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Fridge-maker Kelon implodes
By Sam Ng and Yohji Yuan
SHUNDE, China - 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.
The China Securities Regulatory Commission (CSRC) initiated an investigation
into Kelon in May. Around the same time, Kelon's auditor, Deloitte Touche
Tohmatsu, questioned the company's record-keeping for the month, citing
insufficient evidence to validate some sales figures and accounts receivable in
the balance sheet following a late 2004 merger. On May 12, Deloitte halted its
auditing of Kelon. Also in May, the Shunde office of the Bank of China, Kelon's
main creditor bank, was already on guard against financial turmoil at Kelon.
The BoC, having smelt a rat, had cut back its lending to Kelon in 2004, and the
local branch office is now negotiating with Kelon about loans due this
September.
In June, the company's troubles deepened when three independent directors
resigned, claiming that Kelon had never responded to their proposals or
inquiries over certain questionable transactions of its affiliates. Last week,
the arrest of ex-president Gu Chujun was announced and company equities and
assets valued at over US$100 million were frozen, as if the cooling leader had
frozen itself. AToL has heard that a parts supplier is now threatening legal
action in order to get Kelon to repay a one-million-yuan overdue bill. In
addition, a Kelon distributor told AToL that the branch bank had asked them for
details about the trouble facing Kelon, and it had planned to seal up its stock
for compensation if the company went under. "If the bank [owns] all the stock,
we have no way to redeem our losses," the distributor said. Worse, the promises
made by former Kelon president Gu Chujun only turned out to be a hot check, he
added.
Ex-workers react
Almost two months has elapsed since Chen was made redundant by Kelon. "We all
used to joke about Kelon hitting so many headlines earlier in the year, so we
have been afraid to get the boot from the very beginning. Later, several
production lines stopped and some co-workers went missing, but we had no idea
if they quit willingly or they were sacked. Those of us who were left heard
about this and began to look for jobs elsewhere, but I never imagined being
fired too, because there were all these rumors about a possible change in the
upper management," he said.
Chen recollected how the staff reacted to Kelon's downfall: "We had prepared
for the shutdown, but we'd never expected it to come so fast ... we had little
knowledge about what deep trouble the company was in until the management was
said to be under detention. But we still have to support our families, and how
to move on is of course what we care about most. Anyway, it's a pity that Kelon
is now sinking, with its advanced technology and well-built marketing network."
Kelon, the shooting star
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.
Established brand loyalty, a proven capacity for technical innovation and
reasonable fundamental competitiveness are Kelon's best hope for survival in
some form. Now that the China Securities Regulatory Commission has published
its initial findings of the Kelon investigation, public focus is shifting to
the fate of the former appliance giant. According to one recent report, Kelon
air conditioners and refrigerators have been sold out in Shanghai. The two
leading home appliance chains - Gome and Suning - said that Kelon products were
already out of stock, while Yongle, a competitive counterpart, has been still
selling its products for the past few months. Today, the once-bustling Kelon
factory complex in Yangzhou - the world's largest refrigerator production base,
covering 80 hectares - is lying in silent, gloomy desolation.
Some reports have claimed that the company might be sold, with the purchaser
possibly continuing to produce the Kelon brand. A recent China Daily story
reported that Hisense, another leading Chinese home appliance manufacturer,
intends to buy a stake in Kelon. "We plan to buy part of Kelon, but the price
has not yet been decided," said Zhu Shuqin, manager of brand marketing at
Hisense.
Hong Kong authorities embarrassed
The Kelon fiasco has raised more than a few eyebrows in Hong Kong, because
Kelon is listed in the Hong Kong bourse, meaning that Hong Kong securities
officials had a theoretical responsibility to oversee the soundness of the
company's finances.
Although the Hong Kong Securities and Futures Commission (SFC) has made no
official comment on the incident thus far, in an interview with Asia Times
Online, the commission spokesman articulated that no response would be given to
any query. He only reinforced the message that Hong Kong has established an
independent legal and justice system separate from that in the mainland, and
any criminal offense committed in the territory would be penalized pursuant to
the law of Hong Kong. He also highlighted that the commission maintained a
cooperative relationship with the mainland authorities, and cross-border
cooperation would be held within its jurisdiction.
In other words, how well the SFC is protecting Hong Kong shareholders is an
open question. But judging from similar cases recently, it was mainland
officials who typically started the investigation ball rolling - for instance,
this was the case when former Bank of China (BoC) Hong Kong Limited CEO Liu
Jinbao was tried in Northeast China's Jilin province and finally convicted of
corruption and bribe-taking. The Hong Kong judiciary also steered clear of
another series of banking graft investigations against former Ka Wah Bank
president Jin Deqin and former Everbright Group chairman Zhu Xiaohua. It would
appear that at the very least, both the mainland and Hong Kong need to
strengthen their cooperation in cracking down on financial crimes. To smooth
the way for "one country, two systems" and to restore public confidence in the
stock market, the Hong Kong government must take greater initiative.
The Lang-Gu debates
The most memorable aspect of the Kelon collapse may have been the feud between
former CEO Gu and Larry Lang, a financial economics professor with Chinese
University of Hong Kong, who claimed in August 2004, based on analysis of the
company's accounts, that Gu had taken over several companies (including the
Mailing Group), valued at 13.6 billion yuan in total, with a spending of only
900 million yuan through dubious financial maneuvers. These words sparked a
highly unusual public debate between the professor and the president, during
which Gu filed a public defamation suit against Lang. The spat came to a climax
in October of last year, when more than 10 domestic financial heavyweights
convened a seminar to support Gu. The seminar resulted in the embarrassing (in
retrospect) conclusion that Kelon's consolidation bid, under Gu's directorship,
was in utter conformity with "the reform of Chinese enterprises".
Beijing's abrupt intervention to arrest Gu and other Kelon officials would seem
to have vindicated the professor. As China Daily dryly noted in a recent
report, "with one of the debate's protagonists detained in the midst of a
corporate scandal, the exchange of criticism has come to an abrupt halt".
(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us
for information on
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