China - Shanghai Machine Tool Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15853 PERFORMANCE AUDIT REPORT CHINA SHANGHAI MACHINE TOOL PROJECT (LOAN 2784-CHA) June 28, 1996 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency Equivalents (annual averages) Currency Unit = Country Currency ($$) 1988 US$1.00 V3.72 1989 US$1.00 V3.76 1990 US$1.00 V4.78 1991 US$1.00 V5.32 1992 US$1.00 V5.51 1993 US$1.00 V5.76 1994 US$1.00 V8.62 Abbreviations and Acronyms CNC - Computerized Numerically Controlled ERR - Economic Rate of Return GOC - Government of China ICB - International Competitive Bidding IRR - Internal Rate of Return MMBI - Ministry of Machine Building Industry NC - Numerically Controlled OED - Operations Evaluation Department PCR - Project Completion Report PIU - Project Implementation Unit SBMEIA - Shanghai Bureau of Mechanical and Electrical Industries Administration SMG - Shanghai Municipal Government SMTC - Shanghai Machine Tool Corporation SMTW - Shanghai Machine Tool Works SPC - State Planning Commission TCC - Technical Cooperation Credit Fiscal Year Government: January 1 - December 31 FOR OFFICIAL USE ONLY The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation June 28, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on China - Shanghai Machine Tool Project (Loan 2784-CHA) Attached is the Performance Audit Report (PAR) for the Shanghai Machine Tool Project (Loan 2784- CHA for US$100 million, approved in FY87 and closed in FY94) prepared by the Operations Evaluation Department. An important aspect of China's new industrialization strategy, adopted in 1978, was the need for renovation and modemization of existing industries which suffered from inefficient use of physical facilities, inadequate access to some modem process and manufacturing technologies and insufficient experience in the international market One such ,ndustr\ was industrial machinery manufacturing. In line with the new strategy, the project aimed at the renovation and modernization of the manufacturing facilities at two state-owned enterprises: Shanghai Machine Tool Works (SMTW) and Shanghai Machine Tools Corporation (SMTC). Specifically the project consisted of four components: (i) plant rehabilitation and modernization covering essentially four cast iron foundries. one forging plant, six accessory equipment manufacturing plants, five metal-cutting machine manufacturing plants. two metal- forming machine manufacturing plants and two research institutes, (ii) technology transfer: (iii) improvement in management system; and (iv) training. The project achieved all its physical objectives. All in all, 1040 sets of new equipment were installed in the two companies The companies developed 117 new machinery models. though the transfer of technology fell somewhat short of expectation as only 13 technologies were procured instead of 15 anticipated at appraisal. Both companies enjoyed a lively domestic and export market until 1993, when sales exceeded the levels expected at appraisal. Thereafter sales declined as a result of the slowdown in economic growth. There are already signs that demand for capital goods is once again on the rise. Although devoid of policy reform content, this project made a substantial contribution to the Chinese machine tools industry by methodically analyzing the problems and providing suitable solutions. On the basis of project achievements and given the reestimated economic rate of return of 1].2 percent for SMTW and 14.7 percent for SMTC, the outcome of the project is rated satisfactory. Given the assimilation of procured technologies, managerial capability and the thriving, and increasingly competitive market, sustainability is rated as likely. By introducing new technologies, carrying out intensive training programs and installing modern management concepts, the project has had substantial institutional impact even though the Contract Responsibility System has not been properly absorbed and practiced by the State-Owned Enterprises (SOEs). Bank and Borrower performance are rated as satisfactory. Major lessons include: (i) the paramount importance of quality at entry, (ii) the need for continuous prompting and guidance by the supervisory institutions to put management reforms into practice in SOEs, and (iii) efficient assimilation of foreign technology depends on the existence of an indigenous research and development capability. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY Contents Preface ...............................................................3 Basic Data Sheet........................................................5 Evaluation Summary......................................................9 1. Introduction .......................................................17 Project Design ......................................................17 The Project.........................................................18 2. Implementation .....................................................19 3. Results.....................................................................20 Shanghai Machine Tool Works (SMTW) .......................... ..........20 Shanghai Machine Tools Corporation (SMTC) .......................... ......22 4. Overall Assessment .................................................23 Institutional Development ........................................ ......24 Bank/Borrower Performance.................................... .........25 Outcome......... .................................................25 Sustainability .......................................................26 5. Conclusions and Lessons Learned .......................................27 Annexes I. Project Implementation..........................................29 II. Project Costs - SMTW ...................................... .....30 Project Costs - SMTC ...........................................31 III. Project Financing ........................................ .....32 IV. Direct Benefits ....................................... .........33 This report was prepared by Farrokh Najmabadi (Task Manager) and Amir Mirfakhrai (Consultant) who audited the project in November 1995. Eneshi Irene K. Davis provided administrative support. The report was issued by the Country Policy, Industry and Finance Division, Manuel Peilalver, Chief, of the Operations Evaluation Department, Francisco Aguirre- Sacasa, Director. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed widout World Bank authorization. 2 Annexes (continued) V. SMTW - Total Number of Grinding Machines Produced and Sold ...... ............34 VI. SMTW - Trend in Export of Selected Grinding Machines and Export Prices .......35 VII. SMTW - Trend in Raw Material Prices...........................36 VIII. SMTW - Income Statement.........................................37 IX. SMTW - Work Profile ......................................38 X. SMTC - Performance of Selected Plants..........................39 XI. Grinding Wheel Manufacturing Plant ..................................40 Metal-Forming Machine Manufacturing Plant ............ ................41 No. 4 Machine-Cutting Manufacturing Plant ..................... ..........41 No. 3 Foundry......... ......... ................................42 XII. SMTC - Income Statement ................................ .........43 XIII. SMTC - Export Statistics ..........................................44 XIV. Domestic and Export Selling Prices and Cost of Production ......... ..........45 XV. SMTC - Workforce.......................... .............. .....46 XVI. SMTC - Training Statistics .........................................47 XVII. Management and Technical Training During Implementation ..................48 XVIII. Status of covenants ..............................................49 XIX. Actual Financial Results Versus SAR Forecasts .................................50 XX. Assumptions Used for ERR Reestimation ..................... ..........51 3 Preface 1. This is the Performance Audit Report (PAR) for the Shanghai Machine Tool Project for which the Board approved a US$100 million loan in March 1987. The last disbursement took place in April 1994 at which time a balance of US$3.52 million was cancelled. 2. The PAR was prepared by the Operations Evaluation Department (OED). An OED mission visited China in November 1995 and discussed the effectiveness of the Bank's assistance with the Government of China. The Shanghai Municipal Government and the two beneficiary companies. Their kind cooperation and assistance is greatly appreciated and acknowledged. 3. The PCR was prepared by the Industry and Energy Operations Division, China and Mongolia Department. East Asia and Pacific Regional Office. The Borrower and the two implementing agencies provided Part II. 4. The draft PAR was sent to the Borrower for comments. No comments were received.  5 Basic Data Sheet SHANGHAI MACHINE TOOL PROJECT (LOAN 2784-CHA) Key Project Data (amounts in US$ million) As ofSeptember 30, 1995 Loan Original Disbursed Cancelled Repaid Outstanding 2784-CHA 100.00 96.48 3.52 22.94 73.54 Cumulative Estimated and Actual Disbursements Year Semester Appraisal Revised Actual (USSM) Actual as % of Estimate (USSM) Estimate Appraisal 1987 I 0.9 II 9.5 1988 I 23.8 2.6 0.9 5 II 40.3 17.2 1.84 1989 I 57.0 32.1 2.38 7 II 70.7 50.2 10.2 20 1990 I 82.0 63.8 21.4 34 II 91.1 77.5 44.5 58 1991 I 97.4 86.6 56.4 65 II 99.6 95.7 69.9 73 1992 I 100.0 98.7 81.2 82 II 100.0 86.2 86 1993 I 90.8 91 II 96.3 96 1994 I 96.5 97 6 Project Dates Actual Negotiations January 1987 Board approval March 3, 1987 Signing October 8, 1987 Effectiveness December 16, 1987 Closing date December 31, 1993 Comments: The original loan closing date was December 31, 1992 and was extended by one year to December 31, 1993. Staff Inputs (staff weeks) Actual Staff Weeks Project Preparation 225.9 Appraisal 26.5 Negotiations 13.2 Supervision 137.5 Total 403.1 7 Mission Data Stage of project cycle Month No. of Days in Specialization Performance Types of /Year Persons Field represented' rating statusb Problems' Through Appraisal Preparation 1 09/83 8 35 EN, EC, 0, S, F Preparation 2 02/84 3 14 EC, F, S Preparation 3 06/85 3 6 EC, F, S Appraisal 10/85 7 35 EC, F, S, EN, 0 Appraisal through Board Approval Mission 1 04/86 1 3 Board Approval through Effectiveness Mission 1 05/87 3 5 Mission 2 11/87 1 3 Supervision Mission 1 06/88 2 15 EN, 0 1 Mission 2 12/88 2 10 EN, 0 2 Fl Mission 3 06/89 3 10 EN, 0, F 2 Fl, 0 Mission 4 11/89 3 10 EN, 0, F 2 Fl, 0 Mission 5 06/90 3 15 EN, 0, S 2 Fl, P Mission 6 10/91 2 10 EN, 0 2 F2 Mission 7 11/91 2 3 Mission 8 05/92 6 10 EC, 0, F, EN, S 2 F2 Mission 9 11/92 3 10 EC, EN, 0 2 F2 Mission 10 08/93 2 10 EN, 0 1 Mission 11 12/93 2 10 EN, EC 1 a EN: Engineer, EC: Economist, F: Financial Analyst, 0: Operational Officer, S: Specialist (Machine tool specialist/Financial specialist/Consultant). b l=Problem-free or Minor problems; 2=Moderate problems; 3=Major problems. C F1: Financial problems due to lack of funds; F2: Financial problems due to project enterprise profitability, P: Project Management problems; 0: Operational problems resulting in delayed procurement. 8 Other Project Data Related Bank Loans Loan Title/Number Purpose Approval Comments Date Tianjin Light Industry Project (Ln- Technological restructuring of 1989 $154 million, completion 3022. the light industry sector. date: 06/30/96 Shanghai Industrial Development Development of four 1991 $150 million, completion Project (Ln 3288-0, Ln 3288-1, industrial Sub-sectors in date: 06/30/96 Ln 3288-2, Ln 3288-4). Shanghai. Tianjin Industrial Development Policy and enterprise reform 1993 Loan has not yet been Project (Ln 3572-0). at the regional level. signed. 9 Evaluation Summary Project Background 1. In 1978, China adopted a new industrialization strategy that called for the introduction of market forces, gradual reduction of mandatory planning, decentralization, autonomy in economic management and opening the economy to foreign investment and progressively, to imports. An important aspect of this new strategy was the need for renovation and modernization of existing industries which suffered from: (i) inefficient use of physical facilities; (ii) inadequate access to some modem process and manufacturing technologies; and (iii) insufficient experience in the international market. One such industry was the industrial machinery manufacturing. 2. Initially in 1983, the Chinese authorities suggested that priority be given to upgrading manufacturing capabilities in two machine tool manufacturing enterprises: Shanghai Machine Tools Corporation (SMTC) and Shanghai Machine Tools Work (SMTW) for manufacture of precision grinding machines, high speed presses, modern die making machines and measuring devices and for the use of computers in design, manufacturing, testing and management. The Bank found these objectives far too narrow and pressed for a well formulated program of modernization for the sub-sector including rationalization of the existing facilities; changes in product mix; deletions, additions and/or replacements of manufacturing equipment in specified plants; measures to improve production planning and control; adoption of advanced quality assurance methods; expansion of training programs and facilities and enhancement of research capabilities. To this end these feasibility studies were commissioned for the upgrading of: (i) three SMTC foundries, one SMTW foundry and SMTC's forge plant; (ii) SMTW's grinding machine and hydraulic equipment manufacturing plant as well as its research institute; and (iii) four metal-cutting manufacturing plants, two metal-forming machine manufacturing plants, seven accessory equipment manufacturing plants and the research institute under SMTC management. 3. In the course of project formulation, a restructuring and rationalization plan was proposed by SMTC and SMTW whereby the two enterprises would eliminate some overlapping operations and SMTC alone would reduce the number of plants under its management from 45 to 39 which included the shutting down of two grey cast iron foundries. These proposals were implemented even before the project was finally appraised. Based on the results of the feasibility studies (completed by September 1985), the project consisted of four components: (i) plant rehabilitation and modernization covering essentially the units enumerated above (four cast iron foundries, one forging plant, six accessory equipment manufacturing plant, five metal-cutting machine manufacturing plants, two metal forming machine manufacturing plants and two research institutes); (ii) technology transfer; (iii) improvement in management system; and, (iv) training. Implementation Experience 4. The beneficiaries (SMTW and SMTC) established a project implementation unit (PIU) in their headquarters. The PIUs had responsibility for the preparation of bid packages and equipment specification; approval of engineering designs and drawings, bid evaluation and selection of supplies/contractors, preparation of detailed terms of reference for consulting services and selection 10 of consultants; identification of priority areas for technology transfer and selection of technologies; preparation of detailed scope of work for establishment of modem management systems and selection of consultants for this purpose; development of comprehensive training programs; and, monitoring implementation of the project's components. These project implementation units were technically supported by a highly qualified foreign expert. 5. The project became effective with a delay of some six months. Soon after implementation started in 1988, it became clear that due to the increased rate of domestic inflation, there would be an overrun in the project cost. There were also problems in the procurement of foreign technology. Owners of technology in industrialized countries showed little willingness and interest in transferring their proprietary technology to China at the beginning. It was no earlier than the end of 1991 when the total number of technology transfers climbed to twelve. The number of procured technologies later rose to thirteen. A similar delay was experienced with one of the management contracts. While work on management consultancy for SMTW had already started by the end of 1988, the negotiations between SMTC and the foreign consultants lasted a long time until mid- 1990. 6. A combination of implementation delays and domestic inflation resulted in large cost overruns for the project. Overall the project cost rose from an estimate of V825.1 million to an actual of Vl 159.9 million-an increase of more than 40 percent. The overrun was somewhat more for SMTC (43 percent) than for SMTW (36 percent). In dollars, the total overrun was only about 9.3 percent. During the implementation period, the financial situation of both companies began to deteriorate. There were both internal and external reasons for this situation. Internally, the enterprises lacked efficient production and financial management. The cost of administration and overhead had increased substantially. And the companies carried large inventories, accounts receivable and payable. Externally, the anti-inflationary policy of the Government had slowed down economic activity and with it the demand for machine tools. Moreover, while wages and raw material prices were allowed to increase substantially, output prices were under pressure from both domestic as well as international competition. Other financial burdens were imposed on the companies, e.g., as from 1989, the companies had to pay 25.5 percent of their wage bill to a newly established government-sponsored retirement fund. Results 7. The project achieved all its physical objectives. The companies rehabilitated their plants with new equipment and machinery as envisaged in the project. At SMTW 395 domestically produced and 109 imported pieces of equipment were installed and commissioned. At SMTC corresponding numbers were 390 and 236 pieces of equipment. All in all, 1040 sets of new equipment were installed in the two companies. The product rationalization went generally along the lines anticipated at appraisal, while the companies developed many more new machinery models (117) than projected in the SAR (65). The transfer of technology fell somewhat short of expectation: only 13 technologies were procured instead of 15 anticipated at appraisal. Shanghai Machine Tool Works (SMTW) 8. At SMTW, four new technologies were introduced: cylindrical grinder, three-dimensional measuring devices, Numerically Controlled systems and high strength cast iron. The cylindrical grinder technology consisted of the purchase of know-how (including all engineering information, 11 data and drawings) for the production of advanced models of grinding machines for crankshafts, valves and cylinders associated with the manufacture of engines. Already a few machines of this type have been manufactured and the company anticipates brisk sales to the automotive industry. While the SAR anticipated that total production of grinding machines would remain at around the same level as that achieved in 1986 (1931 units), in practice after a peak in 1987, the number of machines produced declined sharply as the government introduced measures to slow down the economy and fight inflation. These measures, in turn, seriously affected the growth of investment and, therefore, the demand for machine tools. With the softness of demand in the domestic market, the company appears to have intensified its export efforts, selling 12-13 percent of its production in the export market during 1990-1992 and meeting international competition by reducing prices. 9. The year 1993 proved to be a banner year for the machine tool industry in China and for SMTW. Strong demand and, generally, better prices in the domestic market stimulated production to around the 1986/87 level, while exports slumped to only 5.5 percent of production. The reintroduction of financial constraints in 1994 ( again to fight inflation) brought about a reduction of demand in the domestic market and to the machine tool industry. This shock was combined with two other phenomena: (i) a wider opening of the economy to imports; and (ii) a higher importation of machine tools as a part of foreign investment in existing and new enterprises. 10. These output fluctuations have coincided with a very steep increase in the price of all material inputs to the productive process, ranging from 207 percent in the cost of ferromanganese to 944 percent in the cost of scrap iron. These price increases are much above the wholesale price index that has risen by around 80 percent between 1986 and 1994. They actually reflect the policy of the Government that allowed many input prices to approach world market prices (in the case of some items such as scrap iron, round steel bar, aluminium and copper, these prices in 1994 have been well above international prices). In addition to this trend in raw material input prices, the company has had to shoulder many new expenses as the social safety net has been gradually taken over by the Shanghai Municipal Government. The above mentioned cost increases have been coincident with much larger depreciation and financial changes emanating from the project. The result is that the profitability of SMTW's operation has been completely eroded in recent years with the company expecting a gross loss of nearly V 26 million in 1995. Only during 1993 did the company realize an operating profit (V 65.9 million) which approached the anticipated rate at appraisal. Shanghai Machine Tools Corporation (SMTC) 11. The production performance at SMTC has, on the whole, been similar to that of SMTW. Between 1991 and 1993, nine contracts were signed for the procurement of modern technologies for the production of metal forming presses, turret punch presses, grinding wheels, moulds and dies, castings, tooling systems, computerized numerically controlled (CNC) lathe turning centers and vertical and horizontal automatic machinery centers. Practically all of these new technologies have been operationalized and the group has introduced many new and improved models of the various products. In line with what was anticipated in the SAR, the rationalization program has reduced the number of simple machines in favor of more sophisticated models such as NC lathes, turning centers, jig grinders and vertical machinery centers. As a result, the ratio of CNC machines which stood at 3.6 percent of total production in 1987, rose to 8.2 percent in 1994. 12. The Audit Mission visited three plants, one foundry and one research institute affiliated with SMTC. The production at the Grinding Wheel Manufacturing Plant has reached capacity and 12 the products have been well received by the market. At the Metal Forming Machine Manufacturing Works, the new technology has made it possible to manufacture hydraulic presses up to 630 ton capacity. In this plant, not only has new technology been introduced, but the manufacturing capability has also increased considerably, especially in the area of large presses for heavier duties. This plant also manufactures 800 ton hydraulic presses in a joint venture operation with a well-known European manufacturer. The No. 4 Machine Cutting Manufacturing Plant has procured new technology for the production of CNC milling machines. Of late it has started manufacturing automatic machine centers. The three foundries affiliated to SMTC have all been renovated with new casting lines and melting furnaces. The production of these foundries falls short of the appraisal estimates on account of the increased competition in the domestic market from the many small foundries that have sprung up in all parts of China, in recent years. The Machine Tools Research Institute is one of three institutes of its size and scope in the Chinese machine tools industry. Founded in 1964 for the development of new products, it now has a total workforce of around 310 persons, of which 220 are engineers and technicians. Through the project, the institute procured 17 new items (4 machines, 7 testing instruments and 6 equipments for the CAD/CAM center). Not only is the institute involved in the development of new products, it also works on standardization and technical information for the whole group. 13. With the introduction of new and more modem equipments in many plants and the procurement of nine new technologies, the company increased its sales more than two-fold between 1990 and 1993 while the gross profits continued to rise, despite the incidence of high depreciation and financial charges. In the last two years, sales have declined as a result of the Government's policy to fight inflation and slow down the growth of the economy. This has prompted the company to focus on exports which reached around US$37.7 million in 1994 or nearly 31 percent of the sales (Annex XIII). SMTC has created an affiliated trading company for the export of its products and the import of parts and components. Its best markets are in south east Asia notably Singapore, Malaysia, Taiwan (Province of China) and the Philippines. 14. Since 1991, there has been a marginal decline in SMTC's workforce from 28314 in 1991 to 27226 in 1994. While the total number of direct production workers has declined by nearly 1900 persons, between 1991 and 1994, the number of semi-skilled and highly skilled operators has increased by more than 1650. Thus the number of ungraded and low skilled operators has dropped from 8272 persons in 1991 to 4712 in 1994. This is a considerable shift in the quality of direct productive workforce. The company's intensive training program which has been behind this upgrading of skills, especially the attention that has been focused on the engineering and management staff. Overall Assessment 15. This project was very well prepared. It identified, from the beginning, the need for product and plant rationalization which was accepted and acted upon by a the Chinese authorities. By bringing into the process the expertise of highly knowledgeable consultants and presenting the Chinese authorities with clear options, the project helped highlight the problems and propose solutions that have brought considerable improvements in the design and quality of machine tools manufactured in the Shanghai region. 13 Institutional Development 16. The project achieved most of its institutional development objectives. The consultants assisted the two companies in improving their management systems. In addition to carrying out training (both in China and overseas) in a diverse set of subjects such as project management, corporate strategy, organizational development, product design and manufacturing technologies, industrial engineering, product planning, purchasing and materials management, personnel and education, facilities maintenance, workshop management and cost accounting and finance, the consultants helped install the computer hardware and a management information system (MIS) in each company. The training which was carried out as a part of the implementation of the new management system was much more extensive than what was anticipated at appraisal. The result of this policy and of the continued training in later years was the considerable upgrading of the quality of the workforce. This allowed the companies to improve the quality of the machines produced and to absorb the new technologies that have been procured with much effort To be sure, not all plants have as yet been touched by the new management system. So far, in addition to the SMTW and SMTC headquarters, only 7 plants affiliated with SMTC have been brought under the program. 17. The research and development institutes at both enterprises play a pivotal role in the transfer of technology. Their newly acquired equipment, notably the CAD/CAM systems have provided them with powerful tools for technology absorption and new designs. The companies are also well on their way in introducing ISO 9000 for quality assurance. In fact quality control is receiving increasing attention at all plants because of the heightened competition in the domestic market. While both companies have made great progress in absorbing new technology, designing and manufacturing improved machines and establishing a more efficient management, their marketing activities are in need of strengthening. Bank/Borrower Performance 18. Since the start of the dialogue with the Chinese authorities on the reform of the industrial sector, the bank has enjoyed a position of trust in addressing the issues of technological backwardness, efficiency and competitiveness. This dialogue has resulted in a series of projects that have progressively become more policy oriented, attempting to deepen enterprise and policy reforms in the heavily industrialized provinces such as Tianjin and Shenyang. On their part, the Borrowers/implementing agencies modified their initial project design and accepted the Bank approach, calling for a feasibility study in each company and for the foundry and forge plants. Despite some procurement and funding problems, the project was satisfactorily implemented and the new technologies absorbed. The Borrowers complied in all respects with the covenants contained in the Project and Loan Agreements (Annex XVIII). Outcome 19. The outcome of this project is rated as satisfactory. The project has achieved its physical and technological objectives. Not only has the production capacity of the plants been increased, the investment in modem and precision machine tools has also made it possible for the plants to manufacture machines with considerably higher quality. The ancillary plants which manufacture grinding wheels, gears, levels and other accessories now turn out products with enhanced quality. The quality of castings produced in the foundries has also improved and exports of small castings 14 (to many countries including Denmark) have been realized. Above all, the contracts for technology transfer have resulted in the manufacture of technologically advanced machine tools for the Chinese market. Practically all these new machines (including machine centers) have been commercialized and supplied to other industrial enterprises such as automotive, tractor and home appliances manufacturers. Based on the assumptions made in this report, the economic rate of return of this investment is reestimated at 11.2 percent for SMTW and 14.7 percent for SMTC. Sustainability 20. Prior to the reforms of the last decade, the Chinese machine tools industry was for a long time dependent on its own indigenous technology which was based on the work of Chinese research/design institutes, internationally published literature and occasional imports of sample machine tools. While this policy accounted for the technological backwardness of the Chinese machine tools industry, it, nonetheless, created a technological infrastructure which could quickly take advantage of any opening to the outside world in terms of absorbing and assimilating new technologies and introducing improvements and innovations. In fact, the gradual opening of the Chinese economy to international trade and foreign investment has already had significant salutary results. 21. Supporting these movements is the presence of a management at both enterprises which is anxious to apply modern techniques and to enhance productivity and competitiveness. While still at the beginning of a thorough management reform and suffering from the relics of the central planning era, there are clear signs that new concepts are being applied. This managerial capability at the enterprise level is supported by the recent decisions of the Shanghai Municipal Government which transformed the machine tools supervising bureau into a holding company with a corporate structure. The purpose of this transformation is to make a further critical assessment of the capabilities and productive capacity of the two enterprises along with a third (Shanghai Tool Works with an annual sales of around V 200 million) located in the Shanghai Municipal Region and to effect further rationalization of productive plants. Based on all of the afore-mentioned factors, the sustainability of this project is rated as likely. Conclusions and Lessons Learned 22. Although devoid of a policy reform content, this project made a substantial contribution to the Chinese machine tools industry by methodically analyzing the problems and providing suitable solutions. The project succeeded in procuring thirteen new and advanced technologies and establishing a workable approach for the acquisition of more know-how form abroad. Though somewhat slow moving at the beginning, the Chinese enterprises learnt to try new approaches and open new avenues in their quest to acquire new technologies. 23. This project reaffirms the often found lesson that the high quality of the project at entry is a 'sine qua non' condition of success. When combined with diligent supervision and constructive dialogue (which were present in the implementation of this project), they lead to satisfactory results. In addition to the above, the major findings and lessons learned from the implementation of this project are: * Since a substantial part of the technological know-how for most industrial activities in the developing countries comes from abroad, access to foreign technology is crucial. While such 15 access provides one of the most commercial ways of gaining new technology, the efficient assimilation of such new technology depends on the existence of a research and development capability. Thus, "passive dependence on foreign technology may lead to good operational capabilities, but in striving to move to the best practice operational frontier, countries need to develop their own adaptive capabilities including design and engineering. * The import of foreign technology requires information and negotiating skills. Often, foreign lincenseholders are not willing to provide the latest proprietary technology unless they retain control. Under these circumstances, their reluctance may be eased if they are brought into a joint venture relationship with both a degree of managerial control and financial interest. The foreign investment policy of China ensures that such problems are resolved. * While skill upgrading is a component of all industrial projects, it takes on a special significance for projects that aspire to introduce new and advanced technologies on a large scale. The satisfactory outcome of this project owes much to the attention that was paid in the design of the project and also by management of the two companies in continuing with their intensive training programs. * Where an improvement in the management system is to be achieved amidst a radical change in the economic system and the relationships among the economic agents, there is need for continuity until such time as the management reforms are put into practice, tested and internalized. This should be the rule for all the erstwhile centrally planned economies.  17 1. Introduction 1.1 In their first mission to China in May of 1983, a large team of Bank specialists visited several industries in various provinces and municipalities of China and picked out five areas for the renovation and modernization of existing industries: (i) energy conservation in energy intensive industries such as steel, cement and other building material industries; (ii) industrial machinery manufacturing; (iii) fertilizers and other chemical industries; (iv) petroleum refining; and, (v) electronics. The renovation and modernization drive was part of a much larger industrialization strategy that had started in 1978 and called for the introduction of market forces, gradual reduction of mandatory planning, decentralization, autonomy in economic management and opening the economy to foreign investment and, progressively, to imports. 1.2 With respect to industrial machinery manufacturing, the team reported that China had developed a considerable capability in the manufacturing of industrial machinery and that the vast majority of the user industries' requirement were manufactured domestically. The team, however, pointed out that there existed a number of deficiencies in the equipment manufacturing sub-sector, namely: (i) inefficient use of existing physical facilities; (ii) inadequate access to some modem process and manufacturing technologies; and (iii) insufficient experience in the international market to enable China to manufacture goods which would meet international standards. This formed the basis of the project that was developed, appraised and presented to the Board in January 1987. Project Design 1.3 While generally agreeing with the Bank's analysis and convinced of the need for renovation and modernization, the Chinese authorities initially suggested that priority be given to upgrading manufacturing capabilities in the Shanghai Machine Tools Corporation (SMTC) and Shanghai Machine Tool Works (SMTW) for manufacture of precision grinding machines, high speed presses, modern die making machines and measuring devices, and for the use of computers in design, manufacturing, testing and management. The Bank found these objectives far too narrow and the approach was contested on the grounds that it did not constitute part of a well formulated program of modernization for the sub-sector. The Bank and the Government of China, subsequently reached an understanding to cooperate within the following framework: (i) first, the technical transformation program for the Shanghai machine tool industry should not be limited to development of technology for manufacturing advanced machinery, but should include rationalization and modernization of the sub-sector; (ii) second, the Bank should have a major role in preparing this program and market and plant-oriented studies had to be carried out; and (iii) third, the size and content of the proposed Bank project would be determined only after the feasibility studies have been completed. This approach was to result in recommendations covering: changes in product mix: deletions, additions an/or replacements of manufacturing equipment in specified plants; measures to improve production planning and control; adoption of advanced quality assurance methods: expansion of training programs and facilities and increase of research capabilities. 18 1.4 By early 1984 when the basic preparation work started, SMTC and SMTW proposed a plan for the reduction of some overlapping operations between the two organization and SMTC presented an initial restructuring and rationalization program. After consultation with the Bank mission, these suggestions were agreed upon and the Shanghai authorities undertook to implement them. As a result of the restructuring plan, the number of plants under SMTC management was reduced from 45 to 39 which included the shutting down of two grey cast iron foundries, divesting of three remotely located plants and closing one accessory equipment manufacturing plant and merging its gear manufacturing operation with another gear manufacturing plant. Moreover, several product mix rationalization measures amongst various plants were proposed and undertaken. It was also decided that three feasibility studies would be carried out by foreign consultants in collaboration with SMTC, SMTW and a domestic consulting firm covering: (i) three SMTC foundries, one SMTW foundry and SMTC's forging plant; (ii) SMTW's grinding machine and hydraulic equipment manufacturing plants as well as its research institute; and (iii) four metal-cutting machine manufacturing plants, two metal forming machine manufacturing plants, seven accessory equipment manufacturing plants and the research institute under SMTC management. The feasibility studies were delayed for various reasons including the Ministry of Finance's objection to Shanghai Municipal Government's personnel to travel to the United Kingdom and Germany for discussion of the consultant's final report and participation in carrying out financial and economic analysis. Once completed in September 1985 they formed the basis for defining the project scope and, thereafter, appraisal work started. The Project 1.5 The major objectives of the project were defined as: (a) rationalization of products through physical restructuring; (b) upgrading of products and manufacture of precision machines through technology transfer; (c) improvement in quality and quantity of inputs through alleviation of existing constraints; (d) increasing manufacturing efficiency through renovation of buildings, removal of obsolete machinery, installation of suitable new equipment, training of middle management and establishment of appropriate production planning and control systems; (e) expansion of design and engineering capabilities through strengthening of the research institutes; and (f) improvements in the plant/corporate management systems through employment of modem management techniques. 1.6 The project consisted of four components: (i) plant rehabilitation and modernization covering essentially the units enumerated above (four cast iron foundries, one forging plant, six accessory equipment manufacturing plant, five metal-cutting machine manufacturing plants, two metal forming machine manufacturing plants and two research institutes)'; (ii) technology transfer; (1i) improvement in management system; and, (iv) training. 1.7 An issue that needed special attention was the shortage of good quality sand, coke, scrap and pig iron in the Shanghai area. The Chinese authorities undertook to alleviate all these constraints by making special arrangements for their supply from existing and potential sources. The poor quality and unreliability of bought-out items such as electric parts, hydraulic 1 One cast iron foundry, one metal-cutting machine (grinding machines and measuring equipments) manufacturing plant and one research institute belong to SMTW while the rest of the plants/institutes are under SMTC management. 19 components, bearings and control devices2 also contributed to the poor quality of the manufactured machine tools. This issue was to be resolved through technical collaboration between the Chinese component manufacturing firms and well-known and experienced firms from the industrialized countries. For this purpose, several collaboration agreements had already been concluded including one between the Beijing Research Institute and Fanuc of Japan for the manufacture of control devices used in numerically controlled (NC) machine tools. 2. Implementation Experience 2.1 The beneficiaries (SMTW and SMTC) established a project implementation unit (PIU) in their headquarters. The PIUs had responsibility for the preparation of bid packages and equipment specification; approval of engineering designs and drawings, bid evaluation and selection of supplies/contractors, preparation of detailed terms of reference for consulting services and selection of consultants; identification of priority areas for technology transfer and selection of technologies; preparation of detailed scope of work for establishment of modem management systems and selection of consultants for this purpose; development of comprehensive training programs; and, monitoring implementation of the project's components. Qualified staff with experience in engineering, finance, administration and training were assigned to the PIUs. At SMTC, one or two persons from each plant were also assigned to the PIU at the headquarters. These project implementation units were technically supported by a highly qualified foreign expert. 2.2 The project became effective with a delay of some six months. Soon after implementation started in 1988, it became clear that due to the increased rate of domestic inflation, there would be an overrun in the project cost. The slow availability of counterpart funds severely impacted procurement because the approval authorities in Beijing and the International Tendering Company would not proceed unless the funds were secured for the purchase of equipment. There were also problems in the procurement of foreign technology. Owners of technology in industrialized countries showed little willingness and interest in transferring their proprietary technology to China at the beginning. Two years into the implementation, the companies had only succeeded in procuring two technologies. By the mid- 1990, however, contracts for the procurement of a further six had either been signed or negotiations were in the final stages. It was no earlier than the end of 1991 when the total number of technology transfers climbed to twelve. The number of procured technologies later rose to thirteen. 2.3 A similar delay was experienced with one of the management contracts. While work on management consultancy for SMTW had already started by the end of 1988, the negotiations between SMTC and the foreign consultants lasted a long time until mid-1990. Once begun, these management consultancies proceeded well and the subsequent training programs were arranged for the staff of the two enterprises in areas that were highlighted in the management studies. Again, due to the procurement difficulties in the purchase of computer hardware, the implementation of management information systems was completed with a long delay of more than three years (Annex I). 2 The quality of these parts were so inadequate that US importers of the Chinese machine tools brought them without such parts and completed the machines with parts procured in the United States. 20 2.4 A combination of implementation delays and domestic inflation resulted in large cost overruns for the project. Overall the project cost rose from an estimate of V825.1 million to an actual of VI159.9 million-an increase of more than 40 percent (Annex II). The overrun was somewhat more for SMTC (43 percent) than for SMTW (36 percent). In dollars, the total overrun was only about 9.3 percent. As indicated in Annex III, the companies resorted to borrowing much larger sums from the banks while their reliance on their own self-generated funds were also somewhat higher than the appraisal estimates. 2.5 During the implementation period, the financial situation of both companies began to deteriorate. There were both internal and external reasons for this situation. Internally, the enterprises lacked efficient production and financial management. The cost of administration and overhead had increased substantially. And the companies carried large inventories, accounts receivable and payable. Externally, the anti-inflationary policy of the Government had slowed down economic activity and with it the demand for machine tools. Moreover, while wages and raw material prices were allowed to increase substantially, output prices were under pressure from both domestic as well as international competition. Other financial burdens were imposed on the companies, e.g., as from 1989, the companies had to pay 25.5 percent of their wage bill to a newly established government-sponsored retirement fund. This situation and the downward trend in current ratios for both companies prompted the Bank to ask the enterprises to prepare a mid-term financial projection to the mid- 1990s, taking into consideration the market prospects for the enterprises' products and any modification in the scope of the project with the objective of enabling the enterprises to service their debts during the operational phase. 3. Results 3.1 The project achieved all its physical objectives. The companies rehabilitated their plants with new equipment and machinery as envisaged in the project. At SMTW 395 domestically produced and 109 imported pieces of equipment were installed and commissioned. At SMTC corresponding numbers were 390 and 236 pieces of equipment. All in all, 1040 sets of new equipment were installed in the two companies. The product rationalization went generally along the lines anticipated at appraisal, while the companies developed many more new machinery models (117) than projected in the SAR (65). The transfer of technology fell somewhat short of expectation: only 13 technologies were procured instead of 15 anticipated at appraisal (Annex IV). Shanghai Machine Tool Works (SMTW) 3.2 At SMTW, four new technologies were introduced: cylindrical grinder, three-dimensional measuring devices, Numerically Controlled systems and high strength cast iron. The cylindrical grinder technology consisted of the purchase of know-how (including all engineering information, data and drawings) for the production of advanced models of grinding machines for crankshafts, valves and cylinders associated with the manufacture of engines. Already a few machines of this type have been manufactured and the company anticipates brisk sales to the automotive industry. The company has also sold a number of three-dimensional measuring devices( manufactured utilizing the newly purchased design and technology) and it has received favourable customer feedback. These efforts have been concomitant with the introduction of improved designs of the existing grinding machines such as surface, gear, double-disk and thread grinders. With the 21 introduction of improved designs to the market starting in 1989-1990, the manufacture of many old machines have been discontinued. 3.3 The production performance of SMTW is shown in Annex V. While the SAR anticipated that total production of grinding machines would remain at around the same level as that achieved in 1986, in practice after a peak in 1987, the number of machines produced declined sharply as the government introduced measures to slow down the economy and fight inflation. These measures, in turn, seriously affected the growth of investment and, therefore, the demand for machine tools. With the softness of demand in the domestic market, the company appears to have intensified its export efforts, selling 12-13 percent of its production in the export market. Annex VI shows the exports of the most populai machines and the respective prices. It is clear from the data that, while the domestic prices were generally on the rise between 1989 and 1994, the company found it necessary to meet international competition by reducing prices between 1990 and 1992. The year 1993 proved to be a banner year for the machine tool industry in China and for SMTW. Strong demand and, generally, better prices in the domestic market stimulated production to around the 1986/87 level, while exports slumped to only 5.5 percent of production. The reintroduction of financial constraints in 1994 ( again to fight inflation) brought about a reduction of demand in the domestic market and to the machine tool industry. This shock was combined with two other phenomena: (i) a wider opening of the economy to imports; and (ii) a higher importation of machine tools as a part of foreign investment in existing and new enterprises. 3.4 These output fluctuations have coincided with a very steep increase in the price of all material inputs to the productive process, ranging from 207 percent in the cost of ferromanganese to 944 percent in the cost of scrap iron (Annex VIII). These price increases are much above the wholesale price index that has risen by around 80 percent between 1986 and 1994. They actually reflect the policy of the Government that allowed many input prices to approach world market prices (in the case of some items such as scrap iron, round steel bar, aluminium and copper, these prices in 1994 have been well above international prices). In addition to this trend in raw material input prices, the company has had to shoulder many new expenses as the social safety net has been gradually taken over by the Shanghai Municipal Government. Between 1986 and 1994, payments for social insurance have soared nearly thirteenfold from V 334 thousands to Y 4.268 million. The company now also contributes to the pension fund. From 1990 the company pays a cost of living support which has increased from V 3.3 million in that year to V 6.93 million in 1994. There are also new and increasing payments for a home purchase fund and assistance to employees for public transport expenses. 3.5 The above mentioned cost increases have been coincident with much larger depreciation and financial changes emanating from the project. The result is that the profitability of SMTW's operation has been completely eroded in recent years with the company expecting a gross loss of nearly V 26 million in 1995 (Annex VIII). Only during 1993 did the company realize an operating profit (V 65.9 million) which approached the anticipated rate at appraisal. 3.6 These results have come about even though the company has reduced its workforce at a rate of between 250-350 a year (Annex IX). As shown in this Annex, the largest decline has taken place in the direct production workforce (from 3888 in 1991 to 3077 at end-October 1995), followed by engineers and technicians (838 to 631). Two other categories-non-productive labor and others such as those made redundant, on sick leave or lent to other enterprises-have declined by around 100 each. Nonetheless, not only has direct wages and salaries increased from V 22.6 22 million in 1991 to V 27.6 million in 1994, the fringe benefits (discussed in 3.4 above) have also soared by nearly Y 9 million in this period. Shanghai Machine Tools Corporation (SMTC) 3.7 The production performance at SMTC has, on the whole, been similar to that of SMTW. Between 1991 and 1993, nine contracts were signed for the procurement of modem technologies for the production of metal forming presses, turret punch presses, grinding wheels, moulds and dies, castings, tooling systems, computerized numerically controlled (CNC) lathe turning centers and vertical and horizontal automatic machinery centers. Practically all of these new technologies have been operationalized and the group has introduced many new and improved models of the various products. The performance of the six beneficiary plants that manufacture metal-cutting and metal-forming plants is shown in Annex X. It can be readily seen that the trend has been very much in line with what was anticipated in the SAR, with rationalization reducing the number of simple machines in favor of more sophisticated models such as NC lathes, turning centers, jig grinders and vertical machinery centers. As a result, the ratio of CNC machines which stood at 3.6 percent of total production in 1987, rose to 8.2 percent in 1994. In the first nine months of 1995, however, the percentage receded to 4.9 percent, because of the sharp drop in the manufacture of CNC metal-cutting machines. 3.8 The Audit Mission visited three plants, one foundry and one research institute affiliated with SMTC. The performance of these units is given in Annex XI. The production at the Grinding Wheel Manufacturing Plant has reached capacity and the products have been well received by the market. Despite very fierce competition, the plant expects to increase its market share and double its production by the year 2000. At the Metal Forming Machine Manufacturing Works, the new technology has made it possible to manufacture hydraulic presses up to 630 ton capacity. In this plant, not only has new technology been introduced, but the manufacturing capability has also increased considerably, especially in the area of large presses for heavier duties. This plant also manufactures 800 ton hydraulic presses in a joint venture operation with a well-known European manufacturer. 3.9 The No. 4 Machine Cutting Manufacturing Plant has procured new technology for the production of CNC milling machines. As shown in Annex X, the majority of its output has been of CNC design in recent years. Of late it has started manufacturing automatic machine centers. The three foundries affiliated to SMTC have all been renovated with new casting lines and melting furnaces. The production of these foundries falls short of the appraisal estimates on account of the increased competition in the domestic market from the many small foundries that have sprung up in all parts of China, in recent years. As a result, SMTC's affiliated foundries have had to find exports markets for their products with some success. 3.10 The Machine Tools Research Institute is one of three institutes of its size and scope in the Chinese machine tools industry. Founded in 1964 for the development of new products, it now has a total workforce of around 310 persons, of which 220 are engineers and technicians. Through the project, the institute procured 17 new items (4 machines., 7 testing instruments and 6 equipments for the CAD/CAM center). Not only is the institute involved in the development of new products, it also works on standardization and technical information for the whole group. The institute is engaged in developing and designing dies and moulds, measuring instruments as well as testing centers for testing the new products that are developed and manufactured by the various plants. It is not considered as a profit center and charges its services at cost to the other entities in the group. 23 3.11 With the introduction of new and more modem equipments in many plants and the procurement of nine new technologies, the company increased its sales more than two-fold between 1990 and 1993 (Annex XII) while the gross profits continued to rise, despite the incidence of high depreciation and financial charges. In the last two years, sales have declined as a result of the Government's policy to fight inflation and slow down the growth of the economy. This has prompted the company to focus on exports which reached around US$37.7 million in 1994 or nearly 31 percent of the sales (Annex XIII). SMTC has created an affiliated trading company for the export of its products and the import of parts and components. Its best markets are in south east Asia notably Singapore, Malaysia, Taiwan (Province of China) and the Philippines. These countries import not only conventional machine tools, but also the more simplified CNC machines. 3.12 The domestic and export prices for a representative set of SMTC products which are manufactured in the beneficiary plants are shown in Annex XIV. The table indicates that since 1990 domestic and export prices have been very close with some products having export premia. The trend in prices clearly shows that competition from imports has precluded price increases in the last few years, despite sharp increases in raw material costs3. This is, of course, reflected in the income statement which shows a precipitous drop in the gross profit for 1994 and the first ten months of 1995. 3.13 Since 1991, there has been a marginal decline in SMTC's workforce (Annex XV). While the total number of direct production workers has declined by nearly 1900 persons, between 1991 and 1994, the number of semi-skilled and highly skilled operators has increased by more than 1650. Thus the number of ungraded and low skilled operators has dropped from 8272 persons m 1991 to 4712 in 1994. This is a considerable shift in the quality of direct productive workforce. Along with this shift, the number of assistant engineers and others amongst the engineering staff has also fallen while the number of engineers and senior engineers has increased from 1204 in 1991 to 1384 in 1994. Had the company been successful in keeping the number of indirect workers to the 1992 level the total workforce would have declined by nearly 4,000 persons in 1994 as compared with 1991. In actual fact, the drop has been only from 28,314 to 27,226 in 1994. Annex XVI shows the intensive training program which has been behind this upgrading of skills at SMTC, especially the attention that has been focused on the engineering and management staff. 4. Overall Assessment 4.1 This project was very well prepared. It identified, from the beginning, the need for product and plant rationalization which was accepted and acted upon by a the Chinese authorities. By bringing into the process the expertise of highly knowledgeable consultants and presenting the Chinese authorities with clear options, the project helped highlight the problems and propose Raw material costs have increased as follows: Y/ton 1988 1989 1990 1991 1992 1993 1994 1995 Coke 200 240 300 370 420 480 560 680 Pig Iron 400 600 700 850 1000 2000 1500 1450 Carbon Steel 1100 1600 1800 2050 2300 4370 4140 4000 24 solutions that have brought considerable improvements in the design and quality of machine tools manufactured in the Shanghai region. Institutional Development 4.2 The project achieved most of its institutional development objectives. The consultants assisted the two companies in improving their management systems. In addition to carrying out training (both in China and overseas) in a diverse set of subjects such as project management, corporate strategy, organizational development, product design and manufacturing technologies, industrial engineering, product planning, purchasing and materials management, personnel and education, facilities maintenance, workshop management and cost accounting and finance, the consultants helped install the computer hardware and a management information system (MIS) in each company. The training which was carried out as a part of the implementation of the new management system was much more extensive than what was anticipated at appraisal (Annex XVII). The result of this policy and of the continued training in later years was the considerable upgrading of the quality of the workforce. This allowed the companies to improve the quality of the machines produced and to absorb the new technologies that have been procured with much effort. 4.3 To be sure, not all plants have as yet been touched by the new management system. So far, in addition to the SMTW and SMTC headquarters, only 7 plants affiliated with SMTC have been brought under the program. This has already helped with the manufacturing lead times, financial management and inventory control. Currently, the MIS system is being introduced in a second group of five plants and it is expected that within the next 4-5 years the whole group will be covered. 4.4 The research and development institutes at both enterprises play a pivotal role in the transfer of technology. Their newly acquired equipment, notably the CAD/CAM systems have provided them with powerful tools for technology absorption and new designs. Licenseholders still insist that certain parts and components must be imported if the final product is to satisfy their quality standards. In 1992, e.g., some $16.9 million was paid out for these imports. But, there are already indicators that more and more domestically produced parts and components are being accepted on quality grounds, thereby reducing the need for imports (Annex XIII). The economics of domestic production dictate that this quality enhancement be achieved as soon as possible . The companies are also well on their way in introducing ISO 9000 for quality assurance. In fact quality control is receiving increasing attention at all plants because of the heightened competition in the domestic market. 4.5 While both companies have made great progress in absorbing new technology, designing and manufacturing improved machines and establishing a more efficient management, their marketing activities are in need of strengthening. Despite a more proactive approach in recent years, market intelligence and analysis remains patchy and unorganized. As a result, production programming is based on incomplete information leading to accumulation of large inventories seriously impairing the financial health of the companies. At SMTW, their overseas resident The SMTC management suggested that in the case of the 800 ton presses, the cost of a machine containing only Chinese parts would be around Y 8 million. A similar imported machine would cost Y 30 million; but the actual cost is about Y 20 million because some imported parts are used in the manufacture 25 representative (with 6 years of experience at Atlanta, Georgia, USA) has recently been recalled and put in charge of marketing. At SMTC, the corporate marketing department is providing assistance to the affiliated plants, while the trading company carries out the export and import activities for the whole group. SMTC has had representative offices in Germany, USA and Malaysia for both exports and after-sale services. Given the above-mentioned achievements, the institutional development impact of this project is rated as substantial. Bank/Borrower Performance 4.6 Since the start of the dialogue with the Chinese authorities on the reform of the industrial sector, the bank has enjoyed a position of trust in addressing the issues of technological backwardness, efficiency and competitiveness. This dialogue has resulted in a series of projects that have progressively become more policy oriented, attempting to deepen enterprise and policy reforms in the heavily industrialized provinces such as Tianjin and Shenyang. Through its thorough analysis and collaborative preparatory work, the bank has been instrumental in introducing modem technology and management to the selected state owned enterprises. The Bank's contribution is greatly appreciated by the Chinese authorities who often cite the Bank's rightful insistence on rationalization and cost saving investments. 4.7 On their part, the Borrowers/implementing agencies modified their initial project design and accepted the Bank approach, calling for a feasibility study in each company and for the foundry and forge plants. Despite some procurement and funding problems, the project was satisfactorily implemented and the new technologies absorbed. Although enormous changes have taken place since the days of centralized planning in China, there are still some lingering habits and actions that belie the changes. One such phenomenon is the continuing inability of the plants to reduce labor based on their firmly held belief in the plant's social role. The Borrowers complied in all respects with the covenants contained in the Project and Loan Agreements (Annex XVIII). Outcome 4.8 The outcome of this project is rated as satisfactory. The project has achieved its physical and technological objectives Not only has the production capacity of the plants been increased, the investment in modem and precision machine tools has also made it possible for the plants to manufacture machines with considerably higher quality. The ancillary plants which manufacture grinding wheels, gears, levels and other accessories now turn out products with enhanced quality. The quality of castings produced in the foundries has also improved and exports of small castings (to many countries including Denmark) have been realized. Above all, the contracts for technology transfer have resulted in the manufacture of technologically advanced machine tools for the Chinese market. Practically all these new machines (including machine centers) have been commercialized and supplied to other industrial enterprises such as automotive, tractor and home appliances manufacturers. 4.9 The project came to fruition at a time when the markets for machine tools was growing vigorously in China. As a result, sales advanced by leaps until 1993 at which time SMTW reached the level anticipated at appraisal. At SMTC sales surpassed appraisal forecasts in 1991 and reached a high mark of Y 1.27 billions in 1993. The momentum was, however, lost when the anti- inflationary policies of the Government affected the new investments in plant and machinery in 1994 (Annex XIX). There are already signs that the demand for machine tools is again on the rise 26 and the companies' order books for large ticket items such as large presses for the automotive industry, grinding machines for cylinders, crankshafts and valves, sheer punching machines, high speed presses and CNC lathes indicate a healthy picture. Both companies were expecting a reversal for 1996 and 1997, at which time they anticipate to again produce at the 1993 level. 4.10 The data given in Annexes VI and XIII indicate that, in recent years, domestic prices have not increased appreciably and domestic and export prices have been converging. This is due to the heightened competition from other Chinese manufacturers and a gradual opening of the domestic market to imports of machine tools. Currently, import duties on CNC machines stand at an average of 15 percent, down from 20 percent before 1994 . Based on the assumptions shown in Annex XX, the economic rate of return of this investment is reestimated at 11.2 percent for SMTW and 14.7 percent for SMTC. Sustainability 4.11 Prior to the reforms of the last decade, the Chinese machine tools industry was for a long time dependent on its own indigenous technology which was based on the work of Chinese research/design institutes, internationally published literature and occasional imports of sample machine tools. While this policy accounted for the technological backwardness of the Chinese machine tools industry, it, nonetheless, created a technological infrastructure which could quickly take advantage of any opening to the outside world in terms of absorbing and assimilating new technologies and introducing improvements and innovations. This capability, which was well recognized at appraisal, helped the machine tools industry in carrying out its adaptation program with speed and satisfactory results. The project also assisted the enterprises and the institutes to enhance their adaptive and innovation capabilities. 4.12 This capability development was strengthened by the gradual opening of the Chinese economy to international trade and foreign investment. On the one hand, the import liberalization exerted a welcome pressure on the hitherto protected sector and the industry became more familiar with the new technologies and quality standards; on the other, the companies could choose foreign joint venture partners to make a leap into the manufacture of machine tools with the latest technologies. This trend, which has already started, is likely to bring about major advances in the technological base of the sub-sector. 4.13 Supporting these movements is the presence of a management at both enterprises which is anxious to apply modern techniques and to enhance productivity and competitiveness. While still at the beginning of a thorough management reform and suffering from the relics of the central planning era, there are clear signs that new concepts are being applied. For example, the human resource development program at both companies is a testimony to their appreciation of the primacy of skill upgrading for an industry which is becoming increasingly skill-intensive. This Import duties for parts were as follows: Before 1994 1994 and after CNC Systems 9-12% 5% Electric Motors 25% 21% Standard Parts 12% 12% Electrical Parts 40% 12% 27 managerial capability at the enterprise level is supported by the recent decisions of the Shanghai Municipal Government which transformed the machine tools supervising bureau into a holding company with a corporate structure. The purpose of this transformation is to make a further critical assessment of the capabilities and productive capacity of the two enterprises along with a third (Shanghai Tool Works with an annual sales of around V 200 million) located in the Shanghai Municipal Region. It is expected that the assessment may result in further rationalization of productive plants including mergers and closures. The authorities have already concluded that the new competitive environment requires a more dynamic approach to cost reduction and product development. Based on all of the afore-mentioned factors, the sustainability of this project is rated as likely. 5. Conclusions and Lessons Learned 5.1 Although devoid of a policy reform content, this project made a substantial contribution to the Chinese machine tools industry by methodically analyzing the problems and providing suitable solutions. The project succeeded in procuring thirteen new and advanced technologies and establishing a workable approach for the acquisition of more know-how form abroad. Though somewhat slow moving at the beginning, the Chinese enterprises learnt to try new approaches and open new avenues in their quest to acquire new technologies. 5.2 Along with the transfer of technology has come the enhancement of management capability and the increasing spread of management information systems throughout the beneficiary entities. Once installed in all the individual plants, the modem management system is likely to lead to a substantial improvement in the decision making process and management effectiveness. Already the governmental reforms in the taxation and accounting systems have led to a better definition of costs, helping the companies with their financial management and cost-cutting efforts. On the other hand, and contrary to the claims usually made regarding the salutary effects of the Contract Responsibility System (CRS), it appears that the concept is far from having been fully implemented. As an example, the companies report that they are not totally at liberty to separate redundant workers. The CRS has not been effectively spread to the SMTC's affiliated plants. And the companies have been subjected to very onerous charges in respect of the safety net that has been transferred to the Municipal Government. 5.3 This project reaffirms the often found lesson that the high quality of the project at entry is a 'sine qua non' condition of success. When combined with diligent supervision and constructive dialogue (which were present in the implementation of this project), they lead to satisfactory results. In addition to the above, the major findings and lessons learned from the implementation of this project are: * Since a substantial part of the technological know-how for most industrial activities in the developing countries comes from abroad, access to foreign technology is crucial. While such access provides one of the most commercial ways of gaining new technology, the efficient assimilation of such new technology depends on the existence of a research and development capability. Thus, "passive dependence on foreign technology may lead to good operational 28 capabilities, but in striving to move to the best practice operational frontier, countries need to develop their own adaptive capabilities including design and engineering6. * The import of foreign technology requires information and negotiating skills. Often, foreign lincenseholders are not willing to provide the latest proprietary technology unless they retain control. Under these circumstances, their reluctance may be eased if they are brought into a joint venture relationship with both a degree of managerial control and financial interest. The foreign investment policy of China ensures that such problems are resolved. * While skill upgrading is a component of all industrial projects, it takes on a special significance for projects that aspire to introduce new and advanced technologies on a large scale. The satisfactory outcome of this project owes much to the attention that was paid in the design of the project and also by management of the two companies in continuing with their intensive training programs. * Where an improvement in the management system is to be achieved amidst a radical change in the economic system and the relationships among the economic agents, there is need for continuity until such time as the management reforms are put into practice, tested and internalized. This should be the rule for all the erstwhile centrally planned economies. 6 Developing Industrial Technology, A World Bank OED Study. 29 Annex I Project Implementation Indicators Component completion dates Appraisal Actual Estimate SMTC Civil Works June 1992 December 1992 Equipment Procurement June 1990 October 1993 Technology Transfer September 1991 February 1993 Management System June 1990 October 1993 Training June 1992 December 1993 SMTW Civil Works December 1990 December 1990 Equipment Procurement June 1990 June 1991 Technology Transfer: September 1991 December 1993 Cylindrical grinder technology August 1992 3-D measuring machine technology August 1991 NC system technology July 1993 High-strength cast-iron technology December 1993 Management System June 1990 December 1993 Training June 1991 December 1993 aProcurement was almost completed by this date with a few accessories procurement being delayed until December 1993. COMENTS: (1) Price increases in raw materials and resulting shortage of domestic counterpart funds caused delay in civil works. (2) The implementation of management information system was adversely affected with the delay in computer hardware procurement. Project Costs - SMTW Appraisal Estimate Actual Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total ---------- (Y million) --------- ---------( million)--------- --------- (Y million)---------- -------------($ million)----------- SMTW Plant Cost 55.6 104.3 159.9 15.0 28.2 43.2 88.0 152.4 240.4 19.4 29.4 48.8 Engineering/Management 2.6 7.5 10.1 0.7 2.0 2.7 2.0 6.6 8.6 0.5 1.6 2.1 Training - 4.1 4.1 - 1.1 1.1 - 5.5 5.5 - 1.0 1.0 Technology Transfer - 16.6 16.6 - 4.5 4.5 - 35.6 35.6 - 6.7 6.7 Base Cost Estimate 58.2 132.5 190.7 15.7 35.8 51.5 90.0 200.1 290.1 19.9 38.7. 58.6 Physical Contingencies 5.8 13.2 19.0 1.6 3.6 5.2 Price Escalation 12.5 11.0 23.5 3.4 2.9 6.3 - - - - - - Installed Cost 76.5 156.7 233.2 20.7 42.3 63.0 90.0 200.1 290.1 19.9 38.7 58.7 Incremental Working Capital 44.4 4.0 48.4 12.0 1.1 13.1 75.0 - 75.0 17.8 - 17.8 Interest During Construction 10.0 10.7 20.7 2.7 2.9 5.6 16.4 29.4 45.8 3.9 7.0 10.9 Total for SMTW 130.9 171.4 302.3 35.4 46.3 81.7 181.4 229.5 410.9 41.6 45.7 87.3 Project Costs - SMTC Appraisal Estimate Actual Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total ------------ (Y million)--------- ---------(5 million)--------- -----------(Y million)---------- -------------(5 million)----------- SMTC Plant Cost 61.3 197.4 258.7 16.5 53.4 69.9 125.9 309.0 434.9 27.5 63.3 90.8 Engineering/Management 5.0 13.0 18.0 1.4 3.5 4.9 6.9 11.6 18.5 1.8 2.4 4.2 Training - 10.3 10.3 - 2.8 2.8 - 8.3 8.3 - 1.5 1.5 Technology Transfer - 17.0 17.0 - 4.6 4.6 - 33.4 33.4 - 6.4 6.4 Base Cost Estimate 66.3 237.7 304.0 17.9 64.3 82.2 132.8 362.3 495.1 29.3 73.6. 102.9 Physical Contingencies 6.6 23.8 30.4 1.8 6.4 8.2 - - - - - - Price Escalation 9.7 25.4 35.1 2.6 6.9 9.5 - - - - - - Installed Cost 82.6 286.9 369.5 22.3 77.6 99.9 132.8 362.3 495.1 29.3 73.6 102.9 0 Incremental Working Capital 96.5 8.4 104.9 26.1 2.3 28.4 130.0 10.9 140.9 28.3 2.3 30.6 Interest During Construction 22.5 25.9 48.4 6.1 7.0 13.1 40.0 73.0 113.0 8.3 14.7 23.0 Total for SMTC 201.6 321.2 522.8 54.5 86.9 141.4 302.8 446.2 749.0 65.9 90.6 156.5 Total Financing Required 332.5 492.6 825.1 89.9 133.2 223.1 484.2 675.7 1,5.9 107.5 136.3 243.8 Notes: Currency equivalents: $1.00 = Y 3.7 as in the appraisal estimate. Prevailing exchange rate used for actual disbursements. 32 Annex M Project Financing Appraisal Estimate Actual Foreign Foreign Local Exchange Local Exchange (Y million) ($ million) (Y million) ($ million) SMTW World Bank - 36.0 - 34.0 Domestic Loans 86.6 9.2 150.0 4.7 Self-generated funds 44.3 1.1 31.4 7.0 SMTW Total 130.0 46.3 181.4 45.7 SMTC World Bank - 64.0 - 62.7 Domestic Loans 105.2 20.6 241.8 10.9 Self-generated funds 96.4 2.3 61.0 17.0 SMTC Total 201.6 86.9 302.8 90.6 Total Project Financing World Bank - 100.0 - 96.7 Domestic Loans 191.8 29.8 391.8 15.6 Self-generated funds 140.7 3.4 92.4 24.0 Total 352.5 133.2 484.2 136.3 33 Annex IV Direct Benefits Appraisal Actual at Indicators Estimate Closing Date Product Rationalization SMTC Phased-out product models (number) 33 29 Upgraded models 18 12 New models 52 64 SMTW Phased-out models 7 6 Upgraded models 4 4 New models 13 53 TOTAL Phased-out models 40 35 Upgraded models 22 16 New models 65 117 Production Capacity Rehabilitation SMTC New equipment installed - domestic (sets) 390 390 New equipment installed - imported 236 236 SMTW New equipment installed - domestic 305 305 New equipment installed - imported 109 109 TOTAL New equipment installed - domestic 695 695 New equipment installed - imported 345 345 Total 1,040 1,040 Technology Transfer SMTC Number of technology transfers 11 9 SMTW Number of technology transfers 4 4 TOTAL Number of technology transfers 15 13 34 Annex V SMTW - Total Number of Grinding Machines Produced and Sold Total Total Sold Domestic Export Sales Percentage Produced Sales exported 1986 1931 1935 1825 110 5.7 1987 1989 2013 1938 75 3.7 1988 1791 1808 1692 116 6.4 1989 1650 1568 1448 120 7.6 1990 1388 1469 1280 189 12.9 1991 1513 1586 1401 185 11.7 1992 1705 1665 1445 220 13.2 1993 1894 1867 1765 102 5.5 1994 1439 1305 1196 109 8.3 35 Annex VI SMTW - Trend in Export of Selected Grinding Machines and Export Prices 1995 First Nine 1989 1990 1991 1992 1993 1994 Months Cylinder Grinding Machine Type MI 432 B Number Exported 35 24 77 89 17 14 13 Average Export Price (dollars) 10997 17290 15987 13685 17229 18005 15385 Average Export Price V 41400 82700 85100 75460 99270 155180 127700 Average Domestic Price Y 39600 42800 47500 61000 86900 96900 87800 Surface Grinding Machines Series M7120 D Number Exported 17 27 29 34 18 16 13 Average Export Price (dollars) 7435 5593 7103 7147 7155 8096 7373 Average Export Price V 28000 26750 37800 39400 41200 69800 61200 Average Domestic Price Y 30000 30500 31300 44500 66700 71400 68100 Crankshaft Grinding Machines Series MQ8260 Number Exported 16 21 19 20 38 46 36 Type A 16 21 14 - - - - Type B - - 5 20 38 46 36 Average Price Type A (dollars) 14144 11286 16071 - - - - Average Price Type B (dollars) - - 16600 18900 16707 16281 15066 Average Price Type AV 53250 54000 85500 - - - - Average Price Type BY 88300 104200 96300 140300 125000 Average Domestic Price Type BY 61500 61500 77000 126000 136000 134300 36 Annex VII SMTW - Trend in Raw Material Prices Y/ton 1986 1990 1994 Percentage increase 1994/1986 Pig Iron 300 780 1700 567 Scrap 180 660 1700* 944 Round Steel Bar 800 1355 3250* 406 Coal 80 240 265 331 Coke 145 278 550 379 Ferrosilicon 1640 2600 4000 244 Ferromanganese 1760 1850 3650 207 Aluminium 4700 12000 187508 399 Copper 6100 18500 28200* 262 Sand 42 68 145 345 *Equivalent international prices: Scrap 1160 per ton; round bar, V 2770 per ton; aluminium, V 12700 per ton; and copper, V 19840 per ton. 37 Annex VIII SMTW - Income Statement V million 1991 1992 1993 1994 1995 Sales ofProducts 160.2 190.2 275.2 191.2 145 Sales Tax and Surcharge 7.1 9.5 12.8 1.9 1.4 Net Sales 153.1 180.6 262.4 189.3 143.6 Total Operating Costs 133.4 157.1 196.5 148.8 149.5 Operating Income 19.7 23.6 65.9 40.4 (5.9) Other Income/Expenses 14.9 16.0 54.4 40.3 20.1 Gross Profit 4.8 7.6 11.4 0.1 (26.0) 38 Annex IX SMTW - Workforce Profile 1991 1992 1993 1994 1995 End of Oct. Direct Production Machine Operators 1882 1862 1729 1620 1459 Support 2006 1898 1884 1778 1623 Sub Total 3888 3760 3613 3398 3072 Engineers & Technicians 838 791 714 698 631 Management including Workshops 579 610 596 584 569 Non-Production 513 478 464 446 426 Others 384 290 268 220 285 Total 6202 5929 5655 5346 4993 SMTC - Performance of Selected Plants 1987 1993 1994 1995 First Nine Months No. of Of which CNC No. of Of which CNC No. of Of which CNC No. of Of which CNC Machines CNC Machines Afachines CNC Machin Machines CNC Machines Machines CNC Machines as Produced Machines as % age Produced Aachines es as % Produced Machines as % age Produced Machines % age of of Total age of of Total Total Total Metal Cutting No. 2 1139 20 1.8 1066 71 6.7 770 57 7.4 687 12 1.8 No. 3 802 0 0 627 11 1.8 521 8 1.5 355 6 1.7 No. 4 148 31 21 72 62 86.1 53 38 72 21 21 100 No. 8 259 134 51.7 241 162 67.2 188 168 89.4 127 40 31.5 Metal Forming No. 1 237 0 0 175 2 0.1 176 6 3.4 137 16 11.7 No. 2 2540 0 0 1748 3 0.2 1708 3 0.2 709 4 0.6 Total 5125 185 3.6 3929 311 7.9 3416 280 8.2 2036 99 4.9 rb4 40 Annex XI Grinding Wheel Manufacturing Plant An accessory unit that has procured modern technology is the Grinding Wheel Plant. This plant produces diamond bonded wheels. It has a capacity of around 2.2 million carat of synthetic diamond (capacity in grinding wheel plants is denominated in the number of carats of diamond used in the manufacturing process) per shift. This plant has a workforce of 66 persons. The production with the new technology started in 1992 and has been expanding very rapidly in recent years as shown below. Production Sales Carats* V 1000 1992 1,247,000 6129 1993 1,421,000 7209 1994 1,692,000 10383 1995 (Jan-Nov) 2,417,000 12843 *One carat equals 0.2 grams With one shift, the plant is producing annually around ten thousand grinding wheels of various size equivalent to nearly 10 percent of the domestic market. Their plans call for increasing production to 5 million carats of diamond by the year 2000 and supplying a larger share of a more competitive and higher quality market. Already, because of fierce competition from imports they have had to reduce their prices from nearly Y 7.2 per carat in 1992 down to V 6.1 per carat in 1995. Exports from this plant constitute only one percent of its sales. Metal-Forming Machine Manufacturing Plant The Metal-Forming Machine Manufacturing Works was a manufacturer of hydraulic presses up to 400 tons capacity. By acquiring new technology it can now manufacture technologically advanced presses up to 630 ton capacity. While it previously took between 2 and 3 years to produce a 400 ton press, the new investment has made it possible for the plant to manufacture annually up to 8 presses of 630 ton capacity. The plant has also entered a joint venture agreement with another well-known manufacturer of hydraulic presses for larger units up to 800 ton capacity. Already five large units have been manufactured and sold to the car industry. The production and sales performance of this plant is given in the following table. 41 Annex XI continued No. of Machines Sales Revenue Exports Workforce Produced Units Y Million % Persons 1988 235 N.A. N.A. 1569 1989 230 N.A. N.A. 1553 1990 167 24.8 10 1550 1991 197 38.4 10 1548 1992 212 50.0 14 1444 1993 175 69.1 6 1452 1994 176 85.5 8 1439 1995 (Jan-Nov) 168 74.4 4 1370 The plant is one of the major suppliers of 160 ton presses to the Chinese market (around 20 percent). It is looking to the automotive industry to fill its order book for the coming years. No. 4 Machine-Cutting Manufacturing Plant The No. 4 Machine Cutting Manufacturing Plant has procured new technology for the production of CNC milling machines. It also manufactures machine centers, under license, of which 4 have been completed. This plant has also been facing a weak market on account of the factors mentioned earlier especially the constrained investment. The production and sales performance of the plant in recent years is captured in the following table. No. of Total Sales Of which Workforce Machines YMillion Exports % Persons Produced 1988 91 N.A. N.A. 789 1989 127 N.A. N.A. 780 1990 49 15.1 13 775 1991 54 24.6 11.4 770 1992 93 43.4 1.2 764 1993 72 47.4 1.8 741 1994 53 25.7 25 682 1995 (Jan-Nov) 34 22.8 7.2 678 42 Annex XI continued No. 3 Foundry In the rationalization program two foundries out of the five existing before the implementation of the project were shut down and their production transferred to the other remaining three. The No. 3 foundry was earmarked for small casting of up to 90- 100 kilogram per item. The renovation in this plant consisted of a completely new casting line with 90 frames per hour capacity. The new equipment included a cupola (50 tone per shift) and holding furnaces. The new plant has been operation since 1992 and the production and sales performance of No. 3 foundry has been as follows: Tonnage Total Sales Of which Workforce Produced YMillion Exports % Persons 1988 5615 N.A. N.A. 541 1989 5756 N.A. N.A. 540 1990 4641 7.2 529 1991 4584 8.7 525 1992 5214 10.3 - 489 1993 5642 19.5 18.2 534 1994 5811 15.1 24.5 489 1995 (Jan-Nov) 5113 N.A. N.A. 580 43 Annex XII SMTC - Income Statement V Million 1990 1991 1992 1993a 1994 1995 First Ten Months Sales of products 572.6 708.6 921.5 1274.0 1066.8 975.7 Tax and surcharge 33.1 92.1 120.3 59.0 6.7 5.3 Net sales 539.5 616.5 801.2 1215.0 1060.1 970.4 Cost of saleSb 477.2 548.2 670.0 937.3 751.8 709.7 Selling expenses 6.5 5.7 30.8 20.1 15.1 12.8 Profit on sales 55.8 62.6 100.4 257.4 293.2 247.9 General and Administrative expenses N.A. N.A. N.A. 146.6 237.8 184.1 Financial charges' N.A. N.A. N.A. 43.6 95.8 87.0 Profit from other operations 20.0 17.3 (8.3) 13.6 24.9 14.7 Operating Income 35.8 45.3 108.7 80.8 (15.6) (8.6) Other income/(expenses) 8.7 5.0 (43.7) (23.2) 19.5 16.6 Gross Profit 44.4 50.3 65.0 57.6 3.9 8.0 Notes: 'Starting in July 1993, the accounting system was brought in line with international format. bDepreciation is included in the cost of sales. CUp to 1993, general and administrative expenses and financial charges were included in the cost of sales. SMTC - Export Statistics No. of No. of Value of Metal Value of Total Percentage Total Value Metal Metal Cutting and Other Value of of Sale of Parts Cutting Forming Metal Forming Exports $ Exports $ imports Machines Machines Machine Exports Million Million $ Million $ Million 1988 2317 900 7.9 5.9 13.8 N.A. N.A. 1989 2708 1268 14.4 6.0 20.4 N.A. 1.6 1990 3538 1369 20.3 7.5 27.8 24.7 4.2 1991 2800 1116 19.8 10.6 30.4 26.2 4.0 1992 2489 1473 16.0 16.2 32.2 22.2 16.9 1993 3030 1835 24.1 12.1 36.2 17.2 4.6 1994 2619 1540 22.8 14.9 37.7 30.7 1.5 45 Annex XIV Domestic and Export Selling Prices and Cost of Production Name of Name of 1990 1991 1992 1993 1994 1995 Factories Products Grinding Abrasive DSP - - 7.20 6.49 6.49 6.12 Wheel Tool ESP - - - - - 6.12 Works (yuan/ct) COP - - 6.86 5.79 6.02 5.80 1000 Yuan No. 3 Casting DSP 1638 1873 2017 3571 4111 4135 Foundry (yuan/t) ESP - - - - 4483 4906 COP 1625 1690 1842 3401 4711 4826 No. 2 C6250 DSP 25.5 30.0 45.8 55.4 47.9 46.0 M/C, M/T Lathe ESP 24.6 28.6 41.0 55.0 42.4 42.0 Works COP 21.0 22.8 30.9 35.2 37.4 33.0 No. 3 MA1420A DSP 32.0 35.0 59.0 63.0 65.0 65.0 M/C, M/T Grinder ESP 38.0 46.0 63.0 64.0 66.0 65.0 Works COP 26.0 29.0 49.0 51.0 55.0 56.0 No. 4 X754 DSP 120.0 147.0 144.0 160.0 168.0 151.0 MIC, MIT Milling M. ESP 97.0 127.0 137.5 - - - Works COP 121.0 135.0 148.0 135.0 145.50 145.0 M/F, M/T J44-55E DSP 156.0 180.0 200.0 210.0 216.0 235.0 Works Press ESP 159.0 160.0 185.0 - - 225.0 Works COP 119.0 121.0 131.0 161.0 200.0 215.0 Notes: DSP, ESP and COP refer to Domestic Selling Price, Export Selling Price and Cost of Production, respectively. 46 Annex XV SMTC - Workfoce Profile 1991 1992 1993 1994 1995 Direct Production Ungraded 3504 3267 2979 1889 Low-skilled 4768 4189 2939 2823 Semi-skilled 7402 7981 8531 8639 Highly skilled 214 376 528 636 Technicians 144 154 130 142 Senior Technicians 0 1 2 4 Sub Total 16032 15968 15109 14133 Engineering Staff Senior Engineers 152 175 203 241 Engineers 1052 1005 1145 1143 Assistant Engineers 1499 1455 1213 1107 Others 171 164 102 92 Sub Total 2874 2799 2663 2583 Other Management Economists 1512 1474 1506 1489 Accountants 495 536 524 490 Statisticians 370 350 331 317 Sub Total 2377 2360 2361 2296 Services Sub Total 744 899 842 760 Indirect Sub Total 6287 4581 6718 7454 Total 28314 26607 27693 27226 26958 47 Annex XVI SMTC - Training Statistics 1991 1992 1993 1994 1995 Production Workers 4233 4053 3687 2352 1273 Engineering and Management 1672 2376 1596 1323 2185 Academic Studies 87 - - 176 155 Total 6769 6429 5283 4852 3613 48 Annex XVIi Management and Technical Training During Implementation Indicators Appraisal Estimate Actual at Closing Date SMTC Overseas training (staff members) 250 412 Domestic training 400 900 SMTW Overseas training 100 320 Domestic training 150 660 Total Overseas training 350 732 Domestic training 550 1,560 49 Annex XVIII Status of covenants Covenant Subject Status Project Agreement 2.02 Employ consultants. Complied with 2.04 Maintain the Project Implementation Unit. Complied with 2.07 Training program was prepared and finished to the Complied with Bank. 4.01a Maintain records and accounts adequate to reflect Complied with corporation's operations and financial conditions. 4.01b Corporations accounts, financial statements and the Complied with special account for each year audited by independent auditor and the audited financial statements and auditor's report furnished to the Bank not later than six months after the end of the year. 4.01c Maintain separate records and accounts for all Complied with expenditures on the basis of Statements of Expenditure available for the Bank's examination. 4.02 Maintain a ratio of current assets to current liabilities Complied with not less than 1.5. 4.03 Maintain the debt service coverage ratio not less than Complied with 1.5. Loan Agreement 2.02(a) The closing date shall be December 31, 1992. Extended for one year 2.06 Interest and other charges shall be payable semi- Complied with annually on March 15 and September 15 in each year. 3.02(a) Sign the subsidiary Loan Agreement with Ministry of Complied with Finance. 50 Annex XIX Actual Financial Results Versus SAR Forecasts Y Million SMTW Sales Revenue SMTC Sales Revenue SAR Estimate Actual SAR Estimate Actual 1988 108.4 101.6 439.2 555.4 1989 129.0 109.1 517.5 592.3 1990 158.5 109.4 599.9 588.9 1991 206.7 160.3 699.6 708.6 1992 242.5 190.2 840.1 921.5 1993 282.7 275.2 869.4 1274.0 1994 297.3 191.2 872.5 1066.8 1995 (Projected) 305.7 145.0 875.6 975.7 51 Annex XX Assumptions Used for ERR Reestimation * Monetary control relaxed leading to higher demand for capital goods. * Costs are contained through rationalization and further retrenchment of labor. * Production trends are reversed at SMTW in the following way: 1996 production at 1994 level. 1997 production at 1993 level Thereafter production to increase in real terms at 10 percent annually until 1999. Production to remain at 1999 level in real terms until 2008. Residual value of investment - 10 percent. * At SMTC the 1993 peak production level is attached in 1996. Thereafter production to increase in real terms at 10 percent annually until 1999. Production to remain at 1999 level in real terms until 2008. Residual value of investment - 10 percent. 52 Annex XX continued SMTW - ERR Reestimation 4 million - Constant 1995 Prices Investment Incremental Incremental Net Benefit Revenue Cost 1988 8.6 26.3 23.9 (9.8) 1989 21.0 5.7 6.3 (21.6) 1990 60.7 1.9 25.7 (84.5) 1991 107.5 66.3 96.6 (137.8) 1992 128.3 100.3 65.5 (93.5) 1993 70.4 196.0 125.9 0.3 1994 64.4 48.3 16.1 1995 (3.0) 29.5 (32.5) 1996 64.4 48.3 16.1 1997 196.0 125.9 70.1 1998 230.0 148.0 82.0 1999 264.0 170.0 94.0 2000 264.0 170.0 94.0 2001 264.0 170.0 94.0 2002 264.0 170.0 94.0 2003 264.0 170.0 94.0 2004 264.0 170.0 94.0 2005 264.0 170.0 94.0 2006 264.0 170.0 94.0 2007 264.0 170.0 94.0 2008 (40) 264.0 170.0 134.0 ERR= 11.2% 53 Annex XX continued SMTW - ERR Reestimation * million - Constant 1995 Prices Investment Incremental Incremental Net Benefit Revenue Cost 1988 56.0 (4.3) 11.9 (72.2) 1989 94.1 (50.8) (10.3) (134.6) 1990 255.5 (65) 11.2 (331.7) 1991 190.9 43.8 62.6 (209.7) 1992 156.6 101.0 82 (147.6) 1993 70.4 374.9 331.2 (26.7) 1994 210.8 152.6 58.2 1995 213.0 152.3 60.7 1996 374.9 204.0 170.9 1997 454.0 257.0 197.0 1998 533.0 311.0 222.0 1999 612.0 363.0 249.0 2000 612.0 363.0 249.0 2001 612.0 363.0 249.0 2002 612.0 363.0 249.0 2003 612.0 363.0 249.0 2004 612.0 363.0 249.0 2005 612.0 363.0 249.0 2006 612.0 363.0 249.0 2007 612.0 363.0 249.0 2008 (60) 612.0 363.0 309.0 ERR= 14.7%   IMAGING Report No: 15853 Type: PPAR