FRIGID AIR BLOWS THROUGH:

Fridge-maker Kelon implodes (Sam Ng and Yohji Yuan, 8/10/05, Asia Time)

In a dramatic collapse that has become the talk of southern China business circles, Kelon, a top Chinese appliance maker specializing in refrigerators and air conditioners, has stopped production after its top managers were arrested in late July, and the company's future is now gravely in doubt.

Asia Times Online visited Kelon's headquarters in Guangdong province's Shunde city, where employees have resigned en masse and a parts supplier has claimed arrears against the company. Last year, bank loans to Kelon were cut back drastically, and distributors began selling off its stock to offset looming losses. According to a local source, Kelon began to slash production and cut staff in June. Many workers were already thinking about resignation because they had been preparing for the worst ever since production began to fall earlier in the year.

Kelon's production base, the town of Ronggui in Shunde, is dotted with workshops of the fallen appliance company. The firm's production facilities, which once hummed with activity as Kelon's 10,000 workers produced air conditioners and refrigerators for shipment all over China and the world, have turned into a deserted ghost town. The air conditioner and refrigerator workshops started to lay off workers months ago, while materials and unfinished products were sealed so inventory could be taken. Although the final product warehouses are still open, the company's distribution network is almost paralyzed.

The Kelon affair has caused serious ripples in the Chinese business community. [...]

Kelon developed out of the Zhujiang Refrigerator Factory, founded in October 1984. At the time, it was funded by the township government as a "township enterprise", with an initial capital of 90,000 yuan (US$11,097). In the past two decades, however, the company evolved into a modern stock corporation at the front ranks of home appliance manufacturing in China. Kelon attained the biggest single share in the domestic refrigerator market and a continuously rising portion of the global market. In 2004, the company's total assets were over 10 billion yuan while its annual income amounted to 8.4 billion yuan.

Under Beijing's aegis and after two years' endeavor, Kelon became in mid-1996 the first domestic township enterprise listed in the Hong Kong Stock Exchange, where it issued 20,135 H-shares and raised funds of 800 million yuan. By doing so, the share of the township government was reduced to 52.45%. In 1999, Kelon was listed in the Shenzhen bourse, issuing 11,000 A-shares to raise 1.06 billion yuan and pushing the township enterprise to its heyday. As a consequence, refrigerator output of that same year set a record high at 2.65 million units, generating 5.8 billion yuan in sales revenue and 630 million yuan in net profit.
A critical player in Kelon's rise was ex-president and chairman Gu Chujun, who, though now under a cloud, undeniably played a key role in the company's fabulous takeoff. In the wake of several acquisitions, the company managed to make ends meet in 2002, and earned a profit of 202 million yuan in the ensuing year. While the domestic electronics sector entered a difficult period due to a price war and the unexpected outbreak of severe acute respiratory syndrome (SARS), Kelon stood out amazingly from the industry with strong sales in air-conditioners and refrigerators, its two pillars.

These strong results made a celebrity out of Gu, who was named the "most noteworthy Chinese entrepreneur" in 2003, and was awarded by China Central TV (CCTV) the title "Leading Man for Economic Contributions to China" in the same year. Gu even made appearances in the foreign media; for example, a November 2004 Business Week interview in which he boasted, "Kelon's refrigerator technology is very good. In a recent technology contest, we beat Siemens."

But behind the scenes, incomplete ownership reform was nudging the giant manufacturer off the right track. Despite all the fuss over listing and the transition to a stock corporation, the township government retained the final say behind the scenes. The demands of individual shareholders for transparency collided with government dominance, leading the company into disorder and eventual collapse.