Wanted: Right investors for SOE reform

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Last updated at: (Beijing Time) Monday, January 05, 2004

Wanted: Right investors for SOE reform

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Foreign investors are more than welcome in the massive restructuring of China's State-owned enterprises (SOEs), but the red carpet will be rolled out only for those with a good track record, excellent credibility and a long-term commitment

That's the message from Li Rongrong, chairman of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, who explained the government's philosophy in allowing overseas participation in SOE reform.

Foreign investors - of the right kind - can buy into SOEs, even the biggest ones, said Li.

"We will also provide them the necessary policy environment."

Li, who leads China's eight-month-old State assets supervisory body, elaborated - in an exclusive interview with China Daily - on what it takes for foreign investors to find the right match in China.

In short, they should have a sound operation, a long-term vision and the capability of developing business, as well as a full understanding of the Chinese market and culture - which might be tougher than it sounds.

Anxious to improve efficiency, China has paced up SOE reform with a mixed-ownership structure and a shareholding system. Most of the State-monopolized sectors, except for some backbone industries or those concerning national security, will be opened up to private investors, said Li.

That gives an additional impetus to the mergers-and-acquisitions (M&A) market, which has been expanding by an average of 70 per cent annually over the past five years; and offers fresh opportunities to overseas investors who have largely entered the country through green-field investments.

But for a smooth entry, foreign investors should be fully prepared for challenges, said Li.

They will have to resolve cultural conflicts with the Chinese partners as well as social issues like redundant labour and retired staff - a normal feature of cross-border investment.

The partnership should be built on mutual respect, said Li, adding that companies with experience in overseas M&As would be well-positioned.

Long-term strategy

While the Chinese party should be modest about learning, the foreign partner should try and understand the Chinese market and have the determination to develop the business in the long-term.

That's the message from Li Rongrong, chairman of the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, who explained the government's philosophy in allowing overseas participation in SOE reform.

Foreign investors - of the right kind - can buy into SOEs, even the biggest ones, said Li.

"We will also provide them the necessary policy environment."

Li, who leads China's eight-month-old State assets supervisory body, elaborated - in an exclusive interview with China Daily - on what it takes for foreign investors to find the right match in China.

In short, they should have a sound operation, a long-term vision and the capability of developing business, as well as a full understanding of the Chinese market and culture - which might be tougher than it sounds.

Anxious to improve efficiency, China has paced up SOE reform with a mixed-ownership structure and a shareholding system. Most of the State-monopolized sectors, except for some backbone industries or those concerning national security, will be opened up to private investors, said Li.

That gives an additional impetus to the mergers-and-acquisitions (M&A) market, which has been expanding by an average of 70 per cent annually over the past five years; and offers fresh opportunities to overseas investors who have largely entered the country through green-field investments.

But for a smooth entry, foreign investors should be fully prepared for challenges, said Li.

They will have to resolve cultural conflicts with the Chinese partners as well as social issues like redundant labour and retired staff - a normal feature of cross-border investment.

The partnership should be built on mutual respect, said Li, adding that companies with experience in overseas M&As would be well-positioned.

In the first case, Japanese carmaker Nissan agreed to let State-run Dongfeng bring almost all of its assets, regardless of quality, into the venture; while Kodak directly participated in the restructuring of the overall imaging industry and compensated laid-off workers. They compromised, yes, but they also secured wider access to the Chinese market and put themselves in an advantageous position to make the next move.

Such is the preferable mode of SOE restructuring in the future, said Li. China encourages SOEs to bundle their assets together and sell them as a package.

To facilitate such deals, the Chinese authorities are accelerating legislation and parallel reform - including a standard property-rights transfer market and drafting a whole basket of new rules on the management of State-owned assets.

The rules are expected to set up clear procedures for the transfer of State assets, their evaluation and pricing standards; which are of prime concern to potential buyers.

Foreign companies can also get controlling rights in the SOEs they buy into, as long as they follow regulations regarding foreign investment, said Li.

SUCCESS STORIES

Japan's Nissan Motor Co and China's State-run Dongfeng Motor Corp launched a 50-50 joint venture, Dongfeng Motor Co Ltd, in Wuhan, capital of Central China's Hubei Province, in June, 2003. It is the biggest Sino-foreign automobile JV in terms of investment and business scope, with a registered capital of 16.7 billion yuan (US$2 billion) and a workforce of 74,000. The JV aims to double its sales to 620,000 vehicles by 2007 - 320,000 Dongfeng-brand commercial vehicles and 300,000 Nissan-mark passenger vehicles. Nissan said the JV employee headcount would remain stable towards 2007.

Global imaging giant Eastman Kodak signed a US$1 billion contract with the Chinese Government in 1998, acquiring all enterprises in the imaging industry except for the China Lucky Film Corp. Kodak then set up some joint ventures with these enterprises and let some of them go bankrupt, paying out compensation to laid-off workers. In October, 2003, it beat Japan's Fuji Film to ink a US$100 million 20-year co-operative agreement with Lucky. It will contribute US$45 million in cash and provide an emulsion-making line for colour products to Lucky for a 20-per-cent stake in the company's listing arm, Lucky Film. To win the deal, Kodak agreed to allow Lucky to maintain its brand, majority ownership and management control in the JV.

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