The access to cheap capital that being an SOE provides is an extraordinary advantage that allows SOEs to overcome certain levels of operational inefficiencies. The POE Wenzhou bosses pay a lot for capital and use it well. The SOEs do not use capital well and could do a lot more with a lot less. They gain certain efficiencies by fairly average staff pay & benefits (except in monopoly industries where the benefits are great), and staff trade that off for a more structured work environment and career path.

Service by SOEs has genuinely improved in banking, telecoms, power etc. Front line staff that deal with customers are generally fine and some excellent. The SOEs have adopted fairly standard global customer service platforms and pulled out efficiencies in those areas (nothing like a Chinese bank queue).

At the mid and top level though the brutal efficiencies forced through private organisations are absent. Too often too few people are willing to take bottom line responsibility for investment and generating real returns on the capital deployed in the business. Funds come too easily. Too low a return is expected and allowed (excepting the monopolies where they can price in higher returns).

Nice while it lasts. However all this comes at a terrible price to the average Chinese punter. The SOE can obtain funds at 5% interest, while the poor bank saver gets a measly 1.9% interest (12 month term deposit) on which they are slugged 20% income tax. Dreadful return. The bank makes a healthy 3.1% and the SOE borrower gets a long term low cost loan.

The bank was ordered to keep pouring money into that bucket. Instead of paying back the loan (which never seemed likely) , they simply transferred shares to the bank– “lets just call it even”. Since the bank had zero influence or interest in how the company was run, the company ran itself into the ground. Not out of existence, mind you, the bad managers still kept their cushy jobs, but they stopped doing their core business and the value of the company dropped to almost nothing. Same with their brand. A virtual write-off.

I guess my point is that there is a large gap between:

a) The improvement in innovation, technology and marketing which has moved quite fast and has improved SEO competitiveness, at least as far as the big boys are concerned, and,

b) Improvement in operational technology and leadership (accountability, for instance) … the stuff that makes companies successful in the sense that they are self-sustaining, and which may NOT be improving at the same pace.

Once again, I have only had contact with SOE’s at a lower tier— I don’t know what goes on up in the Parthenon of SOE leadership.

Good comments … and I would agree with you. In fact, I would probably agree that even the bigger SOEs are not being “properly” managed in the sense that most of them are not following anything we’d recognizes as GAAP. We did a competitive benchmarking program for a client and several of the targets were large SOEs. We were surprised to find them quite well-run … particularly in their sales and marketing, they showed that they really understood the market and responded to it quickly (much better than our client, in fact!). However, at some point, the SOEs broke down into a traditional behemoth, and typically that happened at the cash management stage — as I discussed in the Podcast, these SOEs had access to tons of cash through bank loans so they didn’t need to manage their cash flow in the same way our client did. The SOEs could respond quicker to competitive threats because they could throw money at the problem in ways our client could not.

So yes, while some of these SOEs are getting better, if you peel back enough layers, you’ll find vestiges of your grandfather’s SOE!

It’s easy in smaller companies where they are either Taiwanese or native mainland owned.

But the situation with the 300 pound gorillas in automotive, energy, media etc. are not necessarily indicative of what’s happening at the majority of SOE’s.

Some of lower-tier SOE’s, for example, which are out of the spotlight have been acquiring private enterprise for the sole purpose of revenue growth, without regards to the target company’s operational efficiencies. This means that the already inefficient SOE is likely to be that much more inefficient after the mergers or takeovers.

Maybe I’m just hanging out with the wrong SOE’s, but down at the lower level I’ve been seeing the same operational, financial and HR mismanagement I’ve come to expect from SOE’s.

That being said, I have no doubt that, like the rest of Chinese society, the lower-tiered SOE’s can transform themselves when they feel the need to do so.

SOEs in China today – Not your Grandfather’s State Owned Enterprises any more! [link to post]

– Posted using Chat Catcher

One day maybe i will end up being in one of these SOEs, which trend news have been showing these days( SOEs more attractive now)…

Great question … and one loaded with both business and cultural baggage. I will think about it some. Anyone else out there have some thoughts on this?