As if doing business in China were not complicated enough, Chinese managers struggle with trying to manage companies that have no clear beginning or end, according to research by Wharton management professor Marshall W. Meyer.


Western firms have fixed boundaries. They are usually consolidated in a pyramid model with ownership and control at the top filtering down through layers of operating divisions or subsidiaries. But in China, Meyer says, boundaries are not so obvious because the legal, listed and operating entities of a business are usually separate. For most Chinese companies, this structure has led to operational inefficiencies and an inability to integrate their operations and consolidate markets throughout China.


“When you look at Chinese firms you can’t figure out where they begin and where they end. Typically they are webs of relationships,” Meyer points out. “How do you manage a spider web?”


In a paper titled Managing Indefinite Boundaries: The Strategy and Structure of a Chinese Business Firm, Meyer and Wharton PhD student Xiaohui Lu examine how one company, China International Marine Container (Group) Company, or CIMC, has been able to work around its fuzzy boundaries and dominate the world market for shipping containers. The paper will be presented to the Academy or Management and to the World Bank at a seminar this fall.


CIMC, based in Shenzhen in Southern China, was founded in 1980 and through a combination of good fortune and a shrewd, well-educated management team, has been able to grow through acquisitions to create an efficient industrial corporation relatively free from state interference.


When the Communists came to power in China in 1949, they nationalized businesses and took away companies’ legal independence. The state planning process deprived them of economic independence, Meyer and Lu write in the paper, while the profit motive was subordinated by the desire to meet the government’s plan and provide for the enterprise’s employees.


Change began in 1988 with the State-Owned Enterprise Law, which gave corporations independent legal status and management responsibility for profit and losses, although businesses are still owned “by the whole people.”


Still, Chinese companies during that time remained small and geographically independent, even though individual factories were large by international standards. In the early 1990s the government began to view consolidation as a way to build larger, successful firms and it began to transform administrative agencies into so-called group corporations. These companies are known as “mothers-in-law plus bosses” because of their tendency to intrude on operations at times, says Meyer


In 1994, the government began to introduce western ideas such as directors and shareholding. Yet most companies remain a mix of separate legal entities and owners, including state and local government. Subsidiaries also are independent. All that makes effective management difficult.


One exception is CIMC. The company was created as a joint venture between a Chinese-Hong Kong investment bank representing mainland interests and a Danish firm. A downturn in shipping in 1986 forced the company to diversify into real estate and other businesses. In 1987 CIMC’s largest customer, China Ocean Shipping (Group) Company (COSCO) – another state owned group corporation – acquired more than 40% of the Danish share, injecting fresh capital into CIMC.


Meanwhile, CIMC’s management was working on a strategy to build the firm into a global player through acquisitions. CIMC reorganized and acquired another Chinese container builder in 1993. In 1994 it floated shares on the Shenzhen exchange.


During the next five years the company made a string of acquisitions, built two new factories and grew to control 42 subsidiaries. It is now the world’s dominant container manufacturer with 38% of the global market and two-thirds of the Chinese market. Sales are about $1.1 billion, 10 times what they were in 1993.


CIMC’s ability to make acquisitions in different geographic areas of China is highly unusual, says Meyer. “In general it’s very difficult for business to span provincial boundaries because of intense localism. There is an enormous home team advantage because of pervasive local government involvement in business.”


CIMC typically offers local government fractional ownership – and dividends – in exchange for its votes in board meetings. “It’s like preferred stock,” explains Meyer. “CIMC says, ‘We offer a dividend and in return you rely on CIMC management.’ The company is able to strike that deal, making local governments into ordinary shareholders. The local governments get paid but they are deprived of influence in CIMC’s operations.”


CIMC’s strategy was orchestrated by the group’s general manager, Mai Boliang, who was assigned to the firm’s Shenzhen factory in the late 1980s. He now runs the entire company with a tight group of executives who studied with him at South China University of Technology. “Mai became the head of operations at the plant and started making money hand-over-fist because he organized it,” says Meyer. “Very early on he was reading management literature.”


Mai, according to Meyer, used Cisco Systems as a role model in structuring acquisitions and integration at CIMC. He was able to install uniform business controls at CIMC acquisitions even though they remained legally independent with their own boards. “All they had to do was install their management system and money would just fall off the trees.”


CIMC has another advantage in being under the control of the party in Shenzhen, the heart of China’s first free-enterprise zone, Meyer suggests. “Mai came along and basically had the vision of running a global powerhouse in a small industry,” Meyer says. “No doubt he sold this vision to the Shenzhen government, which is very entrepreneurial and which gave him protection.”


Another reason CIMC was able to break the pattern of Chinese firm growth was its position in a small industry that was not under as intense scrutiny as more strategic industries such as power or telecommunications. Local jurisdictions were more willing to give up control of local plants because CIMC was in an export industry that could add jobs, without hurting local production elsewhere.


CIMC is also unusual because the full group, not a subsidiary is the listed entity, and a majority of its shares – 55.44% – are traded. “In China, the listed entity is almost always a subsidiary of a group corporation and that subsidiary is often a shell organization into which the best assets are injected,” says Meyer. “So basically you are getting the shiny part of the organization but the parts that are corroded aren’t listed.”


Though CIMC’s two largest shareholders, including COSCO, are state-controlled entities, they own an equal number of shares, balancing each other out and giving CIMC long-term stability. Many of these shares are effectively illiquid because they can only be transferred to domestic institutions with approval of the China Securities Regulatory Commission. As a result, neither partner can appropriate CIMC’s assets for fear of what would happen to their remaining shares.


“Each watches the other out of concern for deterioration of the net asset value of the CIMC shares it cannot easily liquidate,” Meyer and Lu write.


CIMC’s ability to manage its subsidiaries closely has made it vastly more productive than most other firms. “It’s a model of an efficient firm in China,” says Meyer. “The assembly lines are unbelievably clean. It is like being in a Japanese factory.”


But for now, CIMC’s structure makes it an outlier. “The question for China is, ‘Will they allow these forces to play out in other industries and locations?” asks Meyer. “There are lots of smart, entrepreneurial folks in China but there is incredible resistance to the absorption of local capacity by national firms because the politics in China is so fragmented.”


For Western companies, he suggests, the CIMC story could serve as a warning. Already China’s vast, disciplined labor force makes the country – if not its homegrown firms – a key player in global manufacturing. “If more Chinese firms are allowed to operate like CIMC there could be Chinese firms that dominate manufacturing globally,” says Meyer, adding, however, that this would require enormous political change in China.


For the immediate future, CIMC is likely to remain an exception, rather than the rule. But, Meyer says: “It’s a shot over the bow.”