Challenges of China’s SOEs Going Global
I’ve been thinking again lately about the theme of Chinese companies going global, which has been a hot topic for some years now.
In the current environment, lots of commentary in China is critical of the big SOEs, saying they are big companies rather than great ones, and their size is largely due to preferential treatment: access to cheap credit, protective policies, etc.
In fairness, there is some truth to that argument, although many people forget what bad shape the predecessors of these SOEs were in 15 to 20 years ago. They’ve come a long way, which has required able leadership, quite apart from preferential policies.
In my experience many leaders of large SOEs are indeed focused on becoming better managed and more admired companies rather than simply looked up to based on the size of their revenues.
At the same time, many are now in positions of great power, controlling market fiefdoms which they will not readily share with other players. This will take strong leadership from the top to change.
Entering the elite Fortune Global 500 list has been a dream goal for aspiring larger Chinese companies for more than ten years. In recent years, however, there has been a surge of new interest among bigger Chinese companies in Fortune’s Global Most Admired Companies ranking.
Size matters, but in the long run it is only sustainable when accompanied by admiration earned through excellence in leadership, governance, and service to key stakeholders.
China’s bigger SOEs have been leaders among Chinese companies in efforts to go global, largely through acquisitions, many of which have been in the natural resource sector.
Foreign ownership of key natural resource reserves is a sensitive issue in many if not most countries. In some high-profile cases, the resulting push-back has lead to local government’s rejection of Chinese acquisition overtures. In this respect, the record is mixed and is likely to remain so.
One lesser-known obstacle to SOE overseas acquisition efforts is that, in order to obtain approval from the relevant departments of the Chinese government, their proposed equity stake must be greater than 50%.
This rule is effectively a deal-killer in the early stages of many merger and acquisition talks, in any industry, at any time, in any country. Although the logic of wanting majority control is understandable, it will often scare potential targets away from serious discussion even in the early stages.
SOEs have access to capital, they have scale and many other advantages. But in the race to go global, this majority stake requirement puts them at a relative disadvantage to non-SOE Chinese companies, who can be more flexible and adaptive to different circumstances.
Majority control is generally a desirable thing, but inflexible insistence on starting an overseas deal that way may lead to control of nothing at all.
This is compounded by another aspect of SOEs which people in China often underestimate, which is the perception overseas that they are, after all, owned by the State, and thus should be expected to serve the interests of the State as a key stakeholder.
In a question and answer session with a group of Chinese MBA and EMBA students in Beijing a few months back, I was asked to compare China’s SOEs with those in the U.S. and Western Europe. Easy question, because there are so very few, with the exception of France.
This relates to an astute series of observations recently made by Professor Joseph Bower of Harvard Business School in a presentation to the FORTUNE China CEO Summit on November 15, 2012, in Beijing.
Professor Bower outlined 10 characteristics of great global companies. One of the challenges he identified for China’s SOEs as they expand globally, and hire locally in the process, is ensuring that all employees work as one global cohort, working together for the company. It’s challenging enough to get a diverse global workforce in many locations working effectively as a team for the company. Adding a State or national agenda into the mix makes it much more difficult.
Professor Bower’s conclusion was that achieving this, and the other characteristics of great global companies, is ultimately a test of leadership.
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