's national language.

Classes are held at the National Accounting Institute, a futuristic campus of angular buildings established with the backing of former Chinese premier Zhu Rongji, one of China's most fervent advocates for what is known here as the "financial reform and opening process" -- essentially, the drive to turn China into a market economy.

The old system funneled loans from state banks to state-owned companies regardless of their often-ugly balance sheets. It safeguarded jobs, pensions and government-provided housing for millions, but it has left the financial system in tatters: Private economists estimate that China's state banks are choked with as much as $500 billion in bad debts.

Zhu and his fellow reformers have encouraged the introduction of Western management techniques, including modern principles of accounting as a way to make China's businesses more competitive. They have opened up the country to foreign capital and encouraged China's companies to sell shares on stock exchanges in Hong Kong and New York to fund expansions aimed at transforming them into global competitors. They have pressured China's banks to stop lending to unprofitable companies and start supporting a new crop of private firms. They have also urged a cleanup of China's still wild stock markets, which, despite recent efforts, remain rife with manipulation and phony accounting.

The accounting institute and the new MBA program with Arizona State are significant parts of the campaign. Though China today is full of MBA programs, and thousands of young people flock to universities in the United States and elsewhere to earn such degrees, the roster of students at the program speaks of the importance placed on it by China's leaders.

Among the 64 enrolled are presidents and chief executives of some of China's most important banks, brokerage houses and manufacturers, as well as powerful officials, including a vice mayor of Shanghai.

In some respects, the workings of the program highlight the often-seamy ways of Chinese capitalism and the enduring role of personal connections in doing business here, with many of the country's most successful "private entrepreneurs" having amassed their wealth by exploiting links with government officials. No recruitment drive for the program took place. Admission was essentially restricted to people connected to the elite accounting institute.

"Most of the students are the president's good friends, or friends of friends," said Tom Tang, vice director in the marketing department at the accounting institute, referring to the president of the institute.

The two-year program costs $20,000 -- no small sum in a land where many households subsist on hundreds of dollars a year -- but many of the students have had their fees paid by their companies or the government. Others paid themselves, Tang said, seeing the course as an excellent opportunity to cultivate ties with government and party officials. On a recent afternoon, the student parking lot was packed with shiny black Audi sedans.

"You can see from the cars what type of student we have here," Tang said, beaming.

Still, the atmosphere inside the classroom undercut the sense that those in attendance might simply be going through the motions to collect a trophy degree and do some networking. The place hummed with curiosity. Discussion was lively as students bent over thick stacks of case studies. Several of those in attendance said they were gaining bits of practical knowledge they would put to immediate use in some of China's more prominent companies.

Tian Yuan, chairman and chief executive of China International Futures Co., a brokerage house engaged in futures trading, said he was in the middle of acquiring another company but had not fully understood how to calculate its value.

"Now, I'll understand it more clearly," he said.

Zhou Chi, chairman and chief executive of Shanghai Airlines -- a company with 4,000 employees, a fleet of 28 jets, and expansion plans aimed at China and beyond -- said the class was helping him evaluate new ways to raise capital.

As he taught a recent unit in managerial accounting, YuhChang Hwang, a Taiwan-born professor from Arizona State, said he was favorably impressed by the quality of his class.

"My concern was they would show up here just to get a degree," he said. "It turned out to be exactly the opposite: They are very eager to learn."

Still, in China today, even managers who know how to run their businesses along profitable lines are often constrained by politics and the imperative to avoid huge surges of unemployment -- perhaps the greatest threat to social stability. The company heads spoke of having greater and greater power over wages and contracts, but Hwang said that in his private conversations many express frustration about their inability to run their companies as they please. Government officials continue to press banks to lend to major employers and politically well-connected businesses regardless of their balance sheets. Layoffs are difficult to impose, even in hugely bloated money-losing companies.

"The problem is, they have constraints," Hwang said. "They are influenced by the state. Some students say China is different from the United States. There are a lot of things we cannot do."

In the classroom, American-style capitalism was offered up as the model way to do business. After dissecting Nordstrom's managerial triumph, Hwang projected a series of slides on the wall detailing the success of Nucor Corp., the U.S. steel manufacturer.

"The organizational structure of a typical division is made up of only three management layers," one slide declared. "The corporate headquarters employs only 22 people."

Hwang gazed toward one of his students, Ai Baojun, director of Shanghai Baosteel Group Corp., a state-owned giant iron and steel conglomerate whose publicly listed arm alone has more than 15,000 workers. "How many people are there in Baosteel's headquarters?" Hwang asked, bringing laughter.

Nucor has "never had a losing quarter since the mid-1960s," one slide said. . The next slides sought to explain why: "Decentralized nonunion management style -- high levels of individual responsibility -- low base pay."

The class talked about ways to limit overtime abuse and time-sheet fraud. Members talked about the need to standardize hours and punish the tardy. They talked about how to encourage good work by rewarding the productive.

"For technical professionals, should you give them a bonus or not?" Hwang asked, moving up the steps of the lecture hall with a microphone fixed to his collar.

"You must!" came the response from the seats.

"How should the bonuses be paid?"

"The bonus to these people should be tied to the company's overall profit," answered a student near the front.

What was perhaps most striking was the lack of questioning about this mindset, the absence of any discomfort over the singling out of losers along with the winners. The old socialist-style egalitarianism was clearly a thing of an increasingly distant past.

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