Merging State Owned Enterprises Achieves What?


Merging State Owned Enterprises Achieves What?

Last year plans were announced to merge China’s two leading providers of high speed rail equipment – CNR and CSR. Both are state-owned enterprises (SOEs). Both are already world-scale given the volumes they have been producing for China’s domestic needs.

Demand looked to be plateauing in China. So was this announcement a far-sighted move to enable capacity to be rationalized? Very unlikely – allowing SOEs to lay people off is still a step too far in many cases.

Official statements talked about the opportunity to create a global champion of the scale to compete against Siemens and GE. Yet both had already achieved this scale.

It’s not much more likely that the announcement was the result of the embarrassing (to the Chinese government) of the two companies bidding aggressively against each other for international contracts from Turkey to Argentina to Malaysia, even when other bidders had dropped out. And domestically, having only one major supplier reduces the potential for bribe giving, always important in the context of the anticorruption campaign.

Despite the relatively weak logic for mergers between giant SOEs, it seems more will be coming. In the nuclear power plant construction industry, CNNC and China General Nuclear (CGN) are on the same path as CNR and CSR. Rumors of CNPC and Sinpoec being merged to create an oil giant twice the size of Exxon are becoming loud, recreating the “industry” structure of 20 years ago.

What could be next? Telecom? Could the government argue that capital expenditure would be more efficient with only one operator? That there would be fewer local price wars to sign up customers? Maybe even that there would be fewer disruptions as streets are dug up to lay cables?

And then maybe even banks? Even though China’s “Big 4” banks are already some of the largest in the world by assets, surely they could be larger still? And is it not possible to argue that China has too many banks.

What we end up with is arguments for inertia, for the status quo, for less competition and less efficiency, which in the end the consumer will pay for. Too many SOEs are already in “do as little as possible” mode as a result of the anti-corruption program. Having them embark on a multi-year merger program will focus them internally, with extensive organizational infighting on who gets what role and the like.

Performance improvement will slip way down the agenda. Yet for a government official tasked with “doing something”, setting a merger in motion might seem like a low risk way of doing a lot. And by the time it is all settled down, any official will likely be long gone to their next role.

Finally, almost all of these companies are listed and have minority shareholders. Will directors be standing up for their interests in this process? Surely the intent of bringing in more independent directors as announced in the 2012 plans for SOE governance is exactly for this situation. Let’s see.

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

Image: Spreng Ben / Flickr

By |March 3, 2015|Categories: Gordon's View|0 Comments

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