By DING HONGLIANG

The Hongbao Tower changes not only the face of this small town, but also the lives of its people.

SHORTLY after Spring Festival, as China prepared for its WTO entry, arbitration took place between a non-public owned enterprise in Zhangjiagang, Jiangsu Province, and an American company, over the quality of a complete assembly line set. China was victor. A local court in the east district of northern Ohio commenced execution of the London arbitration tribunal's adjudication, with the result that the American company's bank account and all its manufacturing equipment were sealed.

As the first case of its kind where a Chinese non-public owned enterprise has bested a transnational company, this arbitration reflects the development of Chinese non-public owned enterprises, the extent of their participation in international competition, and how their legitimate rights and interests are protected. It therefore opens a large scope of possibilities for numerous Chinese enterprises, which is why it has aroused such a high degree of interest among the media.

How Did They Win?

Zhangjiagang Sanhe Precise Pipe Co., Ltd., the Chinese company involved in this arbitration, is a subsidiary company of the Jiangsu Hongbao Group (Hongbao). In June 1997, the Zhangjiagang Sanhe Precise Pipe Co., Ltd. signed a contract with the American Ohio Hostelter and Decker Inc., worth US $1.4 million, for the supply of Galfam coating line equipment, to be used in the development of motor vehicle components. Owing to delays on the part of the American company, the equipment was not manufactured on schedule, and was consequently delivered four months later than had originally been agreed. In addition, after the equipment had been installed in the Chinese company premises, and debugged six times, it still failed to function correctly. Having made a 90 percent advance payment on this equipment, the Chinese side had to face the possibility that it had been defrauded, but nevertheless gave the American side another chance -- its seventh, which resulted in yet another failure. According to the results of an inspection by the local commodity inspection department, the whole production line was found to be substandard, and was, in accordance with the law, sealed. Despite this ironclad evidence, the American side proposed arbitration to the London arbitration tribunal, requiring, quite without foundation, that the Chinese side pay the balance of the sum in question.

Taking into account numerous negative factors, such as unfamiliar territory, proceedings conducted in a foreign language, and a limited understanding of international economic law, does a Chinese enterprise stand a chance of winning an arbitration abroad? Should the Chinese side lose, a huge sum of money is payable. These are the misgivings of ordinary workers, and also of boards of directors.

Arbitration brought glory to Hongbao's think-thank.

"Zhu Yubao, chairman of the board, overruled all objections," said Wang Zhonghua, deputy general manager of Sanhe Precise Pipe Co., Ltd. "He said that Hongbao was sure to overcome whatever difficulties it came up against, and win." Hongbao engaged the legal services of Huang Zhonglan, who obtained her doctorate in law in the USA. With her help, the company took on another renowned Chinese lawyer based at a prestigious UK law firm. With their help, Hongbao made exhaustive preparations, including ample photographic and material evidence, and an on-the-spot demonstration to refute the American side's case. With the help of a videophone meeting system, the four witnesses representing the Chinese side was able to give evidence to the London arbitration tribunal directly from Shanghai. After eight court sessions over 21 days, the American side was eventually forced to acknowledge that its own error in design had resulted in the violation of the contract. Hongbao thus won the case.

"The American side underestimated Hongbao's strength; they did not expect a non-public owned enterprise from a small Chinese town to go to the London arbitration tribunal, let alone counterclaim," said Huang Zhonglan to this reporter. "There is no doubt that Hongbao's standardized and well thought-out contract contributed a lot to its success, but tactics were also very important.

"In cases involving foreign countries, it is a matter of routine for quality inspections to be conducted by international authoritative institutions or state legal organizations. Notarization is an indispensable part of the process whereby both parties submit to inspection. In the amassing of evidence, characteristics of both English and American law should be carefully considered, and various techniques employed to prepare witnesses, testimony, and material evidence in such a way as to conform to international arbitration and litigation procedures." Huang also believes that with China's WTO entry, there will be more and more transnational business disputes. Enterprises should therefore give top priority to exhaustive preparation so as to preclude any dispute.

The Strength of a Think-tank

A residential block.

Hongbao's success boosted the morale of its employees immensely. "What we gained from this victory is not just over one million US dollars in compensation," said Zhu Yubao, "but also a positive influence on Hongbao's development in various aspects. This is attributable to the great efforts of Chinese and foreign lawyers, as well as to a think-tank of experts and scholars." Lawyer Huang speaks highly of the think-tank, saying that the broad scope of information and abundant evidence it provided, its specialized technological support, and its joining forces with Chinese and foreign lawyers, constituted a key role in this arbitration. "What I did not expect was that there could be such an efficient think-tank at a non-public owned enterprise in such a small town -- Daxin," admitted lawyer Huang.

Officially established in May 2001, this think-tank appeared in embryonic form a full ten years earlier, and has since propelled Hongbao's rapid development. Its leader -- Professor Liu Huaiwen, was formerly vice president of the Chinese Iron and Steel Research Institute, and went to the UK as a Chinese consultant. He told this reporter, "I made Zhu Yubao's acquaintance ten years ago. He is farsighted, full of courage and insight, and also innovative. More important still, he has the ability to pose questions and find solutions, and to adapt to adverse circumstances -- a quality woefully lacking among Chinese entrepreneurs. This is the main reason why I have such confidence in him."

Professor Liu's opinion is fully endorsed by Hongbao's development and expansion. With only a dozen workers and a few hundred yuan in assets, it was formerly a handicraft workshop engaged in manufacturing metal fittings and repairing farm machinery. In the early 1980s, the company faced imminent bankruptcy due to a saturated market. Taking up the post at this critical moment, Zhu Yubao proposed the strategy of "occupying the overseas market," and later "expanding production by means of annexation," after the company's products began to sell successively overseas. Apart from wanting to improve the quality of the company's established products, Zhu has consistently adopted new technology in order to develop new products, and as a result, Hongbao is steadily progressing.

Professor Liu spoke of the importance Zhu attaches to outside support. He is cognizant of the innate deficiencies of non-public owned enterprises in such aspects as foundation, capital, human resources, management, and technology, none of which can be generated solely by the company in the short term. Since the 1990s, metals, its most competitive commodity throughout the 1980s, have given way to steel tubes, which were developed with the help of the think-tank headed by Professor Liu. Currently, steel tube products contribute over 300 million yuan to Hongbao's annual profit.

The Hongbao think-tank is made up of nine national experts and scholars from Beijing and Shanghai. It is divided into four groups that deal with forging equipment and molds, steel tubes and titanium alloys, enterprise capital functioning, and information and automation. Their responsibilities comprise tackling daily technological and quality problems, and also making suggestions as regards the growth and long-term planning of the enterprise.

Hongbao once won an order for steel tubes from an American company worth US $2 million. During the production process, however, which was according to the American company's technical specifications, cracks appeared in the products. With the help of the think-tank, Hongbao upgraded the technology, not only eliminating the cracks, but also improving the overall quality of the product. Deeply grateful, the American company bought all it had ordered from Hongbao, and in addition, paid out a bonus of US $0.1 million. Not long ago, Hongbao had planned to establish a packing factory in a scientific and technological industrial park. The plan was later scrapped by the board of directors, owing to the negative reaction of the think-tank, their reasons being that transport costs would increase owing to the long distance between the production and packing areas.

"Such examples are countless," said Zhu. "Hongbao's development is inseparable from the think-tank." He told this reporter that with China's WTO entry, the best way for Chinese enterprises, especially non-public owned enterprises, to proceed within the ferocious competition of the international market, is to form a think-tank, as only then can they maintain an impregnable position.

A Man and a Town

Zhu Yubao gave donations towards preserving these three 500-year-old ancient ginkgo trees.

Apart from a few rice fields and fishing boats, Daxin, typical of the small towns in southeast China's river region, has few of the essential features of an agricultural town. It has a skyline bristling with factory buildings, and crisscrossing high-grade highways, and in the town itself are modern villas, more traditional style houses, and businesses trading in all varieties of goods.

Several of Hongbao's one dozen subsidiary companies that are scattered throughout Daxin Town owe their survival to Zhu Yubao's annexing strategy. Daxin Town has a population of 28,000, of which over 4,800 work for Hongbao, which means that there is one Hongbao employee in almost every household in Daxin. Hongbao spends 45 million yuan each year on wages, and contributes over 1,600 yuan to Daxin Town's per capita net income. In addition, its tax payments constitute a large proportion of the total revenue in the locality.

Zhu Yubao donates money each year to public welfare projects, such as building roads and bridges, aiding the needy, and supporting cultural and sports projects. He recently gave a donation towards the protection of three ancient ginkgo trees, dating from the Jiajing period of the Ming Dynasty. He also plans to rebuild a "Warning Pond" on the site of a hill, the original having been dug up by a few misguided villagers. He aims to deter future Daxin residents from wasting their time just idling and eating.

DING HONGLIANG is a Xinhua News Agency staff reporter.