Think State-Owned Companies Are Inefficient? Look at China

China’s expected entry into the World Trade Organization later this year or early in 2002 will be a major development in international relations, requiring the world’s most populous nation to lower trade barriers. But one thing WTO membership will not do is eradicate state ownership of Chinese companies.

“WTO requires that business transactions be settled on normal business terms, that the Chinese open their markets to competition, and a lot of other things,” says Wharton management professor Marshall Meyer. “It does not require that Chinese companies become publicly owned.”

Indeed, the Chinese government will never allow the largest, most important state-owned companies to be controlled by non-state shareholders, says Meyer, who has made numerous trips to China and visited senior managers at more than 20 firms.

“The Chinese have a saying: ‘Grasp the large, release the small. The Communist Party leadership may be willing to allow small companies to be held in private hands, but not industry giants, like Baoshan Iron and Steel. The state will never give up control of Baoshan and that’s a company they wanted to list in New York and Hong Kong.”

Western financial analysts, adds Meyer, “are trying to figure out how to market Chinese shares. But the problem is when they look at Chinese firms, they’re basically doing Kremlinology.”

Meyer has embarked on an ambitious research project to investigate the nature of state-owned companies in China, how they are transforming themselves and the extent to which they wish to embrace Western-style management practices.

His interest in government-owned firms in China is partly an outgrowth of earlier research. In 1989, Meyer wrote Permanently Failing Organizations, a book that explored how politics and economics intersect in firms and how politics can make it impossible to change companies in a fundamental way. Hence, firms can become poor performers and stay that way.

Meyer has visited some of the best-known – and best managed – firms in China. In addition to Baoshan they include the Haier Group, a manufacturer of refrigerators, freezers and other appliances, which recently opened a plant in South Carolina; Legend Computer, China’s leading computer manufacturer; China International Marine Containers Corporation (CIMC), a leading maker of shipping containers, and the Pearl River Piano Group, which makes more than 60% of all the pianos sold in China.

During his most recent trip to China in July, Meyer met with Zhang Ruimin, chairman of Haier, and Yang Mianmian, executive vice chairman and president. Zhang and Yang were partners in building the company. Zhang, a magnetic leader, is regarded as the Jack Welch of China and is a “hero of Chinese business,” says Meyer.

Yang is not as widely known outside China, but her pivotal role at Haier is not unusual because it is not uncommon to see women in senior positions in China. Meyer also notes that the president of the Shanghai Baosteel Group Corporation is a woman, Xie Qihua.

“The ownership of the Haier Group is ambiguous,” Meyer explains. “At least officially, it’s not a state-owned business. It’s called a collective – set up by a group of people who start a shop – and the state has not asserted ownership of it. The company pays taxes, but 100% of the profits are retained by the firm. All of the assets are held by the company, save for minority shares of a refrigerator subsidiary that are publicly held. There is a board, but it’s entirely an inside board consisting of managers.”

Haier differs from other appliance companies in that it will build products to order. “This is a business with low margins, zero to 5%,” Meyer says. “Zhang told me he doesn’t compete on price. His philosophy is, ‘I’ll give customers what they want. They’ll pay a premium price and be happy to have their goods.’ Haier’s U.S. sales manager wanted a freezer chest with pullout drawers. Haier designed and built the prototype of a ‘micro-freezer’ in 17 hours.”

Haier is a “high-touch” company: If you buy an air conditioner, an employee goes to your home to set it up for you. All internal transactions are in cash. The direct customer of the production organization is Haier’s distribution organization.

“Everything is absolutely transparent to employees,” Meyer says. “Everyone has a picture of the entire organization and how all its parts are related. I’ve never seen anything like it. If you ask a worker where an order comes from, he can tell you who the customer is. It’s a fast cash-to-cash cycle. If the distribution folks don’t collect the money, no one else gets paid. Everyone has to understand the whole chain from product development to production and distribution. That’s what’s drilled into them at Haier University.”

Haier University is the company-run executive education arm for its managers. The school offers case studies based on its own business experiences. Meyer was the first non-Chinese to sit through an executive class taught by Yang.

As for CIMC, Meyer says the ownership structure is “unbelievably complex. It is a joint venture of COSCO, the large Chinese-owned shipping company, and something called China Merchant. China Merchant is a Hong-Kong-listed investment bank, which in turn is controlled by the Ministry of Transportation in China.”

Mai Boliang, the head of Shenzhen-based CIMC, is a hard-nosed executive who is relentless in acquiring other companies. He has single-handedly consolidated the shipping-container industry. “He’s got 60% of the Chinese market and 40% of the world market,” Meyer says. “Right and left, he’s acquired everything worth acquiring in China. He’s forcing others out of the business. He’s going to diversify within the transportation equipment business next.”

Mai told Meyer that his acquisition strategy is modeled in part on that of Cisco Systems. “He says Cisco’s real strength isn’t its products but its ability to integrate its acquisitions and how it consolidates the market.”

All of the shares of the Pearl River Piano Group are owned by the city of Guangzhou in Guangdong province. The company is led by Tong Zhi Cheng, who has one of the best marketing minds in China. Although China is a poor nation, Tong figured out a way to sell pianos costing $1,000 or more to urban parents who desperately want their children to learn music.

“In China, three groups of people are highly respected — parents, teachers and bosses,” Meyer says. “So Mr. Tong decided to sell pianos at a nominal cost to piano schools. Of course, the grateful teachers recommend Pearl River pianos to the kids, and there are enough affluent parents who can afford to buy them.”

Tong also initiated an international piano competition to lend glamour to the Pearl River brand name. Tong has been so successful that he purchased a British piano maker that exports pianos under a German brand name.

Pearl River also is making components for inexpensive pianos sold by Yahama of Japan. On Meyer’s second visit to their plant, “Mr. Tong took me upstairs and showed me around the workroom where they make the harps for pianos, and the harps had the ‘Yahama’ logo stamped on them. So if you’re someone who owns a low-end Yamaha, part of your piano may have been built in China.”

Meyer says he has learned that Haier, CIMC and Pearl River – and Baoshan for that matter – have several elements in common: visionary leadership, creative marketing strategies, cohesive internal cultures, strong internal management controls, and a commitment to training employees and managers.

It is important to note, Meyer adds, that base wages are low in all of these companies, but incentive wages based on performance tend to be high. “At Baoshan, your incentive may be 100% of your base wage. At Haier, things are even more performance driven. Your incentive salary represents 100% of your compensation. There is no base wage.”

Meyer is critical of what he calls the “shock therapy” approach to privatization of state-owned enterprises in the former Soviet Union. That kind of method, he says, will not be permitted in China.

“Developing the capabilities of the organization is more important to Chinese companies than issues concerning corporate governance and developing capital markets. Western economic theory says that governance and capital markets should occur first, then you can clean up the management of state-owned enterprises. But China doesn’t see it that way.”

Says Meyer: “Keep in mind the saying, ‘Grasp the large, release the small.’ The state will hold onto the big companies. The state will give those companies great leeway in how they go about doing their business. They can do their own thing and maybe even sell shares to non-state shareholders. But the government will always hold a controlling interest.”

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