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The Kaohsiung Gas Explosions

The Price of Loose Bolts


The Price of Loose Bolts


LCY Chemical was one of the good guys in the chemical sector, recognized for its safety and environmental record. Why is it now the main suspect in the deadly explosions that rocked Kaohsiung?



The Price of Loose Bolts

By Jimmy Hsiung
From CommonWealth Magazine (vol. 553 )

On the afternoon of Aug. 3, LCY Chemical Corp. chairman Bowei Lee held a press conference in Kaohsiung. His company had been fingered by Kaohsiung authorities as the main culprit in a series of lethal propylene explosions that rocked the city beginning just minutes before midnight on July 31.

"We will definitely not avoid the responsibility we should bear, and we have not covered up any facts. We want to find out the cause (of the blasts) more than anybody," Lee said.

After bowing to apologize to society, he said he was apologizing because of his sadness over the deadly blasts. There was no admission of LCY Chemical's guilt in the tragedy, which left 30 people dead and more than 300 injured.

LCY Chemical, which had been anxious to maintain a low profile and keep silent while the investigation was proceeding, had finally succumbed to public pressure and expressed its regret over the incident.

Lee, seen as a symbol of excellence within the petrochemical industry, is known for being eloquent and full of confidence, but the individual that people saw that night was a flustered, perhaps even slightly panicked, CEO.

How had Lee, who is credited with saving the family business, been reduced to this? And what implications does the crisis he now faces – not only to the company's image but to its very survival – have for Taiwan's private enterprises?

Reviving a Tarnished Image

To many older Taiwanese, the letters "LCY" are often associated with environmental pollution because the company was one of the targets of Taiwan's first environmental movements.

In the 1980s, LCY Chemical's formaldehyde plant in Hsinchu was releasing wastewater into drainage ditches, triggering a siege of the plant by nearby residents. Resistance to the plant lasted for 500 days and eventually forced the facility to shut down.

To the MIT and Stanford-educated Lee, part of his mission in returning to Taiwan in 1982 and getting involved in the family business was to wipe clean its seriously tainted reputation.

Since Lee took over the management of LCY Chemical in the early 1990s, annual revenues have grown from NT$3 billion to more than NT$50 billion in 2012, but within the industry he is most acclaimed for his sense of mission to the chemical business.

That may seem ironic in view of recent events, but nobody can argue that Lee has long devoted himself to promoting environmental and safety awareness in the domestic petrochemical sector.

Thomas Tseng, the vice president of petroleum products wholesaler Daryar International Corp., says that after Lee became CEO of LCY Chemical in 1991, he invested a large sum of money and considerable resources in industrial safety and environmental protection, becoming one of the few leaders in the sector willing to invest in these areas.

"LCY Chemical set a record of having no safety or environmental claims filed against it for 15 years. Nobody has broken that record to this day," says Tseng, who previously was an executive at Shell Taiwan.

In 2013, Lee received an "Industrial Safety Contribution Special Award" at the National Industrial Safety and Health Awards, Taiwan's most prestigious industrial safety awards. One of the main reasons he won the award was because he helped found and led for many years the Taiwan Responsible Care Association, a group that has promoted industrial safety and environmental protection practices in the domestic petrochemical industry.

In 2004, Lee was officially anointed the successor at LCY Chemical after taking over as chairman of the board from his father, Lee Kuan-chih, and he also began playing more of a leadership role in the industry. If he wasn't busy introducing new technology or systems from overseas at his own company, he was representing the petrochemical sector in communicating with the government on issues ranging from the Economic Cooperation Framework Agreement with China to electricity price policies. Regardless of what he was up to, Lee's fiery speaking style always left a deep impression on his peers.

"To be honest, in the beginning many members of the industry's older generation didn't like him, especially because he would go on the attack about things he believed were right. He simply wasn't interested in showing respect to his elders," says one second-generation leader of a rival petrochemical company. But once they understood that he really had high ideals for the industry, they gradually began to accept him.

But Lee's fierce passion and lofty sense of mission were still no match for one breach of industrial safety.

A popular saying in the petrochemical sector is that participants are practiced in "pipeline installation art." "That's because this business involves liquids and gases, which all rely on pipelines," says Hsieh Chun-hsiung, the director-general of the Petrochemical Industry Association of Taiwan. American industrial safety experts once calculated that pipeline problems accounted for 30 percent of all chemical plant accidents, more than any other factor.

Firmly committed to giving industrial safety the highest priority, Lee was more familiar than most with the crucial role pipelines play in industrial safety in the petrochemical sector. So how did things go so wrong in Kaohsiung on the night of July 31?

The key, experts say, was the shared pipeline system. One industry insider observes that piping networks outside factory boundaries are inherently difficult to manage to begin with, and when one considers that in this case they were owned, used and maintained by different entities, opportunities for management gaps and loopholes abounded.

At a time when the outside world is berating Lee and his company for the accident, this industry insider more calmly observes: "It's easy to foresee that there will still be plenty of arguments over who the pipelines ultimately belonged to."

"But people should not ignore something even more important, and that is, why are petrochemical pipelines allowed to exist in a city?" the insider asks, especially in Kaohsiung where many of the pipes buried underground are aging and the way the pipes were laid down was not consistent with urban planning. This accident, which "would have happened 10 years down the road if it had not happened today... should be treated as a national, collective industrial safety problem," the source said.

Aside from the historical burden of the haphazard pipeline network, the other big question in the disaster is why did LCY Chemical continue to bring in propylene through the piping system after it knew a leak had occurred?

It's a question that Lee simply cannot ignore and one that other entrepreneurs in Taiwan are now reflecting upon.

One executive who has immersed himself in environmental safety issues for many years explains that whenever a problem occurs in any manufacturing operation, "the first principle is to stop the machine and solve the problem before starting up again. Normally, you want to train and educate production line engineers and foremen well, and give them the authority to stop a machine temporarily if senior executives are not around."

He observes that Advanced Semiconductor Engineering's improper dumping of wastewater at the beginning of the year and the gas explosions that occurred recently were both cases of equipment that should have been turned off but weren't, leading to disaster.

If the safety culture that Lee had so carefully cultivated did not simply come undone, then it may have been defeated by the manufacturing sector's penchant to equate production capacity with performance.

Another petrochemical insider said bluntly that although Lee constantly talked about industrial safety, implementing it in practice may have been challenging. The source stressed that giving priority to industrial safety is relatively easy when things are going well, "but if a company is under pressure because it's losing money, then the commitment of people on the front lines may begin to waver."

Many people who have met Lee have heard him say that if he had to choose between making money and ensuring safety, he would choose the latter without hesitation. But LCY Chemical's financial picture in recent years may have led to a different result. The company had sales of NT$49.84 billion in 2013 to remain among the top 10 domestic petrochemical producers, ranking ninth. But its money-losing investment in solar energy raw material producer Taiwan Polysilicon Corp. has hurt earnings, with LCY Chemical posting net losses the past two years and in the first quarter this year.

In the latter half of July, there was speculation that talks between Taiwan Polysilicon and its syndicated loan consortium on restructuring more than NT$11 billion in debts had broken down, leaving the company in a life-and-death dilemma – either start up negotiations again or declare bankruptcy.

With LCY Chemical's affiliated unit facing severe financial woes, the explosions and the company's potential liability only compounded Lee's predicament.

Despite more than 20 years of investing in industrial safety and environmentally friendly practices and promoting lofty corporate social responsibility ideals and ambitions, Lee has discovered how serious a price a company and society have to pay for a figurative bolt coming loose within the organization. The crisis Lee now faces offers a stern warning to all of Taiwan's enterprises.

Translated from the Chinese by Luke Sabatier