China’s state-owned enterprises
China’s state-owned companies, like China itself, are diverse. Many of them would make better partners for multinationals than some of their private-sector counterparts. Openness, not ownership, is the key.
From abroad, China’s state-owned enterprises appear to be either menacing agents of a foreign government or muscle-bound goons—heavy on brawn, light on brain. But as China’s economic and business environment evolves and grows, such simplistic views are less and less helpful. Public- and private-sector companies in China are not as easily differentiated by their management styles or by the challenges they face.
A more informed assessment of China’s companies—especially those competing outside the domestic market—would focus on the extent of their openness: whether their operations are transparent, their top managers willing to bring in new ideas and outside talent, and their organizations capable of adapting to change. Such an assessment allows multinationals to make reasoned rather than reactionary judgments about state-owned enterprises as potential partners and competitors on global markets.
For many years, the West has viewed China’s state-owned enterprises in black or white. In one portrayal, they are infiltrators to be viewed with suspicion. An example: Aluminum Corporation of China’s (Chinalco) recent multibillion-dollar purchase of a stake in Rio Tinto has raised fears about China’s agenda for the acquisition of Australia’s resources. The other version sees state-owned companies as muscle-bound goons: without the smarts of a private company but with plenty of brawn. In this characterization, they are relics of a failed economic experiment that still dominate the national economy, controlling natural resources, utilities, and many other vital sectors. Their power and influence—particularly their links to the ruling Communist Party and government—give partners and competitors pause.
Both views, however, fail to recognize that as the Chinese economy evolves, it is no longer so easy or desirable to pigeonhole state-owned enterprises. The line between them and private-sector companies has blurred considerably. Over the next five years, as the economy and business climate continue to shift, the ownership structure of state-owned companies will matter much less than the degree of openness they show in their business practices and management—that is, their transparency and receptiveness to new ideas.
An out-of-date impression of state-owned companies distorts the picture of China’s competitive landscape and masks both opportunities and threats facing multinationals. A more current view would, for example, have them consider more favorably the value that certain state-owned companies might bring to a global partnership. A realistic multinational must also recognize that they will become more attractive to top talent and, probably, more innovative. Both developments will ratchet up the level of competition.
Today’s state-owned enterprise
Many observers define a Chinese state-owned company as one of the 150 or so corporations that report directly to the central government. Thousands more fall into a gray area, including subsidiaries of these 150 corporations, companies owned by provincial and municipal governments, and companies that have been partially privatized yet retain the state as a majority or influential shareholder. The oil company China National Offshore Oil Corporation (CNOOC) and the Chinese utility State Grid Corporation of China (SGCC), for example, are clearly state-owned enterprises under the first classification, while the computer maker Lenovo and the appliance giant Haier are less clear-cut cases, in which the state is the dominant shareholder. A majority of the equity in the automaker Chery belongs to the municipal government of Wuhu.
State-owned companies of all kinds have gradually been losing some of the advantages once conferred by their relationship with the state. Since the 1980s, the Chinese government and the ruling party have followed a policy of zhengqi fenkai, which formally separates government functions from business operations. The policy has been applied gradually, first to the consumer goods industry, then to high tech and heavy manufacturing, and, more recently, to banking, as officials have attempted to strengthen domestic businesses and the economy to prepare them for unfettered global competition.
As a result, government favoritism toward state-owned companies is fading. Top officials have started holding them more accountable for their successes and failures. Their access to capital at below market rates has been severely limited. From 1994 to 2005, 3,658 state companies failed, according to official statistics. More such bankruptcies are likely.
Many state-owned companies remain encumbered by legacy assets, including obsolete equipment and technology, as well as broad social obligations such as health care and worker pensions. Nonetheless, China is addressing these issues. As the government progressively institutes universal social security, the burden of providing health care and pensions is shifting from businesses to the state. Physical assets (for instance, hospitals and school buildings) that don’t contribute to the core business can be sold at a profit on the open market. In fact, the government’s pervasiveness in society gives China’s state-owned enterprises freer rein to confront these issues than their counterparts in more open societies enjoy: the Communist Party controls both labor and management, eliminating the overt tensions that make public-sector reform difficult elsewhere. Over the past decade, tens of millions of workers have been laid off by state-owned companies striving to become leaner organizations.
As the distinction between a state-owned and private enterprise blurs, the challenges that both face are converging. Chinese companies, in the public or private sector, must gain approval from government officials for cross-border M&A and other global activities. Even the top-tier state-owned companies—those reporting directly to the central government—struggle with many of the same problems confronting their private-sector counterparts as they move beyond China’s borders. In particular, they struggle with the toughest of these problems: integrating newly acquired businesses and employees. Since most Chinese companies large enough to pursue global aspirations have some connection to the government in its capacity as financier, customer, or tax authority, they face similar political obstacles in making headline-grabbing international investments. When Lenovo bought IBM’s personal-computer unit, for instance, the Chinese company had to accept certain restrictions after US politicians raised concerns.