In The Red?

From Martyn…

Only about one-third of China’s economy still remains under government ownership through state-owned enterprises (SOEs), largely concentrated in the strategic defence industry and utilities sector. However, according to the Economist Magazine, the world faces a new danger: the aggressive international expansion of China’s corporations:

The real scaremongers assert that the Chinese state is a single—and single-minded—entity with a master plan to reclaim China’s rightful place at the centre of the world. China’s companies are thus mere tools of an expansionist policy propagated by Beijing’s leadership. More subtle are the fears that, because it is impossible to untangle the ownership of most Chinese companies, foreigners cannot be sure to whom they are selling. When the ultimate authority could be the Communist state, that is a worry.

The Chinese government certainly wants to create globally competitive firms and it is pushing some to secure strategic resources, like oil and metals, overseas. The Chinese state also still has a broad influence over business. But the chaotic way this power is exercised contributes to the weakness, not the strength, of Chinese firms. “It is not a plausible argument that China Inc can take a co-ordinated Long March overseas,” argues George Gilboy, a research affiliate at the Massachusetts Institute of Technology. “It can’t even manage that domestically.”

The article cites the Infighting between the disparate and competing parts of the Chinese government bureaucracy, evident in the death of US aircraft manufacturer McDonnell Douglas after the company ‘backed the wrong government horse’ in the 90s. It also mentions how, in the energy industry, some foreign investors have recently quit in disgust, causing unnecessary power shortages. Also in the media sector, where long-promised joint-ventures have been suddenly and arbitrarily scrapped by the government.
Friction between Chinese central and local government officials is as old as China itself. During the last couple of decades of reform for example, Guangdong Province was notorious for going ahead with economic initiatives long before receiving official approval from Beijing.

Unhappily, the resulting chaos is also hurting the most promising two-thirds of the economy that is in private hands. Private companies are often beholden to state banks for capital and to local officials for favours and contracts. Since private enterprise was not even acknowledged until 1988, entrepreneurs had to bring state investors aboard as political protection, becoming so-called “red-hat” companies. Yasheng Huang, a professor at MIT, says that the results can be disastrous: “Government shareholders may be passive at first, but once a company succeeds, they interfere. Countless Chinese firms have been driven to bankruptcy or failed to grow big because local governments decided to exercise their legal claims on ownership.”

Now, worryingly, something similar may threaten Haier, China’s leading white-goods maker, which recently failed with a bid for Maytag, an American rival. Admired globally for its efficiency and innovation, Qingdao-based Haier is the creation of Zhang Ruimin, China’s most famous entrepreneur, who transformed a company so demotivated that its workers used to urinate on the factory floor. Yet Mr Zhang has just lost a long fight to reward his managers with shares via a Hong Kong listing. Late last year SASAC ruled that Haier was owned by the Qingdao government and that management buy-outs at big SOEs were forbidden.

The article concludes on a dire note:

Fears that Chinese firms are acting as the commercial arm of an expansionist state are thus belied by a more complicated and disorderly reality. The real reason to fear China’s overseas expansion is quite different. Because Chinese firms have grown up in an irrational and chaotic business environment, they may export some very bad habits. As Mr Gilboy puts it: “when Japanese companies took over American ones, they mostly made them better. If the Chinese run foreign firms like they operate at home, driving prices down, misallocating capital and over-diversifying, that is genuinely something to fear.”

One difference between Japanese companies in the 80s and Chinese companies now is that Japanese companies tended to buy, for example, US assets and hire Americans to manage them – while watching and learning from them. To date, Chinese companies have not, apart from exceptions like Lenovo, followed the same pattern and, perhaps arrogantly, have shown little interest in appointing or listening to local managers. The recent scandal in Singapore involving China Aviation Oil, where Mainland Chinese managers lost more than US$550 million on derivatives trading, is a good example.

The Discussion: 4 Comments

You wrote:

“To date, Chinese companies have not, apart from exceptions like Lenovo, followed the same pattern and, perhaps arrogantly, have shown little interest in appointing or listening to local managers. The recent scandal in Singapore involving China Aviation Oil, where Mainland Chinese managers lost more than US$550 million on derivatives trading, is a good example.”

CAO’s massive loss has nothing to do with whether Chinese managers were willing to listen to local managers. The massive trading loss was caused by “classic” trading mistakes, just like when Nike Leeson (a Caucasian) brought down Barings. See

September 7, 2005 @ 1:54 am | Comment

Nick Leeson’s conduct was not a mistake, but was criminal activity. Did the mainland Chinese in Singapore do the same thing, i.e., act with criminal intent?

The Chinese learn and can change, but on a very basic level many, even educated Chinese have the basic animalistic attitude in life’s competition, find a person’s weakness and use it to improving your own position. There is nothing kind, compassionate or fair about it. It is not a Chinese trait, but a human trait. Many may disagree with me, but I find it too close to the surface in China to be comfortable. In America, the same human trait is there but not so close to the surface or better hidden or suppressed in society, except for drug dealers, pimps and other assorted thugs and creeps.

September 7, 2005 @ 9:15 am | Comment

The Economist argues the real reason to fear Chinese firms is that they may export some very bad habits. A real reason to fear something requires more than a maybe to demonstrate it. I thought editors were meant to put a line through sentences like this.

Having said that, if you want to see a real example of exporting bad practices, take a look at Shougang Steel in Peru. I wrote something on it here [opens as pdf, and my article starts on the front page – only 4pp].

September 7, 2005 @ 8:15 pm | Comment

I disagree with the article’s assertion that foreign companies need to fear the Chinese exporting “very bad habits”. Business ethics in China are undoubtedly appalling and the too common abuses of law and corporate governance would not be tolerated overseas. However, this is point: they would not be tolerated.

An company guilty of stealing funds, bribing officials, polluting the environment or making employees live and work in medieval conditions would be shut down and officials fined and/or imprisoned.

While the work practices of Chinese companies abroad is depolorable (such as in Shougagng’s case), it’s also sad to say that this is not uncommon in for domestic companies to do the same in these third world countries (including Peru). Korean and Hong Kong companies are guilty of the same abuses in southern China. (Chinese) Companies’ ethics will be as good or bad as are acceptable in the country in which they operate.

If a Chinese company buys a US manufacturer and runs it into the ground through poor management then the Chinese company loses its investment. The workers will hopefully find new jobs with the domestic competitors that no longer have to compete. While this scenario is simplistic I hope it illustrates my view that the Chinese company will suffer the most.

Despite all of the above I do think that foreign companies should be fearful of China’s march overseas. As mentioned above, the Chinese are “animalistic”: although we in the West like to tell everyone how wonderful capitalism is, we had better watch out when tough insensitive and unemotional Chinese corporations start competing in domestic markets. They will undercut on price, take bigger risks and generally try and put everyone out of business. This is extreme capitalism. As we have seen with textiles, this process has already started. Progress has been slowed by trade quotas and protectionism but the march of Chinese companies (and democracy) is inevitable.

September 8, 2005 @ 3:17 am | Comment

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