State Owned Enterprises in China – Performance and Challenges
State Owned Enterprises in China Performance and Challenges
History and current reality
With the rule of the Communist Party in 1949, all business entities were designed and occupied by the government. However, as a result of Den Xiaoping's market economy reforms, since 1980s the SOE ownership and structure was largely reformed providing more space for the private sector to take part in the economic process, both as the shareholders of the SOEs as well as the competitors to SOEs. State-owned enterprises are governed by both local governments and, in the central government, the national State-owned Assets Supervision and Administration Commission of the State Council.
It would be important to draw a brief comparison among the SOEs around the world. It was a widespread consensus that the world used to have since the aftermath of World War 2 that any country should have a strong chain of government-linked companies for the greater benefit of the public, at least in the area of public utilities supply. With the exception of United States, the above fact was widely practiced in Western welfare-socialist economies as well as in the Asian-African-Latin American former colonies that readily adopted the same systems their colonial masters introduced. This belief was provided with another support with the spread of Soviet Communism outside Russia which taught that taking the private-owned businesses to government control was the key to economic excellence and public service.
The idea collapsed in both poles by the 1980s, with Western welfare economies strengthened by the ideas of Thatcherism (introduced by the British Prime Minister Margret Thatcher) readily reducing the government share of public utility providers and the same model being continued in the former colonies "From France to the Philippines, from Jamaica
to Japan, from Malaysia to Mexico and from Sri Lanka to Singapore, privatization is on the move" as said by Mrs Thatcher herself. On the other hand, the Communist regimes collapsed all over the world except in China, Cuba, Vietnam and North Korea as a result of the public pressure influenced by widespread corruption and mismanagement.
Since the 1980s decade of all these dramatic incidents, China and Singapore seems to be the only countries that have managed to maintain a strong SOE structure at an above-par level characterized by strict regulations and government-controlled financial system, despite the facts that both countries maintain very open economies in the present day. Most importantly, China is still a socialist market economy and its financial system is 70% controlled by the government.
The Chinese SOEs dominate all walks of Chinese industries from food and other consumer products, to essential services like transportation, telecommunication and energy supply to large-scale industries such as steel and aluminium.
SOEs serve the Chinese government's purpose of maintaining the societal peace and stability. Due to the large controlling hand the government has over the SOEs that enjoy a large share in routine consumer goods, it has been able to keep a tight control over the price levels. It doesn't mean that this control affects the economy badly by imposing of price caps. The government has the ability of influencing the prices through SOEs unlike in many other big countries. In addition, the SOEs employ a significant share of the Chinese workforce making the system an important aspect of the everyday lives of many Chinese.
Performance
Under the sub-topic of performance, the gradual developments in the areas of corporate governance, facing the competition with the private businesses, dealing with the foreign investments, the relationship with the Communist party and human resource management are discussed below.
SOEs, for almost decades didn't see the light of proper management standards and techniques. How it used to be was the management which was nearly entirely appointed by the Communist Party itself controlling the operations so as to meeting the seasonal demands. It was an advantage that the government has the authority of appointing the heads of SOEs which allows the efficient and responsibility-enabling system of carrying forward the government agenda on economy. Unlike the crisis-driving situation in big US corporations, here's a system that enforces responsibility and commitment to those who're in-charge of the SOEs with a proper job description and set objectives. This system at least ensures that it will at least try to do good for the society.
But corruption at all levels is a huge disadvantage concerning the SOEs. Many observers see that the major reason for rampant corruption in the SOEs is political connections. Another problem is "guanxi", the successful relationship, especially with the Party officials to make your work easy bringing short paths to success. The darkest side of "guanxi" is that the
conflicts and differences that prevail among the Party officials themselves would affect the performance of the SOEs.
Today, the situation has changed. It is no more the old-style administrative process but there's a continuous surge for learning and adopting up-to-date management practices according to John Thornton who has served in China's Telecommunication giant Netcom as a director, being one of the very few Westerners to do so. Today the top boards of SOEs try to understand the Western administration and management standards while customizing them to the unique environment in China.
Foreign investors are now allowed to acquire significant shareholding in the listed SOEs. They might question the invisible force behind the SOEs which is the Communist Party. It's rather important for them to learn how to deal with this regime rather than to question them which will be a barrier for them to invest in the SOEs. There are often conflicts between the party committee and the management board, which will affect the investor confidence. So both sides should be careful and watchful how to face this situation in order to create a win-win situation.
When it comes to the appointment of the top personnel, the party's decision would be generally accepted but the party is concerned about the views of the investors when it comes to strategy making. Strategy committee would be much independent as the government officials have understood its importance for the SOEs to remain competitive and striving for excellence. Thus, the foreign investors are gradually understanding how they can make the desired influence despite many obstacles; that is through negotiating a considerable representation in the strategic committees.
A very important policy that the Communist party government adopted is "zhengqi fenkai" which declared the separation of the government functions from SOE operations. This policy was implemented step by step: covering the fast-moving consumer goods in the first state, manufacturing and other high technology enterprises in the second stage and then gradually moving towards banking and finance, incrementally releasing the grips of these institutions to face the global competition. As a result of this process, the favourable attitude of the government towards the SOEs have reduced making them less special unless they stand on their own to contribute to the national economic development.
The characteristics of the State-owned enterprises in China vary; some of them actually serve as a better option against the private-owned companies for the multinational companies investing in China, according to an article published by The McKinsey Quarterly. The multinational enterprises will not be essentially concerned of the ownership of their Chinese counterpart rather than about the openness, business-friendliness and profitability. It is possible to draft out an important conclusion from this fact, that it is largely up to the management personnel of the SOE to take effective decisions which will ultimately decide whether to attract or not to attract essential business partners from overseas, which will enable the Chinese SOE new and enhanced business opportunities.
The private sector has developed extremely rapidly displacing the SOEs over the years. In 1978, the GDP share held by the SOEs was nearly 77% which has since reduced drastically to 17% in 2003. But SOEs employ nearly half of China's workforce while having the ownership of a huge share of the industrial assets and maintaining a monopoly in key sectors such as telecommunication, power and financial services. SOEs have become profitable in protected industries such as telecommunication but the average return on assets is drastically low compared to the private sector while losing out to the private sector in competitive sectors such as retailing. The state banking sector has also suffered from the accumulation of the bad debts of under-performing SOEs.
Given this black side of the SOEs, it has been an option-less choice for the government to prepare the SOEs to the competitive business environment especially after the China's entry to World Trade Organization. The Chinese government have gradually understood that in order to excel, the protectionist measures and continuing monopolies would not work. The top management layers who are government-appointees have begun understanding that the performance lies in value creation and profit generation rather than in employment level or the output.
The road to competitiveness is as simply as value-creation for the customers as well as shareholders while creating s structure for the employees which insists on individual accountability to their own work without waiting for the government to bring in solution which leads to high cost inefficiencies. In the planned economy, success was a collective responsibility but adaptation of an individual-responsibility-framework would lessen the burden of the monitoring cost.
China has the world's largest population and after all, it's the people that can make or break China. In the context of SOEs, there is a particular attention paid to the human resources development. China sends its scholars to most of the major institutions in the West to learn and bring back the knowledge, skills and expertise. They are provided with additional benefits to the amount they pump in for the development of the national economy. For instance, those officials who have proven a good track-record by effectively handling the SOEs are often encouraged to go up for positions like mayoral status with the intention of broadening the impact to the society created by that individual. Although this might not work favourable at all times, there is a certain benefit that the SOEs can absorb by these appointments. It will be very convenient to the SOEs to be under a layer of leaders who actually understand the operations and insights of the SOEs.
Under the sub-topic performance, last but not least, it's important to observe the role SOEs have played in China for the country to move from "Made in China" stage to "Invented in China" stage. The government have identified the SOEs as a productive channel of pumping money for research and development (R&D). The results have become evident too. For example, Huawei, the telecommunication giant reserves as much as 10% of its revenues in R&D which enabled the company to be a world-class vendor in telecom applications as well as a giant in terms of international patent applications.
Challenges
What would be the solution for the increased efficiency of SOEs so that they can run into a competition with the private enterprises healthily? One suggestion would be lying off excess work-force in order to increase the per capita output. It's easier said than done. What would be the limit of this labour cut and what would be the measure of the decisions of whom to lay off and whom not to? This should essentially be a process of careful thought and great planning as it is surely a measure that would lead to increased anxiety and disappointment of the labour class. The historical experiences such as in 1911, 1949 and 1989 shows what would be the result of a public uprising against the government. Hence this nearly unavoidable trade-off between the economic efficiency versus social stability remains to be a great challenge.
Some other aspects that need attention to creating a more sustainable approach are the social welfare, environmental protection, problems with mass urbanization and widening of the rich-poor gap. They not only create social problems and imbalance, but also bring high cost to the industries, particularly SOEs as the collective pressure exerted by the world community against China's increasing pollution, and, at the same time, the local awareness about the unequal wealth distribution is also increasing. If they are not dealt with smartly, there will be an increasing internal and external pressure towards the Chinese system.
China is currently experiencing a mature stage of effective transition from command economy to market economy. The real challenge would be the coming years when the competition from the local private businesses as well as the foreign investors will essentially challenge the somewhat comfortable state SOEs are experiencing currently. Being a homogeneous workforce for nearly 5000 years, how would China be ready to embrace the essential elements of this new era for instance integrating foreign talent in the economic process and adopting Western management and administrative practices? In addition, at the verge of businesses from all over the world seeking for business partners in China to align with, the state sector meets with an additional challenge posed by the local private firms in attracting these foreign firms for new business ventures. This adds the complexity of the transformation needed in the state sector.
After all, the bureaucracy, red-tape and corruption have still not minimised to a satisfactory level. The hidden power of the Communist Party officials remain unchallenged and there is a trend that foreign investors, rather than being resistive to this reality, embracing the reality which gives a bonus ticket for all the organizational malpractices to continue leading to further economic inefficiency. The dangerous part of these "foreigners' integration to the local culture" is that it will never be felt as a disadvantage since with the inflow of foreign investments, the economy will still grow. But there will be one day, which the effects of the malpractices begin to leak out and it will surely bring about dangerous outcomes for the government and the people of China especially at a time there's stiff competition from other countries to attract foreign direct investments.
Some great challenges are met with the Chinese state-owned conglomerates who aspire to go into the global market to expand their wings. Those who're used to a favourable local condition might be shocked to experience some unforeseen challenges and restrictions
posed by the other party. The best example is Lenovo's acquiring of IBM's personal-computer units in which the Chinese player had to bow to certain restriction and global standards when the United States policy-makers raised issues.
Locally, rather than competing with the private-owned businesses and considering them as aliens to the SOE arena, it would be profitable to both kinds of entities to try out joint-business ventures. For example, in the energy sector, it is reasonable for a large, state-supported SOE to be in-charge of the large-scale electric, coal and gas plants. But in the area of energy distribution and troubleshooting, the private businesses can play a more effective role with improved efficiency and lesser costs. The burning challenge would be drawing out a workable plan for this type of ventures.
Therefore, the utmost challenge exists on the fact that how China is preparing itself to institutionalise the corporate governance and transparency. The major problem co-exists with this challenge is the lack of knowledge of the Chinese authorities about the corporate governance; otherwise the hard-working Chinese have always shown positive signs for transformation. The government should play a vital role in bringing essential new knowledge equipped with the relevant technology while assuring the independence for the SOEs to grow on their own and to be accountable to their own performance. As a country with rich tradition, making the practices flexible to the local conditions is an essential component too.
Conclusion
Amidst many obstacles and extremely complex situations due to the diversity, historical developments and many other special features of the Chinese economy, there's one certain thing which is continuous change. Over the years, the Chinese SOEs have grown tremendously in terms of management practices, worker efficiency and value creation and exploring new possibilities. Privatization of assets and profits while socialization of losses and liabilities seems to be the major threat to the operations of the SOEs but it is important to understand that if a certain set of SOEs is irrelevant or replaceable by some other institution, it is of the best interest to the economy to do so.
There's a growing trend that only those SOEs that can transform according to the waves of the new economy are able to survive in the modern days. With this challenge, the Chinese government has identified the importance of liberalisation of the SOEs to be shaped according to the new market economy for their own survival and to enhance the service to the public. With this approach, the SOEs have started a tough competition against the growing private sector. Thus, the main challenge for SOEs is to face this contest, while understanding that openness is the best approach as in the modern world economy, Darwin's theory of "The survival of the fittest" is proven over and over again.
China's Wealthiest Cities – Highest Disposable Income How Chaplin Charmed China Stereotypes about China and Chinese People Astronomy Tool - Green 200mw Laser Pointer of china Lottery Winners in China Enjoy Hiding Their Identity Loving "made In China" Wholesale Goods From China This Ball Mill Was Made From China 2010-2014 Deep Research Report On China Wind Turbine Industry 2010 Deep Research Report On China Pv Glass Industry 2010-2014 Deep Research Report On China Wind Power Converter Industry Chipshow Presented At 2010 China Souring Fair In Hk Authorities And China Manufacturer