Slower growth, more intense competition, growing overcapacity, a shift to services, new government priorities, never ending anti-corruption drives. The list of challenges facing business leaders in China today has rarely been more challenging.

How are they responding?  State-owned enterprises have perhaps the toughest performance challenges given the constraints they operate under. For example, despite all the demands to become more efficient and more market-based, none believe they could lay people off at scale.

Across sectors they have five main priorities:

1. Consolidation: At the national level, speed dating is underway between SOEs to determine who merges with whom as the State-owned Assets Supervision and Administration (SASAC) seeks to reduce the number of national level enterprises from 120 to maybe 40.

Some are complete such as rail rolling stock, others are just starting (e.g. China Shipping and Cosco, the nuclear industry, the alumina industry), while others (e.g. energy, telcos, steel and shipbuilding) are still at the stage of discussing if it should happen.  SOEs undergoing mergers naturally become very internally focused, with much jockeying for position.  It’s unlikely that anything strategically bold will come from these companies as they go through a likely two-year process of merging.

2. Anti-corruption: Some SOEs have lost 40-50 executives to the anti-corruption initiative and many of those who remain in place prefer to do nothing of significance in advance of anticipated second and third rounds of review.  Procurement processes, especially in the capital intensive SOEs, are stuck in an infinite approval loop that requires sign-off from a large number of executives who don’t want to sign-off on anything.

3. International growth: High on the list of government priorities for SOEs, in reality low on the list of priorities for many SOEs given their fear of stepping into areas they know less well and messing up. Historically SOEs would have prioritized going to less developed, less well-regulated, low-income markets where they felt they would be able to be successful by throwing their weight around as “China Inc”.

The lesson learned is that nothing really protects you from major discontinuities – political or economic – in those markets.  Expect SOEs to invest in more “boring” mature markets in the next few years, focusing on businesses they might hope will largely run themselves.

The One Belt, One Road initiative is another dimension of international expansion.  For a number of SOEs in infrastructure, rail and the like it is likely the only way they can hope to keep their factories full.  China’s rail road track companies are currently bidding on more than 25 high speed rail projects internationally for example.  This will deliver volume; at what price levels remains to be seen.

4. Efficiency improvement: Successful SOE leaders will improve the performance of their business and for many it is not that hard to do, even with the constraint of keeping the current workforce in full. For example, energy efficiency is often woeful in SOEs and simply focusing on this for the first time can lead to 20-30% improvements (Note: This is one reason looking at energy consumption as a proxy for Chinese GDP growth in 2015 may not be a good idea).

Getting more out of existing production capacity, consolidating into less expensive buildings, using less of other utilities such as water, can all make a real difference.  I expect a lot of activity and real progress to improve SOE efficiency in the next couple of years.  Will this create world-class performers? No, but they will be better, less wasteful, and less polluting than today.

5. Non core asset disposals: National level SOEs have been given clear directions on what is non-core and that they should sell these assets. Rather than conducting open auctions, there is a give and take, as what is non-core to one enterprise may possibly be deemed core by another.  As in the major disposals 20 years ago, there will be limited opportunities for non-Chinese companies to participate.

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This leaves many SOEs in a tough position.  Over-production is likely to continue, and pressure on prices will remain. The next generation of leadership talent may leave. Already we see signs that Chinese talent that joined SOEs mid-career in the last 5-10 years are moving back to the private sector.  The financially weaker SOEs will erode into zombie companies and their weakness will drag down the local economy around them.

Financially stronger SOEs will do fine, especially those where consolidation leads to greater pricing power, for example railroad construction, port operation, and potentially telecom operators.

A challenging time to lead SOEs.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter @gordonorr.