50,000 workers to be laid-off from one company: China's shifting economy

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There was no fanfare to mark Mr. Qin's last hours at Wuhan Iron and Steel. After four decades at the same company, he punched out one day in January as he had thousands of times before, leaving behind the gritty mill colossus, with its humming conveyors and belching exhaust stacks.

Co-workers held no going-away party. No one said a speech.

"No," he says. "There was no event."

He just quietly disappeared, no longer needed by an industry that is fast shedding workers, or a country struggling to find a new footing for its economy. With demand falling and steel prices at 10-year lows, Wuhan Steel has pledged to lay off up to 50,000 people, a 10th of the half million steel workers Chinese planners want to cut as the country's once-vibrant industrial landscape grows cluttered with idled plants.

It has started with older workers. Mr. Qin, a 59-year-old electrician, was pressed into early retirement by a company whose mounting financial losses reached 6.8-billion yuan ($1.37-billion) last year.

"In the golden years, we were the centre of attention for the country and made great profits," he says. "But that splendid time has gone away. We must face reality now."

Outside the steel mill, he discovered, few people place much value on the experience he built up over the decades. At Wuhan Steel, employees work with specialized machinery other factories don't use. Their studies at company-run schools yield credentials that aren't recognized elsewhere. They amass steel-making expertise no one else wants.

"They have worked their whole life on one particular skill, and that's no longer useful for the future," said Bo Zhiyue, director of the New Zealand Contemporary China Research Centre at the Victoria University of Wellington.

"These people are not prepared to take on new jobs."

What is true for the steel workers is also true much more broadly in China, which has trained a giant work force to run the factories, mills and mines that were once its engines of industrial might, powering its decades of roaring economic expansion. Now, as growth slips to its slowest pace in a quarter century, Chinese leadership wants to replace the smokestacks with laboratories, investment banks, websites and other emblems of a high-tech economy driven by consumption.

"Mass entrepreneurship and innovation could offer an endless source of creativity and wealth," Premier Li Keqiang promised recently.

"It could be a gold mine," he said, one rich enough to fund China's escape from the ranks of middle-income countries and rekindle economic growth.

But the plight of Wuhan's steel workers helps to shape a vital question: What if China can't find enough innovators and entrepreneurs to exploit that new gold mine?

"The 'retired' Wuhan Steel workers only know how to manufacture and iron and steel," says Mr. Huang, a 53-year-old electrician still working for the company. (Like many other former and current employees, he offered only a surname, worried about reprisal from a company that built their homes and still holds great power.)

"Now they are being pushed out into a society with a growing service industry and IT companies," he says. He talks over the noise of workers cracking apart a Mao-era Wuhan Steel employee compound, whose demolition offers a vivid image of the fate of the company and its people.

"What these workers are good at doesn't fit with what those jobs require," Mr. Huang says.

That mismatch creates a formidable obstacle to the rewriting of the Chinese economy that the Premier wants to see.

"I think the labour force issue is the most serious problem that China faces today," said Scott Rozelle, a Stanford professor who is an expert on rural China and has studied the country's work force preparedness.

His most recent research has examined what it would take for China to become a high-income country, a critical step toward attaining the developed-world standards of living and consumption its Communist leadership covets – and exporters such as Canada desire to revive moribund commodity prices.

No country has made that transition without a work force where at least 70 per cent of people have at least attended Grade 10, he found.

In China today, just 24 per cent of people between the ages of 25 to 64 have that level of education.

"There is no country with lower human capital in the middle-income world than China. It's lower than Turkey, Mexico, Thailand, Brazil and South Africa," Prof. Rozelle says.

China's population allows it to pump out large numbers of university-educated youth, with 7.49 million graduating last year alone. And it's possible, Prof. Rozelle says, that it has so many people it can defy trends among other countries.

But the numbers today are not encouraging: Even among 15- to 17-year-olds, only 53 per cent attend high school, according to 2010 census data documented in a recent paper Prof. Rozelle co-authored with a group of researchers that included academics at Peking University and the Chinese Academy of Sciences.

For decades, youth have been able to secure profitable work at shoe factories and Wuhan Steel mills without much education, so they've had little reason to stay in school. The effect, written across the decades, is profound.

Barring a dramatic shift, China's work force by 2060 will remain mired at high school education rates "25 percentage points lower than the last successful middle-income country to go to upper income," Prof. Rozelle said.

For China's economy, "the rising tide is going to flounder."

A plan to help laid-off workers

Wuhan Steel is less a company than a kingdom.

Its steelworks sprawl across 22 square kilometres – more than a third the size of Manhattan – along the Yangtze River, with a port that connects its massive blast furnaces to Japan and Europe. The company dominates the Red Steel City neighbourhood in Wuhan, the inland Chinese metropolis where it runs a stadium, hotel, university, hospitals – and even a newspaper.

Pretty tree-lined avenues named "Workers Village Road" and "Industry Street" pass by endless blocks of red brick walk-ups and concrete high-rises the company built to house a work force that once numbered 100,000 strong.

Their hands have helped to fashion the country's skeleton and skin. Wuhan Steel products built container ships and cars, bullet trains and architectural icons, including the Bird's Nest stadium in Beijing, with its criss-crossing metallic exterior.

Write the company's history and you have a pretty good sketch of the way modern China has developed. Construction on the first steelworks started just six years after the Communist Revolution, and visitors to the company still pass by a giant statue of Mao Zedong with an outstretched arm.

Every one of China's Communist leaders has visited the company's steelworks, each leaving behind a quote memorialized in the company's museum. None have been more frequently repeated than Chairman Mao's belief that "nothing in the world can frighten us as long as we have two things: one is food, the other is iron and steel."

As China erected giant new cities, vast new railways and tens of millions of cars, Wuhan Steel built itself into a Fortune 500 company that numbers among the biggest steel makers on earth, boosted in recent years by the flood of Chinese stimulus spending during the financial crisis.

To feed its enormous appetite for iron, it bought stakes in mines in Canada, Brazil, Australia, Liberia and Madagascar. It rolled out plans for massive overseas investments, including $5-billion (U.S.) joint-venture steel mills in Indonesia and Brazil.

But as China's economy slowed, steel prices tumbled and the country's industry suddenly looked hugely overbuilt and precariously indebted. Fitch Ratings estimates Chinese steel makers hold three trillion to four trillion yuan in debt, and that cutbacks will create "huge financial losses, given the highly levered nature of most companies in the industry." For some companies, the reckoning is already under way: Governments have been forced to pay interest on loans to Bohai Steel, which owes 192 billion yuan that it cannot repay, according to a report this week in Chinese financial publication Caixin.

At Wuhan Steel, too, retrenchment has been fast. The Brazil mill, once touted as the biggest-ever Chinese investment in that country, was cancelled. One of the company's mining investments, Toronto-based Century Iron Mines Corp., is now attempting to sell Australian eggs to customers in Hong Kong and Macau.

Poultry sales don't offer much hope to workers at Wuhan Steel. The axe began to fall on them early last year, when the company severed ties with many contractors. It slashed pay by 30 per cent for some workers and began to push others out the door in the fall. As many as 50,000 of its 80,000 remaining employees are no longer needed.

"Only 30,000 will remain," Ma Guoqiang, the company's chairman, said in a March interview with the People's Daily. The remainder will "have to find other ways."

He promised the company would help. "Our motto in this round of structural adjustment and deepening reform is 'to have a job for every Wuhan Steel person who wishes to work,'" he said.

China has built an increasingly sophisticated social safety net for laid-off workers. It has also announced $20-billion in funding to help the 1.8 million people it expects to be dislocated from steel and coal companies. Workers let go from Wuhan Steel have received severance payments and transitional funds to bridge them to retirement.

Still, Mr. Huang, the electrician, worries that by the time the layoffs are done, only 10,000 workers will remain.

And even a giant outlay of government money can't solve the bigger issue: Workers who leave places such as Wuhan Steel struggle to find jobs elsewhere.

'They are stuck in the past'

Few people have more reason for loyalty to Wuhan Steel than Wang Jun. His grandfather and father both worked at the mill. At 35, he has already completed 15 years of service as a waste water remediation worker who digs mud from drainage ditches. The company has been good to his family. But the layoffs in recent months have him worried.

"I'm not optimistic about the company's future," he said.

So, under a heavy spring rain this week, Mr. Wang strode up the concrete walkway to a neighbourhood vegetable market not far from the steelworks, where the vendors had been cleared away and replaced with rows of tables. Behind each stood hiring representatives from local companies.

Mr. Wang came to the job fair looking for a second job, something to ease him into a different career.

What he found was a confrontation with a changed China, where his generations of family service no longer amount for much.

In the back corner of the market, past the recruiters for a supermarket, construction firm, health product vendor, eco-technology firm and shopping mall – many of them looking for basic positions such as security guards – he found Wuhan Beyond Elite Property Management.

The investment firm had scrawled its recruitment basics on a laminated paper. It wanted workers 25 to 45 years old, and offered wages up to 5,000 yuan a month – more than double what Mr. Wang now earns. He fit the age profile, too.

He struck up a conversation with Chen Zuohui, Beyond Elite's fast-talking hiring representative.

"I want another job, in case my work unit really goes downhill, or some new government policy comes out," explained Mr. Wang, who came wearing his tan Wuhan Steel uniform and steel-toed boots.

"You still have faith in policy?" shot back Ms. Chen, dressed in heels and a black business jacket. "Do you think Wuhan Steel can recover?"

Mr. Wang didn't answer. The mill, he admitted, was his "rice bowl," a company that provided all his needs.

Ms. Chen had heard this before. Yes, the mill was once "a golden bowl. But it's now a mud bowl," she said.

"If you come to us, you would first need to be brainwashed. We have no bowl. Our staff need to find their own bowls."

Standing a few feet away from each other, Ms. Chen and Mr. Wang may as well have come from different worlds.

At Wuhan Steel, jobs have historically been for life. At Ms. Chen's hard-charging company, poor performers are culled every three months, and employees must pass rigorous tests to advance. Pay is tied to achievement, not years served.

When Ms. Chen hires, she is particularly vigilant about workers from Wuhan Steel, where she herself worked 20 years ago as an accountant.

"Most of them want to find another job like what they had there, with regular working hours, a steady salary and good severance policies. They want to stick with the old style, without much pressure," she said. "That may be okay at Wuhan Steel. It's impossible elsewhere."

Take Ms. Luo, 46, who was let go in September from a job delivering Popsicles and water to steel workers.

"There was no pressure," she admits.

Life outside the mill has brought a rude reality check. She worked at a grocery store for a few months, but found the manager arrogant and quit.

Another factory then offered a job as a cleaner, which would involve tidying offices, bathrooms and nearby roads, in addition to kitchen work. But it sounds too hard. "It's 10 hours a day and there wouldn't be even a minute for rest," she said.

Ms. Luo came to the job fair, too. But like Mr. Wang, she found nothing.

And not one person passed Ms. Chen's initial screening.

"The people we need are completely different from the Wuhan Steel style," Ms. Chen said. "Society has been racing forward, but they are stuck in the past."

The retraining problem

China has been through mass layoffs before. The most convulsive took place in the late 1990s, when premier Zhu Rongji cut deep in the name of economic progress. He oversaw the privatization of tens of thousands of state-owned firms. Between 1995 and 2001, China said at the time, 43 million workers were laid off, 80 per cent from state firms.

Chinese government statistics suggest most landed on their feet. Between 1998 and 2000, state programs trained 13.58 million workers – a million more than expected – and succeeded in helping re-employ fully 65 per cent of them, according to a Chinese report filed with the World Bank.

It's an optimistic take that suggests people are malleable and, with the right intervention, can find new ways to contribute.

Researchers who studied that period, however, have found the opposite.

In 2001, Albert Park was part of a research team that surveyed 8,100 adult in five large cities, including Wuhan. They found just more than a third of workers cut from state-owned companies found jobs.

"Generally speaking, people leaving these jobs don't have skills that are in high demand in other sectors, especially if they are older," said Prof. Park, the director of the Institute for Emerging Market Studies at the Hong Kong University of Science and Technology. He has studied the Chinese labour market for nearly two decades.

"Most research would tell you that people don't really shift sectors that easily. You don't see lots of people who leave manufacturing go into services."

That's a problem for China today far beyond Wuhan Steel.

"We know a lot of the job growth is in the service sectors, and manufacturing is declining. So it's a difficult adjustment."

Teaching new skills often doesn't work, either. In the late 1990s, only 10 per cent of laid-off Chinese workers actually participated in retraining, according to research from Australia's RMIT University, in part because some of it was insulting.

Convinced that workers suffered from a mindset of dependency that made them "too unintelligent or demoralized to be retrainable," governments offered indoctrination classes instead, the RMIT research found. It was such a failure that in at least one case, workers drove their instructor from the classroom.

That thinking hasn't died.

"You see that today as well in some of the official trade union literature," said Geoffrey Crothall, spokesman for China Labour Bulletin, which advocates for worker rights. "They clearly haven't learned anything."

Companies are as hard to change as people.

"If you're a steel company, can you become an online digital player? That's very different," said Michael Thorneman, the China managing partner of Bain & Co.'s Greater China practice. "That's why we're seeing some shakeouts right now. And that's going to continue."

Even those who want to change often can't.

A search for a new career

Wang Jun is not exactly who Ms. Chen thinks he is. He looks the part of a third-generation Wuhan Steel employee. What his uniform doesn't show is how badly Mr. Wang wants to escape the family mould.

A divorced father, he memorizes classic children texts with his four-year-old son, who he is raising. He has spent a month's worth of his salary on books: biographies of Mao Zedong and billionaire Li Ka-shing, Chinese classics, foreign tomes such as One Hundred Years of Solitude and self-help books. In a satchel that he has taken to the job fair, he carries two guides to stock markets, one of them John Mauldin's Bull's Eye Investing.

He is a health nut, a jogger who refuses sweets and eschews television. He reads instead, cultivating a dream to better his life so he can travel. He'd like to go to Beijing – or, better yet, to the mountains of Sichuan province, home of the Giant Buddha that he wants to visit.

He has trained for a different life, completing a welding course and securing a driver's licence. If he can break out of his current job, he can ensure he is the last of his family to work at Wuhan Steel.

"I don't want my son to be a worker like me," he says.

But he has found it hard to leave his own work behind. He splits mortgage payments with his parents, with whom he still lives, and doesn't want to risk ditching his current job only to run into a financial dead end. He has even had offers to leave town and work with friends, for substantially more money. He turned them down, worried about what would happen to his child and parents if he left.

So, for now at least, he will remain a Chinese steel worker.

"I know my thinking is a bit outdated," he says. "But I simply can't step away from what I have."

With reporting by Yu Mei