Harmonica Buyout: A Real Gas

SHANGHAI -- The Shanghai Gas Company has swallowed a mouth organ factory, and to workers and managers the result has been sweet music.

The takeover of the money-losing Shanghai General Harmonica Plant by the gas utility apparently has been a great success, proving that anything is possible as Beijing promotes mergers as a way to save its ailing state industries.

Shanghai Harmonica has stemmed its losses and the gas works is in the music business, supplying 50 percent of the world's mouth organ market, including blues bands from the United States to Argentina.

"It was completely democratic," said Yao Xun, vice director of Shanghai Harmonica, explaining how the decision to join forces with the gas company was taken. "We got everybody together -- all the workers and the pensioners -- for a meeting and took a vote. Everybody voted in favor."

Not surprising. Although its leading brand names are Star and Victory, Shanghai Harmonica was losing the battle to stay in business.

Making mouth organs is a tricky business: Musical honeycombs with tiny copper reeds screwed to a wooden frame and sheathed in chrome, harmonicas must be tuned at least twice by experts running them over a jet of air before they leave the factory.

Making money out of this is even trickier. The key is stable raw material prices and cheap workers, preferably with a musical ear and sharp eyes.

But in the late 1980s, just as prices of copper, chrome and wood were rising, the factory took out a 10 million yuan ($1.2 million) bank loan to build a new factory next to the old one, almost trebling its floor space. It didn't need the extra room: Privately-run competitors employing cheaper peasant labor were stealing market share. And, it certainly didn't need the extra overheads.

While its annual production of mouth organs was falling from a high of 10 million in 1983, the size of the workforce remained unchanged. Then there were 300-odd retirees to look after.

Still, under China's rigid financial planning system, the loan was offered and management grabbed it.

"Under the planned economy, everything had to be big," said Qian Jianong, Shanghai Harmonica's office director. "Now we work on market principles."

The merger deal was simple. Shanghai Gas wanted to vacate an old meter-manufacturing plant in a prime commercial area so it could redevelop the land for a windfall profit. Shanghai Harmonica had an empty building.

So the meter factory moved its production lines across town and hired some of the harmonica makers. Shanghai Gas paid off the loan for the building and, for good measure, injected working capital into its new partner.

"It wasn't a case of us being gobbled up," said Yao, Shanghai Harmonica's vice director. "They just came in and lent us a hand."

Roughly one-third of China's state-run factories are losing money, and Beijing is hoping many of them can make similar arrangements. By shuffling its industrial assets to take account of changes in the marketplace and to make better use of labor and land resources, Beijing is hoping to find a less painful alternative to mass bankruptcies.

Much of the industrial infrastructure of China's largest city was put in place before the 1949 Communist takeover and has been frozen ever since. Vertical structures linking China's crumbling factories to ministries in Beijing have been held together by a rigid bureaucracy.

And through the years each factory has taken over responsibility for the cradle-to-grave welfare of their workers, turning the problem of industrial restructuring into a potentially explosive social and political issue as well.

Yao believes his merger points to a solution for thousands of factories in a similar predicament: "We didn't have to send a single worker home."