May 14: From May 7 to 10, Mr. Li Yizhong, President of China Petrochemical Corporation (Sinopec Group) and Chairman of China Petroleum and Chemical Corporation (Sinopec Corp.), attended the Fortune Global Forum 2001 in Hong Kong.  On May 10, Mr. Li was invited as one of the guest speakers to a special discussion on the Reality of Post-WTO Business in China hosted by Mr. Bill Powell, editor of Fortune?s Asian edition.  The following is the speech he made in response to questions from the host and the audience.1.

Powell:  What will be the impact of China?s accession to the WTO on Sinopec Corp.?
Li:  China?s state-owned enterprises started making preparations for the WTO entry a few years ago, while major foreign companies began penetrating into the Chinese market aggressively roughly at the same time.  In 2000, China relied on overseas resources for 30% of its oil consumption, with crude oil import amounting to 70 million tons and fuel oil import reaching 15 million tons.  In the meantime, in the domestic market, 50% of the demand was met by import for plastics, 44% for synthetic rubber, and 53% for fiber monomers, polymers and synthetic fiber.  We feel that we lagged behind major foreign companies in the following aspects: A management system and an operation mechanism suitable to the market economy were not in place.  There were too many decision-making levels so that capital and resources were not able to be optimized.  Through reform and restructuring, Sinopec Corp. made a successful IPO in Hong Kong, New York and London last year and has basically set up a management system and an operation mechanism that are adaptable to the market economy, with a sound legal-person administration structure, whereby the primary-level legal person and the business segment departments are the key.I believe that the impact of China?s WTO entry will mainly be in two aspects.  First, tariff reduction.  The import duty on crude oil will be cut to zero, which will lower our cost.  The import duty on gasoline will be reduced from 9% to 6%, the duty on chemicals will come down from 10.6% to 6.5%, and the duty on diesel will remain unchanged.  This will bring sharper competition.  The second aspect is market entry.  Three years after the WTO accession, the oil product retail market will opened up, and the wholesale market will be opened five years after the accession on a conditional basis.After the WTO entry, Sinopec Corp. will face both challenges and opportunities.  To meet the challenges our strategies are firstly to expand our market share.  Sinopec Corp. already enjoys a dominant position in the oil product market, with a complete marketing network in place.  In 2000, we increased the capital in retail business and acquired nearly 9,000 retail stations.  Now we own over 20,000 petrol stations, and in addition, we have 5,000 franchised retail sites.  In the Eastern and Southern coastal provinces, our share of the retail market is 61%.  We will make further efforts and try to raise the percentage to 70-75% following the WTO accession.Secondly, we will shut down small refineries, revamp coastal refineries to boost sour crude capacities, increase the production of high-value light products and clean fuels, revamp ethylene and downstream facilities in Yanshan, Yangtze, Maoming and Qilu to expand the capacity of ethylene crackers from the current 450,000 tons per year to 700,000 tons per year with minimum capital input, and we will improve product quality and slate, reduce production cost, and replace afore-mentioned import with our own products.As said, the WTO accession will also bring us opportunities.  Firstly, China is short of resources.  In 2000, only 26% of our crude need was supplied by our own production, and 53% was met by import.  The WTO entry will make it easier for us to purchase oil from the international market and to look for new oil resources abroad.  Secondly, the WTO accession will help us in introducing foreign capital, technologies and managerial expertise.  Shell, Exxon Mobil, bp and ABB, as strategic investors, acquired Sinopec Corp.'s shares.  Currently, we are cooperating with bp in Shanghai for a 900,000 tons-per-year ethylene project, with Exxon Mobil at Fujian Refinery, and with Shell for coal gasification projects.  In addition, cooperation with Shell, Exxon Mobil and bp in retail stations in Guangdong, Jiangsu and Zhejiang are under way.  China?s accession to the WTO will not only help foreign companies get into the Chinese market and but also help Sinopec Corp. improve its competitive edges with advanced foreign technologies and managerial expertise.

2.Audience:  Mr. Li Yizhong mentioned that Sinopec Corp. had already made a restructuring.  After the WTO accession, with lowered import tariffs and sharper competition will Sinopec Corp. make another restructuring?  Mr. Powell mentioned that Sinopec Corp. had several hundred thousand employees.  Does Sinopec Corp. have any specific target in reducing the number of employees for improved efficiency?
Li:  The overseas listing is definitely not the end of restructuring, but just the beginning of reform.  We will gradually set up and perfect a modernized enterprise system, a legal-person administration structure and a fully functional management system.  This year Sinopec Corp. will issue A shares to raised funds for the acquisition of Sinopec Star Petroleum.  Lay-off is a most sensitive subject, but is an issue that cannot be avoided.  Mr. Powell mentioned just now that the listed Sinopec had 510,000 employees, and the parent company had 710,000.  The big payroll is certainly not an advantage for state-owned enterprises, but a weakness.  Last year for the overseas listing, 710,000 people stayed with the parent company.  That is the biggest attempt we have ever made to diverge the employee burden.  We realize, however, that even with 510,000 employees, our payroll is larger than that of bp, Exxon Mobil and SHELL combined.  The large payroll leads to low productivity.  In order to reduce cost and boost efficiency, we have to make aggressive layoffs.  We plan to lay off 80,000 employees in total this year, 27,000 from the listed company and 53,000 from the parent company.  In the next five years we plan to lay off 280,000 employees in total, 100,000 from the listed company and 180,000 from the parent company.  Now we have already started the lay-off plan, and the compensation program for the layoff has also been defined.  Major measures to reduce the number of employees include the following.  First, Every year the number of new employees must not exceed the number of those who retire.  Second, terminate employment relations by agreement. Third, severance with assets. As for the compensation, our calculation shows that the compensation for the 27,000 employees to be severed from the listed company will be approximately RMB 1.02 billion, the compensation will be recovered in three and half years.  In the meantime, we separated from us five universities of our parent company last year and left them to the local communities.  We will continue such efforts and separate 350 hospitals and 370 primary and middle schools to the local communities, which will diverge 56,000 people.

3.Audience:  The question is to the four guest speakers.  Will the reform currently implemented in China lead to capitalism?
Powell:  I would like to ask Mr. Li Yizhong to answer the question first.
Li:  The theme of China?s reform is development, the thread is structural adjustment, and the driving force is opening and scientific and technological progress.  Since China adopted the opening and reform policy, the market economy has changed people?s mentality significantly.  Market orientation and the context of international market have been planted in people?s concept.  Sinopec Corp. has been promoting a business concept of competition and openness, an operation mechanism of market orientation and tight internal control, and a business aim of maximizing profit and shareholders? return.  These are the requirement of a market economy, and market economy is common to both socialism and capitalism.