China’s State-Owned Enterprises In A Squeeze

The agency that oversees China’s big state-owned enterprises (SOEs)– the 117 that are centrally managed — provided a glimpse earlier this week of the profits squeeze they have been under this year. The State Assets Supervision and Administration Commission (SASAC), said that revenues in the first 11 months of this year, at 20.1 trillion yuan ($3.2 trillion), were up 9% on the same period of 2011, but net profits were flat at 1.1 trillion yuan. Given the favorable bank lending and policy advantages these SOEs get and the pricing power their market dominance lets them enjoy (collectively they account for 40% of non-farm GDP), a 5% margin isn’t overly impressive. But SOEs have been underperforming private sector enterprises for years.

This year could have been worse. Wang Yong, SASAC’s head, said that the SOEs profits were down in the first two quarters in the face of the sluggish global economy. Cost cutting in the third quarter reversed the decline. But SOEs got a helping hand, notably relief from some of their traditional social responsibilities such as providing housing, healthcare, child care, education and even groceries for staff.

Large companies everywhere are trying to shed health and pension costs to enhance competitiveness in tough times. China’s big SOE’s have also been pushed for some time by government into becoming leaner and more professional businesses that look less like government bureaucracies and more like the competitive multinationals that Beijing wants its national champions to become. In the hope they will forced into better governance, SOEs have been pressed to have listed subsidiaries and shed non-core businesses. They are now being pushed to become yet more efficient and to accept more private funding in the hope that will bring additional financial and managerial discipline, especially to those SOEs where it has been tardy in arriving. They are also being told to cut yet more costs, including the lavish salaries and perks of senior staff.

Just as the notorious $6,000 shower curtain bought by former Tyco International chief executive Dennis Kozlowski in the 1980s on the company’s tab came to symbolize the imperial chief executive in the U.S., a 12 million yuan chandelier bought for the lobby of Sinochem’s headquarters in 2009 has come to stand for untamed extravagance among SOEs. However, cutting such excesses may prove easier than cutting remuneration though the austere expectations of the daily round of government officials that new leader Xi Jinping is imposing will apply to SOEs, too. The heads of the most important SOEs hold the equivalent of ministerial rank, with all the trappings that has implied. Many SOE bosses have been in the vanguard of the resistance to a more equal pay hierarchy within the companies, part of a broader reform to rein in income disparity across the country. Change will not take easily.

Though usually dominant in their industries, SOEs also tend to be in the older, heavier industries and less present in the strategic emerging ones higher up the industrial value chain. Changing that will require them not just to become more efficient but also more innovative. That has not been a natural instinct in organizations where there has been a revolving door between senior management and government departments and promotion has been a bigger incentive than profit.

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