By Hu Shuli, editor of Caijing

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(Caijing Magazine) More than 10,000 workers participated in a July 24 demonstration involving the private takeover of a state-owned steel mill in the city of Tonghua, Jilin Province. The protest turned violent, and the mill's new general manager was beaten to death.

Not only was this one of the most dramatic recent news events in China, but it also exemplified how the restructuring of a Chinese state-owned enterprise can turn disastrous.

The tragedy at Tonghua Iron and Steel Group (TSG) apparently began as a clash between employers and employees. The media pointed a finger at Jilin's provincial State-owned Assets Supervision and Administration Commission (Jilin SASAC), which had been handling the takeover.

Jilin SASAC officials were criticized for neglecting to consult with workers. Some media articles hinged on an assumption that Jilin SASAC had failed to consult with the workers union, leading to direct clashes between workers and stakeholders.

These analyses may not be incorrect, but they miss the tragedy's fundamental cause by a long shot. Actually, this incident is much more complicated than it seems. And by getting to the heart of the matter, not only TSG but also Jilin Province and any state-owned enterprise that's examining a restructuring can learn from this brutal incident.

A core issue is tied to the lack of a smooth, established channel for dialogue between company owners and workers. This is a shortcoming that inevitably must be addressed to encourage further progress for China's policy of reform and opening up. How managers and workers negotiate really matters. It's high time to find ways that internal organizations representing worker interests, such as unions and worker representative conferences, can function independently without being controlled by managers.

The state was once sole owner of TSG, and the company has long boasted a variety of active, internal organizations, including a board of directors, Communist Party commission and workers union. But the workers union at TSG was not allowed to convey the needs and requests of workers independently. Even after a years-long restructuring process that included layoffs, the takeover of one-third of company shares by private capital and the introduction of new executives, the union was still stuck with oversight by the original managers of the old enterprise.

That led to friction, because TSG's major shareholders including Jilin SASAC and the private stakeholder Jianlong Group lacked a direct means of consulting with workers during a crucial period of strategic adjustment and restructuring. The only channel between employers and employees was in the hands of old-line managers.

Conflicts between old managers and new executives escalated until a clash eventually pitted the workers and new shareholders. Since workers felt they had no guarantees for protecting their interests, and they had lost trust in the local government, they resisted further restructuring at TSG, and went so far as to riot.

Lubricating wheels of the conflict was a steel industry boom period several years ago when China's economy was overheating. The wheels started spinning faster after the economy plummeted in the second half 2008. State and private shareholders remained aloof, however, while the old company managers have controlled the workers. It was just a matter of time before these tensions led to a serious clash.

An equity trade for TSG's privatization has been criticized by some media. But it's a legal deal with due public disclosure. The Jilin provincial government approved Jianlong's application to increase its share in TSG on July 22, prompting Jilin SASAC to launch an initiative for consulting with TSG managers as well as workers. The goal was to gain their support.

Several conferences and meetings were convened July 22-24. Management promised no layoffs and no salary cuts, even hinted on pay raises. However, without a decent communications channel, shareholders could not provide essential information to workers without going through the old-line company managers.

In retrospect, the violence July 24 had been building for awhile. In the end, a new executive sent by Jianlong was held hostage and beaten while workers simply stood by; no one stopped the attack.

Workers and their families who depend on the steel mill are now long-term victims of the tragedy. This violent clash deprived their company a chance to move forward and benefit from restructuring.

Indeed, the TSG incident was a disaster. And there's no simple way to prevent similar tragedies in the future. But several lessons can be learned.

One of the most obvious is that the interests of various parties must be considered during the restructuring of a state-owned enterprise. The restructuring process can be reformed, as well, although that would increase costs. A primary lesson, however, is that checks and balances are needed to help unions that represent workers communicate with management and function independently, on the basis of rule of law.

Full article in Chinese: http://magazine.caijing.com.cn/2009-08-02/110219547.html