Wedding Bells Ring for China’s State-Owned Enterprises

Across multiple sectors, state-owned enterprises are coming together, merging to create some of the largest companies in their sector anywhere in the world. For example, China Shipping is merging with COSCO to create one of the world’s largest shipping companies.  China’s two manufacturers of rolling stock merged to create a domestic monopoly as China Rail Rolling Stock Corp. COFCO merged with Huafu in food processing. China Power Investment Corp merged with State Nuclear Power Technology. And the list goes on.

Some of the mergers are re-creating what existed in the past, putting back together what was separated ten to twenty years ago as the state-owned enterprises were spun out of ministries. Others are new combinations. There are sustained rumors in the media of many more mergers in the pipeline in construction, telecom, energy, steel, shipbuilding and more. Xinhua has reported that mergers will reduce the number of national level SOEs by two-thirds to only forty.

What is Driving this?  And Who is Going to Benefit?

Certainly the proliferation of mergers tells us something about the mindset of government leaders – bigger is better, fewer firms are easier to oversee than multiple, national champions should be dominant at home as they go abroad. Concerns about over-supply and over-competition are clearly part of the equation.  Will mergers help?  Clearly, they will reduce the number of occasions where state-owned enterprises might be bidding against each other to win a contract to build a railroad as part of the One Belt One Road program or to supply a shipping service which might lead to more rational pricing.

That doesn’t require any deep level of integration, just commercial alignment.  More fundamentally, these mergers create an opportunity for these companies to become more competitive and more efficient. But will they take it? It is possible that capital efficiency might improve.  Expansions to a port or a network might be done in a way that adds less net capacity. Merging the mobile base station operations of all China’s mobile operators into a single business is a credible example of this.  Procurement costs might be reduced due to greater scale, although if purchasing from other SOEs, this may not be as possible, and many SOEs already have massive procurement scale.

Labor efficiency is not likely to improve.  In multiple discussions, I have seen little evidence that leaders of these mergers feel empowered to act even where there are directly duplicate activities in the two businesses.  Sustaining employment is a paramount priority and the sound bite that SOEs are laying people off at scale is not one that is likely to emerge.  Hiring may be down, but reducing the number of employees will be slow at best.

Might there be unintended consequences?  All organizations can be distracted by major mergers, SOEs likely much more than the average.  All executives in SOEs intend to be there for life and they are motivated to ensure they do the right things for new leaders and more importantly that they are not seen to do any wrong things to position themselves for a more senior and significant appointment.  Consequently, many initiatives slow down during this period of uncertainty until executives are certain that they will still be supported.


Foreign Affairs Advisor

Mr. Thomas Phillips

Mr. Thomas Phillips