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The State's Long Apron Strings


The age of the Chinese multinational is upon us. Companies few Westerners had heard of two years ago now make the headlines almost every day. TCL Corp., a Chinese consumer-electronics manufacturer, controls the venerable RCA brand. Lenovo Group Ltd., China's No. 1 computer maker, owns IBM's (IBM) PC business. Haier, a white-goods maker, roiled the waters with its ultimately failed bid for Maytag Corp. (MYG) CNOOC Ltd. riled Washington before withdrawing its $18.5 billion offer for Unocal Corp. (UCL) Add the exploits of Huawei Technologies and ZTE in telecom gear, the overseas deals of Shanghai Baosteel, and the expansionist plans of phone company China Netcom, and it's easy to imagine that the next decade will belong to China's blue chips.

If China's multinationals do emerge as power players, many of them will have the state to thank for their success. These companies have implicit or explicit backing from Beijing and can build on China's other strengths as well -- low wages, vast internal markets, and rapid economic growth. But having the state as either parent or mentor can be a burden, too; rivals often say the support gives them an unfair edge. Ultimately it may be the Chinese companies that transcend their state origins -- or those that are entirely private -- that really excel.

A number of Chinese companies have carved out a smallish piece of their businesses -- typically the most profitable chunks -- and floated them either in Hong Kong or New York. But the listed company is usually majority-owned by its parent, which remains in state hands. In an initial public offering in 2000, oil and gas producer PetroChina Co. (PTR) raised $3.1 billion from investors including Warren E. Buffett. But it's still 90% owned by China National Petroleum Corp., which is 100% state-owned. Same goes for Unocal's former suitor, CNOOC Ltd. Its parent, state-owned China National Offshore Oil Corp., holds 70% of its shares. China Mobile Communications Corp. -- again, entirely state-owned -- owns 75% of cellular operator China Mobile (Hong Kong) Ltd. (CHL), a popular issue whose New York-traded depositary receipts have jumped some 40% since January.

SHADOW MANAGEMENT

State ownership doesn't necessarily mean these outfits are constantly under the thumb of Party bureaucrats. Managers often have free rein in running their companies, and there's no Chinese equivalent of Japan's Ministry of Economy, Trade & Industry, the government body that plotted that nation's postwar rise to industrial might. Although the Chinese leadership clearly wants to build global champions, there's also no indication that the recent push is part of some grander plan handed down from Beijing. Lenovo Chief Financial Officer Mary Ma says the IBM purchase was "a pure commercial and business decision" and maintains that Lenovo doesn't get any special breaks. "People say our success came from government protection," Ma says. "This is not true."

But even if it doesn't interfere in day-to-day matters, the state -- really the Communist Party -- still has plenty of clout. Every state-linked company has a Party organization that acts as a kind of shadow management and vets all senior appointments. The state-owned Assets Supervision & Administration Commission (SASAC), a sort of über-holding company with a controlling stake in nearly 200 big enterprises, keeps a close eye on the results of China's giants, tracking metrics such as return on equity, gross margins, and sales growth just as closely as Wall Street might.

Like activist shareholders in the West, SASAC also sometimes shakes up management. In November, SASAC rotated the heads of rival phone companies China Telecom (CHA), China Unicom (CHU), and China Mobile without any explanation. And Wei Liucheng, who earned praise as chairman of CNOOC, was promoted to governor of Hainan Province in October. "Senior managers have to keep their finger on the pulse of their business, but also on the pulse of the Communist Party," says George J. Gilboy, a researcher at the Center of International Studies at Massachusetts Institute of Technology. "They ignore either one at their peril."

State control can clearly give these businesses advantages at home. In the early 1990s, when China began embracing the market economy in earnest, state-owned companies in key industries were chosen to lead the country's development drive, landing lucrative contracts or receiving tariff protection, cheap land, easy credit from state banks, and preferential access for listing their shares. Legend Group, which owns 60% of Lenovo, is 65%-owned by the Chinese Academy of Sciences, the country's top research body. Its staff of more than 60,000 has lent a hand in developing Lenovo's PCs and servers.

Another big benefit: The government has steered foreign joint-venture partners to these national champions to ensure they have access to imported technology and management knowhow. When Arcelor, Europe's top steelmaker, and Tokyo-based Nippon Steel were on the prowl in China, the government hooked them up with Shanghai Baosteel Group, which needed help with the technology for making the high-grade steel used in car manufacturing. The result is a $785 million state-of-the-art plant in Shanghai that will churn out 1.2 million tons annually of cold-rolled steel for the auto industry.

TOUGH LESSONS

Abroad, though, those state ties can suddenly start looking less advantageous. Chinese companies' government links and their easy access to loans from state banks are likely to dog their foreign adventures again and again. CNOOC, for instance, is generally considered a well-run company and has been traded in Hong Kong since 2001. But U.S. lawmakers focused instead on its government ownership and access to cheap credit. Provincial electrical-appliance maker Sichuan Changhong Electric Co. last year saw its U.S. color-TV sales dwindle to nothing after it got hit with antidumping duties of 25% -- not necessarily because it was actually selling its goods below cost but because its government ownership made it appear to have an unfair advantage over privately owned rivals.

Despite the coddling, mainland companies haven't yet matured into true world-beaters. While the governments of Japan and South Korea walled off their home turf from outsiders as they groomed their giants-to-be, China's borders are much more open to foreign competition. That, plus a cutthroat domestic market where thousands of rivals cut prices relentlessly, means Chinese companies often venture abroad not from a position of strength but of weakness. And lessons learned in China don't always translate abroad. "The management tools Chinese companies used to become the world's leading factory are not the same as those they will need to lead global innovation," says Darrell Rigby, a partner at consultant Bain & Co. That's one reason Lenovo insisted that IBM execs stay on board after it acquired Big Blue's PC business. Indeed, consultancy McKinsey & Co. says China will need 75,000 executives with international experience in the next five years. Today it has at most 5,000.

China's listed multinationals are trying to look more like their global rivals. They're hiring Western-educated execs, engaging the likes of Bain and McKinsey, and beefing up investor-relations teams. CNOOC Chairman Fu Chengyu has a master's in petroleum engineering from the University of Southern California. China Netcom CEO Edward Tian, who got a PhD from Texas Tech University, was recruited after he made a fortune taking the software company AsiaInfo Holdings Inc. public on the NASDAQ in 1999.

Dig a little deeper, though, and many of these companies still resemble their state-owned parents. Tian, for instance, had to renounce his U.S. green card before taking the helm at Netcom. And he drives a company-owned Audi A6 with a 2.4-liter engine. Nice ride, but not as nice as the 2.6-liter version given to company directors, who hold the same rank as vice-ministers. Tian says he still finds it daunting trying to manage 100,000 employees while juggling the interests of shareholders and four state-owned parents -- the Ministry of Railways, the city of Shanghai, the Chinese Academy of Sciences, and the State Administration of Radio, Film & Television. "I have learned the skill of how to survive in a large state-owned enterprise," he says. "That means 50% business and 50% communications for finding the right political balance." If these companies focused 100% on business, the results could be formidable.

By Frederik Balfour


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