MemorandumTO:ZhaoZhouliCC:LiQingyuFROM:AnttiPitkanenJonathanWoetzelDATE:June7,2002LaunchingtheLeanManufacturingPilotZhaoZong,WeappreciateyourcandidnesswithMr.Geindiscussingthecommercialarrangement.WeareveryimpressedandagainencouragedbyyourdeterminationandcommitmenttoimplementleanmanufacturinginBaosteel.WeareactivelypreparingthekickoffmidJuneasweagreedduringlastmeeting.ToshowourcommitmenttohelpBaosteelandtofacilitateyourdecisionprocessonthecommercialarrangementinordertostartthepilotasscheduled,wewouldliketoagainproposethreeoptionsoffeearrangementthatwouldbemoreacceptabletoBaosteel.1.FurtherInvestmentbyMcKinseyWearewillingtomakeanadditional10%investmenttoreducethetotalfeelevelto12.5millionRMBwithoutchangingpilotscopeandourcommittedresources.ThisisofcoursequiteanextraordinaryamountandreflectsourconfidencethathavingbeguntoworkwithMcKinseyonthisoperationalpilot,thatBaosteelwillquicklyappreciatethevalueandimpactthatwecanbring.TheamountofinvestmenthasnoprecedentinGCO.Wehavetriedourbestinloweringthefeelevel.2.StaggeredPaymentToreducetheupfrontriskofBaoSteel,insteadofmakingasinglecommitmentofRMB13.8millionto6monthsandpayusaflatmonthlyfeeofRMB2.3million,Baosteelcouldpayusinastaggeredmannerthroughoutsixmonths.(e.g.RMBmillion1.5,1.8,2.1,2.5,2.8,3.2).Baosteelcouldstoptheengagementanytimeifnotsatisfiedwithourservice.4.ContingencyPaymentsFinally,wewouldbepreparedtodiscusspaymentofpartofourfeesonaperformancebasis.Thiswouldbeauniquesituation,whichweonlyenterintogiventhatwehavejointlysetveryconcretetargetsfortheachievementofoperationalimprovementduringthepilot.Specifically,wewouldbewillingtoacceptRMB11.8millionasnormalfixedfeepaidinequallymonthlyinstallment.WewouldliketolinktheadditionalamountofcontingencypaymentstotheachievementofRollChangepilottargetasitiseasytotrackandislinkedtosubstantialfinancialimpactifpilottargetisachieved.Ifwehaveachieved80%ofpilottarget,wewouldbepaidanadditionalRMB2million,RMB13.8millionintotal.Ifwehaveachievedover100%ofpilottarget,wewouldbepaidadditionalRMB4million,RMB15.8millionintotal.WewouldalsoexpecttheBaosteelteamtobesimilarlyincentivized.SpecificarrangementscanbediscussedifyoubelievethereisinterestatBaosteel.***Wehopeourproposedoptionsorcombinationsofthemcouldaccommodateyourneeds.Weareopentoexplorefurtherwithyoupotentialarrangementthatcouldaccommodatebothofourneeds.Wecouldn’temphasizetoomuchoursincerityandcommitmenttobecomeBaoSteel’slongtermhighimpactpartner.WelookforwardtokickingoffthepilotatHRCsoon.2
