China's Large Enterprises and the Challenge of Late Industrialisation (Routledgecurzonstudies on the Chinese Economy)

China’s Large Enterprises and the Challenge of Late Industrialization

This book considers the ‘late industrialization’ of China, showing how government policies have encouraged the development of 120 ‘national champions’ (akin to Japanese keiretsu and South Korean chaebol), how these ‘national champions’ compete with multinational enterprises, and how China’s rapid and successful ‘late industrialization’ does not fit orthodox economic theories. The book provides a detailed illustration of these wider issues with a case study of the auto industry. Dylan Sutherland is currently a member of the Faculty of Economics and Politics at Cambridge University. He is an assistant director of Development Studies at the university and a fellow of Wolfson College.

RoutledgeCurzon studies on the Chinese economy Series editors Peter Nolan, University of Cambridge Dong Fureng, Beijing University

The aim of this series is to publish original, high-quality, research-level work by both new and established scholars in the West and the East, on all aspects of the Chinese economy, including studies of business and economic history. 1. The Growth of Market Relations in Post-reform Rural China A micro-analysis of peasants, migrants and peasant entrepreneurs Hiroshi Sato 2. The Chinese Coal Industry An economic history Elspeth Thomson 3. Sustaining China’s Economic Growth in the Twenty-First Century Edited by Shujie Yao and Xianning Liu 4. China’s Poor Regions Rural–urban migration, poverty, economic reform and urbanisation Mei Zhang 5. China’s Large Enterprises and the Challenge of Late Industrialization Dylan Sutherland

China’s Large Enterprises and the Challenge of Late Industrialization

Dylan Sutherland

First published 2003 by RoutledgeCurzon 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by RoutledgeCurzon 29 West 35th Street, New York, NY 10001

This edition published in the Taylor & Francis e-Library, 2003. RoutledgeCurzon is an imprint of the Taylor & Francis Group © 2003 Dylan Sutherland All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested

ISBN 0-203-51174-3 Master e-book ISBN

ISBN 0-203-34187-2 (Adobe eReader Format) ISBN 0–415–30581–0 (Print edition)

Contents

List of figures List of tables Preface List of abbreviations 1

Introduction

vii viii ix xiii 1

Competing development paradigms 3 Large enterprises and development 5 Large enterprises, development paradigms and China 10 2

China’s large industrial enterprises

20

Economic growth and the large-scale sector 21 Competing development paradigms and China 32 Conclusions 36 3

The national team of enterprise groups

39

Origins of the national team 40 Pillar industries and an evolving industrial policy 48 Policies to ‘grasp the large’ 51 Conclusions 63 List and description of trial groups: Table 3.4 66 4

The national team and the business revolution

92

A business revolution? 94 Global consolidation and the national team 98 Conclusions 107 5

The national team in international comparative perspective: the auto industry The global auto industry 111 The national team and China’s auto industry 122

110

vi Contents Conclusions 133 6

Conclusions

136

China, large enterprises and the global business revolution 137 Theory and policy lessons 142 Appendices Chronology of business group-related policies Extending the ‘grasp the large policy’ Spread of policy to lower levels Appended key policy documents Global market shares of various business activities

148 148 151 153 155 164

Notes Bibliography Index

170 177 181

Figures

2.1 China’s large enterprises by province for various years 2.2 LME and SOE output share by various industrial sectors 2.3 Share of gross value of industrial output contributed by LMEs for forty Chinese industry sectors, 1987 and 1995 5.1 Province shares of national output by enterprise size for the auto industry, 1997

25 26 28 126

Tables

2.1 Share of large, medium and small enterprises in the gross value of industrial output 22 3.1 Average group assets, net assets, sales, taxes and exports by industrial sector, 1995 46 3.2 Industrial sectors of the first and second trial group batches 50 3.3 Evolution of policies and their implementation within the centrally approved enterprise groups, 1987–99 56 3.4 Description of China’s national team players 67–91 4.1 Cross-border M&As with value over $1 billion, ‘mega-deals’, 1987–2000 95 5.1 Global assembly champions and strategic alliances (their acquisitions, equity partners) 117 5.2 Projections in first-tier supplier numbers, medium and long term 118 5.3 Global oligopoly in the auto component industry 120 5.4 Auto components enterprises, share (per cent) of various indicators in total components production 127 A.1 Provincial locations of China’s preferred large-scale enterprises and groups in the late 1990s 154 A.2 Reported market shares for various products, business activities 164

Preface

This book is based around my PhD thesis. The research I undertook for the thesis was associated with the China Big Business Programme in the Judge Institute of Management Studies at Cambridge University, England. This programme brought together industry leaders from both China and the West and used a selection of case studies on some of China’s leading firms to expose the major issues in the emergence of big business in China today. At the very start of my research, the objective was to contribute to these case studies. My plan was to carry out a detailed investigation on the auto industry in China. Shortly after starting though, I became interested in another area of China’s reforms. In the mid-1990s, short press reports in the Chinese media were beginning to mention China’s plans to develop a batch of large enterprise groups, dubbed the ‘national team’. The trickles soon grew to a steady flow. These snippets of information drew my attention away from the more specialized area of the auto industry and a curiosity in the broader topic of the national team developed. Initially, I searched through the Western media and academic press but could find little of substance on China’s plans to build the national team groups. What seemed like a central component of their industrial policy remained a frustrating mystery. Given the earlier successes of enterprise groups in Japan and South Korea it seemed particularly strange that China’s efforts had attracted so little attention. The increasingly obvious intentions of the Chinese government to attempt to emulate their East Asian neighbours (through what became known as the ‘grasping the large, letting go of the small’ policy) made this omission all the more curious. For the first year of my research, based in the United Kingdom, most of my insights into the large groups of the national team remained limited. By the late 1990s, however, a few academic articles began to hint at the increasingly important role of the large-scale sector in China’s late industrialization. These findings contrasted sharply with mainstream opinion which had argued, even until the late 1990s, that there was little future for China’s incumbent large enterprises. I became even more convinced that the national team really was important – that an understanding of this select group of companies might also contribute towards the debate on the large-scale sector, as well as to far broader questions related to economics and development.

x Preface By the middle of 1998 it had become clear that little could be achieved without undertaking further research in China. News that the original batch of fifty-seven groups in the national team had been increased to 120 signified that the plans to develop groups were progressing quickly. To try and find out more I spent a year in China, carrying out both research on the auto industry (in accordance with the original plan), as well as on the enigmatic national team. It soon became clear that although relatively little was known in the West, the subject of large groups had become extremely topical in China. Despite the debate that existed in China, concrete details and facts remained frustratingly hard to come by. Simply getting the names of the groups in the national team, for example, proved difficult. In the end I was fortunate to be introduced to some of the leading policy makers involved with the promotion of enterprise groups. I was also fortunate to be invited to visit an important state think tank, the Association for the Promotion of China’s Enterprise Groups (Zhongguo Jituan Gongsi Cujinhui) based in Beijing. This organization has responsibility for formulating suitable policies drawing from the diverse experiences of the national team members. Its dusty and darkly lit offices are home to representatives from most of the national team groups. I interviewed members of the association, including representatives from the largest three auto groups. It turned out that these auto groups were actually the first members of the national team trials dating back to the early 1980s (something of an irony given my original research plan). Gradually a much fuller picture started to emerge as to the sequencing and nature of policy measures and what the national team really was. After spending time in Beijing conducting necessary background research, I travelled through China visiting some of the largest auto-makers. What soon became increasingly clear was that China’s auto producers in the national team, though striving for independent success, were in fact increasingly dependent upon the very TNCs they hoped to one day catch-up with. The focus of my research, it seemed, needed a far broader understanding of global industry trends. As it happened, at this very time an unprecedented spate of international mergers and takeovers was dramatically reshaping the global industry. During my research both DaimlerChrysler and RenaultNissan were created. And down the supply chain an even deeper restructuring was unfolding as the fragmented component industry quickly tried to realign itself with the increasing expectations of assemblers. In this context, it seemed that China was attempting to build its national champions and integrate with the global economy at a time of profound change among leading transnational corporations. Two main strands of thought, therefore, can be found running through this book. On the one hand, it attempts to draw attention to China’s large-scale sector and the important role it has and continues to play in the country’s remarkable development. It looks in particular at a small batch of the largest groups, the national team. It is possible academic study may gravitate further towards this topic in the longer term (in much the same way it has done with Japan and South Korea). The second strand considers the broader international aspect. It explores the profound change that is taking place today among the global industry leaders and the possible implications for China’s national team.

Preface xi This research has taken several years and numerous people deserve my gratitude. I owe special thanks to Peter Nolan for his encouragement and inspiration over the past few years. My friends and fellow students in Cambridge, especially all those working with Peter, deserve mention through their direct and indirect support. The time I spent in China also benefited from the help of many people. I am especially grateful to the patience of Wen Xuguang and Yang Kun who both spent hours helping me with my Chinese. Tim Clissold and all the executives from Yiqi, Erqi, Jinbei and SAIC who took the time to meet me also deserve mention. Chen Qiaosheng was a great help in Beijing. I would never have been able to undertake this task without the support of my family and Helene, who has also spent hours reading and improving this book. Thank you.

Abbreviations

CASS CBR CD CDBW COL CRES EEFSU EIU EOS FDI FEER FT GVIO IDD JAC LMEs M&A MBI MOFTEC MMB SCDRC SAIC SETC SSB TAIC TNCs UNCTAD WIR ZDZQN ZGTN ZGFB

Chinese Academy of Social Sciences China Business Review China Daily China Daily Business Weekly ChinaOnline Commission for the Reform of the Economic System Eastern Europe and former Soviet Union Economist Intelligence Unit Economies of scale Foreign direct investment Far Eastern Economic Review Financial Times Gross value of industrial output Investment Dealers Digest www.Just-Auto.com Large and medium-sized enterprises Mergers and acquisitions Motor Business International Ministry of Foreign Trade and Economic Co-operation Ministry of Machine Building State Council Development Research Centre Shanghai Auto Industry Corporation State Economic and Trade Commission State Statistical Bureau Tianjin Auto Industry Corporation Transnational corporations United Nations Conference on Trade and Development World Investment Report Zhongguo Dazhongxing Qiye Nianjian (Yearbook of China’s Large and Medium Enterprises) Zhongguo Gongye Tongji Nianjian (China Industrial Statistical Yearbook) China Industrial Development Report

xiv Abbreviations ZQGN

Zhongguo Qiche Gongye Nianjian (China Automotive Statistical Yearbook) ZTN Zhongguo Tongji Nianjian (China Statistical Yearbook) ZJTGN Zhongguo Jingji Tizhi Gaige Nianjian (China Economic System Reform Yearbook)

1

Introduction

The proponents of competing paradigms practice their trades in different worlds . . . [they] see different things when they look from the same point in the same direction. (Kuhn 1970: 150)

One of the most prominent features of the post-Second World War period has been the spectacular growth of the Japanese and South Korean economies. A vast wealth of literature has emerged attempting to explain the so-called ‘East Asian miracle’. Despite the lack of agreement on the exact reasons for this miracle, the large enterprise groups of both Japan (kereitsu) and South Korea (chaebol) have featured prominently. Meanwhile, the past two decades have also witnessed another East Asian miracle. China has now eclipsed Japan and South Korea as the new rising star of the world economy. According to a recent World Bank study, if China’s individual provinces were considered separate nations, all twenty of the fastest growing nations in the world would have been Chinese for much of the past two decades. How has China been so successful? Although the answer is undoubtedly complex, it is interesting, given the heavy emphasis placed on large groups in Japan and South Korea, that very few studies have yet noted the growing significance of China’s large enterprise groups (qiye jituan). In fact, many have written off large enterprises and groups altogether. This book, building on prominent themes in the late-industrialization literature, is an attempt to fill some of this vacuum. It does so with specific reference to the relatively small number of large enterprise groups now coming to dominate the state sector, the so-called ‘national team’ (guojia dui). Efforts to nurture the national team are actually remarkably similar in spirit, if not exact detail, to earlier efforts in some of the most successful late-industrializing nations. Chinese policy makers have even openly declared an interest in emulating their Japanese and South Korean neighbours. Unlike in these countries though, China is not only attempting to promote large domestically controlled enterprise groups, it is doing so while also attempting to closely integrate with the world economy. But the 1990s appears to have been an exceptional period, one that has witnessed dramatic restructuring among many of the world’s largest transnational

2 Introduction corporations. UNCTAD, for example, have recently suggested we may still only be at the beginning of an unprecedented consolidation process, at both a regional and global level. Chinese leaders, nonetheless, still believe the large enterprise groups of the national team will act as an effective vanguard in international competition. There are two main themes of this book. The first, looked at in the first three chapters, examines in more detail the role and nature of the large-scale sector in China, particularly the national team. I attempt to highlight the important contribution large enterprises have made, why these contributions have at times been overlooked and how some large enterprise groups, supported by state policy, have become ever more important. This book is of a descriptive nature, which is necessary, because comparatively little is still known of the large groups and accompanying state policy that has led to the development of the national team. It also points out some of the implications for the broader debate related to the competing paradigms of development that have typified the literature and policymaking arena through much of the 1980s and 1990s. China, as noted, has grown rapidly, despite facing huge obstacles and contravening much of the mainstream advice. I believe the lessons to be gleaned from its experience are especially important. They should be more fully incorporated into the development debate, which is another purpose of this book. The second theme considers the international comparative perspective. The national team of enterprise groups has been picked out to lead international competition, to combat large foreign corporations both domestically and on international markets. But there are good reasons for believing the challenges it now faces are formidable. And while foreign ownership of certain sectors of the Chinese economy may not necessarily be a bad thing, in an economic sense, this will nonetheless have important implications for the nature of the global political economy going forward in the twenty-first century. One might ask, for example, what the current world economic and political situation might be like if there were no Japanese and South Korean multinational groups? Global competition, for one thing, would certainly be much reduced. Before going further, however, this introductory chapter firstly takes a short detour to explore some relevant background. Several major debates have shaped the development literature in recent years and competing paradigms have emerged, leading in turn to very different policy recommendations. Not surprisingly, the existence of such different views has also led to great differences in the research agenda. Having showed how China can be fitted into this larger debate, the rest of this chapter considers briefly how the current clash in development economics has fed its way down into different conceptions of the role and nature of large enterprises in development. A brief introduction to China’s efforts to ‘grasp the large’ and promote the large groups of the national team is given as well, to prepare the reader for later chapters.

Introduction 3

Competing development paradigms While this study focuses on China’s national team, at the broadest possible level the issues explored in this book relate directly to the overall question of how we think about economic development. In fact, the impetus to study China’s large groups, as noted, was initially prompted by the debates on South Korean and Japanese industrial policy that have figured prominently in the development economics literature in recent years. These debates have seen the field of development economics and related policy split between two competing paradigms. Unsurprisingly, they have had a considerable influence on development thinking. Broadly speaking, two ‘competing paradigms of development’, known as the orthodox school and the heterodox (or revisionist) school have guided development thinking and policy in recent years.1 In certain crucial respects these two schools hold very different views on the processes of economic development, with important implications for the research agenda, as well as leading to divergent views on policy. Unsurprisingly, the proponents of these diverging paradigms have clashed along a number of well-documented battlefronts, leading to a split in the development field. Three particular battlefronts stand out as being of major significance, corresponding to three major economic, social and political events in our recent history. These include the debate surrounding the ‘East Asian miracle’ and the reasons for the successes and failures of Japanese and South Korean late industrialization in the post-war period (see, for example, World Bank 1993; Amsden 1989); the transition and reform of centrally planned economic systems in Eastern Europe and the former Soviet Union (Nolan 1995); and more recently, the Asian financial crisis. Debate concerning the role of the state in economic development dates as far back as List and Smith and has been a central issue in economics and development over the centuries. The rapid emergence of some East Asian nations in the post-war period again focused interest on the possible role that the state could play in development, particularly in late industrializing nations. It also attracted attention to the relationship between state intervention and big business in the process of late industrialization and led to a major rift in development thinking. An important debate arose around attempts to portray the highly successful Japanese and South Korean development strategies as involving ‘market friendly’ policies and trade neutrality (World Bank 1993). The policy implications of what became known as the ‘market friendly’ approach to development were far reaching, suggesting that forms of privatization and liberalization in line with the ‘Washington consensus’ were the best path to rapid growth and development. There came in response to these claims a large number of studies, often with well-founded empirical and historical evidence, arguing very much the opposite: that strategic integration, state orchestrated oligopolistic competition and intervention so as to ‘get the prices wrong’ had been the norm in the most successful late-industrializing nations (Amsden 1989). In these new competing interpretations, the World Bank was accused of seeing ‘its own reflection in East Asia’s success’ (Amsden 1994: 627). The experiences of Japan and Korea were found in heterodox interpretations instead

4 Introduction to ‘comprehensively contradict the central theses of many World Bank Reports’ (Singh 1994: 1818). In terms of policy, which also conflicted between the two schools, it was argued that there were a number of courses of state action available to governments that could be used to promote economic growth. As a result, a concept that became of importance in the Asian miracle and subsequent debate was that of the ‘developmental state’ (see Johnson 1982; Woo-Cumings 1999). Later chapters go on to show that certain aspects of the developmental state can presently be found in China and, more importantly, that the competing paradigms that have shaped development thinking have also strongly influenced the trajectory of research and subsequent explanations for China’s rapid growth. A second major contemporary debate in which the split in development thinking again emerged arose with the fall of central planning in Eastern Europe and the former Soviet Union (EEFSU). Economic advisers, in particular those of the supranational institutions giving policy advice, were quick to formulate plans based around orthodox thinking. A ‘big bang’ policy of liberalization, involving privatization of ownership and a rapid transition to an open market economy was suggested. Policies were quickly and extensively put into practice. Between 1992 and 1994, for example, Russia transferred shares in over 11,000 state companies, approximately 70 per cent of the nation’s industrial sector, to private investors. In Poland a mass privatization programme transferred shares in 415 major state firms to fifteen investment funds by 1995 and in the Ukraine 2,650 medium and largescale state firms were sold off by 1995 (Steinfeld 1998: 34). One objective of this policy was to destroy the bureaucracy upon which the centrally administered systems were based and replace it with the ‘invisible hand’ of the market. This was because the old system, by its very nature, was considered impossible of incremental reform. State plants, therefore, were to be privatized in a ‘big bang’ and allowed to develop under the guidance of the market. One justification for this course was that history was ‘not like a film reel’, capable of being rewound at will: ‘we cannot simply reverse this process in an attempt to reduce the percentage [of state ownership] gradually to 95, 90, 85 per cent and so on. The reel must be fully rewound and played from the beginning’ (Kornai 1990: 73, emphasis added). Thus little or no attention was paid to alternative progressive reform paths. Ways in which large firms, enterprise groups and their accompanying institutions may have been gradually constructed from the existing industrial core were overlooked as possible policy alternatives, even within the existing large-scale sector (Nolan 1995). While reformers stressed the importance of the ‘invisible hand’ of the market, they paid little attention to promoting the organizational capabilities embodied by what has been referred to as the ‘visible hand’ of the large enterprise (Chandler 1977). A theme of later chapters concerns the way in which China, unlike EEFSU, paid close attention to the economic history of advanced capitalism, taking note of the central role of large-scale enterprise in economic development and attempting to replicate such institutions. The third and final major debate briefly mentioned here, in which the fissures between orthodox and heterodox economists again emerged, is the more recent Asian financial crisis. For the Washington consensus of the orthodox school it has

Introduction 5 been noted that the East Asian meltdown has come ‘as a gift from heaven’ and they see it ‘as a massive vindication of their neoclassical orthodoxy’ (Johnson 1998: 655). They have argued the Asian crash is related to the institutions of the East Asian model, such as close links between state and industry and subsidized credit in particular. Many others, however, have pointed out the difficulties with these arguments, noting, for example, that South Korea had given up many of its industrial policies long before the financial crisis (Chang 1998). Interestingly, it is argued it may actually have been the lack of oversight by state-planners that became a contributory factor to the crisis. The orthodox stance on the Asian crisis is also argued by others as being contradictory: ‘the Washington consensus have reversed their earlier description of East Asian policies as market-friendly, and identified domestic mismanagement, in the guise of crony capitalism and excessive government intervention, as responsible for the crisis’ (Gore 2000: 799). At a more fundamental level, then, it is argued the advocates of crony capitalism are guilty of wanting to have it both ways. The ‘Asian miracle’, the reform of the centrally planned economies and the Asian financial crisis are historic events that have had a great impact upon a large share of human civilization. It is unsurprising and correct, therefore, that a large part of the debate in development economics has clustered around these subjects and been shaped by interpretations of them. A striking feature of these debates, as the brief references made to them here has shown, has been the emergence of competing paradigms in which the proponents ‘practise in different worlds’ and see ‘different things’ even when they look at similar questions. This has led to very different interpretations and in turn policy prescriptions for countries attempting to undertake development. China’s recent rapid industrial development, although not yet as high profile as the three aforementioned debates, has unsurprisingly emerged as a fourth area of contention between these two clashing schools. As with the earlier debates, much mainstream research has entirely omitted the large-scale sector, in particular large groups, from its remit of study. This is mainly because the trajectory of its research has been determined by orthodox type insights, in particular a belief that ownership is the key factor determining enterprise performance.

Large enterprises and development Since a major theme of this study is the emergence of the large corporation in China, the different approaches that the competing paradigms of development take in their treatment of the firm, and the large enterprise in particular, is highly relevant. In particular, orthodox type work has been criticized for focusing on questions of resource allocation between firms, emphasizing the role of the market mechanism, at times overlooking the importance of intra-enterprise activity. Heterodox studies, on the other hand, have paid special attention to intra-firm activity and the organizational capabilities embodied by the large modern industrial corporation and the relationship between the state and big business in late-industrializing nations. Indeed, one root cause of the clashes between the heterodox and orthodox schools

6 Introduction seems to descend directly from the conceptualization of the firm in the neoclassical theory that underlies the orthodox approach. The internal activities of the firm, both large and small, have tended to be overlooked following the neoclassical tradition of treating the firm as a ‘black box’. Coase, in his well-known and path-breaking 1937 work, first pointed to this interesting oversight: if economic activity in general is determined by the market mechanism why do entrepreneurs everywhere co-ordinate economic activity within the firm in place of the market? While the market may co-ordinate activity between firms, the ‘distinguishing mark of the firm is the supersession of the price mechanism’. Firms, in this analysis, stand out as ‘islands of conscious power’ in an ‘ocean of unconscious co-operation like the lumps of butter coagulating in a pail of buttermilk’ (Coase 1937: 113). The orthodox approach, therefore, has been described as treating the firm as an unopened ‘black box’, within which little is known. Coase pointed out the essential need to look within the enterprise in order to better understand economic activity, for it is often managers within firms that take it upon themselves to allocate resources in place of the market mechanism. Much work has now built upon Coase’s simple but perceptive insight. Following the call for a greater understanding of the nature of the firm, Penrose, for example, made a useful contribution by working towards a theory of the growth of the firm by asking what determined the rate of growth of the firm and whether there are any limits to such growth. In neoclassical theory, the firm is basically introduced ‘for the purpose of assisting in the theoretical investigation of one of the central problems of economic analysis – the way in which prices and the allocation of resources among different uses are determined’ (Penrose 1995: 11). It did little, however, to explain how firms grew, or why, for example, they might diversify in certain instances. In short, even though neoclassical theory ‘could reasonably be looked on as a “mature science” in the Kuhnian sense’ using ‘rigorous traditional theory embodying well-established mathematical and verbal techniques . . . [it] did not deal with institutions’. In Penrose’s account, furthermore, large and small firms, instead of being seen as similar cogs in a machine working towards allocating resources efficiently, were recognized to be different entities. It was argued, for example, that ‘in many ways it is hard to see that the two species are of the same genus’ (Penrose 1995: foreword). Contrary to common belief, it was also found there was no reason why large firms should necessarily become inefficient as they grew, instead it was argued that ‘it is much more likely that their organization will become so different that we must look on them differently; we cannot define a caterpillar and then use the same definition for a butterfly’ (Penrose 1995: 19, emphasis added). Importantly, the different characteristics and features of big business were starting to be isolated. These new theories, aimed at further understanding the internal workings of the firm stood in stark contrast to the earlier neoclassical works designed for solving resource allocation problems. In Marshall’s classic analogy, for example, the firm was likened to a forest of trees of differing sizes. Unlike Penrose’s analogy of caterpillar and butterfly, therefore, the implication here was that all ‘trees’ (i.e. firms) were basically similar in nature, differing only in terms of size.

Introduction 7 Importantly, it also posited that no firm would grow indefinitely. Marshall argued that although it seemed as if ‘they would grow on forever and forever become stronger as they grow . . . they do not . . . sooner or later age tells on them all’. Even though in this analogy the larger still have better access to ‘light and air’ it is argued they gradually ‘lose vitality; and one after another they give place to others’ so that in ‘almost every trade there is a constant rise and fall of large businesses’ (Marshall 1920: 315, emphasis added). It is debatable whether historical accounts of the rise of big business actually record this constant rise and fall. While many firms do fail, and some rise, an outstanding feature of the historical development of the large modern industrial corporation has been the continued strength and growing dominance of a small number of leading firms, initially at the national level but now increasingly at a supra-national level and often via transnational acquisition of competitors (Nolan 2001). Even during the nineteenth century that witnessed the birth of big business, within only a few decades small firms were no longer able to challenge established businesses. In short, ‘the advantages of being a first mover were immense . . . Challengers did appear. But they were few’ (Chandler 1990: 132).2 As later chapters show, within a large number of industries across a broad spectrum, market concentration, not just at a domestic level, but also increasingly at an international level, appears to be on the increase. In a broad range of sectors, such as autos and components, steel, power equipment, telecommunications, electronics, mining, to name a few, frenetic activity has led to unprecedented transnational consolidation. An era of truly global first movers appears to threaten China’s plans to nurture large groups. Historical perspectives Against this theoretical background it becomes easier to understand why the centrality of the large corporation in economic development has at times been overlooked or misunderstood. In much of the mainstream orthodoxy, such as textbook treatments, the interest in the large firm has almost been entirely reduced to static analysis concerning the welfare impact of monopoly abuse, which remains the staple diet of undergraduate economics study. Traditional neoclassical economics, owing to its focus on the importance of resource allocation between firms, has led to a suspicion of the large corporation. Relatively little has been made of the positive impact of large enterprises on economic growth, such as their crucial contributions to technical change, in exploitation of economies of scale and development of advanced managerial systems. As Chandler concludes after nearly 600 pages of detailed historical investigation of big business in the major industrialized nations: Economists, particularly those of the more traditional mainstream school, have not developed a theory of the evolution of the firm as a dynamic organization. For many of them the modern industrial enterprise is little more than an extractor of monopolistic or oligopolistic rent . . . a prime example of an

8 Introduction inefficient, bureaucratically managed organization. But in the history just told the modern industrial enterprise played a central role in creating the most technologically advanced, fastest-growing industries of their day. These industries, in turn, were the pace setters of the industrial sector of their economies – the sector so critical to the growth and transformation of national economies into their modern, urban industrial form. Therefore the enterprises whose collective histories have been reviewed here provided an underlying dynamic in the development of modern industrial capitalism (Chandler 1990: 593, emphasis added) Indeed, the history of industrial capitalism, both in early- and late-industrializing nations, does testify to the great importance of the large corporation in development. In the late nineteenth and early twentieth centuries the birth of the large modern industrial corporation heralded what Chandler goes so far as to call a ‘second industrial revolution’, one which fundamentally changed the nature of industrial capitalism (Chandler 1990). ‘First movers’, named because of the rapidity with which they came to dominate certain markets, emerged most quickly in the United States, Germany and the United Kingdom from the middle of the nineteenth century onwards. These enterprises adopted radically new types of organizational forms and technologies, undertook a three-pronged investment in distribution, management and production and crucially managed to maintain high throughputs so that they could utilize scale to decrease unit costs.3 For their time they constituted a totally new type of organization, quite unlike the small-scale family-based firms that predominated before them. Separation of ownership from control also crucially heralded the development of a class of salaried professional managers vital to their running and subsequent development. These managers in turn ‘took the place of market mechanisms in coordinating the activities of the economy and allocating its resources’, the so-called ‘visible hand’ (Chandler 1977: introduction). Industrial development, key to economic growth, far from relying solely upon the price mechanism and free markets to mediate between firms, has been firmly rooted in the development of a type of intra-firm planning, the ‘visible hand’ of salaried management. As later chapters go on to show, the central position of the large corporation in development has long been recognized by Chinese policy makers. Contrary to Western advice they have worked pragmatically to construct their own large modern industrial corporations. While they have shunned the importance of planning within the economy as a whole, they have continued to recognize the importance of the firm in undertaking planning like decisions. In modern capitalist systems, the competitive edge of large corporations and the sectors in which they developed was reflected by their growing importance in their contributions to overall national output over the twentieth century. Although we now take for granted the presence of big business, the ‘second industrial revolution’ fundamentally reshaped economies and, in turn, society. In the United States, for example, the net share of manufacturing of the top 100 firms increased from 22 per cent in 1909 to 33 per cent in 1963, from 16 per cent to 38 per cent in the United

Introduction 9 Kingdom and 12 per cent to 26 per cent in France over the same period (Schmitz 1993: 35). The share of the labour force employed within these corporations also increased similarly. Regardless of the changes that have taken place within the structure, activities and technologies that the largest industrial enterprises employ, even today big business continues to maintain its central position in the leading economies. In 1990 the top 100 manufacturing enterprises accounted for 24 per cent of GDP in the United States and 42.3 per cent of employment. Similarly in Japan (29.7 per cent of GDP and 22.4 per cent of employment) and in Europe (19.5 per cent of GDP and 28.2 per cent of employment) the largest manufacturing corporations remained of central importance (Ruigrok and Van Tulder 1995: 155). They also played a crucial part in the international economy: ‘trade within TNCs and arm’s length trade associated with TNCs is estimated to account, together, for about two-thirds of world trade, and intra-firm trade, alone, for one-third in the late 1990s’ (UNCTAD 1999: 14). Large corporations continue to hold a special place in economic development. It should not therefore, be a surprise that the fastest growing East Asian nations, particularly Japan and South Korea, also saw a rapid advance in the contribution of large corporations during their most rapid periods of growth. Between 1962 and 1992 the number of South Korean enterprises in the Fortune 500 increased from four to thirty-three and Japanese enterprises from thirty-one to 128 (Amsden and Hikino 1994: 116). Indeed, it seems almost a general law of development that as economies grow so too does not only the size, but relative importance, of big business: ‘since the beginning of the industrial revolution there has been a steady increase in the size of manufacturing firms, so persistent that it might almost be formulated as a general law of capital accumulation’ (Hymer 1970: 441). Given this reality, policy makers in some of the most successful late-industrializing nations have concerned themselves with the practical issues of nurturing large corporations in key industries. The focus of much contemporary orthodox development theory, analysis and policy, however, has looked elsewhere. Based around highly stylized concepts originating from neoclassical ideas such as the notion of ‘perfect competition’ in which a large number of privately held firms, each with relatively small market shares, compete against one another, the economic logic for big business in policy making has been largely overlooked. A dominant feature of economic development in the nineteenth and twentieth centuries, perhaps the most important of all, has been the growth of large modern corporations and the development of oligopolistic competition. Often this has taken place within a range of specific industries, also at times, although again not generally recognized, with the aid of ‘extensive government support’ (Nolan and Wang 1999: 177; see also Chang 2002 for a detailed description of some of these policies). The following chapters go on to show that by reconfiguring accounts of China’s recent development with the large corporation closer to the fore, new and important insights can be gleaned into China’s remarkable record over reform as well as the contemporary debate on competing development paradigms.

10 Introduction

Large enterprises, development paradigms and China It is perhaps unsurprising, given the fierce debates that erupted over South Korea and Japan’s post-war history and the ‘big bang’ approach to transition, that heterodox and orthodox schools have also started to clash over the interpretation of China’s ‘economic miracle’. As already noted, the very rapid emergence of what has been equated with small-scale private enterprises in China has quickly led to a reconfirmation of the virtues of the orthodox-based explanations to its practitioners (Woo 1999; World Bank 1997). If one takes a different approach to look beyond such explanations and the methodology upon which they are based, a very different perspective on the reasons behind China’s rapid growth is revealed. In fact a key element of Chinese industrial policy, even from early on in reforms, contrary to recommendations of orthodox policy and theory, has been actively to facilitate the development of multi-plant modern enterprises upon the basis of former state plants. Large enterprises, in contrast to the impression given, have actually rapidly grown in China, becoming of greater importance to total industrial output as they did during Chandler’s second industrial revolution (see Chapter Two). What is even more remarkable is that at the same time, like Japan and Korea in earlier periods, China has focused on developing a small number of key groups and concentrating its limited resources in them (Chapter Three). A rallying cry of the top leadership is now to create a ‘national team’ of enterprise groups and to successfully ‘grasp the large’. One key feature of this is to create groups that will be able to compete in the international economy. Enterprises have been urged to ‘unite and rise together, develop economies of scale and scope and nurture a national team capable of entering the world’s top 500’ (Wu Bangguo, Jingji Ribao, 8 January 1998). Contrary to the mainstream prescriptions of privatization and liberalization, therefore, Chinese policy has increasingly supported the growth of large groups and enterprises, following more in the spirit of the model of the East Asian developmental state. In a bid to promote domestic reforms and push China towards closer international integration the slogan China’s leaders have now adopted for state enterprise reform has become ‘grasp the large, let go of the small’. The latter element, letting go of the small, though not looked at in detail here, is itself a very important and interesting subject. By the end of 1996 up to 70 per cent of small state owned enterprises (SOEs) had already been privatized in pioneering provinces and about a half in many other provinces. This was referred to as a ‘quiet revolution from below’ (Cao et al. 1999: 105). Over 20 million TVEs had also come into existence, employing over 130 million people (ZGFB 1999: 369). The ‘shoots’ of these new enterprises had undoubtedly taken root on the ‘dry prairie’ of China’s economy, making them a vital force. One cannot therefore overlook the importance of the small-scale private sector in China’s economic miracle. But the picture remains complex. As remarkable, though seldom commented upon, were equally profound measures that had been undertaken in the large-scale sector over many years of policy trials to build large groups. Even as early as 1987 policy makers were issuing directives claiming ‘the development of business groups is of profound long term

Introduction 11 importance to the development of production capabilities and deepening the reform of the economic system’ (CRES, ZJTGN 1988: IX–17). More recently the goal of ‘grasping a batch of large enterprise groups, using capital ties to link and promote enterprise restructuring, creating economies of scale and thoroughly giving play to their backbone role’ has also been included as part of long-term development plans until 2010 (CRES, ZJTGN 1997: 243). This sentiment, even in the wake of the Asian financial crisis, appears to have basically remained unchanged. Indeed, it has been argued that ‘in the minds of most Asians, particularly the Chinese, the meltdown has, if anything, reinforced the need for the Asian model of development’ (Johnson 1998: 654). Transnational consolidation trends, in particular, have also speeded up the push for consolidation across many of China’s pillar industries. Later chapters present a broad overview of some of these trends, as well as a more detailed look at the auto industry. This book argues that of particular relevance to the ‘grasping the large’ debate are two major policy directives, officially issued in December 1991 and April 1997 (translated from Chinese in the appendix) in which successively fifty-five and sixtythree super large enterprise groups were selected to undergo influential trial reforms.4 China, arguably going even further than Japan and South Korea, has formally adopted a policy of promoting large groups. The exact measures have given the Chinese policy its own distinct characteristics. These included a range of measures promoting institutional sophistication. The development of internal group finance companies, systematic stock market listings, promotion of preferential planning within the groups allowing greater basic decision making autonomy, granting of import and export rights, the empowerment of the group’s core with special rights to incorporate state assets and the creation of research and technology centres were part of these trials (Chapter Three). As well as support for institutional growth the groups have been largely sheltered from international competition via protective tariffs and other measures. At the same time some direct support measures have also been given, such as loans from the banking sector and the strong bias of stock market listings given towards preferred groups. In short, a range of proactive measures, some aimed at institution building and some more direct support, have been directed to these large state-supported enterprise groups. Policy makers have, broadly speaking, implemented these policies in the spirit of ‘we can’t pull the saplings upward in the hope they will grow’. That is, they have in principle recognized the dangers of unconditional support and forced growth, that enterprises must be allowed to develop freely in the market if they are to flourish. It is the combination of these measures that has branded China’s ‘grasp the large’ strategy with is own particular and distinct characteristics. After not much more than 10 years’ experimentation, by the end of 1996, the 120 enterprise groups of the national team had not only developed a range of new institutional features, they had also substantially evolved from the original state plants upon which they were created. Most noticeably of all many had swelled in size and the scale of their production. The 120 groups of the national team were now accountable by themselves for more than 50 per cent of profits and approximately 25 per cent of tax, total assets and total sales of state owned industrial enterprises

12 Introduction (SCDRC, ZJN 1997: 677).5 As later chapters show, many thousands of member enterprises had been incorporated within the business groups of the national team players (to the extent that in terms of numbers alone they were starting to represent those from Japan in the 1970s). The state sector had also become increasingly concentrated in these large trial groups. By the year 2000, the 120 national team group output was reported to be over 35 per cent of China’s total industrial output and a quarter of all industrial profits (SETC, June 2001). Production has also been focused in a range of key ‘pillar industries’, including iron and steel, coal, power generation and supply, autos, electronics, aerospace, various types of machinery and pharmaceuticals. Interestingly and importantly, at lower levels of government, following the example of the State Council-sponsored national team groups, various provincial and city governments have also been encouraging their own teams of groups. Many of China’s large- and medium-sized enterprises (LMEs), which have been used as a broader representation of the large-scale sector in most earlier studies, are now incorporated in large enterprise groups registered at the national and provincial level. In 1999, for example, there were 2,302 such groups registered at the national and provincial level, the majority of these groups supported by provincial governments (Yin et al. 1999: 132).6 By early 2000 this had risen to over 2,472, with assets equal to $806 billion, equivalent to over half the entire state sector’s assets (CD, 11 January 2000). If we include province level groups with the national team it becomes even more evident that much of the state sector has been gradually concentrated within a relatively small number of large groups of considerable size and overall influence to the Chinese economy. The output value of these enterprise groups at this time, it can be approximately calculated, was equivalent to over 10 per cent of China’s national output (SSB, ZTN 1998: 56, 431, 444).7 More recent, official data now show that by the end of the year 2000 there were over 2,700 such groups, producing over 11 per cent of GDP (SETC, January 2001). It becomes more evident then that the significance of policies instituted in the national team, to ‘grasp the large’, lies not only in the impact on the 120 team players but also, perhaps even more importantly, the great influence they have had and continue to exert as role models on the development of provincial and lower level enterprise groups. What is remarkable is that most provincial, as well as hundreds more city and lower level governments, are currently nurturing their own teams of preferred enterprise groups.8 As a result it is probable the magnitude and reach of central and local government industrial policy, if not its effectiveness, far exceeds that which nations such as South Korea or Japan exercised during their most impressive growth periods. It is not difficult to see then why a further understanding of the national team may be extremely useful in gaining clearer insights into Chinese industrial policy and the large-scale sector as a whole. The challenge of closer international economic integration As noted earlier, the initial stimulus to develop groups originates from the mid1980s. At that time, the challenges of closer international integration with the

Introduction 13 global economy seemed a long way off and only something of a distant reality. Accordingly, development of the national team looked primarily to the role groups could play in the domestic economy, the ‘making good’ of state industry. To a great extent, as will be shown later when looking at some of the most important of these measures, the development of the national team of business groups has adopted the traditional Chinese method of reform, using incremental steps, the ‘groping for stones’ approach as opposed to ‘shock therapy’. However, unlike many of the previous incremental reform measures, those related to the trial business groups have over time developed explicitly stated objectives as well as implicitly accepted time horizons. With WTO entry approaching, it was considered ‘imperative to develop a number of large enterprise groups to make up the backbone of the national economy and the country’s main force to participate in international competition’ (Jiang Qiangui, vice-minister SETC, CD, 17 January 2000). The orientation and objectives of policies used to promote the national team has increasingly found itself centred on the goal of making the groups ‘main forces in international competition’ (Chapter Three). Even though by the mid-1990s most accounts agreed China had already succeeded in ‘growing out of the plan’, there was still a great gulf between Chinese and foreign multinationals. By 1999, for example, there were still only six Chinese enterprises in the Global Fortune 500 listings, of which one was from Hong Kong, one a bank and two trade companies (Fortune, 2 August 1999).9 Tariff barriers remained high, sheltering a number of strategic industries. President Jiang Zemin at the 15th Party Conference in late 1997 summarized how efforts were to be made to distil the state sector into key ‘pillar’ or ‘life blood’ industries of the national economy. Using strategic adjustments to create ‘highly competitive large enterprise groups’, Jiang argued: The leading role of the state-owned sectors should manifest itself mainly in its control power. We should make a strategic readjustment of the state-owned sector of the economy. The state-owned sector must be in a dominant position in major industries and key areas that concern the life-blood of the national economy . . . we shall effectuate a strategic reorganization of state-owned enterprises by managing well large enterprises while adopting a flexible policy toward small ones. By using capital as the bonds and relying on market forces, China will establish highly competitive large enterprise groups with transregional, inter-trade, cross-ownership and trans-national operations. (New Star Press 1997: 22, emphasis added) Of course, this policy initiative, as will be shown in the next chapter, stood in stark contrast to the orthodox policy advice of Western advisors such as the World Bank. This advice urged China to take ‘tough decisions’, dismantle barriers and not engage in actively supporting large-scale industry. By the 15th Party Conference in 1997 contrary to many of the mainstream recommendations, the strategy of developing highly competitive large groups appeared to reach a new level of intensity. After the conference, Premier Zhu Rongji

14 Introduction launched a radical campaign to turn around loss making state enterprises by the year 2000, considered a ‘decisive year’. The introduction of asset management companies (AMCs) and the writing-off of debts, increased financial discipline, downsizing of work forces and forced consolidation within certain industrial sectors has ensued. The direction of reforms in the large-scale sector had veered drastically, away from issues related purely to the domestic economy, increasingly towards those dominated by the international economy.10 The centrality the CCP leadership attaches to large enterprise groups in China’s opening to trade and foreign direct investment has now become arguably the major reason for the promotion of large groups. The spirit of this policy, and the mindset of many policy makers, is vividly captured in a speech by vice-premier Wu Bangguo in a pep talk given to government officials: In reality, international economic confrontations show that if a country has several large companies or groups it will be assured of maintaining a certain market share and a position in the international economic order. America, for example, relies on General Motors, Boeing, Dupont and a batch of other multinational companies. Japan relies on six large enterprise groups and Korea relies on 10 large commercial groupings. In the same way now and in the next century our nation’s position in the international economic order will be to a large extent determined by the position of our nation’s large enterprises and groups. (Jingji Ribao, 1 August 1998, emphasis added) Whatever the merits of such a view, there remains a very strong consensus in China that large groups are vitally needed if it is to attain the cherished goal of becoming a leading international power. There is also a great awareness in China, as already noted, that Western economic history ‘testifies to the great national advantages of substantial positive roles for giant firms and imperfect competition’ (Nolan 1996: 27). Much debate in China still surrounds the best way of nurturing groups. This debate has intensified with the recent Asian financial crisis and the entry to WTO. Some argue, for example, that China’s situation is quite different from South Korea because of a huge domestic market and abundant natural resources, making the development of business groups ‘an inexorable trend’ (CD, 8 December 1998). Others look to the South Korean experience mainly as a useful lesson from which to learn: ‘[it] has told us that in the process of establishing large enterprise groups we must pay attention to the asset and liability ratio’ (FT, 11 March 1998). It has also been argued that the group structure as such is not to blame for the woes of the financial crisis: ‘Korea’s enterprise groups suffered during the financial crisis, but it wasn’t the enterprise group form as such that was responsible. Korea’s problems stemmed from dispersed funds, blind investments and lack of management control . . . [elsewhere] large enterprise groups are still flourishing’ (Wu 2000: 4). Even more importantly, the failing conglomerates of Asia have also led to a greater focus on the issue of productivity, not just size. Scale is still seen as important, but not

Introduction 15 everything: ‘[the] size of an enterprise does matter, but it is more important for domestic enterprises to put emphasis on improving efficiency, innovative capability and competitiveness’ (CD, 11 January 2000). In the quest to create large groups ‘learning from the top 500 global companies’ and looking to successful East Asian models in particular, has been strongly encouraged. One recent result of this has been a pressure to force consolidation in a range of key sectors as China has belatedly reacted to the international merger and acquisition wave of the 1990s. Thus in steel, consolidation is now ongoing and seen not only as ‘key way to bail out loss-making companies’ but also as a way of reaping economies of scale and increasing international competitiveness. The target is for four large groups to produce 40 per cent of output by the end of 2000 (CD, 16 January 1998). In the airline industry using ‘Air China, China Eastern and China Southern as the backbone, China will voluntarily merge and restructure the other 31 airlines to form three big groups’ (COL, 1 April 2000). In the building materials sectors small-scale producers are being closed down or taken over in order to ‘speed the development of large enterprise groups’ (CD, 30 May 2000). In electronics the plan is to ‘turn the canoes into bamboo rafts and warships’ by promoting mergers (CD, 8 April 1998). In coal mining thousands of local small-scale producers are being shut down and investment funds are being directed towards seven key large-scale groups. Many other sectors have been belatedly pressured into rounds of consolidation as policy makers have woken to the danger that WTO entry poses for their many fragmented and backward industries. There remains a pragmatic and experimental approach to the policy of ‘grasping the large’ and developing the national team. The history of industrial capitalism has not been ignored in their endeavour to build a modern industrial system. Much of the mainstream theory and policy advice, however, has. It is in the light of these historic policy efforts to create a relatively small number of large internationally competitive enterprise groups, that the debate on the emergence of China’s largescale enterprises becomes of both greater and broader significance. The success or failure of China’s policies to build an indigenous national team will also have profound repercussions in the longer term for both domestic and international economics and politics. In the light of disputed theories of late industrialization relating to Japanese and South Korean development, China also becomes another hugely important example of the interaction between state, market and big business in the process of economic development. Overview and plan There is a dearth of factual knowledge on China’s efforts to promote large groups and actually very little is known about the national team groups and related policy. This book, therefore, is heavily oriented around empirical investigation and description. It also draws from a historical perspective on the development of big business. It is interesting to note heterodox type thinking as a whole, not just in the social sciences, but also other disciplines, by tradition has found itself strongly inclined towards empiricism and historical investigation. For many centuries in the

16 Introduction history of scientific study, for example, empiricism is reported to have been a major haven in clashes between general theorists of the day’s prevalent paradigms and their less orthodox critics (Hodgson 2001: 10). The current orthodox approach in economics, based around neoclassical ideas, has attempted to self-style itself as the ‘general theory’ of the modern day development debate. This orthodoxy has been quite widely accepted and is considered by many as the ‘common core of wisdom embraced by all serious economists’ (Williamson 1993: 1334). Refuting this claim, others have noted the adverse consequences of this search for the general theory, and how it has acted as a ‘lure’ that ‘is in part responsible for the neglect of history in twentieth century economics and sociology’ (Hodgson 2001: 6). Heterodox economists, following the empirical bent of their earlier predecessors in other scientific disciplines, have looked in particular to production-related issues, beyond the formation of markets and macroeconomic aggregates, and more particularly towards the issue of how firms emerge and what role the state has played. One such leading economist has noted, for example, how ‘economists tend to associate the “big picture” with macroeconomic aggregates’, even though ‘any serious understanding of post-war expansion and government’s role in late industrialization must be built from the ground up, based on production and not simply exchange, starting with how firms actually emerge and industries expand rather than how economies actually “get the prices right”’ (Amsden 1997: 477). This approach contrasts sharply with what has been considered the ahistoricism of much contemporary orthodoxy in economics. It involves a hands-on approach to research, investigating firms, industries and government policies (Gore 2000; Kenny and Williams 2001). This book heeds the calls for more work ‘on each industry in each country’, doing so for a relatively unexplored period of history and a vast country that is still poorly understood in spite of its huge importance. It does so in part with the further hope of enriching the explanatory theories of the role of big business in development today in an attempt to further contribute towards an ‘empirically relevant theory of both the general paradigm of late industrialization and its special variants’ (Amsden 1989: vi). Corresponding to the two main themes, this book can be broken down into two main parts. The first part, Chapters Two and Three, as well as briefly noting the relevant theoretical background embodied in the development debate and discussion of the large modern industrial corporation, looks at the specialized debate on China’s large-scale sector. Chapter Two looks specifically at the large-scale sector in China and the specialized debate that has emerged on this subject in recent years. Just as there have been significant changes within the largest multinational corporations in the recent past, so too have there been very important developments within China’s large-scale sector. Quite a number of studies concerned with China’s recent economic successes, however, have ignored or misunderstood the largescale sector. Rapid industrialization and successful transition from plan to market has actually been accompanied by a considerable growth in the number and average size of large enterprises across China, particularly within certain industrial sectors. Although relatively few in number, these enterprises have been of considerable importance to the overall success of reforms. New evidence also suggests that

Introduction 17 their financial and productivity performance has been far better than previously realized. Until quite recently the trajectory of much research was determined largely by a priori reasoning dictating that ownership was the key determinant of enterprise performance. As noted, the inclusion of a dynamic large-scale sector, which remains for the most part state-owned, has important implications for development theory, the transition orthodoxy, as well as public policy. New work on China’s large-scale sector, including the findings presented here on the national team groups, casts China’s rapid economic development in a new light. This new perspective brings to the fore the enigma of China’s large enterprises and groups. The third chapter, building on this specialized literature on LMEs, sharpens the focus of the study by looking at the national team of enterprise groups that have emerged from within the large-scale sector. Existing literature on China’s largescale sector looks mostly at China’s large and medium enterprises (LMEs) at an aggregate level using quantitative methods. This research has produced important results and insights. However, as in Japan and South Korea in earlier periods, China’s large-scale sector is now rapidly coming to be dominated by a relatively small number of large preferred enterprise groups at the forefront of the ‘grasp the large’ campaign. Relatively little, however, is known about the institutional evolution of the LME from what were originally plant-based operations to the multi-plant geographically dispersed trans-regional and trans-industrial enterprise groups that predominate today. Chapter Three, in the light of the conclusions of the previous chapter, explores in greater detail the ways in which the ‘grasping the large’ campaign has been orchestrated and how this has fostered institutional change. It is predicted the ‘national team’, central to this policy, will in all likelihood become of greater importance as forced consolidation continues in response to WTO entry. The second part of the book, Chapters Four and Five, consider in more detail the nature of the intense international merger activity that is taking place among large enterprises – the so called ‘global big business revolution’. It looks at some of the challenges to catch-up this poses for a particular industry, the auto and auto components industry. The investigation of the auto industry frames the question of the emergence of China’s large groups and their attempts to catch-up in an international comparative context. This is of particular relevance for China’s national team of enterprise groups now, given that an explicit objective of their development is to become China’s ‘main force in international competition’. Chapter Four moves slightly away from the focus on the emergence of large groups in China. Instead, it examines the profound changes that have taken place in the past few years among the world’s largest TNCs. It has become apparent in the closing years of the twentieth century that a process of increasing global concentration of production is taking place. This has been driven by among other things new technologies and bullish stock markets. It has been reflected in the unprecedented level of transnational merger and acquisition activity now taking place across a broad range of industries. Mega-mergers in the petrochemical, pharmaceutical, auto, banking, telecommunications and mining industries, to name a few, have rapidly reshaped

18 Introduction firms and industries. Some observers have likened this process to a new industrial revolution coinciding with a technological revolution in communication and predict that only a handful of huge global enterprises, increasingly with globally recognizable brand names, will come to dominate important sectors of the international economy. The implications both in the shorter and longer term for a late industrializing nation such as China are only starting to be addressed by a handful of academics in the West, yet they remain of daily concern to policy makers in China. The changing nature of the large modern corporation today is perhaps more pronounced, and the implications for a late-industrializing nation such as China of greater significance, than they have ever been. Across a broad range of sectors in which China has hopes of nurturing national champions global consolidation has been ongoing, changing the nature of international competition. Chapter Five, building on this theme, considers the development of the auto industry. A number of the 120 key national team enterprise groups are found in this industry. It considers China’s auto industry in the context of international restructuring among leading TNCs, in which rapidly emerging ‘global champions’ can be identified. The auto industry is a classic large-scale industry that gave birth to Fordist mass production and later Toyotist lean production concepts. Today transnational ‘mega-mergers’ such as those between Renault and Nissan, Daimler and Chrysler and Ford and Volvo testify to the rapid changes taking place in this industry. The rapid increase in strategic alliances, as well as the spinning-off of huge components divisions and rapid consolidation among others to form the ‘extended firm’, such as Ford’s Visteon and GM’s Delphi also illustrate this change. These developments have been driven by bold new strategies like the introduction of global platform strategies, lean production methods and adoption of new information technologies (to manage all stages of design, production and distribution). What appears to have happened is that lessons from Toyotist production methods have been applied, but now on a much larger scale than before. This in turn has led to a mutation in the firm and its relationship with other firms, particularly suppliers. Various aspects of the revolutionary changes taking place among big business today are illustrated by reference to this industry. The auto industry, as Chapter Four shows, also spawned the very first Chinese enterprise groups, such as the First and Second Automobile Works. It is still home to some of the largest groups in China. These early groups, as will be shown later, played a critical pioneering role in the subsequent creation and evolution of the national team of enterprise groups. Chapter Five, therefore, logically extends the focus of the study by looking in greater detail at the transformation at the global level of some of the world’s biggest auto producers and asking what this means for China’s national team. The conclusion points out that including the large-scale sector, particularly the national team, is important in full accounts of China’s remarkable performance over reform. China’s development path and the strategies she has employed must surely also hold lessons for other nations, as well as for the competing paradigms of development still prevalent today. At a more practical level, China still faces difficult, perhaps insurmountable challenges, if she wishes her national

Introduction 19 team to achieve their desired goals. If the national team in China does not achieve the same kind of success as her Korean and Japanese counterparts, this will undoubtedly have profound implications for the future of the international political economy.

2

China’s large industrial enterprises

China’s economy could be described as a dry prairie, parched by years of planning, awaiting the first sprinklings of market reform. (World Bank 1997: 4) The development of the Chinese economy is increasingly hinged upon the improvement of the international competitiveness of LMEs [large and medium enterprises] . . . the reforms of LMEs should represent the core of China’s overall systemic transformation. (Lo 1997: 6)

The next two chapters turn to look in greater detail at China’s large-scale industrial sector. This chapter lays the basis for an examination of the large groups of the national team by explaining how insights on large and medium-sized enterprises (LMEs) help our understanding of China’s recent economic development. There has been significant change within China’s large enterprises and groups, but until quite recently these changes have remained poorly understood. In fact, as the above quotes indicate, divergent views on this subject have emerged. These competing views broadly correspond to the competing paradigms found in the development literature. This split has emerged at least in part owing to the fact that among studies related to China’s economic development, because of a priori assumptions regarding key variables determining enterprise performance, there has been a tendency to categorize and study enterprises mainly from the perspective of different ownership types. Ownership and the distribution of property rights have conventionally been considered one of the main determinants of economic performance, particularly in economies undertaking the transition from plan to market. As a result of this mindset there have been many studies looking at state-owned enterprises (SOEs) as a whole and also studies making comparisons between the state sector and the newer private sector. Comparatively fewer studies, by contrast, have looked directly and exclusively at China’s large-scale sector or large enterprise groups. The important contribution and growing presence of large enterprises, particularly large groups within key industries supported by specific state policies, has therefore at times also been largely overlooked. Only a small (though growing) body of specialized

China’s large industrial enterprises 21 literature in Western academia investigating large enterprises and groups has emerged in the past few years (Keister 1998; Lo 1997; Lo 1999; Lo and Chan 1998; Nolan 1996; Nolan and Wang 1999; Smyth 2000). These studies have already strongly challenged some of the conventional insights on China’s industrial development. In particular, the generally negative assessment made of the overall performance and importance of large-scale state industry, and the tendency to regard small enterprises as ‘engines’ or the ‘foundation for recent economic growth’, has been brought into question (World Bank 1997: 21). Instead, an alternative and competing viewpoint, namely that China’s LMEs are now actually coming to represent the ‘core’ of China’s transformed economy, is gaining ground. This chapter shows that contrary to the impression sometimes given, LMEs share of industrial output has significantly increased over the reform period. LMEs, furthermore, still remain mostly state owned, although ownership has been diversifying, thus giving rise to the seeming anomaly of a dynamic and fast growing large-scale state sector in the least marketized area of the economy. China’s large enterprises are also found predominantly in key upstream pillar industries, often supplying smaller scale enterprises with basic producer goods, or in industries with significant linkages, giving them an important strategic position in the Chinese economy. Despite large enterprises being ‘parched by years of planning’, some new econometric evidence also suggests LME productivity and financial performance have at least equalled or even bettered that of the small-scale sector (Lo 1997, 1999). In short, there is a growing weight of evidence suggesting the role of the large-scale state sector has been of far greater importance in China than previously recognized. This raises important questions concerning the conventional ‘sprinklings of market reform’ explanations given for China’s rapid growth. The reappraisal of China’s large-scale sector also raises numerous important questions about the broader approach to development thinking and development paradigms, as well as the transition theory briefly alluded to in Chapter One. The main purpose of this chapter is to outline some of these implications. It shows that the emergence of a large-scale sector in specific industries in China appears to follow a distinct pattern with clear historical precedent. It highlights key features regarding the broader trends in the large-scale sector, explaining their relevance to the current theory and policy debate, contributing to the specialized debate of the LME literature. Understanding LMEs becomes very important in better understanding China’s largest enterprise groups and related policy. This is because the large and medium enterprise sector forms the bedrock of the state-endorsed provincial and national level enterprise groups that are increasingly coming to characterize the landscape of large-scale industry. So, in this sense, a clearer picture of China’s LMEs also constitutes a first step in understanding the basis upon which the larger enterprise groups of the national team have emerged.

Economic growth and the large-scale sector From the outset it is important again to emphasize that China has made outstanding economic progress in the past two decades. This has had a huge impact not only on

22 China’s large industrial enterprises the daily lives of China’s population but also on the entire global economy. A conservative estimate reckons that between 1978 and 1995 real GDP per capita in China increased 8 per cent per annum (World Bank 1997: 2). Such a remarkable growth story clearly has important implications for development thinking. Credible explanations or theories for this miraculous performance must convincingly explain the major contributory factors. Key to this has been the rapid industrialization of the country, and it is this process that must be fully explained. Indeed, over the period discussed the share of the agricultural workforce decreased from 71 per cent to 50 per cent of the total. The share of industrial output in total output also increased from approximately 30 per cent at the beginning of reforms to over 50 per cent by 1995 (EEAU 1997: 26). Putting this in perspective, for Japan, another East Asian nation that experienced very rapid industrialization, a similar shift took 60 years, over three times the length it has taken China (World Bank 1997: 2). It is an extremely rapid industrialization process that has primarily been responsible for China’s remarkable rate of economic growth. It is often pointed out that the state enterprise share of total output has fallen dramatically, to under 35 per cent from an initial 80 per cent in 1978 according to one estimate (EEAU 1997: 26). The private sector and quasi-private sector’s share of total output has therefore considerably increased. This distinct trend is commonly used to support the argument that a dynamic private sector facilitated by greater liberalization, embodied by small-scale enterprises, has been the primary factor driving China’s industrial growth. Hence the analogy of ‘a dry prairie, parched by years of planning, awaiting the first sprinklings of market reform’ is considered appropriate when attempting to explain the performance of China’s economy over reform (World Bank 1997: 4). Because the share of the state sector in total output has markedly decreased over reform the increasing importance of China’s emerging large industrial enterprises in industrial output is seldom recognized. Table 2.1, highlighting this general point, shows that although state industry’s output share as a whole may have declined, large-scale industry (as measured by LME output) has actually become of growing importance in industrial output.1 The independent accounting LME sector produced about 55 per cent of the gross value of industrial output (GVIO) by 1995, a substantial increase from the 43 per cent in 1981.2 By the mid-l990s an important part of the industrial sector, that most important to China’s sustained growth, was coming to be dominated by large enterprises. Although there was initially a very rapid growth in the number of Table 2.1 Share of large, medium and small enterprises in the gross value of industrial output Enterprise

1981

1984

1986

1988

1992

1995

Large Medium Small

25.4 17.6 57

26.2 18.7 55.1

28.1 18.7 53.2

30.7 19.7 49.6

36.4 21.1 42.6

38.2 16.2 45.6

Source: ZTN, industry sections, various years.

China’s large industrial enterprises 23 industrial enterprises in China, this was followed by a subsequent slowdown and also an increase in concentration, leading to the creation of large groups. As early work on China’s LMEs notes: In the first phase of reform the number of industrial establishments in the formal sector grew rapidly as localities responded to profit-making opportunities in the slowly reforming economy. However, as the reforms progressed, there occurred a growing concentration of production, and a marked slowdown in the rate of establishment of new small plants. (Nolan 1995: 12) If state industry as a whole has declined in importance, how can it be that large enterprises, many of which are state owned, have continued to grow? The seeming anomaly of a declining share of state output coinciding with a rising share of LME output in that of total output, it is argued, can ‘nearly entirely be accounted for by the decline in the importance of the small and medium sized state sector’ (Naughton 1995: 167).3 Thus the decreasing importance of state industry as a whole appears to have been largely at the expense of small-scale state industry. As noted in the previous chapter, this is consistent with the state policy of ‘grasping the large and letting go of the small’. As a result of this policy, and the natural gravitation towards concentration in certain sectors, state industrial output is increasingly concentrated in a small number of large enterprises. These, on average, have also grown in scale. Thus by 1997 official statistics record that approximately two-thirds of state industrial output was already attributable to LMEs, up from about 60 per cent in 1995, several years earlier (ZTN 1998: 444). So large enterprises, again consistent with the state policy of ‘grasping the large, letting go of the small’, are increasingly coming to dominate the state sector. The powerful imagery of the healthy young shoots of small enterprises pushing their way upwards in response to ‘sprinklings of market reform’ does not accurately explain the Chinese experience. Small enterprises in this analogy are considered the ‘foundation’ or ‘engine’ of recent growth (World Bank 1997). Although small enterprises have played a very important role in China’s recent industrial development, the large-scale sector, still predominantly state owned, has, among other things, made considerable direct contributions to output growth (Lo 1997, 1999; Naughton 1994; Nolan 1996; Nolan and Wang 1999). It is now even considered ‘the core of China’s transformed economy’ (Lo 1999: 22). Large enterprises have played a more important part in China’s economic miracle than they are generally given credit for. The following sections will describe in more detail some of the important features of the large-scale sector, such as the emergence of large enterprises throughout China’s regions, the continued domination of state ownership, as well as its concentration in specific pillar industries. Large enterprises also have important linkages with other sectors of the economy and thus have played an especially important part in China’s rapid industrialization.

24 China’s large industrial enterprises Geographical location of LMEs Small enterprises have flourished throughout all of China, particularly township and village enterprises (TVEs). In this respect the analogy of the ‘shoots’ of small enterprises springing up in response to reform may not be entirely misleading. It is far less commonly acknowledged that large enterprises and enterprise groups have also sprouted in nearly every provincial economy. These so-called ‘saplings’ of big business have quickly sprung up, often under the influence of state and provincial level policies (see Table A.1 in the appendices for a more detailed description of the geographical spread of the these supported groups). Figure 2.1 (the number of large enterprises per province, 1981–97), illustrates the dramatic growth of large-scale enterprises over reform. As might be expected, LME growth has been particularly pronounced in the fastest growing provincial economies, notably the southern and coastal regions of Guangdong, Shandong, Jiangsu and Zhejiang.4 Traditionally important industrial areas (such as Shanghai, Liaoning Tianjin and Beijing) have also witnessed increasing numbers of large enterprises, if not as spectacular. Even the poorest regions, contrary to what might be expected, also saw a considerable increase in the number of large-scale industrial enterprises (Xinjiang, Guangxi and Inner Mongolia all showing more than threefold increases). By 1995 large enterprise output ranged in the region of 25 to 60 per cent of industrial output at the provincial level, constituting a significantly large share (ZTN 1996: 408). Large enterprises have become integral components of nearly every provincial economy, both in wealthy and poorer regions. Many of these large enterprises, as already noted, are also included in centrally and provincially orchestrated plans to nurture batches of large enterprises and groups. The growing importance of LMEs to China’s aggregate industrial output, illustrated in Table 2.1, as well as the increase in the number of LMEs throughout nearly all of China’s provinces, raises questions about the nature of this rapid expansion. As noted, often the impression is that large enterprises are of diminishing importance to Chinese industry and that they are the ‘dinosaurs’ of the Chinese economy. This sector has actually been far more dynamic than it is generally given credit for, as shown by the widespread growth of large enterprises throughout all of China’s regions. LMEs and ownership Although ownership has been rapidly diversifying in recent years China’s LMEs remain, for the most part, predominantly state owned. This is perhaps unsurprising in the light of the traditionally high incidence of state ownership in the successful diversified business groups of late-industrializing nations. In 1987, for example, thirty-nine of the seventy largest industrial enterprises were state owned in developing nations. This compared with only six in advanced economies (Amsden and Hikino 1994: 117). By 1995, according to official statistics, approximately 73 per cent of China’s large enterprises remained classified as state owned and 66 per cent of medium-sized enterprises (ZTN 1998: 444). Small enterprises on the other hand

Jiangxi Shandong Henan Hubei Hunan Guangdong Guangxi Hainan Sichuan Guizhou Yunnan Shaanxi Gansu Qinghai Ningxia Xingjiang

700

Anhui Fujian

600

Zhejiang

500

Shanghai Jiangsu

400

Heilongjiang

300

Shanxi Inner Mongolia Liaoning Jilin

200

Beijing Tianjin Hebei

100

0

Province

Figure 2.1 China’s large enterprises by province for various years.

Source: China Statistical Yearbooks (ZTN), various years.

Number

1995 1992 1988 1986 Year 1984 1981

26 China’s large industrial enterprises 100% 90% 80%

LME output share

70% 60% 50%

Series1

40% 30% 20% 10% 0% 0%

10% 20% 30%

40%

50% 60%

70% 80%

90% 100%

SOE output share

Figure 2.2 LME and SOE output share by various industrial sectors. Source: ZDZQN 1996: 1–7; ZTN 1996 industry section.

were mostly privately owned (about 85 per cent). Ownership figures were also closely reflected by output values. Large state enterprises produced around 70 per cent of the gross output value of all large enterprises and 55 per cent for mediumsized enterprises. Of small enterprises, by comparison, only 17 per cent of total industrial output value was attributable to the state sector. This has been steadily decreasing over the years, consistent with the policy of giving up small-scale state industry and focusing on large corporations (ZTN 1996: 404). The scatter-diagram Figure 2.2 nicely captures the close relationship between state ownership and enterprise size. It shows the share of LME output against the share of state output for over thirtyfive different industrial sectors listed in Chinese industry. An imagined line of best fit would clearly slope upward illustrating the close relationship between state ownership and enterprise size. Perhaps even more importantly it also makes another suggestion, namely the prevalence of large state enterprises in certain specific industrial sectors (top right hand quadrant). The scatter-diagram hints at the apparent specialization of state industry embodied in large enterprises within specific sectors. These, shown next, are usually also the ‘key’, ‘pillar’ or ‘backbone’ industrial sectors that are home to large enterprise groups favoured by the ‘grasp the large, let go of the small’ policy.

China’s large industrial enterprises 27 LMEs in capital intensive ‘pillar’ industries As noted, LMEs have grown in number and size throughout China’s provinces. Their growth has also primarily been within certain industry sectors. It is well known that large enterprises have typically clustered across nations and through time within the same capital intensive industries, those that ‘are most crucial to the strength, continued growth, and defence of a modern, urban, industrial and technologically advanced society’ (Chandler 1969: 257). Early industrializing nations such as the United States, United Kingdom and Germany illustrate how big business emerged in chemicals, transportation equipment, electrical machinery, machinery, petroleum refining, food processing, textiles, paper, lumber, electronics, pharmaceuticals and the like (Chandler et al. 1997: 31). It should not be surprising that the same phenomenon is found in China. Figure 2.3 shows in more detail which sectors China’s LMEs can be found in and how the share of large enterprise output has changed during reform. To achieve this it illustrates the LME share of gross industrial output value for thirty-eight sectors of the Chinese economy against state enterprise share. One way of gauging the relative importance of large-scale industry in a particular sector is by simply looking at concentration ratios, this is to say the share of output of a small number of leading firms. In fact a number of Chinese studies have looked at trans-industrial four- and eight-firm concentration ratios (Liu 1999; Bai and Li 1994). Their findings, however, are generally not clear-cut. A difficulty with these studies is that in a very fast growing large economy, with many new entrants and historically low levels of firm concentration, it is quite improbable that examining a small number of firms will provide meaningful insights. Indeed, because rapid industrial growth usually involves entrants of new enterprises it ‘generally, but not always, reduces concentration’, which ‘accords with empirical evidence from other industrial countries’ (Amsden and Singh 1994: 947). In Japan, for example, a nation that is also well known to have experienced rapid growth in large industrial corporations, ‘industrial concentration declined [during the 1960s] . . . because of the rapid growth of the economy . . . [and] entry or expansion of smaller firms’. In Japan the three-firm concentration ratios increased in only three out of twenty industry sectors in the 1950–62 period (Amsden and Singh 1994: 947). In the initial very fast growth periods, because of the entrance of new firms, concentration ratios may not tell us a great deal about the growth of the largest corporations. An alternative way of estimating the importance of large enterprises is by taking a broader measure of large-scale industry. Instead of looking at the four- or eight-firm concentration ratio, the share of LME output by industry sector for two different years, 1987 and 1995 has been calculated.5 Figure 2.3, building further upon Figure 2.2, shows the breakdown of LME industrial output by industrial sector. Each column represents an estimate of the LME share contributed to total sector output for the two years, 1987 and 1995.6 What this shows is that the industrial structure in China is rapidly progressing towards that of today’s industrialized nations. LMEs have become of greatest importance to the capital-intensive sectors Chandler has identified in earlier periods of history as being bastions of the large modern

Industry sector

Source: ZDZQN 1996: 1–7; ZTN 1996, 1988 industry sections.

0%

10%

20%

30%

40%

50%

60%

Figure 2.3 Share of gross value of industrial output contributed by LMEs for forty Chinese industry sectors, 1987 and 1995.

LME share of GVIO 70%

80%

90%

100%

Petroleum and Natural Gas Extraction Tobacco Processing Petroleum Processing and Coking Products Smelting and Pressing of Ferrous Metals Chemical Fibres Logging and Transport of Timber and Bamboo Transportation Equipment Manufacturing Coal Mining and Processing Beverage Manufacturing Smelting and Pressing of Nonferrous Metals Tap Water Production and Supply Rubber Products Electronics and Telecommunications Medical and Pharmaceutical Products Raw Chemical Materials and Chemical Products Electric Equipment and Machinery Textile Industry Equipment manufacturing Other Minerals Mining and Processing Nonferrous Metals Mining and Processing Papermaking and Paper Products Food Manufacturing

Instruments, Meters, Cultural and Official Machinery Ferrous Metals Mining and Processing Nonmetal Mineral Products Printing and Record Pressing Plastic Products Metal Products Nonmetal Minerals Mining and Processing Garments and Other Fibre Products Stationery, Educational and Sports Goods Leather, Furs, Down and Related Products Timber Processing Other Manufacturing Furniture Making

1995 1987

Year

China’s large industrial enterprises 29 industrial corporation. By 1995 chemicals, transportation equipment, petroleum, lumber, tobacco, ferrous metals and non-ferrous metals, for example, were all dominated by LMEs. The ten industry sectors in which LME share of total industrial output was greatest had output shares ranging from 65 to 95 per cent of the total sector output. In these sectors, therefore, LMEs had become the major contributors to industrial output. These ten sectors alone (of a total of forty broken down in Chinese statistics) also accounted for approximately a third of total industrial output value in 1995 and constituted a significant component of total LME industrial output value (over 40 per cent). The static picture presented in Figure 2.3 was one in which LMEs were concentrated in a number of important industrial sectors many of which were also the fastest growing and could be considered capital intensive ‘pillar’ or ‘backbone’ sectors. Of perhaps even greater interest and significance than the observed clustering of LMEs by industry sector are the dynamic trends in the share of LME output over time shown in Figure 2.3. It appears that only in certain industry sectors have LMEs become of growing importance in terms of their overall output contribution during the course of reform. This, again, is consistent with the policy objective of ‘grasping the large and letting go of the small’ and illustrates that the growth of the large-scale sector in China mirrors historical trends of big business in other nations. Of the ten industry sectors in which LME share was greatest in 1995, for example, eight have seen a growing importance of LMEs in total output value (i.e. the front column for 1987 being lower than the back column for 1995). For the ten sectors in which LME share was lowest, on the other hand, eight have seen a decrease in the share of LMEs in sector output (the front column for 1987 being higher than the back column for 1995). It is important to note that these trends mirror those seen in other nations undergoing rapid industrialization, such as Japan and South Korea, as well as the United States and United Kingdom in earlier periods of history.7 The concentration of large-scale enterprise in certain sectors is therefore to be expected as growth takes place. LME performance Apart from the rapid growth in the number, size and overall contribution to the economy, new empirical work on enterprise productivity has now even found that the relative productivity and financial performance of LMEs has bettered that of other sectors. Analysis and discussion of enterprise performance often assumes by implication (because it assumes most LMEs are SOEs) that the relative productivity and financial performances of LMEs have been worse than other sectors. This assumption is based upon the belief, as already mentioned, that there is a high degree of homogeneity within the state-owned sector and that the SOE group as a whole has performed poorly. Building on the growing interest in China’s LMEs, however, Lo (1997, 1999) uses time series regression analysis to look specifically at LME industrial productivity and financial performance in comparison to other sectors, such as collective and state industry.8 Most surprisingly, the results indicate that ‘LMEs have consistently outperformed COEs [collectively owned enterprises] and

30 China’s large industrial enterprises small scale SOEs’ (Lo 1997: 106). The relatively good performance of China’s LMEs is described (unsurprisingly given the universally held belief that large SOEs have performed poorly) as ‘the most enigmatic aspect of the reform of China’s economic system’ (Lo 1999: 709). A preliminary effort is also made to look for the sources of the relatively superior performance of LMEs. This is hypothesized to be attributable to economies of scale (EOS) and scope, as well as via vertical de-integration within the enterprise. To test these hypothesizes an explanatory variable to account for scale is included and the enterprise net-to-gross output ratio to account for enterprise reorganization, specifically vertical de-integration. Interestingly, the preliminary regression results find in favour of the hypothesis that both scale and de-integration have been important contributory factors in the overall good performance of LMEs. This, it is speculated, has been driven by ‘the structural change associated with the rise of a range of “new” industries, characterized by strong increasing returns, [which] has propelled overall output and productivity growth’ (Lo 1997: 55). Economies of scale in production, therefore, are considered the main factor in driving productivity growth. The emergence and relatively good performance of China’s large-scale sector is perhaps not so unusual after all. It appears instead to conform to a pattern of growth witnessed across nations and also through different time periods. The argument that the relatively good performance of China’s LMEs is due to them taking advantage of economies of scale in capital-intensive, often heavy, industries, is further supported by the observations based on Figure 2.3, that China’s large enterprises and groups have emerged in the very sectors in which economies of scale and scope have, historically, been of great importance. If scale economies have been an important contributory factor to productivity growth it would be expected that sectors capable of reaping them would also have experienced the greatest expansion. The growing number, size, overall contribution to the economy, focus in specific sectors and comparatively favourable productivity and financial performance of large enterprises appears to be better explained by recourse to an examination of historical development of big business, not rules of ownership. Linkages Figure 2.3 also illustrates that LMEs have become increasingly important to the Chinese economy not only because of large output contributions in key sectors but also through their linkages to a wide range of other sectors. Large state-owned LMEs in backbone or pillar industries now supply key inputs for downstream industry, relieving bottlenecks in the fast expanding economy. Steel, petrochemicals, chemicals, coal and power generation are some good examples. Large enterprises not only provide key inputs for downstream industry, they have also come to develop other ‘ancillary networks’ around them, often involving smaller firms. This is particularly true of large enterprise groups that provide management skills, technological advice and investment funds to smaller enterprises in China (Murakami and Liu 1996). There are comparisons with other late industrializers.

China’s large industrial enterprises 31 In South Korea it has been noted, for example, that although the small-scale sector was a relatively unimportant element in Korea’s growth, as a subcontractor it is ‘becoming pivotal’ (Amsden 1989: 161). In Taiwan also it is has been argued ‘large firms provided the basis for the growth of small firms, not vice versa’ (Amsden 1989: 162). Chapter Three will also show that one of the key reasons for developing large enterprise groups has been explicitly ‘to lead the activities of a large number of small and medium enterprises’ (see State Council directives, appendices). In the context of economic reform, particularly in transition economies, this has led to the question of whether small firms could be expected to grow at all without simultaneous expansion of large-scale industry: ‘It is questionable whether the reforming communist countries could expect fast growth of the small-scale manufacturing sector in the absence of a dynamic large-scale sector. Their growth is inextricably linked’ (Nolan 1996: 5). Large and small enterprises are now being considered the ‘Siamese twins’ of China’s remarkable industrial growth (Nolan and Wang 1999). Thus increasingly it is being argued that the development of the shoots of small enterprises has been contingent on the continued health of large enterprises: it would be a tremendous error to think that SOEs have been peripheralized . . . Despite all the changes that have swept China in the last twenty years, heavy industry still remains thoroughly dominated by the state sector. No other ownership form has penetrated large-scale, capital intensive sectors in any significant sense. State-owned enterprises are still providing the basic inputs upon which all other sectors depend, and for that reason alone can still be considered the backbone of Chinese manufacturing. (Steinfeld 1998: 15, emphasis added) Naughton (1995) also finds that despite the rapid growth in small enterprises a growing interdependence between large and small enterprises has emerged. It is quite often assumed that TVEs are overwhelmingly a rural phenomenon in nature and that SOEs are based in larger cities. In 1987, for example, it is reported that cities and their environs produced 91 per cent of SOE industrial output. It is less well known, however, that 87 per cent of non-state industrial output was also produced in urban and semi-urban regions. There is a closer geographical proximity between state and non-state industry than is commonly recognized. The relationship between the two, has been described as ‘complementary, rather than [them] being substitutes for one another’ (Naughton 1995: 154). It has also been noted that a ‘rapid growth in subcontracting relationships between TVEs and urban industry, which is also assisted by local government mediation, has been a striking characteristic of some Chinese regions’ (Naughton 1994: 478). These observations have led to a similar conclusion, namely: there is a division of labour between state and non state industry . . . consistent with the rationalization of an industrial structure in which SOE’s continue to dominate sectors characterized by increasing returns and technological

32 China’s large industrial enterprises barriers to entry, while relinquishing naturally competitive sectors to emerging collective and private firms. (Naughton 1994: 481) Small enterprises, in this view, again cannot alone be considered the ‘foundation’ or ‘engine’ of recent growth. By focusing solely on TVEs as the engine and foundation of growth some mainstream analysis not only misses the great contributions large enterprises make in simple output terms, it also misses the interconnected and complex nature of the emergence of the small-scale private sector along with growth and development in the large-scale sector.

Competing development paradigms and China At this point, even on the basis of the relatively brief investigation of China’s largescale sector so far presented, it is worth reappraising previous insights based around orthodox approaches explaining China’s growth pattern over reform as well as related policy advice. The main criticism of these approaches is that they lay too heavy a stress upon the role of small private enterprises in China’s reforms, overlooking the large-scale sector. The evidence so far presented in this chapter shows that LMEs have grown in number and size throughout all China’s provinces, they have also performed better than generally appreciated. Their development, rather than being an aberration of fettered markets, appears equally well to conform to a historical process in which large corporations emerge in specific sectors. A recent World Bank study highlights some of the problems with analysis of China’s reforms (World Bank 1997). It argues with respect to attempts by policy makers to target pillar industries through LMEs, for example, that ‘it is difficult to say what this policy really means’ (World Bank 1997: 39). With the use of such tools as controlled interest rates, protection against import competition, tax and price policies, rules on procurement, unofficial levies, preferential bank loans and stock listings, it is concluded the effects are ‘difficult to assess, but it is quite likely they work at cross purposes and in unintended ways that distort development’ (World Bank 1997: 39). Comparatively little effort is made at probing more deeply into the nature of China’s LMEs, enterprise groups or the real impact of such measures and their underlying logic to find out what the policies really mean. Instead, following a common practice, LMEs are bundled together with the SOE group under the assumption that there is a high degree of homogeneity among SOEs. Again, ownership is considered the most important factor in explaining enterprise performance. As a result the logic underlying the ‘grasp the large strategy’ is largely overlooked. Instead it is believed that ‘informational’ and ‘administrative capacity’ are the crucial factors in determining the orientation of policy: The simple truth is that the authorities have neither the administrative capacity nor the appropriate information to effectively oversee the sprawling state enterprise sector . . . Managers need autonomy to improve efficiency, but the government has neither the informational nor the administrative capability to

China’s large industrial enterprises 33 ensure that managers are pursuing that objective. So rather than reforming all state enterprises at once, the central authorities are focusing on 1,000 large state firms. (World Bank 1997: 29)9 The arguments presented so far, however, question some of these ‘simple truths’. First, it is difficult to believe that overseeing managers is the primary reason why industrial policy has come to focus on a small number of large enterprises. The large enterprises China has chosen are of particular importance in industries that, to repeat Chandler, are ‘most crucial to the strength, continued growth, and defence of a modern, urban, industrial and technologically advanced society’. As already argued, they also often supply key inputs for other downstream sectors (such as electricity, ferrous metals, petroleum products, chemicals and mining) and are industries that usually require very large capital investments and therefore preclude a very large number of entrants (such as transportation equipment, tobacco processing, beverage manufacturing and electronics and telecommunications). These industries, more often than not home to large oligopolies (increasingly global oligopolies, see Chapter Four), have been specifically targeted by policy. Indeed, industry structure in every country is determined largely by basic industry conditions (such as the underlying technology and demand conditions of the industry). As an expert on public policy has pointed out: ‘knowledge of this fact should influence, far more than has actually been the case, the role governments take in promoting or discouraging large or small businesses’ (Chandler 1997: 527). China’s leaders have appreciated the immense importance of successful large-scale industry in key sectors since early in reforms and their policies have been influenced accordingly. The key rationale of selecting large groups, then, has not been to monitor and oversee enterprises. Second, China’s state sector is accused of being ‘sprawling’. An objective of current policy, however, of ‘grasping the large and letting go of the small’, is exactly to reverse industrial ‘sprawl’. The policy of developing certain large-scale pillar enterprises has the purpose of enforcing a new industrial order, an order more akin to that found in the most successful industrialized economies in which large oligopolistic producers dominate certain sectors. State policy, embodied by ‘grasping the large’, is therefore directly aimed at rectifying the problem of a ‘sprawling’ state sector. As in earlier debates in the transition literature, ownership reform and liberalization is considered by the World Bank as the final solution to China’s reform challenge: the government’s decision to focus on developing 1,000 of the largest state enterprises while loosening controls on the remaining 314,000 is a step in the right direction. But much more needs to be done. All enterprises should be fully exposed to domestic and international competition. Just as important, their ownership should be diversified toward households and nonstate institutions. This cannot be emphasized enough. China’s future lies with vibrant, competitive and private firms in industry and services. The earlier success of

34 China’s large industrial enterprises TVEs and the recent expansion of privately and individually owned firms are evidence of the enormous latent energy of China’s dynamic and enterprising people. (World Bank 1997: 100) But it is not clear how such policies address the problem of ‘industrial sprawl’ or that of poor management. The lessons of the former Soviet Union and Eastern Europe also provide little encouragement as regards the efficacy of ownership reform. Indeed, recent work on the issue of property rights in China’s large enterprises argues it is not ownership reform per se that is vital for successful reform of China’s LMEs. The challenge of reform in transition economies, it is argued, is ‘not to transfer property rights but rather to create them from scratch, and create as well the whole institutional underpinning necessary to make them function . . . To transfer rights in a system in which rights have little meaning is to put the “cart before the horse”’ (Steinfeld 1998). The misunderstanding of the nature and role of China’s LMEs is brought into even clearer focus looking at the issue of trade liberalization. Trade issues and policy are a central issue in the competing paradigms of development alluded to in Chapter One. They also cut to the heart of the LME debate. The World Bank, adopting an orthodox approach, predict WTO accession will on balance ‘be very favourable’ to overall welfare and industrial structure precisely because there will be a relative decline of large indigenous enterprises in capital and technology intensive industries, those dominated by state enterprises (World Bank 1997: 84). Areas such as transportation, machinery and equipment, and other heavy manufacturing industries will suffer, ‘consistent with China’s comparative advantage’ (World Bank 1997: 89). This is in part based upon the belief that large state enterprises have performed relatively poorly, they have been a drag on the economy and played no essential part in recent growth. It is also justified by claiming there is a growing consensus among policy makers and academics that trade liberalization is one of the key ingredients for higher growth. The basic proposition being that ‘the more open the economy, the closer its integration with the global economy, the faster would be its rate of growth’ (Singh 1994: 1818). This, however, amounts to a neglect of academic theory that refutes the claim that trade liberalization is beneficial to growth (see, for example, Wade 1990; Singh 1994). As some neoclassical advocates have even conceded, ‘trade theory provides little guidance as to the role of trade policy and trade strategy in promoting growth . . . There is nothing in the [comparative advantage] theory to indicate why a deviation from the optimum should affect the rate of economic growth’ (Krueger 1980: 288). The possible dynamic comparative advantages found in those capital-intensive industries associated with the large-scale sector, those that some other countries have successfully exploited, are effectively overlooked. In Japan, for example, MITI helped establish: industries which require intensive employment of capital and technology, industries that in consideration of comparative cost of production should be

China’s large industrial enterprises 35 most inappropriate for Japan, industries such as steel, oil refining, industrial machinery of all sorts, and electronics . . . From a short-run, static viewpoint, encouragement of such industries would seem to conflict with economic rationalism. But, from a long-range viewpoint, these are precisely the industries where income elasticity of demand is high, technological progress is rapid, and labour productivity rises fast . . . Japan has been able to concentrate its scant capital in strategic industries. (OECD 1972, quoted in Wade 1990: 25) Like Japan, China has also embarked upon a programme of developing large groups in heavy capital-intensive industries, those capable of dynamic comparative advantages that can ensure better living standards in the longer term for its huge population. Sticking to its static model of comparative advantage, however, the possible longer-term strategic importance of large enterprises in these industries is not seriously considered by the World Bank. It argues, to the contrary, that if China continues to use the industrial policy of ‘grasping the large’ then growth will moderate as the cumulative costs of maintaining increasingly inefficient state enterprises undermines the budget, banks and burdens the rest of the economy, so reducing international competitiveness. Instead of promoting state enterprises in industries with greater export market potential, it is argued the state should limit itself to the crucial role of delivering public goods and services – basically that of a ‘night watchman’. It is claimed that losses in these key industries will be largely offset by the large gains in labour-intensive sectors, in particular the clothing sector. The World Bank concedes that large indigenous firms will only survive in capital-intensive areas by developing ‘closer links with international partners and competitors [which] will also be vital to long-term success in export markets’ (World Bank 1997: 84). The shutting down of large enterprises, it is concluded, will be worthwhile, because ‘whatever the short-term costs, they will be far outweighed by the long-term benefits of an open economy that derives its strengths from . . . the strong foundation of comparative advantage’ (World Bank 1997: 102). Interesting new evidence, however, suggests it is far from clear that China’s trade performance over reform can be reducible to the tenets of comparative advantage. A mainstream orthodox view would have it that for the ‘near term China’s major export opportunities mainly lie within the labor-intensive products’ (World Bank 1994: 255). Yet China’s fastest growing export sectors over the 1980s and early 1990s came from relatively capital-intensive areas of the economy, particularly electronics and machinery, the very areas in which it has supported large enterprises and groups (Lo and Chan 1998). The 120 enterprise groups of the national team alone, increasingly the focus of the large-scale sector (considered in detail in the next chapter), accounted for 10 per cent of China’s exports by the late 1990s and by 2000 China traded over $90 billion worth of machinery in the first six months of the year, accounting for 43 per cent of the nation’s imports and exports. The Ministry of Foreign Trade and Economic Cooperation reported recently that ‘machinery and electronics products have accounted for the largest category of exports for five years running’ (CD, 20 July 2000).10 This was not simply a situation

36 China’s large industrial enterprises in which a static comparative advantage in labour intensive goods had been exploited. Rather, it appears China has also shown some success in moving up into higher value added sectors, developing dynamic comparative advantage in industries with high-income elasticity of demand, high value added and a relatively high level of technological content. As one study puts it: the export momentum, and hence the contribution to growth, has been increasingly sustained by exports that do not accord with China’s ‘given’ comparative advantage . . . the Chinese nexus of foreign trade and economic growth contradicts, rather than validates, the neoliberal thesis of trade regime neutrality which explicitly rules out any form of strategic integration of late developing countries with the world market. (Lo and Chan 1998: 734) China’s pattern of trade, therefore, appears to correspond equally well to a model of ‘strategic integration’ witnessed in some other successful East Asian nations, which reflects the policy to nurture large-scale enterprise in key industries. Trade, as with the more general patterns in LME development, such as their clustering in specific industries, is not well explained by the more conventional orthodox approach explaining China’s performance over reform.

Conclusions Research on China’s large-scale sector finds, contrary to popularly received wisdom, that it has not only considerably increased its output over reform but also that it has performed far better than previously realized. China’s large enterprises have actually grown in both number and average size throughout all of China’s provinces, even the least developed. For the most part, though ownership has diversified, they still remain state owned. Large enterprises have become of increasing importance mainly within certain industries, predominantly those that are capital intensive and those that have historically been home to large corporations. The significance of this development is important because the emergence of capitalintensive heavy industries brings with it the ‘birth of modern industrial enterprise’ and also salaried management, as well as a ‘new mode of competition, oligopoly’ (Amsden 1989: 19). The transition from heavy to light industries, in turn, also involves a transition from competing against firms from other low wage countries to competing against firms from high wage countries. Growth in China’s LMEs appears, moreover, to reflect a historical process, not governed by the simple rules of ownership. The enigmatic performance of LMEs may in part be attributable to the fact that they ‘have been especially capable of generating economies of scale and scope’ (Lo 1997: 6). Just as there has been a rapid Lewisian shift from agriculture to industry, so too has there been what could be called a ‘Chandlerian shift’ of increasing concentration within certain sectors. Chapter One showed how the development literature has been shaped by the important events it seeks to understand. The economic transition from a centrally

China’s large industrial enterprises 37 planned economy to market economy in China has been one such important event. Although the debate on the transition from planned to market economy has recently lost some of its ferocity and relevance, the implications of the re-interpreted Chinese experience incorporating the large-scale sector have again stirred up this debate. Transition orthodoxy paid little attention to the possibility of constructing large multi-plant firms capable of reaping economies of scale. Instead, it concentrated on the destruction of the incumbent bureaucracy and policies of individual plant level privatization. This is particularly ironic, given ‘it is the firm, rather than the plant that is the key location of decision-making and competition within the capitalist economies’ (Nolan 1996: 3). China’s efforts to build large firms have highlighted an alternative path, one that a recent study considered to have an appealing and ‘sound economic logic’ when ‘weighed in the light of realistic alternatives’ (Smyth 2000: 734). The reinterpretation of the performance of China’s LMEs again brings into question the wisdom of the transition orthodoxy. This is because it suggests it may in fact be possible to gradually reform state enterprises, if appropriate policies are followed. China’s growth over reform has often been set in the context of the debate on transition. It is important to realize, however, that its experience also has important implications for general paradigms of late industrialization and development. General theories, explanations or models of late industrialization must fully explain the most important aspects of Chinese growth. Until recently it was usually argued, on the basis that the share of state output in total output has rapidly diminished, that rapid industrialization was the result of growing marketization and entrance of new small private firms. Hence the analogy of ‘a dry prairie, parched by years of planning, awaiting the first sprinklings of market reform’ captures the spirit of this argument particularly well. Here the ‘shoots’ of small private enterprises are considered the ‘foundation for recent growth’. The problem with this view is that it focuses on too narrow a range of explanatory factors in determining performance, oversimplifying the actual process. It does not account for the important linkages between small and large-scale industry. It precludes the possibility of a dynamic state owned large-scale sector and cannot explain why large enterprises have come to play ever more important roles within specific capital-intensive industries in which economies of scale and scope, among other factors, have been crucial to the development of the large modern industrial corporation. If the favourable performance of LMEs cannot simply be attributable to the general tendency to marketization this opens up a number of possibilities for interpreting China’s enterprise reforms, including those in which the emphasis is on achieving ‘an appropriate combination of market and (non-market) institutional arrangements’ (Lo 1999: 21). Chapter One noted that when competing paradigms exist in scientific studies it can often be found that adherents of the different paradigms ‘practice their trades in different worlds . . . [and] see different things when they look from the same point in the same direction’. This chapter has shown how insights gleaned from the more mainstream orthodox type approach at times fail to pay enough attention to explaining the emergence of China’s large-scale sector. So-called heterodox type

38 China’s large industrial enterprises approaches of the late industrialization literature with their emphasis on large-scale industry, institutional reform and the role of the state, point towards alternative explanations for the enigmatic nature of China’s large enterprises and groups. Chapter Three, following these insights, turns to look at the national team of enterprise groups.

3

The national team of enterprise groups

We must unite and rise together, develop economies of scale and scope and nurture a ‘national team’ capable of entering the world’s Fortune 500. (Wu Bangguo, vice-premier, Jingji Ribao, 8 January 1998)

This chapter, building on the previous, turns to look specifically at the ‘national team’ of enterprise groups and related policy trials initiated by China’s State Council. This small number of very large enterprise groups have now come to dominate large-scale Chinese industry and are therefore very important to its understanding. They are sometimes also known as the ‘generals’, ‘key few’ or ‘aircraft carriers’ of the current ‘grasp the large’ industrial strategy, to which they are central. By looking at State Council initiatives to nurture these groups a different perspective on understanding the large-scale sector is provided, generating new insights into both the large-scale sector and the role of state policy. Chapter Two highlighted key features regarding the broader trends in the large-scale sector, explaining its relevance to the current theory and policy debate, contributing to the specialized debate of the LME literature and suggesting how large enterprises have grown quickly throughout China and how they have performed better than generally appreciated. The problem with the LME approach, however, is that it does not reveal in any detail the nature of the institutional transformation of largescale industry. More importantly, the history, role and nature of state intervention, integral to its development since early on in reforms, remains largely overlooked. This chapter, taking a different approach, describes how the small number of national team groups, with state support, have become increasingly important to the current reform strategy, following in spirit the East Asian developmental state model of Japan and South Korea. It looks specifically at the various ways that the micro-evolution of the large-scale sector has been encouraged as China, unlike the former Soviet Union, has actively pursued policies to construct large-scale multi-plant enterprises on the basis of the former large-scale state-owned sector. It therefore builds on the few detailed studies as yet made of China’s large enterprises, moving away from views based ‘on purely a priori conceptions . . . towards the kind of appraisal that is based on empirical investigations’ (Lo 1997: 2). It draws

40 The national team of enterprise groups on interviews undertaken at a leading state think tank, the Association for the Promotion of China’s Enterprise Groups (Zhongguo Jituan Gongsi Cujinhui), as well as using a wide range of Chinese academic sources not readily available in the West. A number of visits were also made to some of China’s largest pioneering national team groups from the auto industry and detailed research into the other 120 enterprise groups now found in the national team was also carried out. This chapter considers the origins of the national team group policy. It also describes important features of the groups, such as their overall importance to the Chinese economy and the industries from which they are found. The evolution of the national team industrial policy, with its changing priorities, including the shift towards creating internationally competitive groups is also considered. Two important State Council directives, issued in 1991 and 1997, in which the selection of the 120 groups was made and various policy initiatives introduced are looked at in detail. These are key policy documents central to understanding the ‘national team’ groups and China’s industrial strategy. The conclusion argues, among other things, that the aspiring developmental state in China has looked to foster oligopolistic competition and replicate the institutions of the large modern corporation in its national team members. Although the development of the national team was initially domestically oriented, aimed at fostering continued domestic economic growth, progressively it has come to recognize the significance of the large corporation to further integrate with the international economy.

Origins of the national team Before explaining the nature of the national team and its relevance to the largescale sector, it is interesting to first consider its origins. It is particularly puzzling that the ‘grasp the large’ strategy has not yet been carefully researched given the obvious similarities of Chinese industrial strategy with Japanese and South Korean policies. The impression sometimes given (maybe because of the increasing interest shown by the leadership in reform of the large-scale sector at this time) is that the strategy was officially endorsed in September 1997 at the 15th Party Conference (Smyth 2000: 721). Closer investigation into the policy to build large enterprise groups, however, reveals that such policies have actually been ongoing at the highest level for at least 15 years, during which time policies have extended their reach and sophistication. Trials to promote large enterprise groups were in fact among the first measures to help ‘grasp the large’. More recently, these have been complemented with other measures to nurture over 500 large enterprises as well as trials with introducing a modern corporate system (in 100 LMEs) and also trials with a number of very large nationwide holding companies. What is interesting, however, is that many of these trial enterprises are also found subsumed within the 120 enterprise groups of the national team, again making these groups of special significance (see Table 3.4). According to policy makers involved with creating the national team, the first policy aimed at enterprise group development was in fact published as early as 1986 (a detailed chronology of these policies is listed in the appendices, as are

The national team of enterprise groups 41 translations from the two main landmark documents in 1991 and 1997). There were a number of factors at the beginning of reforms in the early 1980s that increased the potential political and economic gains of forming business groups. Of particular importance was the need to increase the average scale of operations. The centrally planned economy had fostered an excessive degree of vertical integration within the enterprise.1 There are stories, for example, of car and truck producers manufacturing their own nuts and bolts (Marukawa 1995). This in turn led to a lack of specialization with relatively small-scale operations, many of which were dispersed, often deliberately located in inaccessible regions. The problem of excessive integration is sometimes referred to in China as the ‘da er quan, xiao er quan’ problem, literally translated as ‘large and complete, small and complete’. Cutting away excessive vertical ties while at the same time building horizontal linkages between producers of similar products was necessary for greater specialization in production, which in turn could foster economies of scale. For this rationalization to take place, however, a huge redistribution of physical assets was required. In the face of unclear property rights and undeveloped capital markets this posed a serious challenge.2 In its first stages the development of supra-departmental enterprise groups was one way of breaking through these regional and departmental barriers to enterprise reorganization. Enterprise groups, at the same time as promoting scale, were also seen as a means of maintaining employment and social stability. By coercing or offering incentives for profitable enterprises to take over less profitable enterprises it has been possible to smooth the transition from the planned economy. The practice of attempting to ‘make good’ state industry in this way is not unprecedented. It has been noted enterprise failures were ‘handled as the failure of one division of “China Incorporated” . . . [and that] the means of arranging takeovers of failing firms is quite reminiscent of the practice used within large Japanese enterprise groups’ (Naughton 1995: 240, emphasis added). Although the motives and means for developing business groups have evolved since the early 1980s, increasing scale and ‘making good the entire state industry’ by incorporating loss making enterprises into larger more successful groups still remain important. The origins of the large business groups in the national team are closely related to the emergence of inter-enterprise production agreements and it is for this reason they date to the beginning of reforms. Although sometimes overlooked, even as early as 1979 in the initial throes of state enterprise reform, over 4,200 enterprises were empowered to carry out business outside the plan. This rose to 6,600 in 1980, or 16 per cent of in budget enterprises producing 60 per cent of industrial output and 70 per cent of all profits (Shao 1997: 87). In July 1980 the first policy document recognizing the existence of growing inter-enterprise production agreements was published, ‘The State Council on pushing forward rules relating to economic links between enterprises’ (see appendices). By April 1981 Erqi, a large and well known auto producer and arguably the leading pioneer in the trials with enterprise groups, had become one of the first emergent enterprises to expand from predominantly plant-based operations to a regionally and operationally diversified group of enterprises. At that time it established the Dongfeng Joint Management Company, which attempted to move from a position in which ‘the factories jointly manage’, to

42 The national team of enterprise groups one in which the ‘company manages the factories’ (CRES, ZJTGN 1990: 192). While in the early 1980s reform slowed or even regressed, by 1984 reforms again started to gather pace in urban areas and many large enterprises were also devolved to city and provincial governments. As a result of this growing autonomy and competitive pressures a new impetus to the formation of economic linkages started and continued to develop throughout the mid and late 1980s. From a level of 3,400 in 1980, by 1986 the number of what were termed ‘co-operation agreements’ between enterprises is reported to have mushroomed to 50,000. Among these 32,000 gained the somewhat vague status of ‘economic unions’. Approximately 1,000 were also already being labelled as enterprise groups (Chai 1997: 42). Other reports suggest by 1987 there were 34,518 ‘close’ links between enterprises, and some 11,785 ‘semi-close’ concerns (CRES Research Group 1998: 28). It is worth briefly noting the official definitions given to China’s large enterprise groups. The trial enterprise groups are defined by a large powerful ‘mother’ or ‘core’ company, otherwise also known as a ‘group company’, surrounded by other ‘son’ companies in which the mother holds a controlling share, known as the ‘close’ layer of the group. Enterprises in which the mother has minority share ownership are known as ‘semi-close’ members. Often close or semi-close member enterprises also own stakes in other enterprises, which in turn become ‘grandsons’ of the mother. In this way the member enterprises of enterprise groups have expanded quickly, and this is what distinguishes them from lone large-scale enterprises. By definition ‘the core of the enterprise group and other members all possess independent legal person status . . . this is the main difference between an enterprise group and an individual large enterprise’ (1991 State Council directive, CRES, ZJTGN 1992: 160, see appendices). According to an early official definition firms engaging in economic linkages were only recognized as groups if ‘the firm at the centre of the group had secure ownership or control over (such as majority ownership in) three or more firms’ (Marukawa 1995: 332). By 1995 this number had increased to five enterprises (either stock controlled or wholly owned), although in practice the largest groups such as those undergoing trial had many more members (China’s EM Digest, October 1998). Groups such as Huaneng, Dongfeng, Xinjiang Construction Group and China State Construction Engineering Group, for example, had many hundreds of member enterprises (Table 3.4). On top of the multi-layered structure, it was also necessary that the group’s mother company was classified as either a large-scale enterprise or have registered capital exceeding 100 million Rmb.3 Although the true spirit of the Chinese business group is embodied by those based upon large state plants, such as those in the trial groups, the latter condition has also given rise to a large number of small business groups. As a result the actual number of groups registered at all government levels has grown very rapidly. By 1998 one estimate placed this at 20,000. However, it is suggested that only 5 per cent were ‘cohesive groups’ (ningjuli jituan) at this time, in which son companies were closely co-ordinated by the mother and the capital ties close. As early as 1988 there were reported to be 1,630 large groups, although only 280 were considered ‘closely knit’, meeting official definitions (CRES, ZJTGN 1989: 94). By 1991 this had risen to 431 satisfying CRES’s criteria

The national team of enterprise groups 43 (CRES, ZJTGN: 306).4 In 1992 there was a jump in the total number of recorded groups to 7,538, rising over four-fold from 1988. The rapid increase in this period is somewhat illusory, however, as it was plagued by the practice of what has been called ‘hanging signs’ (gua paizi), referring to the renaming of industrial departments as groups in the absence of any real structural change. Nonetheless, the development of business groups, particularly evident in the early 1990s, has been very rapid with those of the national team at the forefront. Regardless of the exact types of links that were forming, the operations of what were originally plant-based concerns run by industrial departments had started the metamorphosis towards multi-enterprise groups. Of the 45,000 or so links that had developed, a total of 19 per cent were exclusively between state-owned enterprises, 36 per cent between collectives and 34 per cent between state and collective industry (CRES Research Group 1998: 28). Thus, even at this early stage in reform the original basis of the state-owned economy had evolved considerably, with a mass of ad hoc linkages taking place between the newly empowered economic units. The origins of business groups date back to these early reforms. Unsurprisingly, this early period is now being labelled as the ‘gestation’ period of business group development (CRES, ZJTGN 1998: 270). By December 1987 the publication of ‘Some opinions on arranging and developing business groups’ marked the first policy document setting out the aims and means of developing enterprise groups. It also heralded what has now become known as the ‘developmental stage’ of business group development.5 A number of trials with several large auto groups actually preceded and gave rise to the publication of the December 1987 document that marked the ‘developmental’ (chuangjian) stage of business groups and the national team’s development. With the proliferation of economic linkages between enterprises in the early and mid-1980s, it was not long before policy advisers started to realize the potential of further promoting some pioneering groups, particularly those in industries that could benefit from economies of scale. By 1986 prominent Chinese economists and policy makers, including Ma Hong, head of the influential State Council Development Research Centre (SCDRC), began to look at policies specifically aimed at the promotion of very large business groups based around former state plants (Chen 1998).6 It was in fact these plants, such as Erqi, which had been some of the most influential in co-ordinating economic links between firms in their attempts to improve operative efficiency, increase market share and profits. The SCDRC, led personally by Ma Hong, undertook a survey of the problems faced at Erqi in March 1986 (later to become Dongfeng Group). By this time, these enterprises had already incorporated a number of separate enterprises into joint management companies, the prototype of the business groups that were to later emerge. Ma Hong’s discussions with the emerging group were subsequently presented to the State Planning Commission in the form of a report. This report pointed out that the basic problems enterprises such as Dongfeng faced were systemic. Although new types of business organizations were developing, they remained controlled by the institutions of the planning mechanism. The SCDRC therefore made four recommendations: that Erqi be made a trial group, this be given

44 The national team of enterprise groups the status of a top level planning unit, support for the development of a financial institution within the group be provided and that governmental departments continue to devolve power to the group (Chen 1992: 63). By the following month, April 1986, the State Council agreed on the principles of this report and ordered the State Planning Commission and CRES to examine their proposals in more detail. By July, after 2 months of enquiries and research at Erqi the State Council approved the policy that resulted from this research, ‘On Dongfeng Joint Management Company undertaking preferential planning status’. Several months later, this new policy was extended to include two more auto groups, Jiefang (based on the First Auto Works) and Heavy Vehicle Group. Another policy document, ‘Notice on Jiefang, Dongfeng and Heavy Vehicle Group joint management companies undertaking preferential planning status’ was issued and the trial was expanded (see chronology of important policies related to the development of large business groups in the appendices) and the ‘Big Three’ auto manufacturers were given a special place in enterprise group policy making. The following year this policy idea continued to evolve and by December 1987 the first landmark policy document was published. The research and policies undertaken at the three large auto groups now stand out as historically significant landmarks. As later sections show, they represented the first cautious steps in what was later to become a greatly expanded and sophisticated long-term industrial development strategy of China’s large-scale sector. They ushered in a period, continuing today, in which innovative policies were introduced and cautiously widened to other large enterprises in other industries throughout China’s regions. Nascent business groups exchanged views with top policy makers in the search for the institutions governing the scope of their activities. From 1988 onwards, to the batch of the three pioneering groups, were added four enterprises from the electric generating equipment, three from electronics, two from construction materials and one from the agricultural equipment industries (Chen 1998: 18). The lone policy of the preferential planning was thus expanded in number to thirteen groups. On top of these centrally controlled groups another thirteen provinces and cities also promoted some fifty or so groups to separate planning status, heralding a new era. The inclusion of provincial and city-level groups in the trials also marked another important element of the trial policies, namely their quick adoption and implementation at lower levels. Ten years later the batch of trial groups had increased from just a single group, Dongfeng, to over 200 statelevel groups and about 2,700 province-level groups, as well as thousands more lower-level groups. A range of new measures, considered shortly, had also been introduced. The investigations in 1986 of the SCDRC, led by Ma Hong, and subsequent directives of the State Planning Commission in 1987 reaffirmed a commitment to the enterprise above the plan, and in particular to promoting large-scale enterprise groups as microeconomic engines of growth. They constituted the very first steps in the policy, yet to be fully conceived, of ‘grasping the large and letting go of the small’.

The national team of enterprise groups 45 Scale Before going further, it is important to briefly stress again the growing importance of the national and provincial teams to an accurate understanding of the large-scale sector. Even by the mid-1990s China’s national team had grown to be very large, dominating much of the large-scale sector. This should perhaps not be so surprising. A feature of economic development, explained in Chapter One, has been the increasing importance of large-scale industry, both in terms of contribution to output and employment. A key goal of ‘grasping the large’, as in Japan and South Korea, has also been to create industry leading enterprises capable of reaping economies of scale and scope, of which the trial groups appear to have been especially capable. By 1996 the six trial groups in electricity generation and supply, for example, produced over half of China’s electricity. The eight metallurgy groups produced 40 per cent of the nation’s iron and steel and the six approved auto-making groups manufactured 57 per cent of the total volume of China’s auto industry. In the aviation sector, the three civilian airline groups shared 55 per cent of the domestic market (CRES, ZJTGN 1997: 244).7 Although this was high by Chinese standards, Korea’s all industry three-firm concentration ratio in the 1980s reached 62 per cent and Japan’s 56.3 per cent (Amsden and Singh 1994: 948). In Korea, ‘despite world record rates of economic growth the chaebol still managed to increase their share of GNP . . . By 1988 the revenues of the top ten business groups equalled about 60 per cent of GNP, up from 15 per cent in 1974 (Chandler et al. 1997: 337).8 In the US the largest 100 manufacturing firms sales are reported to be equivalent of almost 25 per cent of GDP (Chapter One). The 2,500 plus national and provincial largescale enterprise groups still only produced approximately 11 per cent of GDP by the end of 2000. By international standards, concentration therefore remained low in Chinese industry. The national team groups, furthermore, had also become increasingly important to international trade, exporting about 10 per cent of China’s total exports in 1995 (ZTN 1995: 581, Table 3.1) and playing a leading role in many of the most important trading sectors, such as electronics. Unsurprisingly, their large overall size and history as sources of income from the command economy meant they still made important contributions to public finances. Their taxes were equivalent to about 15 per cent of total government revenues (ZTN 1995: 221). It is no surprise that the national team groups are large, as they are normally based upon large-scale enterprises that became the ‘core members of the group’ with the ‘capability to act as investment centres’ (CRES, ZJTGN 1992: 160). This enterprise was invariably listed among the top ten in its sector in China, in terms of both assets and sales (Table 3.4 shows that there are few exceptions). In 1995, the only year for which aggregate statistics can be found, the 120 trial groups’ combined workforce stood at approximately 7 million, averaging about 60,000 workers per group and equalling 1 per cent of the national workforce and 6 per cent of the total state sector workforce (CASS, ZGFB 1998: 121; SSB, ZTN: 92–102). The workforce of large industrial enterprises stood at a peak of over 24 million this year so the 120 enterprise groups’ total employment was already approximately equal to a quarter of that of the large-scale sector (Liu et al. 1999: 119).9 Within the

46 The national team of enterprise groups Table 3.1 Average group assets, net assets, sales, taxes and exports by industrial sector, 1995 Average assets ($b.) Metallurgy (8) 4.3 Energy (11) 5.0 Chemicals (7) 0.92 Autos (6) 3.2 Machinery (14) 0.52 Electronics (10) 0.52 Transport (8) 2.8 Pharmaceuticals (5) 0.47 Construction (3) 1.9 Foreign trade (8) 1.4 TVEs 0.75 120 Average 1.6 120 Total 193.5

Average net Average assets ($b.) sales ($b.)

Average taxes ($m.)

Average exports ($m.)

2.3 2.5 0.35 1.1 0.16 0.18 1 0.16 0.38 0.27 0.42 0.65 78.5

332 207 58 293 29 43 73 37 64 37 85 86 10.2 bn.

228 31 26 42 26 103 256 31 48 765 10 117 14.1 bn.

2.1 1.8 0.42 2.6 0.29 0.52 1.2 0.29 1.3 1.6 0.7 0.93 112

Source: CASS, ZGFB 1998: 121, 122.

state-owned industrial sector, as mentioned previously, by 1997 the groups were reported to make over 50 per cent of profits, pay 25 per cent of taxes and make over 25 per cent of all sales. Of the 120 groups, it is reported less than ten were loss makers at the end of 1995 and total profits of $5.3 billion were made, an average of $44 million per group (CRES, ZJTGN 1997: 243). The sales value of these 120 groups was equivalent to approximately one-third of the total output value of the whole large and medium-scale enterprise sector, consisting of nearly 24,000 enterprises (CASS, ZGFB 1998: 121; SSB, ZDZQN 1996: 2). The process of ‘jituanhua’, the transformation of enterprises into extended groups of enterprises, had therefore subsumed much of the large-scale sector. State industry, under the aegis of the policy of ‘grasp the large, let go of the small’, has now become gradually distilled in a small number of large enterprise groups. Group expansion and diversification An important means of growth for China’s largest enterprise groups, as well as a key reason for their promotion, has been because of their ability to takeover other enterprises, often loss makers. China’s large enterprise groups have been likened to those of East Asia because of the rapid expansion of the number of members in their groups, often in diversified industries (see Nolan 2001 and Keister 1998). By 1997 the original 57 trial business groups in the national team had incorporated over 1,800 stock-controlled enterprises and over 1,300 enterprises in which they held minority share positions as the ‘ancillary networks’ of the groups grew (Yu 1997: 5). On average therefore each mother company had fifty-four stock-controlled or stock participating companies within its group, of which thirty-one were fully

The national team of enterprise groups 47 stock-controlled companies and twenty-three linked via minority stock holdings. Large Japanese enterprise groups typically have several hundred subsidiaries. Sumitomo Metal, for example, has over 190, Matsushita 670, NEC 230 and Toyota 200 (Shimotani and Shiba 1997: 8). In terms of the number of subsidiaries, Chinese groups appear to be approaching those of Japan’s in the mid-1970s. Among the largest enterprise groups are three experimenting with the introduction of a national holding company system, Aviation Industries China (AVIC, now split into two), China National Non-metallic Minerals Enterprise Group (CNMEG) and Sinopec. These possess hundreds of close and semi-close stock-controlled companies involving hundreds of thousands of workers. Other smaller groups of the national team, such as China Textile Machinery Group, for example, are still quite large, consisting of over twenty LMEs scattered across over eleven provinces (Table 3.4, column d for details of the number of members in the trial enterprise groups). Enterprise group formation and subsequent diversification is, unsurprisingly, closely related to merger and take-over activity in China, the earliest examples of which date to 1984. Although such activity initially was restricted in number and size, by the end of 1988 over twenty-seven provinces and cities were involved in this type of restructuring promoting the development of groups. It is reported that a total of 2,856 enterprises had taken-over or merged with 3,424 other enterprises, although only a quarter of these were reported to be profitable and 4 per cent of these considered ‘comparatively profitable’ (Shao 1997: 90). This reflected the role business groups undertook in incorporating and ‘making good’ (gao hao) poorly performing enterprises, a key feature of their development and promotion. This early period, which is considered China’s first ‘merger wave’, as already noted, also corresponds to what has been labelled the ‘developmental’ stage of Chinese business groups. The development of groups and such restructuring have progressed together. Large groups such as Yiqi, Dongfeng, Shougang and Jilin Chemical Fibre Group, for example, incorporated dozens of member enterprises during this period. Interestingly, however, up to the end of 1988 there were still only 220 cross-provincial transactions reported, less than 7 per cent of the total.10 In contrast, 33 per cent of these were trans-industrial (SCDRC, ZJN 1994: 659). It appears, therefore, that many groups diversified even early on in their development, although they found it harder to spread their operations geographically. According to one 1994 study of the close members of forty-two large enterprise groups, thirty-three produced between two and seven different products and six produced more than ten different product types. It deemed that forty of the forty-two groups were transindustrial. Of these forty there were thirty-six groups that spanned between two and five industries, and four groups that operated in more than six industries (SCDRC, ZJN 1994: 659). The problem of excessive diversification continues today as barriers to large trans-provincial mergers remain. It is suggested the result of the unbridled expansion of enterprise groups ‘is a typical East Asian diversified conglomerate investing in any activity that brings short term profit, but without a common focus’ (Nolan 2001: 283). Excessive diversification has important implications for firm level catch-up today during an era in which supra-national consolidation and specialization has been ongoing. Indeed, as the next chapter

48 The national team of enterprise groups shows, the logic driving development of enterprise groups, and the national team in particular, more recently appears to have turned from salvaging small-scale industry to pushing forward the development of large internationally competitive groups by promoting mergers between strong groups in the same sectors. China’s national team enterprise groups have grown quickly over reform, partly as a result of absorbing smaller, often loss-making enterprises. They have fulfilled a dual function, contributing to production in key industries, as well as helping promote economic and social stability by incorporating loss-making enterprises. By the mid-1990s the national team enterprise groups consisted of key enterprises in important pillar industries and they had come to dominate the large-scale sector and state industry as a whole. Before returning later to the challenge international integration poses for China’s national team, it is worthwhile recounting the history and progression of the ‘grasp the large’ strategy. This itself has evolved from an initial focus on domestic considerations until only more recently turning to focus on the international challenge.

Pillar industries and an evolving industrial policy Most of the groups of the national team were selected, unsurprisingly, in the capitalintensive pillar industries capable of reaping economies of scale and those that the previous chapter identified as being bastions of big business. However, the selection of the national team groups has also been staggered in two stages, stages that reflect the evolving nature of China’s industrial policy. Of the 120 trial groups, energy supply (11), electronics (10), iron and steel (8), autos (6), machinery (14), pharmaceuticals (5), construction (3), aviation and aerospace (6) and chemicals (7) are some of the most important. The groups include the crown jewels of Chinese industry with industry leaders across key industries such as autos (for example, First and Second Auto Works and SAIC), steel (Shougang, Baogang and Angang), glass (Yaohua), agricultural machinery (First Tractor), construction equipment (Xuzhou Construction), textile machinery (CTMC), chemicals and petrochemicals (Juhua, Haiyanghua Groups), pharmaceuticals (Sanjiu, Tongrentang), mining (Shenhua, Yankuang), trade (Sinochem, China Minmetals), electronics (Legend, Founder), building materials (Hailuo Group), construction (China Construction), power equipment (Harbin, Dongfang), power generation (Huaneng), aerospace (Avic), transportation (Cosco), retailing (Hualian), food processing (Chundu), camera film (Lucky) and forestry (Jilin, Harbin), to name just a few examples. It is common in advanced economies, as the previous chapter pointed out, for these industries to harbour large modern industrial corporations, ‘most crucial to the strength, continued growth, and defence of a modern, urban, industrial and technologically advanced society’ (Chandler 1990: 257). To Chinese policy makers, then, it can be little surprise these industries have been isolated as the ‘pillar’, ‘lifeblood’ or ‘backbone’ industries that basically ensure steady economic growth. Other industrial sectors, where large enterprises are currently not so important, have not received the same level of support. Recently, a minister responsible for light industry, for example, commented that ‘to develop State sectors is critical to the

The national team of enterprise groups 49 economy but not to light industry because light industry isn’t influential enough to national security and the economy’ (CDBW, 20 March 1997). Instead, it has been advised that ‘the state should pull out of direct activity in 146 of 196 industrial departments, including garments, textiles, food, beverages and daily consumer good . . . but maintain at least partial control over 35 sectors, including coal, iron and other major mineral resources, aerospace, new materials, computers, medicine, electronics, petrochemicals and automobiles’ (COL, 6 December 2000). As the previous chapter showed, it is exactly these light industries that have experienced a decrease in the importance of large enterprises and in which the number of new entrants has been most rapid. Thus the share of output contributed by large-scale industry has actually decreased in these sectors over reform (leather, furs, down, furniture making, garments and other fibre products, stationery, educational and sports goods, printing and record pressing, etc.) following the general tendency of other developed market economies in earlier periods of their development. Only a small number of groups has been chosen from what could be considered light industries and these were added in the second batch, mainly to standardize the trials across a wider range of industrial sectors in the quest to spread the modern enterprise system. As Table 3.2 shows, the first batch of fifty-seven groups selected in December 1991 was clearly biased towards utilities, large construction projects and areas that acted as either the mainstays of economic development or were crucial to national security.11 Among these fifty-seven groups, for example, were five large power generation groups and five power generation equipment groups. Ten of the first fifty-seven groups were therefore related directly to electricity supply, evidently, a ‘pillar’ industry crucial to the ‘strength’ and ‘continued growth’ of the economy. Six aviation groups, important in guaranteeing national defence, were also included in the first batch. Three major national construction and technology projects were also added, all related to power generation. The Shenhua Group involved in coal mining, transportation and power generation, Guangdong Nuclear Power Group involved in developing nuclear power plants and Gezhouba Group, involved in hydroelectric dam construction, were all of great national importance. Three national airlines were also added, as were four forestry groups. In the second batch of groups in 1997 no further additions were made to the sectors from which these twenty-six groups originated. The selection of these groups was indicative of the particular goals of early policy, which though ostensibly aimed at creating large modern industrial enterprises was also well aware of the practical necessities of providing the basic inputs to the fast growing Chinese economy. At this time, therefore, the development of the national team appears to have kept hold of some of the traditional planning concepts, which prioritized the development of basic industries and projects of significance to the continued growth of the national economy. Rapid demand growth for a range of new consumer goods spurred industrial development during the 1990s and was in part responsible for the change in direction of policy. The second batch of groups not only expanded the number of trial groups and the industries from which they were chosen, it also included groups from a

50 The national team of enterprise groups Table 3.2 Industrial sectors of the first and second trial group batches Industry

First batch, 1991

Second batch, 1997

Total

Electricity generation Coal mining Automobiles Other machinery Electronics Iron and steel Transportation Civil Aviation Chemicals Construction materials Construction Textiles Forestry Aviation and aerospace Foreign trade Domestic trade/services Pharmaceuticals Agriculture Light industry TVEs Other

8 1 3 10 3 4 2 3 4 4 0 1 4 6 2 0 2 0 0 0 0 57

0 2 3 4 7 4 3 0 3 1 3 3 0 0 6 6 3 5 3 3 4 63

8 3 6 14 10 8 5 3 7 5 3 4 4 6 8 6 5 5 3 3 4 120

Sources: SCDRC, ZJL 1998: 704; CASS, ZGFB 1998: 121; SSB, ZTN 1996: 232.

range of different industries with different ownership forms. Especially symbolic was the inclusion of three TVEs, claimed to be a ‘great breakthrough, illustrating that the standardization of the trials had broke through the traditional concepts of state enterprise system’ (SCDRC, ZJN 1998: 704). In the second batch no additions to the power generation groups, power equipment makers, defence groups or major construction projects were made. Instead, the remaining twenty groups in steel, autos, chemicals, electronics and machinery industries were expanded. The steel groups were increased from four to eight, autos from three to six, chemicals from four to seven and electronics from three to ten (Table 3.2). This, in part, was an attempt to promote oligopolistic competition between group members, following principles used by industrial policies in South Korea and Japan. The market mechanism was also allowed to play a greater part in pushing forward successful groups. Policy makers were well aware of the intense nature of oligopolistic competition in both Japan and Korea. Members of the Association for the Promotion of China’s Business Groups, an important think-tank responsible for formulating national team-related policies, undertook trips to Japan and Korea to discuss industrial policy with leading academics and policy makers and attempted to replicate certain elements of these nations’ policies. In South Korea it has been noted that the groups ‘have been self-disciplined to the extent that they have competed fiercely with one another’ (Chandler et al. 1997: 361). Another observer

The national team of enterprise groups 51 notes that ‘if there is one key to the Japanese economic miracle, it lies in the maintenance of a fever pitch of inter firm competition’ (Chandler 1997: 543). The second directive appeared to veer towards this line of thinking. To these ends three more pharmaceutical groups, two mining groups and three construction groups, were also added. The second batch also included six trade groups, expanding the two groups already approved in 1991, highlighting the growing importance of the trade balance and foreign exchange constraint to China’s overall progress. Although there was also far greater emphasis on pushing forward the creation of the ‘enterprise’ and the legal institutions necessary for its development (the enterprise law having been published several years earlier) policy makers maintained an element of their pragmatic streak. What claims to be one of China’s largest business groups, for example, the Xinjiang Construction Group, which employs several million people and is important in the development of a relatively backward province, was also added to the second batch. A number of other groups from the poorer inland regions, such as Xinjiang Textile Group and Guangxi Guitang Group (sugar production) were also included. This marked a recognition of the need to boost the development of poorer regions as well as to experiment with the business group policy across China’s regions. Other new entrants among the second batch of groups included a number of regional development and investment groups, including one of China’s earliest groups, the Shenzhen Special Economic Zone Development Group and Changjiang United Economic Development Group. The particular industries from which the groups have been selected as well as the timing of their selection is indicative of an evolution in policy objectives, as well as a structural change in Chinese industry towards new types of consumer goods. The most noticeable trend is the movement from support of the most basic backbone industries, such as power, defence and construction projects, to those which held greater growth potential as incomes increased and export markets developed. Autos, electronics, machinery, pharmaceuticals, chemicals, steel and aviation stand out as examples. Policy makers also attempted to intensify competition between the largest groups in these key growth industries. The inclusion of a small number of large township and village enterprises highlighted the acceptance of new ownership forms. The small number, however, was also indicative of the supremacy that state industry still maintained in the large-scale sector.12

Policies to ‘grasp the large’ Although the emergence of trials with groups, as already mentioned, dates back to 1986, two influential State Council policy directives, in which formal selection of the trial groups was also made, are rightly regarded as a ‘a great leap forward’ in the national team’s development (Chen 1998: 704). Although they were not the first enterprise group-related policies (the first being, as noted, in 1986), they stood out as an explicit high-level commitment to the policy of building national champions, elevating it to an even higher status. Just as the groups themselves have grown in size, state policies endorsed in these two documents have also helped

52 The national team of enterprise groups drive institutional sophistication in the large enterprise groups. To some extent then, ‘grasping the large’, suggesting a highly interventionist approach, is a slightly misleading representation of the actual policy. This has focused closely on institutional development, allowing the former state plants to evolve and grow as large corporations in their own right. Although direct support has also been provided (such as via financial means) this, at times, has been overemphasized at the expense of other measures. The first directive, December 1991 This first directive stated the objectives and principles of experimentation with the trial groups as well as the necessary conditions for selecting trial members. It is the first published blueprint of the plans that the Chinese State Council hatched for the development of large internationally competitive enterprise groups. An important theme of this early directive, contrary to what might be expected, involved endowing the groups with greater autonomy by freeing them from some of the constraints of the planning system. One feature of the policy to develop groups has been the creation of new institutions within and around the groups. It has been suggested ‘the Chinese government has offered two main reasons for promoting state-sponsored enterprise groups’ (Smyth 2000: 727), namely to create groups large enough to compete in international markets and to avoid duplication. While these are two main reasons, Chinese policy makers explicitly stated five and they were put forward in the December 1991 directive. The first, coinciding with the aforementioned, was to encourage specialization and reduce replication so as to redress the historical legacy of geographically dispersed small-scale industry with the ‘inability of achieving economies of scale’ (quotes in next sections, unless otherwise stated, are based on the 1991 State Council directive, published CRES, ZJTGN 1992: 67–71 which is translated, along with the subsequent 1997 directive, in the appendices). This problem is commonly referred to under the phrase ‘da er quan, xiao er quan’, already explained, and focuses on achieving scale. As Chapter Two showed, there are good reasons for thinking groups have been especially capable of reaping economies of scale. Second, the groups were seen as important agents and a means of breaking through the existing regional and departmental barriers that constrained the natural growth of large-scale enterprise groups. This still remains a serious problem today: ‘enterprise mergers are still hindered by regional and departmental barriers’ (CD, 8 December 1998). Empowering groups with a new degree of autonomy created new supra-departmental agents, capable of superseding the previous state bureaucracy. Third, groups were to give play to the leading role of large enterprises to ‘form superior masses and co-ordinate the roles of members’, particularly to direct investment funds to specific areas of the economy so as to ‘concentrate financial capital in order to undertake unified planning’. The co-ordination of member enterprises, as various case studies show, has been an important element of the enterprise group (Nolan 2001). Fourth, related to the closer international economic integration already noted, they were to improve their international competitiveness and ‘steadily occupy and increase share of international

The national team of enterprise groups 53 markets so as to become the major force’. Even as early as 1991, therefore, there was a stated intention of developing large internationally competitive groups. This goal, as later sections show, has become prioritized in recent years, superseding all others. The fifth and final stated goal of creating the groups was somewhat misleadingly referred to as ‘macro-economic adjustment capabilities’. The enterprise groups were also to ‘improve the efficiency of macro-economic reform’ by absorbing smaller, often loss-making enterprises, so that ‘by means of creating a batch of large enterprises as the core of the enterprise groups the state will be able to more efficiently lead the economic activities of a large number of small and medium enterprises’. This final objective highlights the official endorsement groups were given in absorbing enterprises in the small-scale state sector and loss makers in general. Although comparatively little is known about this, in the period 1994–7 it was reported, that large profitable groups saved about 2,000 loss making enterprises (CBR, May–June 1999). It is also known, as discussed in earlier sections, that the history of enterprise group development is closely associated with that of merger and take-over, a process in China that has usually involved loss-making enterprises but seldom mergers between ‘strong’ enterprises. Enterprise groups have therefore explicitly been given a dual role, one with inherent contradictions. They have been earmarked to lead the large-scale sector into international markets as well as absorbing large numbers of poorly performing smaller enterprises. This dual function of enterprise groups continues to make them an appealing and natural policy for the reform of state industry. It also, however, brings into question whether both goals can simultaneously be achieved. The State Council envisaged four criteria for group selection. First, a key prerequisite was for a ‘strong core member’ to lead the group with the ‘capability to act as an investment centre’ (all quotes taken from CRES, ZJTGN 1992: 67–71). To this end it could either be a ‘large-scale manufacturing operation, service enterprise or even a capital rich holding company’. The former has become the most common among the three different types of core member and this has given rise to the agglomeration of the national team enterprise groups around successful LMEs, often industrial LMEs, such as Shougang, Yiqi, Dongfeng, Sanjiu, Datong, Harbin Power Equipment and the like (Table 3.4). Second, a ‘multi-layered structure’ was considered a prerequisite for large group companies with the duties of leading smaller enterprise and developing into trans-regional groups. To this end it was argued that there must be ‘a number of semi-close and dispersed members’ in the group. Third, ownership ties linking the group members were to be established so that ‘the core enterprise should establish stock control over the close layer of member enterprises’ and ‘semi-close members should gradually develop capital links with the core’. The purpose of this was to bring ‘integrated management’ between member enterprises and promote cohesion within the groups. Finally, the selection of groups was to ‘correspond to national economic development strategies and industrial policies’ so that in ‘production, construction, investment and trade the groups should occupy important positions’. The selection of groups, therefore, had the intention of developing multi-plant enterprise groups in key industries, those highlighted in the previous chapter.

54 The national team of enterprise groups The first State Council directive in 1991 outlined some of the unique steps that were to be taken to help develop groups. These included the nature of preferential planning, the means of developing finance companies promoting the internal circulation of funds within the groups and the promotion of export and import rights. In selecting a batch of fifty-seven groups it marked an important landmark in the development of the national team. The State Council in China, unlike leaders in the former Soviet Union, had committed itself to the development of a policy for creating large enterprise groups in industries it considered of special importance. An incremental pragmatic approach, building in the spirit of earlier successful East Asian developmental states, had been adopted. The second directive, April 1997 After a gap of about 5 years, on 29 April 1997, a second major state directive concerning the national team of enterprise groups was published. An additional batch of sixty-three trial groups was added to the initial fifty-seven groups. This new policy was in some respects an update and continuation of the earlier policy. It deemed that the initial batch had ‘basically achieved the stated goals’ and had therefore been successful (all quotes based on 1997 State Council directive, CRES, ZJTGN 1998: 159, see appendices). It also, however, importantly stressed that a ‘new phase’ had been entered. The new policy directive, although pushing forward and recognizing many of the reforms initiated in the earlier document, noted in particular two important changes with implications for policy making. First, it was argued that the pattern of economic growth in the domestic economy had ‘changed from extensive growth to concentrated intensive growth’. This referred to the rapid development of large-scale industry in certain key areas of the economy (highlighted in the previous chapter). Second, it also heavily stressed the implications of further integration with the international economy, arguing that ‘as opening to the outside continues enterprises will face more severe domestic and international competition’. As a result of these two observations the new enterprise group directive now argued that a ‘crucial stage’ in reform had been entered in which ‘two basic transformations’ had to be made. The movement from extensive development to intensive concentrated development within key industries had to be promoted and with this, also from national to international markets. The new directive therefore acknowledged a new and important jump had to be made, in which the scale of enterprises needed to be increased and a focus placed upon their international competitiveness. Unsurprisingly, the directive concluded that ‘deepening the trial work with large enterprise groups is a vital necessity’. It suggested that more profound steps would have to be taken if the national team were to challenge international competitors. The other goals laid out in the later document are in many ways quite similar to those given in the 1991 document, signalling that some of the basic problems with group development still existed. Apart from the stress on reaching international levels of competitiveness, there were two other noticeable differences to the earlier document. First, an important position is given to the establishment of the modern

The national team of enterprise groups 55 corporate system so that the groups and their members could become ‘defined legal entities’. To this end it is noted that ‘the direction of state enterprise reform is the establishment of the modern corporate system’, based upon China’s company law, newly established in 1994. Greater emphasis is also placed upon the separation of enterprise and governmental activities and the transformation of government departments, making the groups responsible for their debts as well as granting them rights to retain profits. Second, although the role of groups in promoting ‘macroeconomic stability’ and directing a large number of small enterprises is not omitted entirely as a goal, in this later document it is only briefly mentioned in passing. This later directive signified an intention to move away from state intervention in creating ‘forced marriages’. The second policy continued to attempt to concentrate greater powers within the mother company so that they could ‘formulate strategies’ for the groups and become the leading providers of capital and technology, co-ordinators of foreign investment and technological exchanges within the groups. To this end the investment function of the mother company was expanded, giving it greater freedom in co-ordinating new investment projects as well as utilizing foreign capital for new projects beneath $30 million dollars. Domestic and international stock market listings were also to be encouraged among the mother companies, as well as corporate bond issues. Trade rights were also expanded to other member enterprises within the enterprise groups. The creation of technology and research centres within the groups was also promoted. This second directive recognized China’s increasing international economic integration and the need to develop further the institutional framework within which large enterprises operated. It recognized the need to concentrate further industry in certain sectors by creating larger economic units more akin to large modern industrial corporations in developed nations. It expanded the number of enterprises, the industries and regions they covered, it also recognized that large enterprises could be privately owned and operated, by including three TVEs. Importantly, it also promoted the development of R&D capabilities in the trial groups. It was a reaffirmation of the commitment to the enterprise group strategy. Perhaps most importantly, however, was its recognition of the coming pressures of closer international integration and the need to strengthen large groups further. Implementation Enterprise group policy has followed the ‘groping for stones’ approach to reform, using trial and error, building upon more successful measures. Dongfeng Group, a large auto manufacturer, as previous sections have shown, was arguably the first trial enterprise group. Its rapid growth in the early 1980s, coupled with its innovative spirit, singled it out as one of the most progressive of reformers. Accordingly, it attracted the attention of policy makers. By 1986 policy makers with close links to the State Council undertook several months of investigation at Dongfeng and subsequently trial measures were introduced at two more auto producers, forming the first batch of only three trial groups. Shortly after this, by April 1987, the number of trial groups had unofficially expanded to thirteen and the preferential planning

56 The national team of enterprise groups policy, the first trial measure, was complemented with the promotion of internal group finance companies. Over the years a number of new policies was introduced and spread throughout an expanded number of trial business groups, including such measures as foreign trade rights, clarification of property rights within the core enterprises, the promotion of technology centres and stock market listings. Many of the policies introduced to the trial enterprise groups in the 1991 and 1997 State Council directives were strongly oriented towards the introduction and promotion of new institutions that could operate around the legal framework also being created. These allowed the groups to break away from the traditional planning system and facilitated the transformation from lone plant-based operations to multi-plant transregional enterprise groups. Table 3.3 illustrates the variety of policies used, listing some of the most important measures, the timing of their introduction to the trial groups and the way in which they gradually broadened their coverage within the national team. Table 3.3 shows that by 1999 the three original trial groups selected in 1986 from the auto industry had, over the years, expanded to the present 120 of the national team and over 2,500 province-level groups had been registered in lower-level teams. Various major policy measures, considered in the next sections, had been introduced to the national team. These included such steps as freeing up the groups by allowing them greater basic decision making, the development of internal financial companies, the reform of ownership rights, introduction of import and export rights, stock market listings, financial support for selected large enterprises in the groups, the unification of tax payment systems and the annexation of scientific research institutions within the groups. Table 3.3 Evolution of policies and their implementation within the centrally approved enterprise groups, 1987–99 Policy

1987 1991 1994 1995

1996 1997 1999

Number of groups undergoing trials Preferential planning status Foreign trade rights Access to foreign finance Foreign commercial affairs Unified taxation of groups Empowered with state property rights Technology centres Finance companies Unified taxation system Involved in State Council trials with introduction of modern enterprise system Number of focal 512 LMEs in groups Stock market listings Mother/son company system

13 12 — — — — — 13 — — — — —

55 14 — — — — 3 — — —

56 34 54 — 46 — 7 26 33 22 —

57 40 57 — 49 23 7 — 39 — —

57 40 — — — — 7 — 35 — 15

— 57 57 — 51 — — — 38 25 —

120 120 108 38 — — — 71 44 — 30+

— — —

— 30 15

— — —

— 32 —

— 43 —

74 66 —

Sources: SCDRC, ZJL 1998: 704–9, 1996: 706, 1995: 601; CRES, ZJTGN 1997: 244; Ying 1999: 34; Beijing Review, 11–17 January 1999.

The national team of enterprise groups 57 Preferential planning As Table 3.3 shows, the single-track preferential planning policy was the first trial measure introduced within the national team groups. It originated from Ma Hong’s 1986 visit to the three pioneering auto groups. It enabled the emergence of the groups from within the planning system and the beginning of their evolution into units more akin to enterprises. For the first time it gave enterprises real autonomy in the most basic of decisions concerning areas such as product output volume, basic construction and investment, foreign technology use, science and education, salary and financial decisions. First introduced in 1986 at Dongfeng and later at the other two auto producers, the system was quickly expanded to other groups, reaching thirteen by 1989. By the end of 1991 all of the trial groups were using the single-track system giving them greater autonomy in making firm-level decisions. Of all the policies introduced it spread most quickly. Symbolically, it elevated the core enterprise of the group to the same level as the planning authorities. Instead of receiving planning orders, therefore, the groups were able to make requests directly from the state planning department and other necessary organs, informing them directly of their plans and requirements. This included only ‘the core enterprise and the close layer of members but not semi-close and dispersed members’ (CRES, ZJTGN 1992: 67–71). This created an incentive for enterprises to enter the close layer of the groups and gain preferential access to supplies. By 1991 the right to participate in relevant meetings with the Planning Commission and other related departments was also granted. The Planning Commission’s role evolved, it now provided macroeconomic information to the groups to help them better deal with unpredictable market conditions, circumstances of which they did not have a great deal of experience. The policy also raised the status of managing directors to viceministerial level, although interestingly their salaries were not raised in line with new political status. Although the single track was basically phased out as the plan’s importance diminished, it had played an important role in stimulating the early development of the enterprise groups. As early as 1986 it recognized the need to clear away the restraints of the planning system and represented the first coherent measure aimed at promoting business groups by empowering enterprises with the most basic of production decisions. It was also the first step in the movement towards a more coordinated business group strategy by accepting that micro-level planning should be carried out by the enterprise. The need to introduce such basic enterprise freedoms highlights just how primitive China’s nascent groups remained and how much work there was to be done to transform them. Only by the start of 1987 was the most basic of decision making being passed on to the firm as the groups started to edge out of the planning system. Internal finance companies In July 1987 the first internal finance company was established, again at Dongfeng, heralding another important development in the national team by increasing the

58 The national team of enterprise groups provision of finance within the groups. The introduction corresponded to a time when, as previously described, formal and informal take-over activity was starting to take place and thus relations between close members of the groups, concerning both production and management, were growing ever closer. Exchanges of products and services had increased quickly between group members. This is illustrated well at Dongfeng. By 1987 a third of the group’s total sales was made between member enterprises (Chen 1998). This in turn helped not only breakdown the regional and departmental ownership structures between close members of the group, it also led to the question of how better internal financial distribution channels could be developed. A logical step was to establish an organ that could productively harness funds, moving them from enterprises making excess profits to those short of capital. The policy quickly caught on and by 1994 there were thirty-three such finance companies (Table 3.3). Because of weaknesses with the state-owned banking system financial companies were a significant innovation for the national team. The banking system was not capable of undertaking loans of sufficient size nor could it allocate them across the various provincial and departmental boundaries that the business groups often spanned. Finance companies, as well as solving this problem, also introduced innovative new measures to help their groups grow. Among these was the provision of timely short-term credits to tide over member enterprises in emergency situations as well as the introduction of hire purchase schemes. The banking system did not offer this kind of flexibility, dedication or innovation to promoting the interests of the trial groups.13 The development of internal group financial institutions has been hypothesized to compensate for market imperfections, a way of reducing transaction costs (Leff 1976). New econometric evidence, one of the few studies made on China’s large groups, suggests finance companies have significantly contributed to the improved financial and productivity performance of China’s largest groups: ‘the presence and predominance of insider lending arrangements in the business groups positively affect the financial performance (profitability) and productivity (output per worker)’ (Keister 1999). It has also been argued that such financial arrangements are typical of nations during early periods of development.14 As with the broader trends in the emergence of LMEs, in particular sectors shown in Chapter Three, the microeconomic and institutional evolution of these groups also appears to be following a pattern that has historical precedent. Management rights over state assets Introduced gradually, by 1997 renewed commitment was shown in efforts to reform the rights to manage state property, a key element in clarifying the ownership relations between the large numbers of group members and promoting ‘cohesion’ (ningjuli). Again, Dongfeng was the first group to introduce this policy under the guidance of the newly established State Capital Management Office in 1990. Later in 1990 a small trial among three groups was run, including Dongfeng, Heavy Vehicle Group and Dongfang Group. By 1992 official policy expanded the number undergoing the trial to seven groups. From February 1993 onwards more of the

The national team of enterprise groups 59 trial groups were given these rights. Provincial and city-level governments also started to introduce the policy, quickly widening their impact. The policy was introduced because of the rapid expansion of the groups and the difficulty of taking investment decisions under such opaque ownership rules. In the 5 years between 1982 and 1987, the early stages of business group formation, Dongfeng had grown from a group of just eight enterprises spanning eight provinces to 118 enterprises spanning twenty-one provinces. As a leading group representative commented, ‘what this amounted to in reality was simply the linking of industrial departments’, not enterprises (Chen 1992: 64). The group company did not always have absolute authority over these departments. It therefore became very difficult for Dongfeng to control group members, which though nominally linked to Dongfeng were still often under local government control. Thus, for example, in extreme cases local authorities would simply repossess enterprises that Dongfeng had transformed into profitable enterprises and claim them as theirs. Closely related to this ownership problem was the policy known as the ‘three no changes’ (san bu bian). During the 1980s this stated that departmental relations, financial relations and ownership rights within enterprises should not change. Under these conditions the expansion of groups became seriously threatened. To combat this problem, in September 1992 the State Capital Management Office published ‘On how to implement the empowerment of trial business groups with state capital management rights’ clarifying issues related to the new policy. This specified explicitly that it gave: the rights to run the close members of the group to the core enterprise . . . Establishing between the core enterprise and its close members ownership ties, concentrating the groups power, making the close members of the group become the core’s wholly invested son companies or stock controlled companies and giving play to the overall advantages of the group. This measure, therefore, was designed to give the mother company ownership and hence management control over the close members of the group. The mother company came to supersede the previous regional and provincial controllers in place under the policy of ‘three no changes’. It delineated the responsibility for the management of state capital, placing a firm responsibility with the group’s core. This policy followed in the general spirit of attempting to unify the groups around the core enterprise. This is unsurprising, as a feature of China’s large enterprises has been the emergence of enterprises with strong identities and their own corporate aspirations. The attempt to force large enterprises together has at times, unsurprisingly, provoked strong reactions (see Nolan 2001, various case studies, in particular the Daqing oilfield). One of the key features of early policy, therefore, was the effort to find means to induce the often disparate members of the enterprise groups together into a cohesive organic whole, led by the mother company. To this end the policy of ‘six unifications’ (introduced in 1991) within the close layer of enterprises of the group was also developed. The objective of this was ‘both to ensure the realization of unified development strategies and plans within the groups but also

60 The national team of enterprise groups at the same time not to interfere with the member enterprises independent legal person status jeopardizing its willingness to positively contribute to the group’. In attempting to unite the groups the ‘six unifications’ therefore aimed at joining the planning departments of core members and developing greater contractual relations within core enterprises. The basic goal of this policy was to create a clearly delineated ownership structure among the core members, to be supervised by the State Capital Management Bureau. Again, of the few studies on China’s enterprise groups, it has been found that generally, ‘the more cohesive the relations in the group, the better the firms performed’ (Keister 1999). Thus at the micro-level of the firm the State Council has shown an awareness of the need to perfect the organizational structure of the enterprise groups so as to improve enterprise performance and facilitate the emergence of large-scale corporations. Technology centres Research and development is crucial to large corporations. The annexation of existing scientific research institutions to the business groups as well as the creation of new centres symbolizes the high hopes the State Council has for the national team to become research and development power houses. The 1997 State Council directive ordered groups to ‘establish technology centres and improve their technological upgrading, absorb and adopt imported technologies, and enhance the ability to develop new products and raise their international competitiveness’. By 1997 the 120 enterprise groups had already created or annexed seventy-one statelevel research institutes. By 1999 this had risen to 100 state-level institutes from a national total of only 203.15 About half of China’s most advanced research institutes, therefore, have been annexed to the national team (CD, 3 April 1999). Measures had also been taken to force all LMEs to create their own research institutions or face disciplinary measures, such as loss of bank loans or preferential access to material supplies. The central government is keenly aware that if Chinese enterprises are to be successful, especially in the longer term, they must develop research capabilities. This reflects the ambition of the State Council to push the groups from technology acquiring late-industrializing enterprises to modern corporations. The acquisition and development of technology has played a crucial role in the process of late industrialization. Under the centrally planned system, however, research was carried out in institutes well removed from the activities of the plant and much scientific progress was based upon imports from the Soviet Union. It is unsurprising then that many enterprises still lack adequate research capabilities. Even in 1997 about 80 per cent of all research was undertaken by the state research bodies and only 20 per cent by enterprises.16 In the United States enterprises were responsible for half national R&D expenditures and in Japan and Germany over 60 per cent (Li 1999: 141). The top 500 global companies investment in R&D ranges from 5 to 10 per cent of total sales and has been increasing in recent years. In China LMEs have invested no more than 2 per cent of sales per annum in technical innovation since 1990 (CD, 17 January 2000).

The national team of enterprise groups 61 The incorporation of research institutions into the trial groups represents another strategic step in developing the national team. It also reflects the long-term vision and hope of creating internationally competitive groups such as those in South Korea and Japan. South Korea’s large groups had only three R&D centres in 1967 and by 1976 there were still only fourteen. After this time, however, as the need to develop their own products increased, this number rose dramatically, to fifty-two by 1980 and 138 by 1984. This rapid growth was promoted largely as a result of incentives set by the state, including reformed tax credits and ‘sweeteners’ (Amsden 1989: 328). Korea’s hugely successful steel manufacturer POSCO undertook its first R&D investments only 5 years after being founded. China must also hope its groups can make this kind of ‘broad, frontal sweep’ when it comes to research and development capabilities (Amsden 1989: 318). The forced annexation of research institutions is an important step to this end. Stock markets and banking support Aside from measures aimed at promoting an institutional transformation of the microeconomic structure of the national team members, such as finance companies, technology centres and clarification of ownership and management rights, a range of direct support measures has also been employed to help promote the groups. Of central importance to these measures has been the role and supply of finance, the ‘nerves of the state’ and the ‘tie that binds the state to the industrialists in the developmental state’ (Woo-Cumings 1999: 10). The state directives of 1991 and 1997 were mainly concerned with the institutional development of the groups. These two directives make little reference to other direct measures that have also been taken to promote the continued growth of the trial groups. It is well known that large state enterprises are intimately linked to the financial sector and many are in debt (Lardy 1998).17 For the trial enterprise groups it is realized that with ‘one mouthful you can’t put on weight’, meaning some kind of financial support may be necessary if rapid growth is to be promoted. At the same time though the dangers of ‘pulling the saplings upward in the hope they will grow’ are recognized. Financial support has involved channelling finance to selected areas of the economy and also to selected large enterprises such as those in the national team. Contrasting with Japan and South Korea, the stock market has been viewed a key instrument in fostering the development of trial business groups and the large-scale sector of the state economy as a whole. In the past several years alone it is reported 307 SOEs have issued domestic shares, raising $32.8 billion, and twenty-two have been listed abroad, raising US$26.7 billion (CD, 12 December 2000). Stock markets are usually associated with private ownership. In China, however, firms have been listed while the state has remained the major shareholder in them, diversifying the ownership structure but not taking the crucial step towards full privatization. Even by the end of 1998 only about a third of all shares of listed companies could be traded. This has left the umbilical cord between the state and enterprise uncut, a practice widely criticized (World Bank 1997). Of the three vital functions stock markets serve in other economies, the raising of capital, its allocation to the most

62 The national team of enterprise groups profitable projects and subsequent monitoring, only the first, raising capital, has been fully exploited. It has provided the state with what, at present, seems an inexpensive method of raising greatly needed capital funds. This in turn ‘consolidates the leading role of the state sector’, in particular large state groups, one of the goals set by Jiang Zemin at the 15th Party Conference, noted in Chapter One. Unsurprisingly, 78 per cent of listed companies are reported to be among the largest top ten companies in their respective industry sectors (Liu et al. 1998: 129). As the largest enterprises tend to be involved within the trial groups, stock market listings are heavily biased towards the experimental groups. At the end of 1997 there were 745 listed companies in China, 42 per cent of the 120 trial business groups had one of their core enterprises listed (CASS, ZGFB 1998: 4).18 As a result a large proportion of China’s listed companies are in fact state-sponsored enterprises or groups.19 The stock market has been used as an active tool of industrial policy. The provision of credit by the banking system has historically been of greater importance than the stock market. It is also heavily biased towards the state sector and increasingly to large enterprise groups, a practice heavily criticized. It is reported, for example, that ‘SOEs continue to absorb more than three-fourths of domestic credit and their borrowing comprises about 60 per cent of the total non-financial public debt’. The four large state banks, Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, Bank of China and the China Construction Bank (CCB) have all taken an active part in supporting the development of enterprise groups. This has been referred to as the ‘bank sponsoring system’ and one slogan it has adopted is the ‘bank and enterprise walk hand in hand’. The ICBC has taken a lead role in this process in which ‘banks concentrate limited funds on key state businesses, which can help the country to implement its industrial policies’ (CD, 11 May 1997). Because much of the working capital of state firms comes from bank loans (80 per cent in 1997) and banks already have large outstanding loans, they also have strong incentives to improve the performance of enterprises (CD, 24 February 1997). Thus, for example, according to the ICBC vice-president, ‘supporting large state-enterprises is not only our duty but also a key strategy for our expansion’. In 1997, for example, it acted as the sponsor for 90 per cent of 512 preferred LMEs, an increase from 272 in 1996. In 1998 it planned to loan 80 per cent of a $4.8 billion loan allocation to trial groups such as Yizheng, Changhong, and First Auto Works, all members of the national team (CDBW, 13 July 1997). The banking sector has also been encouraged to play a key role in industry rationalization by promoting mergers and bankruptcies, important in the formation of groups. This has also brought closer ties to the business groups. The China Construction Bank, one of the first to initiate a bank sponsoring policy in 1995, claims that ‘by focusing on large conglomerates and giving up small firms with poor performances, our banks achieved good returns’ (CD, 13 July 1997). It has developed a simplified loan procedure for these groups and claims about 95 per cent of loans are collected on time and problem loans account for less than 1 per cent of the total. The CCB has 500 professional branches based in the large enterprises giving advice as well as providing easier access to capital markets for the groups. The bank’s stated policy of supporting 287 ‘prime clients’ is deliberately

The national team of enterprise groups 63 intended to ‘fuel the fostering of international industrial giants’, making it one of the leading supporters of the national team (CD, 20 October 1997). The Bank of China has also been active in making loans to large-scale industry. In 1997, for example, it undertook an agreement to supply Konka, a leading electronics firm, with one of the largest ever loans to a manufacturing company (totalling half a billion dollars). The Export-Import Bank of China has also given export credit guarantees to large firms in sectors such as electronics, shipbuilding and high-tech machinery sectors. It financed $4.27 billion worth of electronics and machinery exports to fifty countries in 1996 (CD, 3 February 1997). A further step used to help ‘grasp the large’ has been the writing-off of the accumulated debts of large enterprises. The SETC has prepared a list of 108 large state enterprises chosen for debt relief. Among these are many of China’s largest enterprises, including the preferred national team enterprise groups. Four asset management companies have been created in order to help rid large enterprises of this debt. First Auto Works and Shanghai Electric Group were the first enterprises in China to have the burden of their heavy debts relieved, involving $1.5 billion (COL, 6 December 1999). China Huarong Asset Management is now the main shareholder in FAW, holding $387 million and ten companies under Shanghai Electric. Subsequently, debt relief has been biased towards the national team members and large groups in general. Other large deals include $360 million for equity in Shougang and $265 million in Dongfeng. Anshan, Panda Electronics Group are other members of the ‘national team’ included (COL, 3 January 2000). Both the stock market and banking sector have also been heavily directed towards LMEs and the large enterprise groups of the national and provincial teams. Various efforts, however, have also been taken to help promote the institutional sophistication of the trial enterprise groups in the national team. The ‘grasping the large’ strategy, therefore, is a blend of policies. It has paid close attention to the evolution of necessary institutional developments in the knowledge that it is not possible to ‘pull saplings up in the hope they will grow’.

Conclusions The large industrial enterprise in particular has been an, ‘underlying dynamic in the development of modern industrial capitalism’ (Chandler 1990: 593). The competitiveness of nations, furthermore, is also crucially dependent on the ‘capabilities of firms and their supporting institutions’ (Teece 1993: 1999). Chinese policy makers have appreciated both the importance of large firms and the important link this has with the competitiveness of their nation. Although comparatively little research has yet been undertaken specifically on China’s largest enterprises and groups, explicit policies to build national champions have been a feature of Chinese policy since early on in the reforms. As noted in Chapter Two, many studies of China’s rapid industrialization process, as well as the general media perception, consider small-scale private businesses the ‘foundation’ or ‘engine’ of recent growth. Presenting arguments based around new research on the large-scale sector it suggested large enterprises have been far more important and performed far better

64 The national team of enterprise groups than often perceived. They have important linkages to other sectors of the economy and there are reasons for thinking it is the large-scale sector that is in fact the ‘foundation’ or cornerstone of China’s recent industrialization. This chapter has drawn special attention to the small number of very large state-supported enterprise groups that have increasingly come to dominate China’s large-scale sector. From among over 20,000 groups that have sprung up nationally only 120 in key industries have been chosen by the State Council to pioneer important enterprise reforms. Mostly based around large state-owned plants, over the years the groups have incorporated many thousands of other enterprises into their operations. They are all industry leaders and account for a significant and increasing share of the state sectors sales, profits and assets (35 per cent of total industrial output value and 25 per cent of profits). Many provincial-level teams of large enterprise groups, furthermore, have followed the example of the national team, vastly extending the influence of the ‘grasp the large’ policy. The members of the national team and the policies instituted in them, therefore, are also central to properly understanding state industrial policy in China, not just at the national level, but also at numerous lower levels. They are also increasingly coming to dominate the state sector as the process concentrating on key groups progresses. Although not yet generally recognized, the national team groups are therefore of growing importance in gaining a deeper understanding of the large-scale sector, the state sector, the policy of ‘grasping the large and letting go of the small’ and also entry to WTO. The origins of enterprise group development date from the beginning of reforms in the early 1980s. Enterprises at that time expanded scale and market coverage in the face of growing market pressures. Groups started to form spontaneously as a natural result of the marketization of the economy, and the first policies dealing with this new phenomenon were established in the early 1980s. As early as 1986 policy makers and economists came to realize the far greater long-term strategic potential and significance of a small set of large groups clustered in pillar industries. They therefore looked for ways to enhance the healthy development of the emerging enterprise groups and harness their positive momentum. Thus the first measures aimed at shaping the institutions of the group company were introduced to a small number of elite pioneering groups in the auto industry. By the end of 1991, after some years of trials, the State Council officially chose a much larger batch of groups to undergo further reform. By 1997 these trials had been expanded still further. As China has now entered the WTO efforts to promote the large enterprise groups of the ‘national team’ have become even more pronounced. Although the rationale behind the promotion of the national team has evolved over the years, and so too the focus of policy, a number of key reasons have underpinned its expansion and that of large business groups in general. These include the expansion of scale and scope in pillar industries. At the same time, maintaining economic and social stability via the incorporation of other, often loss-making enterprises, has also been promoted by group development. They have ‘led’ the activities of smaller less successful enterprises. Industrial sectors with a high income elasticity of demand, large export market potential, backward and forward linkages, and important linkages to technological change have also been specifically selected. Methods such

The national team of enterprise groups 65 as single-track preferential planning, development of internal finance companies and empowerment with the management rights of close members of the groups have all helped in the gradual institutional evolution. These policies have encouraged their latent potential via the removal of traditional constraints and the promotion of the use of the market mechanism and market-like institutions. The single track, for example, for the first time empowered the emerging groups to behave as autonomous decision-making enterprises, allowing them to make basic decisions concerning such things as investment plans and production levels. The development of finance companies allowed the groups to grow organically by developing internal financial markets. These acted not only as a substitute for an underdeveloped financial sector but also led to the more efficient allocation of funds within the group. The handing over of management rights to the mother company, furthermore, also marked an important step in clearly delineating the property and management rights within the group. Policy has worked at gradually building large corporations via the experimental promotion of institutional sophistication, which has taken considerable time. One lesson of the Chinese experience is that such institutional evolution inevitably requires considerable time as businesses and policy makers interact looking for suitable policies to govern business behaviour. Chapter Two alluded to the enigmatic performance of LMEs, stressing the importance that economies of scale have played. The national team groups are also among the largest in their sectors, most capable of reaping economies of scale, considered so important to the overall performance of LMEs (Lo 1999). If the largescale sector really has performed better than previously recognized, China’s national and provincial-level teams must have made a significant contribution by virtue of the fact that they are of increasing overall importance to it. There are only about 7,000 large-scale enterprises in China and already nearly 3,000 provincial and national-level enterprise groups supported in teams based around large core enterprises. Although it is still too early to gauge the exact impact on enterprise performance of the policies described in this chapter, some empirical work supports the hypothesis that some of these measures have promoted firm-level performance. It has been found, for example, that the development of finance companies and greater internal cohesion within groups has had a positive impact on their financial and productivity performance (Keister 1998). There are also good theoretical reasons for believing that enterprise groups may improve performance in developing economies. They compensate, for example, for the effects of imperfect markets (Leff 1976). The only detailed empirical study on the microeconomic structure of large Chinese enterprise groups concludes that ‘the evidence that is amassing points to the possibility that the business groups really are important for China’s development’ (Keister 1999: 3).20 Of the few other studies on China’s groups, the general conclusion is that they may be beneficial. Thus another author argues that the negative conclusions may be ‘too pessimistic about the benefits of promoting enterprise groups in China given the viable alternatives’ (Smyth 2000: 735). What this evidence suggests is that at the micro-level China may be following the most effective course available. The measures used, furthermore, have contributed to the comparatively favourable performance of the large-scale sector.

66 The national team of enterprise groups At the microeconomic level of the firm and group the policies have been beneficial. Again, this brings into question the view that China’s growth can be explained purely in terms of the ‘sprinklings of market reform’. The role of the state in promoting institutional change in the large national team groups has been equally important. The evidence now emerging, at both the micro-level and broader macrolevel, suggests a set of plausible reasons explaining not only why the large-scale sector may have performed comparatively well, but also the inherent economic logic in the policy of ‘grasping the large’ and supporting the national team. Finally, it should again be noted that China’s efforts to create a national team of large enterprise groups are remarkably similar in spirit, if not in exact implementation, to previous efforts in Japan and South Korea. Whereas Japan and South Korea actively discouraged foreign direct investment, by contrast, China has actively encouraged direct investment, although with some controls in strategic industries. It is the rapid penetration of foreign capital, combined with the profound changes in the nature of the largest TNCs, which makes the challenges of catch-up particularly acute for China. As regards Japan’s remarkable post-war performance, it has been asked whether the success of the Japanese developmental state in the post-war era depended on unusually favourable international conditions (Johnson 1998). While some may consider that it is still premature to label China a successful developmental state, there are good reasons for considering the international context in which China is attempting to develop internationally competitive large groups to be unique. China, therefore, might be thought of as an aspiring developmental state. A country attempting to catch-up in an epoch of globalization, one witnessing unprecedented restructuring among large TNCs. China’s entry to WTO raises important and pressing questions regarding the capabilities of China’s nascent national team of enterprise groups. In particular it must be asked whether they will actually be able to compete in a liberalized market open to international competition?

List and description of trial groups: Table 3.4 The names and descriptions of individual members of the national team of enterprise groups are given in Table 3.4. The first column gives the name of the group. The second and third columns, except where otherwise stated, record the sales and assets positions and their value in dollars (using an exchange rate of 8.3 Rmb) of the largest known enterprise in the group. This is taken from China’s Yearbook of Large and Medium Enterprises, 1997 (SSB, ZDZQN). This is not the same as the value for the entire group, which consists of many legally independent enterprises and is therefore larger. The fourth column shows whether the group was listed in the first batch of trial groups in December 1991 or the second in April 1997. The final column provides a brief description of the enterprise group. Much of the information in this table is based on information supplied in post-1994 China Economic Reform Yearbooks (‘pillar enterprise’ sections) and the Almanac of China’s Economy (1996, 1997 and 1998) and the official web sites of the trial groups.

Dongfeng Group (Aeoleus) Dongfeng qiche gongsi

3rd $1206

Automobile manufacturing First Automobile 2nd Works Group $2615 Zhongguo diyi qiche jituan

Sales sector

2nd 1st $2616

1st 1st $3386

continued

FAW Produces a range of vehicles, including modern passenger cars in joint venture with VW. The group has 13 core members but over 500 member enterprises in total when semi-close and dispersed members are included. Based in Changchun, Jilin province, it became a trans-regional group early in its development with members as far afield as Yunnan. FAW is one of the largest enterprise groups in China and considered a role model. It was selected as one of the first three trial groups to implement the single track in 1987. It is being primed as one of several groups to lead the restructuring of the Chinese auto industry: ‘China’s top 20 auto makers will reshuffle into three or four enterprise groups by the turn of the century to meet overseas competition. The US Big Three – GM, Ford and Chrysler – evolved from as many as 140 auto plants in 1900 . . . 116 car makers are registered with the Ministry of Machine Building Industry. The urgency to develop competitive groups is mounting as China begins new negotiations to enter the WTO . . . The Chinese government plans to adopt policies to accelerate the process . . . With three or four auto giants as its backbone by 2000, the country’s motor industry has a future. Otherwise, it would be hopeless’ (CDBW 1997: 2). The entire group’s sales value approached $4 billion in 1997 with a workforce of 170,000 (MMB, ZQGN 1998: 110). As with other Chinese auto groups, it remains far behind international rivals in nearly every aspect. Even with three or four groups as its backbone the Chinese auto industry faces great challenges. Dongfeng, like FAW, is a pioneering business group. It was particularly influential in working with central government policy makers to initiate the first experimental trials with business groups, such as the single track and finance companies. It produces a similar range of vehicles to FAW and is also similar in size. Both traditionally have relied on sales of medium-duty trucks although in the past few years both have turned to passenger car production which has the greatest long-term growth potential. Dongfeng produces passenger vehicles in a joint venture with Citroen. The assembly line in Wuhan is one of only seven super-large plants in the Chinese auto industry. These plants are shared among the national team members. An auto industrial policy to support this pillar industry was introduced in 1994. There is still a high degree of fragmentation in the industry though and indigenous groups are heavily dependent upon their foreign partners.

Assets 1st or Brief description of the group 2nd

Table 3.4 Description of China’s national team players

2nd

1st

7th $859

—

China Auto 6th Industrial $567 Corporation (CAIC) Zhongqi jituan Jialing Motorbikes — Zhongguo jialing gongye (jituan) gufen youxian gongsi

2nd

18th $411

3rd 2nd $1386

1st $2928

1st

9th $703

32nd $181

Jialing Group is based upon former military operations. It was included in the first batch of trial groups and has become a leading motorbike producer.

HVG specializes in heavy-duty trucks and special vehicles. It has 19 core members and 34 stock controlled enterprises. The core members are spread across China. It has a total workforce of 84,000 but a relatively low group output value of $650 million (MMB, ZQGN: 110). Attempts to force the core members into a more closely knit group failed in the mid 1990s, highlighting the difficulty of uniting core members into cohesive groups when group members have divergent aspirations. SAIC is the most successful auto manufacturer in China. It is closely knit, with most of its members based in or around Shanghai. It also relies heavily on foreign partners, with over 40 joint ventures. It employs a relatively small workforce of just 60,000 although it has a sales output value of over $2 billion and over half of the passenger car market in China. SAIC was added to the second batch of business groups in 1997. It has one of most advanced assembly and engine plants in China, producing Buicks and people carriers in partnership with GM. Like Shanghai, the Tianjin-based group has a large number of joint ventures (23 in total) in close proximity to its main assembly providing it with a strong component supply base. It also has a relatively small labour force of about 60,000. Its main foreign partner is Daihatsu, now part of Toyota. Like SAIC, both groups have strong provincial relations and were only added to the second batch of trial groups in 1997. This increased the number of large vehicle assembly groups within the national team from three to six, fostering greater competition. This group is based around Yuejin which has a large joint venture with Iveco of Italy. It has 14 core members with a workforce of 40,000. The group output value was $700 million in 1997 (MMB, QZGN: 110).

Assets 1st or Brief description of the group 2nd

5th $607

Tianjin Auto Industrial Corporation Tianjin qiche gongye jituan

Heavy Vehicle Group (HVG) Zhongguo zhongxing qiche jituan gongsi Shanghai Auto Industrial Corporation Shanghai qiche jituan

Sales sector

Table 3.4 continued

3rd 309

5th $255

10th $172

8th $108

9th $97

89th $27

1st $455

1st $537

1st $515

Ordinary machinery Xuzhou 4th Construction $242 Machinery Group Xuzhou gongcheng jixie jituan

Special Purpose Equipment First Tractor and Construction Machinery Group Zhongguo diyi tuolaji gongcheng jixie gongsi First Heavy Machinery Group Zhongguo diyi zhongxing jixie jituan gongsi Second Heavy Machinery Group Zhongguo dier zhongxing jixie jituan gongsi China Textile Machinery Group (CTMC) Zhongguo fangzhi jixie jituan

2nd

2nd

1st

1st

1st

continued

Among Jiangsu’s ten largest enterprise groups it employs over 20,000 people and has assets of over $400 million. It is involved in 18 equity joint ventures with leading multinationals such as Rockwell and Caterpillar (China Business Review, May–June 1999). As with many of the other trial groups it is also among the 100 trial enterprises experimenting with the modern corporate system. It is reported to have undergone a three-stage development. From 1989 to 93 three core enterprises were merged as a single legal entity with eight independent subsidiaries. From 1993 to 95 the municipal government

CTMC, officially established as an enterprise group in 1988, is also included as one of China’s 512 preferred key enterprises. There are over 20 state-owned LMEs within the group which employs over 50,000 people. It has production facilities covering 11 provinces and makes machinery for spinning and weaving and chemical fibre manufacture as well as dyeing and printing equipment. Currently the group is attempting to split into three specialist production units to prepare for greater domestic competition with WTO entry.

Sichuan-based group.

The four groups in this sector are ranked 1st, 3rd, 5th and 10th in terms of total assets within their sector and have similar sales positions. They were all included in the first batch of trial groups. The First Tractor works is China’s largest agricultural machinery production facility and was established in 1955. Its product range has expanded from a single type of agricultural machinery to eight different product ranges, including high-pressure equipment, bicycles, diesel engines and tractors. It had four foreign-invested companies in 1995. Harbin-based group.

Electronics China Zhenhua — Electronics Group Zhongguo zhenhua dianzi jituan gongsi

Fabricated metal goods Monkey King 8th Houwang jituan $71

Luoyang Bearing 20th Group $96 Luoyang jituan

Sales sector

Table 3.4 continued

—

2nd $163

12th $262

1st

2nd

2nd

By 1999 China’s top ten electronics producers accounted for 33 per cent of the sector’s sales (CDBW, 3 April 1999). Five of these top 10 were national team members. China’s electronics industry was ranked seventh in the world in 1998 and it is predicted it will enter the world’s top five in 2000 becoming the largest industrial sector in China, accounting for 8 per cent of China’s gross value of industrial output. Electronics have become increasingly important to China’s trade balance, reflecting a shift towards higher value added products as it attempts to move away from a comparative advantage in labour-intensive products. Its status as a key industrial sector is reflected by the addition of seven

Monkey King has quickly expanded by taking over other enterprises and incorporating them within its group. It claims this is more efficient than developing its own subsidiaries. In the early 1990s it took over 26 loss-making enterprises which it claims to have reinvigorated by introducing market oriented behaviour.

empowered the group with greater autonomy which led to a third stage from 1995 in which steps to introduce the modern enterprise system were undertaken. This involved clearer delineation of property rights and the use of the newly created company law. Luoyang Bearing Group is a large-scale bearing manufacturer based around the Luoyang Bearing Factory founded in 1954. The group has fixed assets of 605 million yuan and annual sales of over 1.3 billion yuan. It has 16 fully-owned subsidiaries and over 25,000 employees including 4,300 technicians. It has imported over 4,000 sets of advanced equipment and has an annual output of 60 million bearings covering nine different product groups. Following national policies it has established a technology and product development centre which claims to be able to develop various bearing products to meet the diverse requirements of its clients. It has established its own import and export corporation and markets products to over 70 countries.

Assets 1st or Brief description of the group 2nd

—

58th $94

—

33rd $168

6th $477

Caihong Group Caihong jituan

7th $500

57th $94

57th $67

Great Wall Group Zhongguo changcheng jisuanji jituan gongsi Changjiang Computer Group Changjiang jisuanji (jituan) lianhe gongsi Legend Lianxiang jituan

2nd

2nd

1st

1st

continued

Legend has been one of China’s most dynamic companies. It was founded in 1984 with a $24,000 loan. By 1999 it was the largest electronics goods producer in China and fifth in Asia. Its main product is personal computers but it has diversified rapidly into system integration, motherboard manufacturing as well as investments in other industries. It has strengthened research and development by merging with the Computing Institute of the Chinese Academy of Sciences as well as taking a 30 per cent share in Kingsun, a software company. It hopes to develop not only hardware but the software to run on its machines. The Ministry of Electronics has encouraged consolidation within the sector, advising that ‘domestic companies should not rely solely on expanding investment and their self development, but should turn the canoes into bamboo rafts and warships’ (CDBW, 8 April 1998). It has close ties with Bank of China, receiving a total of about half a billion dollars in 65 separate loans in the period from 1990 to 1997. In early 1998 the largest ever financing package to a Chinese IT company was made by the bank, totalling $120 million. It plans to raise another half billion dollars by 2000 through banks and the stock market (CDBW, 28 May 1998). Caihong’s main products are colour television tubes and television parts. It has also diversified into systems control, computers, communications equipment, chemicals and property. Based in Shaanxi the group was China’s first television tube manufacturer, beginning production in the early 1980s using imported Japanese plant. It has a 30 per cent share of the domestic market and exports about a third of its total output (CDBW, 10 December 1998). It is not only a trial business group but has also been chosen as one of the 512 focal LMEs by the SETC. In 1997 it had assets of 7.6 billion yuan (net assets of 3.2 billion) and was the 76th largest industrial enterprise in China.

Changjiang, another PC maker, like Great Wall, has been eclipsed by the success of Legend.

groups in 1997 to the original three national team members. Zhenhua was included as one of the three groups in the first batch. Great Wall was the leading PC producer in 1990 but has since been outshone. By the end of 1998 it had become the sixth largest producer. Like the other electronics groups, it has developed extensive foreign partnerships. It has three joint ventures with IBM and a video-conferencing venture with Intel.

4th

10th $274

2nd

2nd

22nd $219

48th $87

2nd

China Hualu Group Zhongguo hualu jituan Shanghai General Electronics Group (SGEG) Shanghai guangdian jituan

5th

2nd

1st 2nd $1442

7th $470

Panda Group Xiongmao dianzi jituan

—

Shanghai General Electronics Group was the third largest electronics group in China in 1998 (CDBW, 3 April 1999). It had registered capital of over two billion yuan. Total profits in 1998 were 700 million yuan with exports valued at $660 million. SGEG has in total 32 fully-funded enterprises, 40 joint venture enterprises and four overseas enterprises.

As well as being a member of the national team in 1998 Founder was also chosen as one of six companies chosen by the central government to be groomed for entry to the Fortune 500, granting it special funds for technology acquisition. The group initially produced Chinese-language software but diversified into PCs in late 1995 where it has rapidly built up a strong position. By the end of 1998 it was the 8th largest electronics group in China. Panda is one of China’s largest TV producers. It also produces other types of electrical and electronic products, such as DVDs, water heaters and products for farm use. It is based upon the Changsha Electrical Equipment Manufacturing Plant, production dating back to 1936. It claims to have one of the strongest research and development capabilities in Chinese industry, with five state-level technical centres employing over 3,500. It also has nine joint ventures. Changhong dropped to 2nd spot in terms of sales by the end of 1998 although remaining the most profitable electronics company ($260 million). It had been number one for the previous three years. It took over two television producers in 1997 in Jiangsu and Jilin provinces and a controlling stake in a battery plant in Sichuan. Like Founder Group, it has been selected as one of six groups which will be given additional support in attempts to enter Fortune’s listings. —

Assets 1st or Brief description of the group 2nd

Changhong 2nd Group $1282 Changhong jituan

—

Founder Group Beida fangzheng jituan

Sales sector

Table 3.4 continued

—

continued

1st

31st $797

6th 1st $4032

1st

29th $798

Based on Gansu, Qinghai, Ningxia and Xinjiang Electric Power Companies.

Central China Power Group is based around Hubei, Henan, Hunan and Jiangxi Electric Power Companies. It has ten stock-controlled companies in its close layer and a finance company which services the group. In 1998 its assets were 120 billion yuan.

2nd 1st $6605

North China 4th Power Group $2259 Zhongguo huabei dianli jituan gongs China Eastern 27th Power Group $307 Zhongguo dongbei dianli jituan gongs Central China 52nd Electric Power $42 Group Zhongguo huazhong dianli jituan gongsi China North 17th Western Electric $720 Zhongguo xibei dianli jituan gongsi Guangdong 16th Nuclear Electric $734 Group Zhongguo Guangdong hedian jituan gongsi

17th 1st $1698

Power generation and generation equipment form the backbone, along with aerospace, steel and autos, of the first batch of 57 trial business groups. Regional power generation groups were established in efforts to eventually bring together an integrated national grid. The groups are under the jurisdiction of the State Power Corporation of China, formed in 1997 as a state holding company. Huaneng Power was set up in 1985 to finance power station construction and operation. It is part of Huaneng Group which has 12 main subsidiaries, two of which are listed. It is reported to be the largest enterprise group among the national team in terms of total assets, which exceed 90 billion yuan (CASS, ZGFB 1998: 122). North China Power Group consists of various regional owners and operators of power plants, including Beijing Datang Power and Shanxi, Hebei and Inner Mongolia Power Companies. It is China’s second largest enterprise group in terms of assets (over 100 billion yuan) reaching a population of about 140 million. It has 132 members. Its operations also involve design, construction and repair of power plants. Based on Shanghai, Jiangsu, Anhui and Zhejiang Electric Power Companies. All of these regional producers, as well as the others included in the other three regional groups are ranked in the top 20 power suppliers.

3rd 1st $6434

Power generation 8th Huaneng Group $1296 Zhongguo huaneng jituan gongsi

Dongfang Electric Power Group Zhongguo dongfang dianqi jituan gongsi Shanghai Electric Power Group Shanghai dianqi (jituan) zong gongsi Xian Power Generation Machinery Manufacturing Group Xian dianli jixie zhizao gongsi

7th $321

—

2nd $515

—

6th $283

14th $232

1st

1st

1st

1st

—

—

There were five power equipment manufacturers listed in the first batch of trial groups. Harbin, Dongfang and Shanghai are the largest power equipment producers in China. Harbin, the ‘city of power generation equipment’, is home to a group which after recent restructuring had 26,000 employees and 70 plus member enterprises. In 1987 a large trans-regional group was proposed integrating some of neighbouring Liaoning’s power equipment producers. One of the Liaoning plants, however (based in Shenyang), disagreed with this project and split away to create Northeast Power Equipment Group (Dongbei Group). Harbin Group subsequently grew around firms based in or near Harbin, with three large enterprises at its core. Along with Harbin Dongfang was the only domestic large-scale producer of hydroelectric power plant. It is also a leading supplier of other power equipment.

Assets 1st or Brief description of the group 2nd

43rd $77

Power generation equipment Harbin Power 44th Equipment $77 Company Zhongguo Haerbin dianzhan shebei jituan gongsi

Sales sector

Table 3.4 continued

Nanjing Aero — Motive Machinery Group Zhongguo Nanjing hangtian gongye jituan gongsi Shanghai Aero — Industry Group Zhongguo Shanghai hangkong gongye jituan

Aviation and aerospace Xian Aircraft Group Zhongguo Xian feiji gongye jituan gongsi

Northeast Electric 22nd Transmission and $116 Transformation Equipment Group Dongbei zhuanbiandian shebei jituan gongsi

1st

1st

—

1st

1st

—

12th $508

9th $285

—

continued

All six groups were included in the first batch of trial groups. Experiments with AVIC, one large holding company controlling the whole industry as an ‘ultra-large industrial group’, have subsequently given rise to AVIC 1 and AVIC 2. The industry faces great problems as entry to WTO approaches. Although the Xian group was only the 12th largest transportation equipment manufacturer in China, it was the largest single maker of aircraft (by assets). It has not been very successful in its diversification strategies, unlike some of the other aviation groups. From its 200 or so child companies an aluminium and bus-manufacturing company have been most successful. The mother company employs 20,000. —

Based on the Shenyang Transformer Plant and other plants in neighbouring Liaoning. It is the 34th largest industrial group in China.

Textiles Xinjiang Textiles 13th Group $2.5 Xinjiang fanzhi gongye jituan Inner Mongolia 9th Cashmere Group $118 Neimenggu eerduosi yangrong jituan

Guizhou Aero — Industry Group Zhongguo Guizhou hangkong gongye jituan gongsi Nanjing Air — Industry Group Zhongguo jiangnan hangtian gongye jituan gongsi Sanjiang Air — Industry Group Zhongguo sanjiang hangtian gongye jituan gongsi

Sales sector

Table 3.4 continued

2nd

3rd $194

1st

—

2nd

1st

—

6th $169

1st

—

All of the textile groups belong to the second batch of trial groups reflecting the broadening of the business group strategy in the 1990s characterized by a movement away from basic upstream industries to fast-growing consumer goods industries. It is also noticeable that the textile producers are from relatively poor inland regions of China reflecting efforts at counteracting growing regional inequalities. —

—

—

—

Assets 1st or Brief description of the group 2nd

Wuhan Steel Group Wugang jituan Anshan Steel Group Angang jituan Baoshan Steel Group Baogang jituan

national

Iron and Steel Panzhihua Steel Group Pangang jituan

2nd

3rd 1st $4953

2nd 1st $5935

1st 1st $9080

2nd $2378

1st $2850

10th 1st $1850

6th $319

4th $1867

5th $1064

China Shenma 6th Group $145 Zhongguo shenma jituan

continued

Based in Shanghai Baoshan is one of China’s leading enterprises. It is one of the youngest and most profitable in the steel sector, specializing in relatively high-value products with a small workforce of 20,000. It exports 15–20 per cent of its total output. In 1997 sales topped $4 billion and after recent mergers involving Shanghai Meishan and Shanghai Metallurgical, other large Shanghai-based steel groups, it accounted for about 15 per cent of China’s total steel output. The group aims to become multinational relying mainly on steel but also integrating finance and trade operations as well. It has also taken over a major software producer believing China’s IT sector to be of great potential. It has been suggested it may merge with Wugang Group sometime in the near future to create China’s only world class steel producer. It is among the six enterprises being given special support for technological upgrading in a bid to push it into the Fortune 500.

At the beginning of 1998 there were 47 money-losing state steel producers with debts of $337 million (CDBW, 16 January 1998). According to the minister responsible for the steel industry creating industrial conglomerates was a ‘key way to bail out the loss-making companies’. As with other sectors consolidation is ongoing. The target is for the largest four groups to produce 40 per cent or more of output by 2000. Panzhihua is one of four steel groups among the first batch of 57 groups approved in 1991. All of the steel groups are large, being in the top ten in terms of sales and assets. Panzhihua has made progress in improving the cohesion within the group. By the end of 1994, 25 of the 30 close members in the group were wholly-owned subsidiaries or else stock controlled. The group has continued to experiment with the modern corporate system and the mother/son enterprise group system. Wugang is set to take part in the consolidation sweeping China’s steel industry. It will be encouraged to merge with surrounding steel mills. Policy makers have also touted the idea of merging it with Baogang to form a giant steel producer. Based in China’s northern Liaoning province near Shenyang the group employs over 100,000. It has been suggested that it should merge with another Liaoning-based national team group member, Benxi.

Based in Henan province this group is China’s largest maker of cord fabric, producing approximately 55,000 tons per year. The sectoral ranking given here is for the chemical fibre-manufacturing sector. Shenma, as with a number of the other trial groups, has issued corporate bonds to raise much needed capital.

Chemicals Donglian Petrochemical Group Donglian jituan

—

—

—

8th 2nd $2017

8th $843

Taiyuan Steel Group Taigang jituan

2nd

6th 2nd $2497

14th $829

7th $901

Benxi Group Bengang jituan

4th 2nd $4394

Based on the merger of four large enterprises, Yizheng Chemical Fibre Co, Nanjing Chemical Fibre Co, Jinling Petrochemicals and Yangzi Petrochemicals, this has become China’s largest chemicals group. The former two, Yizheng and Nanjing, were members of the first batch of trial business groups. The creation of Donglian in late 1997, involving $6.5 billion of state-owned assets, was the largest restructuring of state-owned assets since 1949 and is considered of symbolic importance in the reform of large SOEs and the development of business groups. By 1998 record year end figures were reported of $5.3 billion in sales and $0.4 billion in profits.

The Beijing-based iron and steel group is centred around the Capital Iron and Steel Corp. The latter has been doing business for over 70 years. The group has set itself the task of establishing clearer boundaries between the parent company and its subsidiaries which have been accused of swallowing profits. The parent company has about 60,000 staff, a quarter of the group’s total (FT, 11 March 1998). The number of group member enterprises stretches into the hundreds and over 300 of these have reached international quality standards. It has diversified into shipping, construction, electronics and machinery manufacturing. Shougang Group is a member of the 100 centrally supported trial enterprises attempting to introduce modern corporate systems as well as being one of 512 centrally supported LMEs selected for preferential treatment. Lioaning province’s Benxi Steel Group is among the top ten in China. It has 46 member enterprises within the group and recently has been tipped to join forces with Anshan Group as part of the ongoing restructuring of the steel industry. Chongqing is a specialist iron and steel producer, one of the smaller among the national team steel groups. In 1997 it exported $160 million worth of steel. The inclusion of this group in the trials supports Chongqing’s regional devolution and growth as well as broadening the geographical coverage of the trial enterprise groups. Based in Shanxi, the Taiyuan Group is among the top ten Chinese iron and steel producers. Included in the second batch of trial groups it obtained a stock market listing in 1998.

Assets 1st or Brief description of the group 2nd

Chongqing Steel 17th Group $423 Chonggang jituan

3rd $2061

Capital Iron and Steel Group Shougang jituan

Sales sector

Table 3.4 continued

Zhejiang Juhua Group Juhua jituan

—

Yizheng Group 2nd Zhongguo yizheng $763 huaxian gongye lianhe gongsi Tianjin Bohai 18th Zhongguo tianjin $146 bohai huagong jituan gongsi Nanjing Chemical — Group Zhongguo nanjing huaxue gongye (jituan) gongsi China Jilin 1st Chemical Industry $1270 Co Zhongguo jilin huazue gongye gongsi Shanghai — Tianyuan Group Shanghai tianyuan jituan —

In 1996 the Shanghai municipal government merged Shanghai Chemical Industrial Group with Shanghai Pharmaceutical Administration and some other subordinate enterprises. This formed Huayi Group. The group consists of Shanghai Pharmaceutical Group, Shanghai Tire and Rubber Group, Shanghai Pacific Chemical Group and also Shanghai Tianyuan, the group picked to enter the second batch of trial business groups. Huayi Group had sales of $2.8 billion in 1998, about 65 per cent being in the chemical sector. The group has bought out 17 enterprises and absorbed 14,000 staff in recent years. It has more than 100 joint ventures with chemical and pharmaceutical giants such as Du Pont and BASF. Total foreign investment has reached $1.4 billion (CDBW, 2 April 1998). A conglomerate with businesses covering pharmaceuticals, thermal power, metallurgy, building materials, chemical fibres, textiles and machine building.

1st 1st $3900

—

2nd

continued

—

1st

—

—

This group is based on one of China’s 123 super-large enterprises. It has a number of large state-owned LMEs participating in the group and 100 plus close and semi-close members.

1st

22nd $236

2nd

Yizheng was China’s leading chemical fibre group with 23 members, 16 of which were considered ‘close’. It was a member of the first batch of trial business groups.

2nd 1st $1631

Shenhua Group Zhongguo shenhua jituan

Mining Datong Mine Group Datong mekuang jituan Yankuang Group Yanzhou kuangye jituan

—

—

1st

2nd

2nd $991

1st $600

2nd

1st 2nd $1488

—

Established as a group in early 1996 by the administrative bureau responsible for running the mines in Yanzhou in Shandong. It is also one of the 100 enterprises selected to experiment with the modern corporate system as well as being among one of first 300 preferred LMEs, later expanded to 512, to receive special government support (CDBW, 6 September 1998). It has 80,000 staff and produced 17 million tons of coal in 1997 with profits of $107 million. It has assets of over 11 billion yuan and is the leading coal supplier in East China. It is one of China’s largest coal exporters, shipping a third of its output to Japan accounting for about 15 per cent of China’s total volume of coal exports (CDBW, 24 March 1998). The coal fields are rich in high-quality coal. It also has interests in construction, chemicals, electric power generation, machinery and light industry. The mining operations have won national prizes for technical excellence. As with the other national team members, the group also has aspirations to eventually enter the Fortune 500. The proceeds of its recent flotation are to be used to buy Shandong’s Jining coal field as well as for investments in machinery and equipment. The group is based on developing the massive Shenhua Project, China’s first major energy project to co-ordinate coal mines, railways, a port and a power station in an integrated power project. It is wholly state-owned and managed by the State Planning Commission. It has a registered capital of over $300 million. It claims to be ‘an industrial conglomerate based on energy and communications, being diversified in operation and featuring trans-regional, multi-industrial and transnational development’,

Shanxi’s coal mining group has 15 mines, four construction companies, five affiliated factories, a research centre, four hospitals and 84 schools. Employees total 170,000. It is a leading mining group.

Also known as Haihua Group, it absorbed 17 enterprises in 1997 alone and has been active in the restructuring of the Chinese chemical industry (China Business Review, May–June 1999). It is also one of eight backbone groups being nurtured by Shandong’s provincial government.

Assets 1st or Brief description of the group 2nd

2nd $563

Shandong — Haiyanghua Group Shandong haiyang huagong jituan

Sales sector

Table 3.4 continued

Changjiang — United Economic Development Group Changjiang jingji lianhe fazhan jituan

Regional groups Shenzhen Special — Economic Zone $602 Development Group Shenzhen jingji tequ fazhan jituan China Xinjiang — Construction Group Xinjiang jiantou jituan

China National — Non-metallic Minerals Enterprise Group (CNMEG) Zhongguo feijin shukuang gongye zong gongsi

2nd

2nd

—

—

2nd

1st

— $467

—

continued

This group claims to be among the first enterprise groups in China, its origins dating to October 1981 when it was established by the provincial government of Guangdong. By 1995 the group had net assets of 3.88 billion yuan and specialized in five main areas: tourism, commerce, trade, finance and property. It had a total workforce of 14,000. Sales had reached over 5 billion yuan, projected to more than double by the year 2000. It was among 18 groups sponsored by Shenzhen city, another two of which were also among the trial enterprise groups. This group claims to be the largest in China, encompassing a huge workforce of 2.4 million people. It is based on the Xinjiang Production and Construction Corps which was established in 1954 to promote the development of Xinjiang and guarantee regional security. The group has 172 giant farms, 344 industrial enterprises, 200 hospitals, 500 schools and 46 research institutes. The group plans to list 30 of its enterprises and is keen to import new machinery to improve its agricultural output and efficiency (Economist, 19 June 1999). —

some of the characteristics the State Council has advocated for the national team. Its ten subsidiaries are in coal mining, trading, construction, power generation and port management, all important elements in carrying out the Shenhua Project. CNMEG is a state agency belonging to the State Bureau of Building Materials Industry. In the past 40 years it has developed over 1,000 mines supplying non-ferrous metals, minerals and building materials. In 1995 over a third of China’s non-ferrous metals was produced by enterprises under CNMEG (CDBW, 24 December 1996). It was established in 1983 by the then State Economic Commission and was given preferential planning status in 1987 and trade rights in 1988 as were a small number of other pioneering groups. The group has over 200 members including seven listed companies which have raised close to half a billion dollars. It also has 11 scientific research centres and universities. Presently its capital is valued at over 5 billion yuan with 45,000 workers and annual sales of over one and half billion yuan. It is one of three groups participating in the trials to develop national holding companies.

China National — Foreign Trade Transportation Group (Sinotrans) Zhongguo waiyun jituan China Southern 1st Airlines Zhongguo nanfang hangkong (jituan) gongsi

Transport COSCO (China 1st Ocean Shipping Corporation) Zhongguo yuanyang yunshu

Sales sector

Table 3.4 continued

2nd

1st

—

1st

—

—

The country’s largest passenger carrier carrying 15 million people in 1999 employing 99 aircraft. In recent years it has started international routing. The group is expected to lead consolidation of the airline industry. During 1999 rumours emerged of a merger with Air China, China’s largest international provider. The proposed merger, discussed at a State Council meeting on 20 June 1999, is part of plans to rationalize the industry’s 34 enterprises. According to a senior manager (and party secretary) at China Eastern Airlines: ‘taking Air China, China Eastern Airlines and China Southern Airlines as the backbone, China will voluntarily merge and restructure the other 31 airlines to form three big groups’ (ChinaOnline, 1 April 2000). The three members of the national team, as with trial

COSCO is China’s largest shipping firm as well as being the second largest bulk fleet and fourth largest container fleet in the world (Economist, 28 November 1998). It has 80,000 staff and over 700 vessels that constitute about 74 per cent of China’s total tonnage (CDBW, 2 July 1999). Its assets stand at about $13 billion although its debt asset ratio stands at approximately 60 per cent. By 1997 it had 360 foreign offices and carried over half of China’s exports to more than 150 countries. The group had expanded its investments to include overseas property, stocks, leisure and port management businesses. COSCO has attempted bold reforms. It claims to have hired the first ever Western executive to work in its headquarters and in late 1998 severed ties with the Ministry of Communications, its state patron. It has also followed guidelines on the establishment of the modern corporate system, including an independent board of directors. Bond issues have been made and by the end of 1999 it had raised $235 million through foreign institutions. The listed arm runs a third of the fleet and holds 62 per cent of COSCO Pacific which leases containers and operates shipping terminals. Also known as Sinotrans, the group claims to have 52 subsidiaries, 508 independently managed enterprises and 238 joint ventures in China, as well as nine representative offices and 67 enterprises abroad. It has 67,000 staff and employees and the total assets of the whole group are 22 billion yuan. It provides air, sea and road transport services.

Assets 1st or Brief description of the group 2nd

—

—

—

—

China Eastern 2nd Airlines Zhongguo dongfang hangkong gongsi

Air China 3rd Zhongguo guoji hangkong (jituan) gongsi

—

—

Changjiang Shipping Group Zhongguo changjiang lunchuan zong gongsi Guangzhou Rail Group Guangzhou tielu jituan

2nd

1st

1st

1st

continued

China’s largest railway operator and the first business group created in this sector. It is responsible for the operation of networks in Guangdong, Hunan and Hainan covering over 4,000 km of rail network. It has 166,000 employees and total assets of over 42.2 billion yuan (debts of 8.7 billion yuan). It is one of the 512 key enterprises selected by the SETC as well as being one of the 120 trial business groups. The group is based around four fully owned transportation subsidiaries and four stock controlled companies.

groups in other sectors, are positioned to lead consolidation. A merger of CSA and Air China would see the new entity with 38 per cent of China’s fleet. Air China, unlike the other two members listed in 1997, has yet to be listed owing to its high debt and lack of corporate structure. China Eastern carried 2.4 million international and 4.5 million domestic passengers in 1998. It is the second largest passenger airline. It has 57 aircraft and has taken part in consolidation of the airline industry by taking over China General Purpose Airline Co. in 1997. It may also make a move for China Northern (4.4 million passengers and 42 aircraft) in reaction to the likely merger of Air China and China Southern. China Eastern is considered something of a pioneer in the industry. It was the first to take over another airline as well as the first to issue share capital at home and abroad (it is listed in Hong Kong, New York and Shanghai). Air China, based in Beijing with close ties to the central government, carried 1.7 million international passengers and 6.4 million in total in 1998. With 60 aircraft it is smaller than both China Southern and China Eastern. New bilateral services accords with the US have forced the group into merger talks with China Southern, whose management is likely to take control of the new group. 1998 has seen record losses for Chinese airlines, with Air China’s losses probably exceeding the $65 million loss of China Southern Airlines. Slack demand in Asia due to the financial crisis and heavy discounting of tickets between the major carriers have been major contributory factors. Changjiang Group is the largest passenger and freight carrier on China’s huge inland waterways. In 1997 it had a turnover of over five billion yuan. The group has 22 son companies spread across six provinces. By the end of 1997 it had total assets of 12.5 billion yuan, including over 2,500 ships. Its strategy is to steadily develop its shipping business while at the same time developing interests in property, tourism, trade and finance.

2nd

1st

17th $103

4th $267

Harbin 9th Pharmaceutical $113 Group Haerbin yiyue jituan Northern 10th Pharmaceutical $109 Group Zhongguo huabei zhiyue jituan gongsi

2nd

2nd

5th $216

2nd $291

This pharmaceutical group is one of the six groups selected for preferential treatment with regard to increasing investment funds aimed at promoting technology acquisition in the hope of pushing it into the Fortune 500 listings.

The Chinese pharmaceutical industry is still dispersed: of China’s 3,000 plus enterprises half are state owned and only 72 of these have assets greater than $12 million (CDBW, 1 January 1998). It faces extreme pressures as entry to WTO will bring stricter intellectual property regulations. Currently many successful Western drugs are copied in China. Of China’s 512 preferred key state enterprises, 15 are pharmaceutical producers. There are five large trial business groups in pharmaceuticals. Sanjiu is one of the largest, it is also a diversified conglomerate, originating from southern China’s Guangdong. Tongrentang specializes in Chinese medicines which are seen as an area of potential growth in international markets. It claims to have first traded in 1669, migrating from Zhejiang to serve the imperial court of the Qing Dynasty in Beijing. Held back during central planning since reform, the group, formed officially with the approval of the Beijing Municipal Government in 1992, has transformed itself into a successful conglomerate aimed at achieving scale and facilitating co-operation among group members in production and distribution. During its development there was uncertainty about whether scale or agility were more important, scale won over and this was partly because of the need to develop a strong brand name which could only be achieved if they ‘clung together’. Tongrentang’s experience has taught them that ‘total company strength is the key factor in market competition’. Like other successful groups it has imported advanced Western equipment to boost production. —

Assets 1st or Brief description of the group 2nd

Tongrentang 2nd Group $191 Zhongguo beijing tongrentang jituan

Pharmaceuticals Sanjiu Group 5th Sanjiu qiye jituan $170

Sales sector

Table 3.4 continued

Construction Shanghai — Construction Group Shanghai jiangong jituan Beijing — Construction Group Beijing chengjian jituan China State — Construction Engineering Corporation (CSCEC) Zhong jian jituan Gezhouba Water 3rd Resources and $213 Hydropower Engineering Corp Zhongguo gezhouba shuili shuidaing gongcheng jituan

China Northeastern — Pharmaceutical Group Zhongguo dongbei zhiyue jituan gongsi

2nd

2nd

2nd

1st

—

—

1st $471

1st

—

—

continued

This group is based around construction of hydro-electric facilities. It has over 14 subsidiaries employing over 50,000 manual workers and 8,000 engineers and technicians. The group was officially added as the 56th member of the national team in December 1994.

CSCEC describes itself as a large state-run multidisciplinary enterprise. It employs one and a half million workers throughout its various provincial operations. It has taken advantage of China’s construction boom, engaging in surveying, design and construction of all types of projects including chemical plants, hotels, railway stations, power stations, schools, airports and bridges to name a few areas of construction in which it is involved.

—

—

—

1st

1st

—

—

China Yaohua — Glass Group Zhongguo yaohua boli jituan gongsi Luoyang Floating — Glass Group Luoyang fufa boli jituan gongsi

2nd

1st

—

—

—

China’s building materials sector is still fragmented with many small factories using outdated technology, high energy use and low productivity causing serious pollution. Authorities are attempting to ‘encourage large factories . . . [and] annex or purchase small plants’, particularly in cement, where factories producing under 50 million tons will be closed, and also in glass. The aim is to ‘speed the development of large enterprise groups’ (CDBW, 30 May 2000). Industrial policy has identified 26 key enterprises in this sector, which incorporate the national team players. The mother company and ‘kernel’ of the CNNMBG is the China National New Building Materials Corporation, established in 1984 on approval of the State Council. In 1987, along with the pioneering group, Dongfeng, it was listed separately in the state plan and was one of the first pilot enterprise groups. In 1994 it entered China’s top 500 enterprises. It is based upon construction materials production but has also diversified into other fields such as real estate development, tourist services and consultancy. It has eight series of products: new type wall materials, insulation materials, waterproof and sealing materials, architectural ceramics, chemical building materials and gypsum, glass fibre, building machinery and metal products. It has 40 per cent of the Chinese paperliner gypsum board, asphalting roll and glass fibre markets. The group has aspirations to become a ‘well known transnational group’ by 2010. Hailuo Group has been given key support by the State Administration of Building Materials to annex and purchase other companies. The China Construction Bank (CCB), which has established a cement sector restructuring team, has also played an active part in restructuring the cement industry. From 1997 to 1999 approximately 24 merger projects were supported by the CCB, involving close to half a billion dollars. The origins of Yaohua Glass Group date back to 1922. It is classified as a super-large integrated glass producer with 10 subsidiaries, eight wholly owned companies, 10 stock-controlled companies and four companies in which it holds minor stakes. Its net fixed assets are close to six billion yuan.

Assets 1st or Brief description of the group 2nd

—

Anhui Hailuo Group Anhui hailuo jituan

Construction materials China National — New Building Materials Group (CNNBMG) Zhongguo xinxing jianzhu cailiao (jituan) gongsi

Sales sector

Table 3.4 continued

1st

2nd

2nd

—

—

—

China National 10th Minerals and $1875 Metals Import and Export Corp (China Minmetals) Zhongguo wujin kuangchan jinchukou zong gongsi China National 8th Textiles Import $2250 and Export Corp (Chinatex) Zhongfang jituan (COFCO) 2nd Zhongliang jituan $3429

2nd

1st

—

Trade volume 1st — $8529

China National 3rd Technology $3422 Import and Export Group (CNTIC) Zhongguo ji jituan

Trade groups Sinochem Zhongguo huagong jinchukou zong gongsi

continued

COFCO, China National Cereals, Oils and Foodstuff Import and Export Corporation is one of China’s few Fortune 500 members, ranked in 362nd position. As with Chinatex it has raised funds via bond issues on foreign capital markets. COFCO Capital Corp raised $200 million in 1998.

China’s largest textile trading house, generating $1.54 billion from exports in 1997. One of six companies originally allowed to issue commercial bonds (including COSCO, noted earlier) it has been able to exploit the US capital market. In 1998 it raised $100 million by issuing 1 year commercial bonds.

The initial batch of groups contained only two trade groups, Sinochem and China Minmetal Group. Subsequently, in 1997, another six groups were added, highlighting the growing importance of trade to the national economy. Consolidation has taken place and the eight trial groups have quickly expanded. Sinochem, among other activities, is involved in chemical import and exports. The listed arm is Sinochem International, founded in late 1998. The listing is an important step as it gives the group access to capital markets. All of Sinochem International’s subsidiaries are reportedly profit making. This group is focused on technology, high-tech plant equipment, machinery and electronic products. It has more than 30 overseas branches worldwide. In 1998 it merged with China Machinery and China Instruments Import and Export Corporations, as well as China National Corporation for Overseas Economic Co-operation (a provider of overseas labour). The merger involved CNTIC, itself the third largest trade group, with the 7th and 26th largest. The new super import export corporation known as China General Technology (Group) Holding, Ltd has an annual trade volume of over $7 billion. It is hoped this will combine overlapping functions and benefit from less intrusive government oversight. Minmetals Development, the listed arm of China Minmetals Group, became only the second and largest listed trade company in mid-1997. China Minmetals, the mother company, is based upon the old centrally planned era government trade monopoly. The listing of Minmetals Development raised $72 million which was to be used to expand its shipping fleet, although investments in property, such as Beijing’s Shangri La Hotel, have reportedly been made. Minmetals Development has total assets of $125 million and an average turnover of $5 billion which ranked it among the top five trade groups in China during the mid-1990s.

—

6th $2608

—

—

—

Guangxi Guitang — Group Guangxi guitang jituan

Tangshan Ceramics Group Tangshan taoci jituan

—

—

2nd

2nd

2nd

2nd

2nd

This Guangdong ceramics group, founded in 1956, specializes in several main ceramic product areas, including those for the construction industry, bathroom ceramics and ceramic machinery. It is the largest stock-controlled enterprise in China’s ceramic industry. Today, the group is based around ten enterprises and a technology centre. It entered China’s largest 500 enterprises in 1995 and is included amongst the 100 enterprises experimenting with the modern corporate system. In 1996 it was also included in the first batch of 512 focal LMEs. Based on the North China Plain in Tangshan, the ‘pottery city of the north’, supplied by nearby high-quality clay deposits, the company’s origins reportedly date back to 1403. Today, it claims to be the only large-scale pottery making enterprise in China, employing over 30,000 workers and with total assets approaching four billion yuan and annual exports of over 50 million dollars. It is also included in the list of 512 centrally preferred LMEs, entering the first batch of 300 in 1996. It has an approved technology centre and is also implementing trials with the modern enterprise system. The only trial business group from inland Guangxi province, which also is home to only 11 of the 512 state preferred LMEs. The group specializes in sugar production.

—

A large trade group with 63 affiliated companies in China and 19 overseas enterprises. It has established 170 manufacturing facilities producing various kinds of art and craft commodities, including jewellery, woven products of grass, wicker and rattan, pottery and porcelain, and toys and light industrial products.

Assets 1st or Brief description of the group 2nd

16th $1495

Light industry Guangdong — Ceramics Group Guangdong fotao jituan

China National Crafts Import and Export Corp. Zhongyi jinchukou jituan Dongfang International Group Dongfang guoji jituan

Sales sector

Table 3.4 continued

Zhejiang Goods — and Materials Group Zhejiang wuchan jituan China State — Development and Investment Corporation (SDIC) Guojia kaifa touzi gongsi

Others China Lucky — Film Group Zhongguo lekai zhaopian jituan gongsi Luoyang Chundu — Group Luoyand chundu jituan Shanghai Hualian — Group Shanghai hualian jituan

2nd

—

2nd

—

2nd

2nd

—

—

1st

—

continued

Based upon part of the state planning apparatus, the State Goods and Materials Department. In 1988 the State Council established it as a large general investment company and in 1995 it was turned into an experimental group. Its original finance capital came from the state budget special projects fund. It follows state industrial policy and describes itself as a ‘governmental investment body’. It has over 60 members and total assets of 46.7 billion yuan ($5.6). Up to 1998 it had invested 47 billion yuan ($5.6 billion) in electricity generation, coal mining, bridge construction, pharmaceuticals, auto parts, chemical fertilizers, building materials and electronics. Of this 95 per cent was invested in large and medium-scale policy-oriented projects and over 80 per cent was invested in the western and central areas of China (CDBW, 17 February 1998). SDIC, by investing in large-scale projects in key industries, often in western regions, follows industrial policies of the central government.

The group consists of two joint stock companies and six subsidiaries and was officially recognized in 1995 as an enterprise group. Its main business is in retailing and it has a number of department and other stores, mainly in Shanghai. The formation of the group has allowed the parent to gain greater control of the subsidiaries as well as providing financial help to them. It has established a strategy to develop four kinds of chains in department, supermarket, convenience and franchise stores. It has over 100 supermarkets and has a Japanese joint venture with plans to establish over 500 convenience stores in Shanghai alone. A network of franchised stores has been established in large department stores throughout China dedicated to home appliances and garments. It also has interests in distribution. —

China Lucky Film was established in 1958. It produces over 100 different kinds of films and is China’s market leader. The group is based around five core enterprises and a research centre. In the mid-1990s it had about 60 per cent of China’s film market but this has fallen quickly owing to competition from foreign joint ventures (Kodak) and rampant smuggling. It now has a domestic share of less than 25 per cent. The group specializes in food processing. Based in Luoyang it has six core members and is one of China’s leading food-processing groups.

—

—

Forestry Jilin Senlin Group — Jilin senlin jituan

Hongdou Group — (Red Bean Group) Hongdou jituan Wanxiang Group 39th Wanxiang jituan $149

TVEs Wanjie Group Wanjie jituan

China Ports Construction Group Zhongguo gangwan jianshe jituan

Sales sector

Table 3.4 continued

1st

2nd

47th $188

—

—

—

2nd

—

—

—

All of the four forestry groups were included in the first batch of trial groups in 1991. They are all based in China’s northern regions and are based upon the administrative departments once responsible for the large forests of this region. Of the 17 close members of Jilin Senlin Group, 12 are state-owned LMEs. The group also has over 70 member enterprises, including 13 close members. It is involved in all aspects of forestry and has industrial capital of over 1.2 billion yuan and a workforce of 135,000.

Wanxiang is one of only three TVEs in the national team. It started business in 1969 as a cycle repair shop with capital of only several hundred dollars in Hangzhou, Zhejiang. By 1996 the assets had shot to $604 million. In 1999 it spent $80 million on building an R&D centre in Shanghai’s Pudong area. This might also later be used to house their headquarters. Wanxiang produces high-quality components and has won orders with GM. It exports to 34 countries. In 1988 the group addressed its vague property rights structure by buying out local state interests, to which some of its success is attributed. The strength of the company is also based upon its strong management. It was the largest exporter amongst the TVE groups, totalling $46 million.

In terms of sales and total assets the three TVEs equal their state-owned counterparts. They also appear to have less debt (Table 3.1). Wanjie Group is the largest group among the three TVEs. In 1995 it had total assets worth $365 million, net assets of $213 million, sales of $403 million and exports of $22 million. Hongdou Group, a clothing manufacture, is the smallest of the TVEs. It had assets worth $62 million, net assets of $26 million, sales of $110 million and exports of $15 million in 1995.

—

Assets 1st or Brief description of the group 2nd

2nd

2nd

2nd

2nd

—

—

—

—

1st

—

2nd

1st

—

—

1st

—

—

—

—

Founded in 1994 as a group, it is has 22 internal branch companies and 16 overseas enterprises. Its main businesses include agricultural production and processing and agricultural trade as well as a number of services, such as management of wholesale agricultural markets.

—

—

—

—

Sources: ZJTGN 1995–98; ZDZQN 1997; www.setc.gov.cn.

Agricultural groups Zhongshui Group — Zhongshui jituan China State Farms — Agribusiness Group Zhongken jituan Zhongmu Group — Zhongmu jituan Shanghai — Agricultural, Industrial and Commercial Group Shanghai nong gongshang jituan Jilin Province — Development Group Jilin sheng jifa jituan

Heilongjiang — Anling Forestry Group Heiongjiang anling jituan Inner Mongolia — Forest Industry Group Nei menggu senlin jituan Heilongjiang — Forest Industry Group Heilongjiang senlin jituan

4

The national team and the business revolution

The modern multidivisional corporation is thus a far cry from the Marshallian firm in both its vision and its strength. The Marshallian capitalist ruled his factory from an office on the second floor. At the turn of the century, the president of a large national corporation was lodged in a higher building, say on the seventh floor, with wider perspectives and greater power. In the giant corporation of today, managers rule from the top of skyscrapers; on a clear day they can almost see the world. (Hymer 1970: 442) What is already happening may be only the beginning of a massive consolidation process at the regional and global levels. If so, it is all the more important to put in place the necessary policy instruments to deal with this process . . . In the end, a global market for firms may need a global approach to competition policy, an approach that takes the interests and conditions of developing countries fully into account. (UNCTAD secretary general, WIR 2000: 21)

Over three decades ago Hymer, a pioneer in the study of transnational production, neatly captured what he believed to be the inevitable direction in the development of the firm using the imagery of the manager’s work place. Hymer described how as the capitalist system developed so too did the nature of the firm, becoming ever more sophisticated and larger. The firm started applying both the physical and social sciences to business activity on a scale far greater than could ever have previously been imagined. This in turn ‘gave it the power to invest on a much larger time-horizon than the smaller, less developed firms that preceded it’ (Hymer 1970: 442). The manager of the small Marshallian firm, as the analogy goes, progressed from the cramped second floor offices of the local enterprise, to eventually rule from giant skyscrapers of the TNC headquarters based in the world’s major cities (predominantly in Europe, North America and Japan).1 These skyscrapers were to become so high that on a clear day the managers could ‘almost see the world’. That was nearly 30 years ago. Even Hymer, who had a healthy respect for the dynamism of the large corporation, would probably have been surprised by the rapid transformation in the nature of the TNC and global production that appear

The national team and the business revolution 93 to be taking place today. A vast array of statistics testifies to the central position they now occupy in the global economy. By the end of the millennium there were about 60,000 TNCs worldwide that owned over 800,000 foreign subsidiaries. Transnational production, through foreign affiliates, had come to outweigh exports as the dominant mode of servicing foreign markets by the late 1990s (UNCTAD 1997: 1). TNC trade was also hugely important, it accounted for roughly two-thirds of world trade. A very large share of world trade, furthermore, had become intrafirm trade between branches of the same companies (UNCTAD 1995: 23). TNCs have, as Hymer predicted, become increasingly important to world production and trade and are key actors shaping the global political economy. By the new millennium it was calculated that thirty-seven of the largest 100 economies were no longer nations but instead transnational corporations, leading some even to fear that ‘governments lie prostrate before unbridled corporate power’ (FT, 6 February 2002).2 The Economist captured especially well the spirit of TNC restructuring in the 1990s in an article it published in the late autumn of 1997, titled ‘Merger Monday’. On Monday 13 October 1997, Western Europe, it reported, saw $130 billion-worth of takeovers and mergers in one single day.3 Merger Monday eclipsed previous daily records to the extent that in just one day deals totalling nearly one half that of the previous year were made ($250 billion in 1996). The Economist enthusiastically declared ‘by sheer volume, Merger Monday demands to stand for something’ (Economist, 18 October 1997).4 In a sign of the increasing concentration of business power that resulted from these deals, the EU competition commissioner (Karel Van Miert) later that same year, explained frankly to the Davos World Economic Forum his growing concerns: More and more, the problem is that there are only a few players left in a sector, and they want to get together to be effective worldwide. I tell them that’s not what free markets are about. Otherwise, you end up with worldwide private monopolies in place of the old state monopolies. (FT, 12 February 1998) By the beginning of the new millennium, Rubens Rupicero, UNCTAD’s general secretary, also warned of the imminent need for a global approach to competition policy, fearing this ‘may only be the beginning of a massive consolidation process at the regional and global levels’ (UNCTAD secretary general, WIR 2000: 21). Indeed, like the ‘second industrial revolution’ described by Chandler (1990), it is not at all fanciful to term current global restructuring among big business as ‘revolutionary’. This presents special challenges for China’s aspirant developmental state and the national team of enterprise groups. Unlike Japan and South Korea, China has strongly encouraged foreign direct investment.5 By 1999 nearly 400 of the Global Fortune 500 firms had already invested in China and over 350,000 TNC foreign affiliates had been established, more than for any other country in the world (the whole of the rest of the developing world, by comparison, had a total of only 490,000 TNC foreign affiliates) (WIR 2001: 11).6 For much of the early

94 The national team and the business revolution and mid-1990s approximately one-third of all foreign investment to developing countries was finding its way to China. In less than two decades of opening many of the largest TNCs had taken a firm root in the Chinese market.7 The evolution and nature of the TNC today needs to be considered when looking at the future of China’s national team, increasingly considered ‘the backbone of the national economy and the country’s main force to participate in international competition’ (Jiang Qiangui, vice-minister SETC (CD, 17 January 2000)). China, unlike Japan and South Korea in earlier periods, is attempting to create national champions during a period of unprecedented change among the world’s largest TNCs. It has also invited the enterprises it hopes eventually to challenge to compete head on in the domestic Chinese economy. This chapter briefly considers the extent to which some of the largest corporations have consolidated in the past decade, as well as some of the reasons behind this change, highlighting the challenge this poses for the national team.

A business revolution? During the late 1990s the business media was rife with talk of the ‘end-game’ in which a handful of global giants would emerge to dominate the ‘hyper competition’ of global markets. These rumours were fuelled by a massive surge of M&A activity, ‘an awesome M&A movement’, that took place both on a domestic and transnational level (Mergers and Acquisitions, July 1998). It is interesting that historically, M&A activity, not organic growth, has been the most important determinant in promoting firm and industry rationalization. During the already alluded to second industrial revolution in the nineteenth century, for example, the merger movement became the ‘most important single episode in the evolution of the modern industrial enterprise in the United States . . . as it permitted the rationalization of American industries in a way that did not begin in Britain and Germany until the 1920s’ (Teece 1993: 203). This gave large enterprises in the United States important first mover advantages over their European counterparts. For the United States this has been the ‘greatest takeover market ever’ and in Europe too there have also been ‘spectacular merger dramas . . . in scores of industry sectors’ (Global Finance, June 1999). M&A activity, in terms of size, value and number of deals has rocketed. Throughout the 1990s long-standing records were broken on a quarterly basis. In the United States, for example, $1.3 trillion of domestic deals were made in 1998 alone, half an estimated world wide global total of $2.52 trillion (Global Finance, June 1999). This was double the level of the previous year and approximately a quarter of the total value of the previous 18 years in the United States (Global Finance, June 1999). During the 1990s the value of globally announced deals continued to rise, reaching a record high of $3.43 trillion in 1999. Record levels of M&A activity have also been witnessed in Europe, and during the third quarter of 1999 European deals exceeded those of the United States for the first time. M&A activity has even spread to Japan and South Korea, nations traditionally hostile to such activity, as enterprises have reacted to the massive restructuring apparent in Europe and the United States.

The national team and the business revolution 95 While domestic consolidation has been a feature of the 1990s, the emergence of the first truly global market for firms also saw record new levels of transnational M&A activity (UNCTAD, WIR 2001). Indeed, during the 1990s it was the increasing scale, proliferation of ‘mega deals’ and the transnational nature of M&A activity that became the defining feature of the period. Because this international wave of mergers took place alongside a boom in domestic M&A, however, the share of cross-border M&As in all global M&A activity appeared to remain constant (averaging about 25 per cent in terms of both value and number of completed transactions (UNCTAD, WIR 2000: 10)). Their share of world GDP, however, increased from under 0.5 per cent to over 4 per cent over the 1990s (UNCTAD, WIR 2001: 53). Most telling of all, however, has been the rapid increase in the frequency of cross-border M&A ‘mega-deals’, deals exceeding one billion dollars in value. From only several dozen in the late 1980s the number has risen to nearly several hundred by the late 1990s (Table 4.1). The average size of ‘mega-deal’, moreover, has also increased substantially, averaging only 2 billion dollars in the early 1980s but reaching nearly 5 billion dollars by the 1990s. ‘Mega-deals’, involving large industry leading TNCs in the developed world, have become increasingly important as a form of industry rationalization and foreign direct investment among the world’s leading transnational companies. To take an example, in 1998 there were eighty-six mega-mergers, fourteen of which involved corporations from among the world’s largest 100 TNCs. These fourteen deals alone accounted for approximately 40 per cent of the total value of announced cross-border M&A for that year. Together the eighty-nine mega-deals constituted three-fifths of the value of all crossborder M&A and four of these deals broke the previous size records. It is interesting to note though that large corporations from developing nations were involved in just eleven of these mega deals. Table 4.1 Cross-border M&As with value over $1 billion, ‘mega-deals’, 1987–2000 Year

Number of deals

Percentage of total number of deals

Value (billion $)

Percentage of total value

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

14 22 26 33 7 10 14 24 36 43 64 86 114 175

1.6 1.5 1.2 1.3 0.2 0.4 0.5 0.7 0.8 0.9 1.3 1.5 1.6 2.2

30 50 60 61 20 21 24 51 40 94 129 329 522 866

40 43 42 40 25 27 28 40 43 41 42 62 68 76

Source: WIR 2001: 56.

96 The national team and the business revolution As well as the growing size of transnational deals, it is also highly significant that these deals have largely been horizontal in nature, between businesses in the same sectors looking to build on core businesses, not diversify into new areas. The share of such deals has risen from under 55 per cent of the total value of deals in the late 1980s to over 70 per cent by the late 1990s (UNCTAD, WIR 2000: 11). Both conglomerate and vertical M&As, on the other hand, have decreased in importance, with vertical M&A activity seeing the largest decline. The prevalence of huge transnational mergers has, unsurprisingly, also given rise to an increase in the transnationality of the world’s largest firms. If allowance is made for the fact that a range of new firms have entered UNCTAD’s transnationality index (measured as an average of the share of employment, assets and sales made overseas), the index of the largest 100 TNCs can be seen to have risen significantly.8 These largest 100 TNCs are especially important as they accounted for about one-third of the total assets of TNC foreign affiliates worldwide by 1998. They were also concentrated in certain sectors such as electronics and electrical equipment, automobiles, petroleum, chemicals and pharmaceuticals. These have experienced a ‘dramatic geographic expansion and increased number of foreign affiliates, especially since the mid-1980s’ (UNCTAD, WIR 2001: 95). Most significantly of all, these are the very sectors, as the previous chapter showed, in which many of China’s national team members are also found. Unlike the rapid consolidation trend found in developed economies, China has yet to witness such serious consolidation and restructuring efforts among its national team groups, even though M&A activity has increased in recent years. From September 1993 to May 1995, for example, there were a measly twenty-four mergers or takeovers reported on Chinese stock markets. By 1997 this had increased, but still only 202 mergers or takeovers were reported (CRES, GQGG 1998: 26). Even by the late 1990s the total annual value of M&A activity on China’s stock markets was less than a single large ‘mega-deal’ (Thomson Financial Data, January 2001).9 So even though the late 1990s saw record years of activity in China, the role of stock markets as markets for firms still remained tiny in international comparison. The United States alone in 1998 experienced M&A activity exceeding $1.3 trillion in value (Global Finance, February 1999). This was approximately 700 times the value of China’s 1997 record year. Unsurprisingly, China’s large groups have not expanded as quickly as they might have done if mergers between the leading groups in the national team had been carried out. Large, even increasing differences in size, remain between China’s national team and its global competitors. These TNCs sometimes employ a global workforce of comparable size to some of their Chinese counterparts but they have vastly superior sales and assets. In 1997, for example, the world’s three largest TNCs (Ford, GE, Shell) employed on average approximately 250,000 people globally. They had sales approaching $400 billion and assets of over $600 billion (UNCTAD, WIR 2000). While their workforces averaged only about four times that of the larger Chinese groups, their sales and assets were over 100 times greater. It has been calculated that in 1998 the average total assets and average sales of China’s top 500 enterprises were $712 million and $398 million, respectively. This

The national team and the business revolution 97 corresponded to less than 1 per cent of the average assets of the top 500 global companies and less than 2 per cent of their average sales (CDBW, 11 January 2000). By comparison with the largest TNCs based in developing countries, China’s largest groups still also remained small.10 Drivers of change Just as Chandler identified the ‘three pronged investments’ of the second industrial revolution as key to its progression, a number of important drivers, strategies and conditions of the current big business revolution are being isolated (Nolan 2001; Sturgeon 2002). These are numerous, and are only briefly mentioned here (but are looked at in more detail in the next chapter using the example of the auto industry). Among these, liberalization of trade, financial deregulation (allowing the free flow of capital), the formation of trading blocks, as well as further integration of existing trading blocks, have been very important. GATT and the WTO have been at the heart of world trade liberalization. Between 1970 and 1997 the number of countries abandoning exchange controls affecting imports rose from thirty-five to 137 (UNCTAD, WIR 1999: 9). On top of this many foreign direct investment (FDI) restrictions have also been lifted. Since 1991 some 570 agreements have been made liberalizing FDI and 1,330 bilateral investment treaties involving 162 countries have been put into effect, a three-fold increase in half a decade. Under these conditions TNCs have expanded overseas operations and a rise in the share of world output from multinational affiliates from about 4.5 per cent in 1970 to 7.5 per cent in 1995. In the past decade global output and sales of foreign affiliates have grown faster than world GDP as well as world exports: ‘more and more firms engage increasingly in international production’ (UNCTAD, WIR 2000: 15). Liberalization has been an important condition, allowing TNCs to embark upon their firm level strategies of expansion. Profound organizational changes, however, also appear to be taking place among leading TNCs. Most noticeable of these has been the increasing focus on ‘core activities’. The sale of non-core operations or affiliates by firms and the acquisition of similar operations from other firms, according to UNCTAD, ‘indicates a strategic shift by TNCs to focus on their core activities’ (WIR 1998: 22). This has involved the greater use of subcontracting partnerships to out-source a larger share of the supply chain, to what is becoming known as the ‘extended firm’ (as will be shown in the next chapter, this trend is most pronounced in the auto industry). This has often been coupled with the overt adoption of strategies in which a small number of first-tier suppliers are invited to work with core enterprises to supply them, increasingly on a global basis. In certain cases this strategy has also been accompanied by the use of global ‘platform strategies’ (see Chapter Five). These strategies appear in turn to have been facilitated by the utilization of new information technologies that, among other things, help monitor and co-ordinate the supply chain. Large investments in hardware and software, aided by a rapid fall in prices, as well as training staff in its use, have greatly helped firm-level globalization strategies. Complementing this use of new information technologies, the development of a smaller number of leading global

98 The national team and the business revolution ‘mega brands’ and a rationalization of brand portfolios has also been encouraged where possible.11 The growth of service providers around big business, such as global media empires and advertising agencies has made it easier to manage global brands. Finally, buoyant stock markets in the 1990s and a strong consensus among institutional investors that dominate them have fuelled industry consolidation. The search for ‘shareholder value’ has led to a set of goals that were universally rewarded by markets. Focus on ‘core’ activities and commitment to industry leadership in turn resulted in higher stock values. These higher valuations encouraged yet more paper deals. Transnational M&A, among other things, has also been fuelled ‘by the increased use of such financing mechanisms as the issuance of common stocks, the exchange of stocks and corporate debt’ (UNCTAD, WIR 2000, summary: 10). The rapid increase in the capital valuations of enterprises pursuing the approved strategies of large institutional investors has had important virtuous feedback effects, allowing them to pursue further mergers and acquisitions based upon high stock market valuations. The trend during the 1990s, therefore, saw increasingly large mergers between firms headquartered in the developed nations doing business in the same sectors. As a result, a small number of larger firms, as the next sections show, appear to have considerably increased their international market shares. In the same way that a domestic consolidation wave between American enterprises gave them first mover advantages on their rivals during the ‘second industrial revolution’ of the nineteenth century, so a number of firms can now be identified emerging across quite a broad range of activities. These too may become ‘first movers’, although as UNCTAD have warned, now on a global scale (UNCTAD, WIR 2000). Perhaps, above all, as with the so-called ‘first movers’ of the ‘second industrial revolution’ studied in such detail by Chandler for the late nineteenth and early twentieth century, scale appears to remain as important today as it did over a century ago: ‘size is a crucial parameter’ (UNCTAD 1998: 25). A defining feature of modern-day restructuring among big business is its search for greater scale.

Global consolidation and the national team One result of this search for scale appears to be increased market concentration, not just at a national level, but now increasingly at an international level. Hymer noted that there has always been a tendency towards increased firm size: ‘since the beginning of the industrial revolution there has been a steady increase in the size of manufacturing firms, so persistent that it might almost be formulated as a general law of capital accumulation’ (Hymer 1970: 441). Because of this he argued that it seemed after a point as if ‘a corporation comes to think in terms of its world market position rather than merely its United States or European market position and to plan in terms of worldwide factor availabilities and demand patterns’ (Hymer 1970: 442). Because the process was just beginning in the 1960s and 1970s, however, it was difficult to evaluate how strong the tendency would be. More recently, UNCTAD, commenting on the merger wave, note that today it is ‘the search for

The national team and the business revolution 99 increased market shares and indeed market domination that is one of the characteristics of business behaviour’. This is particularly true for what is perceived of as a new knowledge-based economy, in which ‘the search for market power – or even monopoly – is accentuated by the nature of the costs of knowledge-based production’ (UNCTAD, WIR 2000: 20). There has been comparatively little detailed work on the concept or measurement of transnational firm-level concentration. Some argue there is little evidence of a long run increase in global firm-level concentration or the emergence of a winner takes all economy: ‘in the overwhelming majority of the industries looked at, global concentration has decreased in the postwar period’. Even recent international mergers, it is suggested, have made only a ‘relatively modest’ increase in global concentration (Ghemawat and Ghadar: 2000: 66).12 Other studies, on the other hand, find some evidence of increasing concentration over the post-war period: ‘the evidence in cigarettes, heavy electrical equipment, autos, tires, and tractors points to increased concentration of the global marketplace under the dominance of a handful of transnational majors . . . Acquisitions and mergers in all industries have played a central role in increasing global concentration’ (Gomes-Casseres and Yoffie 1985: 395). More recently, UNCTAD reported that the effect of mergers on concentration in the past decade ‘has been considerable’ (WIR 2000: 128).13 Industry examples The following brief industry summaries of sectors from which the national team groups are found appear to emphasize the rapid increase in global concentration that has taken place in the past few years among many areas of business activity. Indeed, the striking feature of the six deals on ‘Merger Monday’, according to the Economist, was how different they all were: ‘Each takes place within its own industry; none is the empire-building diversification of old’ (Economist, 18 October 1997). The current consolidation wave appears to reach across industry boundaries. Machinery and electronics In the auto industry in just 3 years (between 1996 and 1999) mergers have increased the world market share of the largest ten auto assemblers from 69 to 80 per cent (UNCTAD, WIR 2000: 128). In both the non-commercial and commercial vehicle sectors only a handful of global players with ‘critical mass’ remain as independent producers. All the global leaders have established equity tie-ups or full partnerships with other sizeable producers, on a transnational basis. Further down the supply chain auto component manufacture is also experiencing its greatest rationalization ever. It is predicted ‘the number of suppliers for many key parts will be whittled down to two players, maybe three’ global oligopolists as suppliers move to align themselves globally with the remaining assemblers (FT, 28 October 1996).14 The era where large national champions can stand alone appears to be over. Against this dramatic backdrop of unprecedented global consolidation in transportation equipment, China has selected seven large auto groups from the national team

100 The national team and the business revolution to represent the core of its auto industry. These include the big three of FAW, Dongfeng and SAIC. The State machine-building industry has recently argued ‘it is significantly important for China to form some large corporate groups in the automotive industry, power generation, transmission and distribution equipment, engineering machinery and farming’ (CD, 31 August 1999). In the auto industry, for example, it is hoped that ‘China’s top 20 auto makers will reshuffle into three or four enterprise groups’ (CD, March 1997). Despite efforts to this end, Chapter Five shows that China’s national team auto groups, although having made progress, have also become increasingly dependent upon the groups they hope to one day catch. In more complex equipment, such as power generation and process controls only a small number of global industry leaders remain. By 1995, for example, there were just five main integrated producers of power equipment with an estimated 76 per cent of the ‘new-build’ market for fossil and nuclear-fuelled power-station equipment (FT, 9 June 1998). Many of these had penetrated the Chinese market, in the form of joint ventures. In power generation equipment the national team consists of a number of large groups: Harbin, Dongfang, Shanghai, Xian and North Eastern groups. There are also a number of groups in power supply and these formed the basis of the first batch of trial enterprise groups in the national team selected in 1991. In many electronics sectors concentration is already high. In mobile telephony, for example, there are already only three major first-tier players, Ericsson, Nokia and Motorola. It is predicted second-tier firms will ‘be forced into successive rounds of consolidation within five years, driven by the need for greater economies of scale to support research and development’ (FT, 20 March 2000). In household electronics a number of giants already exist, such as Sony and Phillips. Personal computing is also dominated by a few groups. China’s national team includes ten groups from the electronics industry (an increase from only three in 1991). These are well-known Chinese names such as Legend, Caihong, Founder, Changhong and Shanghai General Electronics Group. Five of these rank among the nations 10 largest producers, themselves responsible for 33 per cent of the entire industry’s national output. Iron and steel Iron and steel, an industry until recently dominated by national champions (and as a result still comparatively fragmented) has also witnessed rapid domestic and transnational consolidation. Following in the footsteps of downstream users, iron and steel makers have responded to the calls of their clients to serve them in an increasing number of markets so as to ‘secure orders from their main customers, particularly carmakers’ (FT, 13 April 2001). Europe has taken a lead in this consolidation process with various mega-mergers of former ‘national champions’. British Steel, for example, merged with Hoogovens in 1999 to form Corus (the third largest European producer) writing ‘one of the closing chapters in the continuing saga of the continent’s steel industry consolidation’ (FT, 11 October 1999).

The national team and the business revolution 101 Most noteworthy of all within Europe has been the creation of Arcelor, a European champion and world leader (with about 7 per cent of the world market, producing 40 million tonnes). It was created by a three-way merger of Arbed (Belgium), Usinor (France) and Asceralia (Spain). Other significant signs of global consolidation include Nippon Steel (Japan) and Posco (South Korea) forming equity links and ties in research and development, information technology and third-country joint ventures (a full Posco/Nippon Steel alliance it is conjectured, would possess 7 per cent of the global market, approaching that of Arcelor (FT, 27 August 2000)). In Japan the second and third largest steel makers (NKK, the world’s sixth largest and Kawasaki Steel, the world’s ninth largest) also recently merged, creating the world’s second biggest steel maker. This was driven by among other things ‘drastic changes in the industry including the global consolidation of major industries and the expansion of globally-integrated procurement policies’ (FT.com, 13 April 2001). China’s national team boasts eight steel groups. Attempts were made to force consolidation and increase scale with the aim of developing four large groups to produce over 40 per cent of national output in 2000. Several larger groups including Baoshan (China’s largest steel maker in China and the sixth largest in the world) and Shougang emerged during this process. They still lag behind their international rivals, however, and cannot produce certain high-grade steels. The large TNC steel corporations they hope to compete with are also developing a strong presence in the Chinese market (Nolan 2001: Chapter Nine). Petrochemicals A string of historic multi-billion dollar deals have also transformed a range of key industries of strategic importance. In the petrochemicals industry, for example, BP, Amoco and Arco, Total, PetroFina and Elf Aquitaine, Exxon and Mobil and Chevron and Texaco merged in the late 1990s leaving five large oil groups (including Shell) dominating the global industry. Smaller players have been ‘left stuck in no man’s land’ (FT, 18 November 1999). As a result of this rapid consolidation some smaller independent companies have also attempted to initiate mergers. In the chemical-related businesses the emerging ‘global champions’ have rationalized their activities to focus on fast growing businesses and those in which they lead the market or which have high margins. In China three large groups have been created to oversee petrochemical exploration, recovery and refinement. PetroChina, Sinopec and CNOOC are included among the trials with large enterprise groups as national holding companies. These groups faced rapid restructuring in the late 1990s in a belated effort to increase scale and create large national champions. Foreign TNCs, however, have already deeply penetrated the market in the form of joint ventures and equity shareholdings. The recent issue of stock by China’s large oil groups was heavily subscribed to by the global champions of this industry. The prospects for the development of an indigenously owned global competitive oil and petrochemical industry do not look good in this light (Nolan 2001: Chapter Seven).

102 The national team and the business revolution Metals and mining Across all types of mining, such as copper, aluminium, gold, coal and iron ore there has been a push towards transnational consolidation. Iron ore production is already highly concentrated. The world export market is now dominated by just three companies (CVRD, Rio Tinto and BHP-Billiton). They share 75 per cent of global trade and consolidation is ongoing: ‘we are in an era of unparalleled consolidation’, so that in some bulk commodities, ‘notably iron ore and coal . . . an oligopoly is developing’ (Billington’s chairman, FT, 6 October 2000). In the mining of coal ‘there are basically five large global players positioning themselves to lead the industry’ (IDD, 15 November 1999). In gold production there has been ‘ a profound restructuring’ with the ‘emergence of two powerful groupings’, GFSA and Anglo American (IDD, 15 November 1999). In aluminium, as with steel, huge transatlantic mergers have taken place. The attempted merger of Alcan, Pechiney and Algroup looked to create the world’s largest aluminium company as well as the global leader in flexible and specialty packaging to serve increasingly global customers. Alcoa already mines about half of global alumina supplies and several groups control large shares of the alumina market, with Alcoa claiming approximately half the free market (FT, 31 October 2001). In the primary production of smelted aluminium the top 10 producers share about 55 per cent of the global market (in terms of volume).15 Alcoa is the largest with about 15 per cent of the global market share and Alcan 8 per cent (FT, 31 October 2001). It is also estimated that almost half of world steam coal exports could be in the hands of five companies by 2010: ‘There is the possibility of the market situation in the medium-term being equivalent to the Organization of Petroleum Exporting Countries’ influence over the oil market’ according to a recent survey of the industry (FT, 31 August 2000). The national team members from the coal industry include Shenhua, Yanzhou and Datong. These are among China’s largest coal mines. Thousands of small-scale TVE mines have been closed in recent years and only seven large regional Chinese groups, with the three national team members as the core, are being created (this restructuring has followed the example of the petrochemical industry, in which groups have been established by region). In another dramatic and symbolic example of plans to build globally competitive groups (in response to WTO entry) China has combined all its alumina assets to form a state-run integrated aluminium giant. This group includes China’s six largest alumina manufacturers as well as the largest research institutes and construction firms. The Aluminum Corporation of China (Chinalco) now produces 70 per cent of the domestic market’s alumina, and 23 per cent of its aluminium (CD, 24 February 2001). It is now the third largest alumina producer in the world (after Alcoa Alcan) and is ‘confident of becoming a strong multinational aluminium conglomerate in three years’.16 Aerospace In aerospace, a key strategic industry, EADS (the European Aeronautic Defence and Space group, based around Dasa of Germany, Aerospatiale Matra of France and Casa of Spain) has recently been created. It hopes to be able to compete with

The national team and the business revolution 103 North American rivals Boeing, Lockheed Martin and Raytheon. BAE has maintained its independence in a take-over of Marconi, with the goal of further penetration of the American market. The cross-border consolidation in aerospace and defence, industries of key strategic importance, is indicative of the strength and depth of current international restructuring among large-scale enterprises. The merger of former ‘national champions’ in defence-related industries indicates that no industry can consider itself immune from the pressures of global competition. China’s aerospace industry was dominated until recently by AVIC, a large and disparate national holding company undergoing trial reforms. Recently, this was split into two separate groups and a number of other military industries were also restructured creating a number of enterprise groups. So far China’s aerospace industry has failed to mass-produce any large or medium-sized passenger jets and there is little hope of doing so in the near future. Even though efforts have been made to consolidate the domestic industry there appears little hope of it competing with the global giants in the near future. The best prospects for the Chinese aerospace industry appear to be working as a subcontractor to the likes of Boeing and EADS. Pharmaceuticals In the increasingly research and marketing-intensive pharmaceutical industry, in which ‘blockbuster’ drugs are becoming ever more important, a small number of global leaders has also emerged. Consolidation spreads the risks involved in attempting to develop and market blockbuster drugs. The GlaxoWellcome and SmithKline Beecham merger created the world’s largest pharmaceutical company with over 7 per cent of the global prescription market (FT, 9 November 1999). The rest of the top five players now also each hold between 3 and 6 per cent of the global market. Pfizer’s recent take-over of Warner-Lambert left it in second spot with a market share of 6.5 per cent (FT, 9 November 1999). Other billion dollar megamergers have included Astra and Zeneca, Hoechst and Rhone Poulenc (Aventis), Sandoz and Ciba-Geigy (Novartis) and Monsanto and Pharmacia Upjohn.17 It is unsurprising that as a result of this remarkable activity the global market share of the top ten companies is estimated to have risen from 23 per cent in 1983 to 31 per cent by 1995 (Matraves 1999: 188). Other estimates suggest that by 1999 this had risen to over 40 per cent (FT, 9 November 1999). In all areas related to pharmaceuticals, therefore, ‘powerful consolidation forces’ have been put to work.18 Like the auto industry, the rapid rise in the global market shares of the largest TNCs has been driven by billion dollar transnational mega-mergers. This stands in stark contrast to China’s five pharmaceutical groups in the national team selected from the many thousands of small domestic producers. The sixty largest pharmaceutical firms in China still only account for a third of national sales. The R&D expenditure in China’s entire industry is less than one leading foreign enterprise (COL, 2 August 2000) and over 99 per cent of China’s pharmaceutical output is reported to be nothing more than simple imitations of foreign drugs (COL, 12 February 1999). All of the top twenty largest global pharmaceutical companies

104 The national team and the business revolution already have ventures in China and nine of China’s top ten plants are foreign joint ventures (COL, 4 October 2000). As with the auto industry, China faces serious challenges in the quest to develop large internationally competitive groups in the pharmaceutical industry (Nolan 2001: Chapter Five). Building materials It is not just in large high-profile sectors that international consolidation has been taking place. The Economist described even the cement industry as a ‘fast moving, high-tech paragon of globalization’ in which several leading multinationals were ‘jockeying to divide up world markets’ (Economist, 19 June 1999). During the mid-1980s European groups ‘invaded North America and now own most of capacity there’ and in the late 1990s ‘did the same in Eastern Europe’ (Economist, 19 June 1999). In the mid-1990s after Mexico’s currency crisis they ‘snapped up’ most of the independent South American companies. The Asian crisis gave them similar opportunities there: ‘the big six will take over most of the Asian cement industry – they’ve already started’ (Economist, 19 June 1999). The struggle between two global giants (Lafarge and Holcim, 8 and 6 per cent global market shares, respectively) is ‘part of a wider struggle for domination of the global cement industry in which every available tonne of production capacity is being keenly fought over’ (FT, 21 August 2001).19 As well as cement and concrete, other products such as roofing materials and aggregates are also dominated by these large groups. In another area, glass, leaders such as Saint-Gobain, Asahi and Pilkington have also come to dominate the global market. The world’s six biggest glass producers accounted for nearly two-thirds of world flat glass sales. Several building materials groups, such as CNNBMG, Luoyang Floating Glass Group and Yaohua Glass are included in China’s national team (Table 3.4). Like other industries, it is still fragmented. Plans to close small plants producing under 50 million tonnes of cement are underway with the aim of ‘speeding the development of large enterprise groups’ (CDBW, 30 May 2000). CNNBMG, for example, aspires to become ‘a well known transnational group’. There are few signs, however, that China’s large building materials corporations will be able to compete with their global counterparts. Forestry While it might also seem improbable, the forestry and paper industry ‘crying out for consolidation’, is also a rapidly globalizing industry (FT, 8 December 1999). During the late 1990s a number of global champions rapidly emerged in the paper, forestry and packaging industries: ‘the past 12 months has seen concrete results and the creation of a whole new tier of truly global companies . . . For decades, the pulp and paper industry has suffered from a reputation of being fragmented, prone to volatile earnings and seemingly addicted to high capital spending and capacity growth’ (FT, 5 April 2001). The Nordic forestry giants, StoraEnso, UPMKymmene, Norske Skog and SCA, have all bought substantial assets in North

The national team and the business revolution 105 America. During one month in February 2000 three major deals were made. The leading European group StoraEnso (itself the product of a large deal between the Swedish and Finnish companies in 1998) undertook a transatlantic take-over ($5 billion) of Consolidated Papers (FT, 23 February 200). The combined group became the world’s largest producer of paper and board products (FT, 23 February 2000). Another transatlantic deal saw the world’s third largest group, UPM-Kymmene (Finland) undertake a $20 billion merger with Champion International (US), creating another global giant. Analysts ‘applauded the industrial logic of the latest deal’ (FT, 23 February 2000). As with other industries, paper and packaging is supplied to many intermediaries and according to industry executives many of their customers are consolidating and operating all over the world and ‘they wish the large companies to serve them where ever they are’ (CEO of UPM-Kymmene, FT, 8 December 1999). A number of forestry groups, such as Jilin and Heilongjiang Forestry Groups, have been included in China’s national team to help manage China’s large areas of natural forest and boost related industries. These too will face severe competition from the global groups now emerging. Service industries As well as across major industrial sectors, a wide range of service industries have also been involved in transnational consolidation. While the majority of the national team groups is mainly based around large-scale industrial manufacture (about eighty of the groups), a number is also involved in service provision, mainly transportation and trade. In civil aviation, for example, numerous strategic alliances, such as Star Alliance and One World (also referred to as ‘virtual mergers’) have already set the stage ‘for a ferocious battle among three of four families of airlines on a global scale’ (IDD, 31 January 2000). Star Alliance already has a global market share of more than 22 per cent (FT, 25 May 2000). The recent failed merger of British Airways with KLM would have created a market leader. In response to these trends China’s civil aviation sector has been consolidated in three of the national team groups, Beijing’s Air China, Shanghai’s China Eastern Airlines and Guangzhou’s China Southern Airlines. Over twenty smaller airlines run by local investors have been forced to either join one of the three aviation groups or compete directly with them. They now operate 80 per cent of China’s aviation business. The reorganization of China’s airlines, it is believed, will ‘set a good example for reorganization in many other industries including the auto industry’ according to the deputy director of the Development Research Centre under the State Council (Lu Zhiqiang, quoted in CD, 22 March 2000). Within the retail sector, by way of another example, consolidation and geographical expansion has also been ongoing. In the world’s seventy-three largest economies, it is estimated since 1994 that the top 200 retailers have increased their share of retail spending from 21 to 28 per cent. The trend is likely to accelerate so that by 2009 this could reach 50 per cent. The greatest concentration of retail spending is likely to be found in the top twenty-five companies, which are predicted

106 The national team and the business revolution to control 40 per cent of retail spending. Most importantly, of these twenty-five ‘only 5 to 6 will be the real world leaders’ and they ‘represent the future’ (FT, 4 October 1999).20 Although there are only twenty foreign retailers approved by the State Council in China, about 200 have entered the Chinese market through provincial and municipal governments and they already make up about 2.5 per cent of China’s total retail sales of consumer products. For China it is felt ‘consolidation must be the first choice for China’s retail chain sector’ so as to establish ‘a group of name-brand large supermarkets that can compete with foreign giants in terms of either consumer satisfaction or recognition’ (CD, 6 August 2000).21 Hualian, a retail group from the national team has been established to this end. In order to become more competitive, some big cities, such as Shanghai, have also drawn up specific strategies to deal with foreign counterparts.22 Other sectors As the above descriptions suggest, international consolidation across many manufacturing sectors was a feature of the 1990s. As well as the large headline grabbing examples, many diverse and even bizarre examples can be found elsewhere. Examples range from manufacturers of locks, ovens, specialist paints and coatings, smart cards, forklift trucks, rolling bearings, thermostats, forest machinery, chainsaws, farm equipment, lifts, escalators, solar cells, food flavourings, industrial chocolate and even rubber gloves to a wide range of service providers such as advertising businesses and temporary labour agencies (see Table A.2 for numerous examples). A maker of professional ovens, for example, now has 40 per cent of the global market (FT, 19 September 2000). In locks, a leading firm has recently increased its global market share from 7 to 11 per cent, twice that of its nearest rival (FT, 8 March 2000). In forklift trucks, one of Europe’s three largest manufacturers of materials handling equipment was recently taken over by Toyota, giving it 22 per cent of the global market (FT, 4 April 2000). In food flavourings, Nestle’s sale of its food ingredients specialities business (a global leader in savoury chemicals used in sauces, soups and prepared dishes) led to a subsequent merger that created a company with 15 per cent of the global market for savoury chemicals. Hoechst recently sold a paints business to DuPont creating a coatings business with 30 per cent of the global automotive coatings market (FT, 30 October 1998). Many service sectors, as noted, have also been pulled into the expansionist strategies of the emerging global champions. While their activity is not always as immediately obvious as those of manufacturers (such as the dramatic expansion of component suppliers in the automobile industry), activities in service industries have, in many respects, closely mirrored those of the manufacturing industries they serve. Indeed, the reasons for consolidation are often remarkably similar: to cut costs, increase scale and follow clients to become global service providers. In fields as diverse as transport, financial services, IT, telecommunications, law, advertising, accounting and management consultancy the ability of service firms to offer global services has become crucial. Adecco, for example, the world’s leading temporary staffing agency is looking to establish a 20 per cent world market share

The national team and the business revolution 107 (FT, 19 August 1999). Securitas, is now the world’s largest security services group, with a global market share of around 7 per cent. In many other obscure areas consolidation can be found. The largest container shipping enterprises, for example (predominantly east to west ocean carriers), are ‘not only feeding on each other’ but also ‘gobbling up’ smaller north to south shipping lines, which ‘will probably not survive’ (Traffic World, June 2000). In 1998 four large east–west carriers joined to create the largest strategic grouping in the world (Transportation and Distribution 1998: 17). In larger tanker services consolidation has also taken place so that a leading group in large capacity container shipping and large oil tankers now commands about 15 per cent market of the world market share. Even in an area such as dredging, the bulk of the market is carved up between four Dutch and two Belgian operators, with smaller Japanese, Korean and American companies filling in the local gaps (FT, 22 June 2001). By the late 1990s a large number of different enterprises found across a very broad range of activities had developed considerably large market shares (Table A.2, appendices). This was particularly true of many of the sectors from which the national team was found.

Conclusions Our knowledge and understanding of what has already been termed a ‘big business revolution’ remains basic. This chapter has only briefly attempted to highlight the dynamism of the current era by describing some of the interesting global consolidation trends across the different industries from which many of China’s national team groups have been chosen. The next chapter, after introducing in more detail China’s large enterprise groups, looks at one specific industry, the auto industry, and explores the nature of recent changes in this industry with a view to better understanding the revolutionary changes underway. Information technology, the liberalization of markets, the search for global leadership rewarded by financial institutions, exploitation of economies of scale aided by the introduction of new manufacturing techniques such as platform strategies and the development of global brands all appear to have played important parts in the current restructuring among large TNCs. The closing years of the twentieth century and opening years of the twenty-first century have seen profound changes among the world’s largest corporations. There is, however, as noted in Chapter One, still ‘no theory of the evolution of the firm as a dynamic organization’ and in economics as a discipline relatively little is made of the central position that the large corporation has made to modern-day economic prosperity. No model or theory, as yet, fully explains how this phenomenon has taken place, why it is doing so now, or what the wide range of implications might be. This chapter has briefly suggested a number of causal factors, looked at again in Chapter Five. There are still great gaps in our knowledge and Chandler’s final words on the second industrial revolution ring true today for another process of revolutionary change that is only just underway: ‘much more work needs to done at every level on each industry in each country’ (Chandler 1990: 628).

108 The national team and the business revolution The emergence of China’s large-scale sector must be considered against the backdrop of unprecedented global consolidation now taking place. Consolidation, to reiterate, is particularly evident across all of the ‘pillar’ or ‘backbone’ industries from which China has selected her national team enterprise groups as a vanguard in international competition. Examples include motor vehicles and components of all types, power generation machinery, building materials, steel, aerospace and defence, petrochemicals, telecommunications, electronics, airlines, retailing, transportation, mining and pharmaceuticals, to name but some. The evolution and future of China’s national team and large-scale sector, with increasing international economic integration inevitable in the wake of China’s WTO obligations, is now intimately linked to the current restructuring taking place among the largest global corporations. UNCTAD have warned this ‘may be only the beginning of a massive consolidation process at the regional and global levels’, one which may one day require ‘a global approach to competition policy’ (UNCTAD Secretary General, WIR 2000: 21). China’s ambitious plans to nurture a batch of large enterprise groups coincide with a unique period of history typified by rapid global consolidation. There has only been a belated reaction to this business revolution in China. Attempts to force consolidation in the key sectors of the national team, for example, have only become apparent in the past few years. There is now a strong belief, however, that mergers should be ‘encouraged to help China prepare for ferocious foreign competition after the country enters the World Trade Organization. Transregional and inter-sector mergers should be speeded up to develop large enterprise groups’ (Lu Zhiqiang, deputy director of the Development Research Centre under the State Council) (CD, 22 March 2000)). Vice-premier Wu Bangguo recently commented: if we use our strong large-scale enterprises and groups and they all fight alone, everyone will still find it difficult in the ever intensifying domestic and international competition to compete on equal terms with large international companies. We must unite and rise together, develop economies of scale and scope and nurture a ‘national team’ capable of entering the world’s Fortune 500. (Jingji Ribao, 8 January 1998, emphasis added) Thus by the late 1990s mergers between large enterprises, although still a comparatively rare phenomenon in comparison to their global counterparts, were becoming more prevalent. Those that did take place, however, usually relied upon state intervention: ‘few large state-owned enterprises have realized substantial expansion through market oriented mergers’ (CD, 1 June 1998). Although China’s largest enterprise groups are still small in comparison to large global corporations and lag behind them in many important aspects, perhaps as worrying is the continued lack of suitable mechanisms and institutions that would help facilitate restructuring in China. Chapter One noted how Marshall (1920) once suggested that although it might seem as if large corporations might grow forever, becoming increasingly stronger,

The national team and the business revolution 109 they do not. Instead, it was argued, ‘sooner or later age tells on them all’ so that in ‘almost every trade there is a constant rise and fall of large businesses’ (Marshall 1920: 315–16). A reality of contemporary economic history, however, now appears to be the growing dominance of a small number of leading firms, initially at a national level, but now increasingly also at a transnational level. The challenge for China’s large enterprise groups today stems from the challenge posed by the revolution among TNCs currently taking place and their rapid penetration of the Chinese market.

5

The national team in international comparative perspective The auto industry

China’s top 20 auto makers will reshuffle into three or four enterprise groups by the turn of the century to meet overseas competition. The US Big Three – General Motors, Ford and Chrysler – evolved from as many as 140 auto plants in 1900 . . . 116 car makers are registered with the Ministry of Machine Building Industry. The urgency to develop competitive groups is mounting as China begins new negotiations to enter the WTO . . . the Chinese Government plans to adopt policies to accelerate the process. With three or four auto giants as its backbone by 2000, the country’s motor industry has a future. Otherwise, it would be hopeless. (CD, 2 March 1997: 2)

The first two chapters of this book presented an account of China’s indigenous large-scale sector based around the emergence of large enterprise groups in pillar industries under the influence of state policy. Chapter Two showed how the role of the large-scale sector in China has generally been poorly understood even though it has played a significant role. Chapter Three, moving on from this, isolated what it considered to be a small number of state-supported enterprise groups, the 120 large preferred enterprise groups of the national team. These are of growing importance to the large-scale sector. It described the background to their selection, reasons for ‘grasping the large’ and policies related to their institutional transformation. These chapters also showed that the State Council explicitly declared a number of reasons for promoting the national team of enterprise groups, including salvaging small-scale industry, promoting macroeconomic stability, reducing replication and increasing scale. Since the second national team enterprise group directive in 1997, however, it is important to stress an overriding policy goal has been to further the creation of a small number of internationally competitive groups. The 1997 State Council enterprise group directive, as Chapter Three showed, explicitly recognized that a ‘crucial stage’ had been reached in which the industrial growth pattern had ‘transformed from extensive growth to concentrated growth’. The directive also recognized that ‘as opening to the outside continues enterprises will face more severe domestic and international competition’. China still has high expectations of developing successful groups in assembly and component manufacture. Industry-specific measures to promote group development have been

The national team in international comparative perspective 111 implemented in the auto industry. As a result, it is a particularly interesting case to consider the question of catch-up at the level of the large enterprise. This is especially so in the light of the revolutionary change that has taken place in the global auto industry in the past few years. The global giants now emerging are eager to increase their market shares across all markets, particularly by way of the fast growing Asian market. This poses enormous challenges for China’s indigenous auto industry. The global auto industry has always been at the cutting edge of new organizational and production techniques. It gave rise to Fordism, Toyotism and the related concept of ‘lean production’. In the early twentieth century Fordist mass production systems heralded a completely new era for their time, transforming the physical way in which production was carried out. This in turn had repercussions for the nature of the firm as enterprises sought to integrate vertically upstream processes. In their way Fordist production systems not only permeated the global economy, in turn they transformed the nature of society. In a similar fashion today a movement to a new paradigm appears to herald important changes in production processes, organizations and society. The auto industry, as well as being a good barometer of economic growth, has historically led new trends in production systems and industrial organization. The profound international restructuring currently taking place throughout all echelons of this industry may well also herald profound changes in industrial organization in many other sectors. Unprecedented restructuring in both assembly of passenger and commercial vehicles, trucks and all areas of components supply has been witnessed in the past decade. The last few years of the twentieth century saw not only a headline grabbing wave of historic mergers and acquisitions. Obscured to some extent in the shadow of the merger activity, a range of revolutionary changes in production processes also occurred. The changing strategies of the largest auto groups have driven this activity. Because this industry has played and continues to play a pioneering role in the international restructuring of the large modern industrial corporation, it provides an important yardstick with which to gauge the likely impact of the so called global ‘big business revolution’ on Chinese industry (Nolan 2001). The first half of this chapter therefore describes the nature of the remarkable global transformation of the global auto assembly and component supply industry. Following this the subsection of groups from within the national team in the auto industry are briefly compared with the global giants now emerging. It draws upon insights based upon research undertaken at three of China’s largest auto groups, First Auto Works (FAW), Dongfeng and SAIC, during the spring and summer of 1999 as well as one of China’s largest auto component groups, ASIMCO.1

The global auto industry The previous chapter described how global oligopolies already appear to be emerging across a wide range of industrial and non-industrial sectors leading UNCTAD to argue there soon may be need for a global approach to competition policy. Auto assembly, both in heavy and light vehicles as well as all types of component

112 The national team in international comparative perspective manufacture, appears especially to epitomize the global business revolution, both for its speed and depth. A clear paradigm shift in the perceptions of the largest Western assemblers, dating from the 1980s although gaining true momentum in the 1990s, has driven profound change in the global auto industry. This industry change was initially motivated by the comparatively poor performance of Western assemblers relative to their Japanese counterparts. By the early 1990s, GM had announced the largest ever loss in its corporate history (of several billion dollars) and at that time the largest in United States’ corporate history. Many other Western auto manufacturers were also struggling. This was largely because of foreign competition, particularly from the Japanese, and was reflected by increasingly large trade deficits with Japan. In fact by the early 1990s, nearly three-quarters of the American trade deficit with Japan consisted of automobile trade. This Japanese success was initially attributed by some to Japanese protectionism. However, it was also becoming clearer that this was not the sole explanation. Japanese-owned and -operated auto firms had made visible inroads into the American domestic market. By this time about 20 per cent of North American production was already made by Japanese-owned or -controlled firms. It therefore became increasingly evident that the production methods of large Western assemblers had fallen well behind their Japanese counterparts. This was obviously of great concern not only to assemblers and parts makers, but also to a wider group of politicians and business leaders. The auto sector was the largest single manufacturing sector in the United States and there was almost disbelief that they could have fallen so far behind. It also had wider implications for manufacturing as a whole, which was to lead to a drastic rethink among American and European makers and eventually to the implementation of radically new production strategies. By the end of the 1990s, strategies of vertical disintegration and new forms of supplier–client relationships were emerging. North American and European automobile firms, in particular, embarked upon profound restructuring programmes to try and regain lost momentum and credibility. Chrysler was among the first Western auto assemblers to recognize and implement new strategies. Faced by a series of major financial crises at the end of the 1980s Chrysler was forced into taking extreme survival measures.2 A main feature of its strategy was to start working far more closely with fewer and larger component suppliers in the design, development and engineering of new vehicles. By the early 1990s, in a little over 5 years, the company had drastically reduced the number of its major (first-tier) suppliers, from 3,000 to just 150, accounting for 90 per cent of its components budget (FT, 3 October 1994).3 This left Chrysler focusing on what it considered its ‘core activities’ of overall vehicle design and development, as well as a number of certain specific manufacturing processes.4 Suppliers became incorporated in different aspects of production and they were increasingly perceived of in a different way, as ‘fully-fledged members of our platform (individual car range) teams’. They now came to be viewed as ‘an integral part of a value-added chain . . . we call it the extended enterprise’ (former Chrysler president, FT, 4 October 1994). Witnessing the successes at Chrysler, numerous other assemblers began to embark upon similar initiatives. In 1992 GM brought together 600 of its largest suppliers and 200 purchasing managers. It also expounded its plans to grant fewer

The national team in international comparative perspective 113 larger long-term contracts to suppliers. The aim was to attempt to centralize parts purchasing (which was still spread over twenty-six different operations) in an effort to knock $2 billion off parts purchasing over 3 years (FT, 21 May 1996). Like Chrysler, a set of new strategies was introduced, employing what they called ‘lean production systems’ (following the Japanese). As well as this, aggressive new product development programmes and the introduction of what were to become known as a ‘global platform strategies’ followed. By the mid-1990s, Ford also launched the highly publicized ‘Ford 2000’ restructuring programme. This had the same basic ingredients as GM and Chrysler’s strategies. It pressurized component suppliers to reduce pricing. It also developed a single global centre capable of interacting with its many hundreds of suppliers in the design, development and final procurement of its thousands of different component types (amounting to many millions of units of parts).5 As with other assemblers, there was a movement towards centralization and a push for economies of scale and greater efficiency. Purchasing, design and engineering centres, previously regionally based, were integrated into five ‘vehicle centres’. The campaign was described as ‘effectively a $140 billion internal merger’ (FT, 31 January 1999), which was to knock down all the ‘barriers, geographic or bureaucratic, that have complicated our lives for generations’ (FT, 31 January 1999).6 By the early 1990s, most of the largest Western assemblers had started to adopt new but similar strategies. Superficially, these appeared to involve the replacement of Fordist mass production strategies with elements of so-called Japanese ‘lean’ production systems. At the same time, however, they looked to produce on a far greater scale than ever before, as well as producing across a far larger geographical area. There was not so much a simple adoption of Toyotist methods of production, therefore, but more of a hybridization or even mutation of the Toyotist system on a new scale. The centrality of scale and global platform strategies Lean production hinges around decreasing inventory via just-in-time deliveries, developing closer ties with suppliers, increasing the speed of product development and reducing the number of faulty parts. It is now generally recognized that the combined aspects of lean production in themselves have a number of advantages over other production methods, one of the most important being the increased speed of product development and reaction to changing consumer demands. However, early claims that lean production and new production technologies, particularly advanced machine tools, would ‘reduce economies of scale to such an extent that small firms could compete with large without product differentiation’ turned out to be largely unfounded (MBI 1993: 135). As one auto industry expert has put it, ‘lean production was never a substitute for volume’. Even with lean methods, a rise in vehicle production from two to four million units is capable of lowering unit costs by 6 per cent, naturally a significant reduction in keenly competitive markets (FT, 15 April 1999).7 Scale, contrary to what is sometimes thought, has become more important than ever before.

114 The national team in international comparative perspective A vital way in which scale and cost reductions have been achieved in production is via the use of a smaller number of basic engineering structures – the ‘platform’. This refers to the major components found on the underbody of the vehicle. According to the definition used by VW, a pioneer of the technique, these include the drive train from radiator and fan to the engine and mountings, fuel lines, gearbox and gear shift, steering column, fuel tank, brakes and cables, exhaust system, front and rear axles, foot controls and wheels. The platform, therefore, consists of a number of basic components on the underbody of the vehicle which can be mass produced. An integral element of the platform strategy is that it allows increases in the scale of part manufacture by making an increasing number of parts common. This takes place for simple but also more complex components. Ford, for example, during its ‘Ford 2000’ campaign, found it could use three instead of thirty-three different horns, fourteen batteries instead of forty-four, eleven steering wheels in place of fifty and one cigarette lighter instead of fifteen (MBI, January 1996). As well as this, reductions in more complex parts such as engines and gearboxes have been achieved. The platform strategy works because different combinations of components and styling can be applied on top of the basic platform to create different models. It is possible, therefore, for each platform to produce a number of different variants, nowadays even for different brands to be built on the same platform (such as the outwardly different Skoda and VW models). By the mid1990s Ford, GM and Daimler had a total of forty-nine platforms, but between them they had plans to reduce this number drastically in the United States, at the same time as they were to increase the number of variants per platform. In Europe the platform strategy was implemented at an even greater pace, with plans introduced in 1995 to reduce the number from seventy-two to fifty-four and increase the number of variants per platform from 1.5 to 2.1. Under these conditions increases in volume per platform from 160,000 to 250,000 units were planned (MBI, 1st quarter 1996: 112). These volume increases have been quickly realized, with the most successful firms during the 1990s, such as VW, rigorously implementing such strategies. Platform strategies have also been central to the rationale and cost-cutting strategies of many of the recent mega-mergers that have taken place. After Renault’s takeover of Nissan, for example, it decided its number of platforms would be cut from twenty-four to twelve by 2004 (the supplier base, it was announced, was also to be cut from 1,150 to 600 by 2002). Fiat and GM expected $1.2 billion annual cost savings in 3 years, increasing to $2 billion after 5 years as a result of shared components brought about by platform sharing in their equity alliance (FT, 14 March 2000). Daimler and Chrysler, although finding it harder to share platforms (bringing into question the sense of the deal by some experts) expect nonetheless to save $1.4 billion in the first year, rising to $3 billion within 3 to 5 years (MBI, October 1999). As a result of the growing scale imperative found in the platform strategy, lower volume producers like Volvo believed they ‘lacked the size and resources to remain competitive in the long run’ (Volvo’s chief executive, FT, 29 January 2000). Similarly, GM, which has placed great emphasis on creating equity

The national team in international comparative perspective 115 alliances, considers these a ‘key part of the solution of getting bigger and doing so faster’ with the eventual goal of increasing component volumes by sharing platforms (FT, 11 July 2000). It is now widely accepted that platform strategies confer significant cost advantages upon the larger enterprises in the auto industry. This heralds a new era in which global production promises cost advantages for larger assemblers and component makers. Another key feature of the platform strategy is that it has also increased the pace of product development as well as the resources dedicated to new products. Typically, over 80 per cent of revenues come from products introduced within the last 5 years. Only superior, innovative products can therefore deliver the competitive edge to provide above average margins and are vital in ensuring commercial success. The likes of GM and Ford invest many billions of dollars annually and R&D frequently exceeds over 5 per cent of annual sales. Common platforms and a focus on a reduced number of basic components and component modules, combined with an increase in the average scale of operations, have generated far greater resources available for product development.8 Because the platform strategy reduces the number of discrete component modules used in vehicles, a car based on this new production philosophy requires far fewer parts. They also depend on suppliers undertaking far more product development. Chrysler’s successes in early 1990s, for example, were attributed to dramatic improvements in product development costs (reported to be $357 less per car than Fords and $290 less than GMs in the early 1990s). This gave Chrysler a massive advantage in the launch of new vehicles. Significant cost savings had been achieved (particularly with the help of suppliers who themselves put forward proposals for savings) totalling almost a billion dollars in 1990 and 1991 alone (FT, 3 October 1994). Turning itself around from the brink of bankruptcy, it was out earning its nearest competitor by more than $500 per vehicle by 1993. The Ford 2000 campaign, copying Chrysler’s example, also looked to reduce development costs and time. The Ford Ka, one of the first vehicles built under the new programme, required only 1,200 discrete parts compared with the 3,000 or so for the previous generation Fiestas. As a result, with the greater assistance of component suppliers, it could be built 25 per cent faster. Most importantly of all, the development time of the Ka was reduced from an average time at Ford of 36 months to only 24 months. Because by the late 1990s the number of Ford’s basic platforms had been reduced by 50 per cent, product development was simplified and greater economies of scale, particularly in component manufacture, were also possible. Engines and transmissions that had previously been developed independently by region were now being developed with global homogenization in mind. This eradicated the waste of human and financial resources expended in duplicating vehicle platforms, power-trains (engines and transmissions) and other basic components that served nearly identical customer needs in different markets. Thus, for example, a single family of small engines was introduced for both Europe and North America, as opposed to two similar separate families of engines.

116 The national team in international comparative perspective Global consolidation It has recently been argued that there is little evidence of an increase in concentration in the auto industry over the past 50 years and that any increase has been ‘relatively modest’. It is argued that, because of an increase in incomes, consumers have been ‘willing to pay for differentiation . . . which is why so many companies are able to survive’ (FT, 24 March 1998). Although demand for ‘variety’ may increase with higher incomes, it seems that global platform strategies and the use of the extended firm mean variety need no longer be necessarily met by an increased number of firms. These new strategies have allowed firms to increase scale while at the same time increasing variety, meeting the demand for differentiation. This is because even when the styling of vehicles differs, their innards are increasingly the same. A trend over the last decade has also been the acquisition of specialist producers, particularly those with distinct identities and globally recognized brands (Rolls Royce, Bentley, Jaguar, Saab, Land Rover, Volvo being some examples) by larger groups. A recent study has found that vehicle manufacturers are increasingly ‘exploiting the value inherent in their brand’ (JAC, 7 June 2000). Indeed, part of the intention of assemblers, as they increasingly move away from actual manufacture, is to redefine themselves as ‘vehicle brand owners’ (VBOs). It is possible component suppliers eventually may take-over responsibility for the production of entire vehicles.9 The common claim that the long-run trend has been toward dispersing market share and power across a greater number of players seems wrong. Neither does it account for the rationalization of the supply chain, an outstanding feature of the 1990s. This has undoubtedly also pushed up concentration among component makers. By absorbing other brands and integrating existing technology and using platform strategies, supply has kept pace with demand but the number of independent producers has still fallen. Indeed, in the last several years alone a blitz of groundbreaking ‘mega-mergers’, equity tie-ups and strategic alliances have transformed the global industry. One time national champions have quickly consolidated into a smaller number of considerably larger global champions. Using a broad time horizon, from among the top twenty auto assemblers listed in 1965, for example, it is reported fourteen have since been merged or taken over (MBI, September 1999: 142). Much of this activity, certainly the largest transnational deals, took place in the late 1990s. From among the top fifteen producers listed in 1995, Daimler (14th) merged with Chrysler (12th) in one of the largest industrial mergers ever ($38 billion). This created a group with nearly half a million employees and assets of $160 billion. As a result, Daimler increased its product range and greatly expanded its geographical coverage in one stroke, particularly in the vital American market. Subsequently, it has made various moves to expand in Asia, taking a controlling share in Mitsubishi of Japan and linking with Hyundai of South Korea. Renault (7th) undertook another historic transnational deal, taking a controlling share in Nissan for $5.3 billion (6th) and South Korea’s Samsung. This greatly increased its coverage in Asia and North America as well as increasing its production volume. The other industry leaders also increased their size and transnationality by pulling in smaller assemblers from

The national team in international comparative perspective 117 within and outside the realms of the top fifteen assemblers. Toyota (3rd), for example, took a controlling share in Daihatsu. Ford took over Volvo in 1999 for $6.5 billion and also took a controlling share in Mazda (11th), one of Japan’s leading assemblers. GM, following a slightly different path, has placed a greater emphasis on equity alliances. It has strengthened ties with a number of Japanese producers, such as Isuzu, Suzuki and Fuji Heavy Industries (maker of Subaru cars). It has strategic alliances with Vauxhall, Opel and Saab Automobile – the latter two now being 100 per cent subsidiaries. It has also taken a large 20 per cent equity share in Fiat, exchanging this for 5.7 per cent of GM equity. Most recently, it has taken control of Korea’s Daewoo, ahead of Ford. GM, including its equity partners, now claims to have 24 per cent of global car sales. This includes 30 per cent of the market in South America, 18 per cent in Asia, 20 per cent in Europe and 30 per cent in the United States (FT, 11 July 2000). Table 5.1 illustrates how six global champions with ‘critical mass’, a scale approaching 5 million units, have acquired numerous foreign partners across the major markets. The larger TNCs have mopped up smaller scale producers around them, particularly extending their reach in the triad markets of Asia, Europe and United States, as well as broadening their brand portfolios. In the search for greater global scale China has also become an increasingly attractive and important market because of its huge growth potential, entry to WTO and relatively low wage levels. As a result of these large international mega-mergers, a rapid increase in global firm-level concentration has taken place. Outside the six largest assemblers only Honda, BMW, PSA Citroen, Hyundai, Mitsubishi, Daewoo and Suzuki remain as volume producers. Only three of these, however (Honda, PSA Citroen and BMW), have not yet developed closer ties of one kind or another with the six leading global champions. These included two large groups from the United States, GM and Ford, as well as two new European-led groups, RenaultNissan and DaimlerChrysler as Table 5.1 Global assembly champions and strategic alliances (their acquisitions, equity partners) Global champion Asia

Europe

United States

GM

Fiat (20), Saab

GM

Volvo, Land Rover Daimler (mother) — Dacia (73), Renault, Volvo (20) Seat, Skoda, Audi, Bentley

Ford Chrysler —

Suzuki (10), Fuji Heavy Industries (Subaru) (20), Isuzu (49) Ford Mazda (33.4) DaimlerChrysler Mitsubishi (34), Hyundai (10) (Kia) Toyota Daihatsu (51.2), RenaultNissan Nissan (36.8)1, Samsung (70%) VW

Yiqi, SAIC

—

Sources: FT, 18 October 1999, 11 July 2000, 9 June 2000; Motor Business International, 3rd quarter 1999: 143. Note a Option to increase stake to 44.4 per cent in 2003–4.

118 The national team in international comparative perspective well as VW (Europe) and Toyota (Japan). By 1999 the ten largest automobile makers accounted for 80 per cent of world vehicle production, compared with only 69 per cent in 1996 (UNCTAD, WIR 2000: 128). In under 5 years 11 per cent of world vehicle production had been further concentrated in the ten largest companies. The picture of consolidation has also been much the same in heavy commercial vehicles, if lagging somewhat behind passenger and light commercial vehicle consolidation. Consolidation in component supply Assemblers have not only asked suppliers to produce greater volumes, they have also demanded increasingly sophisticated component modules from suppliers, who are expected to undertake R&D and product development. Apart from lower labour costs, advantages include the greater R&D capabilities of larger specialized components groups and the greater volumes at which they can produce. Because large component manufacturers usually supply to more than one assembler greater volumes can be attained and knowledge of best practice diffuses among component makers (Table 5.2). It is unsurprising then that nearly all assemblers have openly declared an intention to reduce their numbers of first-tier suppliers, further accelerating the consolidation trend and formation of what Chrysler originally pioneered as the ‘extended enterprise’. To an extent, the huge transnational mergers seen in the assembly industry mask the overall pace of change within the auto industry, particularly that found in the component supply chain. Remarkably, this has been of equal or even greater size and importance than that in assembly. Consolidation among ‘core’ assembly enterprises has rippled down through the ‘extended firm’ of suppliers. The global sales value of the components sector rose from $450 billion in the 1980s to more than $950 in 2000 while the number of large parts suppliers fell from 13,000 to 8,000 (FT 29 February 2000). It is estimated that by 2005 it could be worth $1,300 billion (FT 29 February 2000). Not only have a number of global assembly giants emerged, so too have a number of first-tier global component suppliers that have aligned themselves in close co-operation with assemblers. As with assemblers, Table 5.2 Projections in first-tier supplier numbers, medium and long term Assembler

1996

Medium term

Longer term

Audi BMW Ford Mercedes-Benz Opel Porsche Chrysler VW

900 900 900 1200 1400 650 2500 1500

400 450 600 600 1100 300 1500 950

90 100 — 40 300 100 — 100

Source: Company reports; EIU, MBI, January–March 1996.

The national team in international comparative perspective 119 therefore, a similar tell-tale picture of rapid transnational M&A activity emerges, albeit more confused, as suppliers move towards providing a larger and more diverse modularized product range. Many of the top twenty supplier firms have merged among themselves, as have many other smaller players further down the supply chain. Rationalization accelerated in the late 1990s as a new conviction and belief in the emerging business model took shape. In 1995, for example, there were 157 mergers or takeovers involving European groups alone (FT, 21 May 1996).10 In the first 9 months of 1996 five $1 billion plus take-overs were made, reflecting the growing size of deals, and the total value of large transactions in this period reached $15bn (FT, 28 October 1996). In 1998, North America alone witnessed 227 domestic deals with a disclosed value of $17.6 billion. Of these, there were forty-two (totalling $5.3 billion) involved in taking-over or merging with European groups. Europe had 173 domestic deals valued at $8.5 billion. In thirteen of these European firms took-over or merged with United States-based firms (FT, 1 March 1999). By 1998, one estimate suggested there were 320 worldwide mergers and acquisitions in the supplier industry, with an estimated value of $30 billion, up from $17 billion in 1997. Another 600 transactions, worth $65 billion, took place in 1999. The average value of the largest top ten deals, furthermore, rose from $0.8 billion to $1.8 billion in 1999, reflecting the increasing taste for industry-transforming mega deals (JAC, 28 October 1999). Perhaps most significantly of all, Delphi and Visteon, GM and Ford’s components groups, have now been listed as separate Fortune 500 companies. As a result, the number of Fortune 500 component suppliers is set to rise from five in 1996 to eight or more groups.11 While profound restructuring has taken place throughout the component supply network of global assembly champions, China’s component makers, as will be shown later, remain fragmented and small scale with relatively backward technology. The contrast could not be starker. In recent years, unsurprisingly, foreign component groups have made rapid inroads into China’s market. By 1999, in fact, many component sectors had been rationalized. In these sectors, a small number of leading groups emerged, exclusively serving large assemblers. In crucial areas such as seats (Johnson Controls, Lear and Magna), brakes (Bosch, TRW (Lucas Varity, ITT) and airbags (Autoliv and Morton), concentration and the process of systems integration had taken place. In lighting and fluid handling systems, as well as exhaust systems (ArvinMeritor, Tenneco) air conditioning (Valeo, Denso), axles and chassis (Dana), velocity joints (GKN), a few leading players had emerged. In the tire industry it is predicted that 7 to 10n years down the road ‘you will see the world industry basically in the hands of three or four global players’ (FT, 3 March 1999). Already, Michelin, Goodyear and Bridgestone have taken commanding leads. As Table 5.3 shows, consolidation has been considerable. Many within the industry consider these trends will continue. A former CEO of a first-tier supplier predicts, for example, the number of leading components companies is expected to shrink to fifteen to twenty global groups over the next decade, compared with about ten times that number today. Another predicts the ‘shake-out will leave fewer than 300 truly global tier-one suppliers by the year 2000’, meaning ‘the bottom line for

120 The national team in international comparative perspective Table 5.3 Global oligopoly in the auto component industry Name

Pilkington Denso GKN Tenneco

Product

Auto glass Air conditioning units Constant velocity joints Shock absorbers/car exhaust systems Delphi Ride control products Kayaba Ride control products Lear Seat systems Lear Door panels Lear Floor and acoustic systems Lear Full interior Kelsey Hayes ABS brake systems Lucas Brake systems Bosch (Zexel) Diesel fuel injection pumps Delphi Diesel fuel injection pumps ITT ABS brake systems Bosch ABS brake systems Bridgestone Tyes Michelin Tyres Goodyear Tyres

Global Source market share 25 22 40 25

FT, 21 May 1996 FT, 28 Nov 2000 FT, 22 July 1996 FT, 28 Oct 1996

21 14 22 7 14

JAC, 31 Aug 2000 JAC, 31 Aug 2000 1997 annual report 1997 annual report 1997 annual report

19 16 25 52

Lear.com (June 2000) Ward’s Auto World, December 1997 FT, 8 May 1996 Ward’s Auto World, January 2000

21

Ward’s Auto World, January 2000

25 31 19 18 14

Ward’s Auto World, December 1997 FT, 8 May 1996 FT, 19 January 1996 FT, 19 January 1996 FT, 19 January 1996

suppliers today is crystal clear: change or die’. Ford has predicted the number will eventually drop to eighty-five worldwide (FT, 23 Feb 1998). Others, on the other hand, suggest that 1,500 tier-one suppliers will consolidate into 600 major suppliers by 2005, of which 150 will supply integrated systems and modules and 450 direct suppliers of parts rather than systems (JAC, 28 October 1999). More recently, it has been suggested that there will be a ‘rationalization down to just 30 mega-suppliers’ (JAC, 7 June 2000). The prevailing view now holds that less than 30 suppliers may come to dominate the industry because of a new mentality for scale: ‘the attitude of those driving the development of the industry is that size and reach do indeed matter, and that companies need to get big fast, or they will become small even faster’ (JAC, 9 August 1999). Whatever the final number of supplier firms, it is evident which way the trend is moving. While consolidation has been remarkable for both assemblers and component suppliers alike in auto manufacturing, the trends of service providers around the auto giants are also very interesting to note. Not only has physical production followed a particular pattern towards global alignment, service companies have also been pulled into the melting pot of global restructuring. In the auto industry, for example, owing to the ‘just in time’ production methods of the industry, logistics services are very important. It is interesting then that logistics firms have consolidated in a bid

The national team in international comparative perspective 121 to become part of the ‘chosen few’ to provide logistics services to the remaining assemblers. They hope to secure larger and longer contracts by being sole suppliers. In the shipping of finished vehicles, for example, we also find the creation of the world’s largest shipping line specializing in carrying cars and roll-on roll-off freight. This ‘was triggered by global consolidation in the car manufacturing industry. As vehicle manufacturers became larger, they needed shipping companies large enough to provide a wider range of services’ (FT, 26 March 1999).12 The larger delivery firm also expects to ‘improve results by co-ordinating tonnage, traffic planning and hence reducing the number of chartered vessels and operational costs’ via the creation of the new company. Like component suppliers, service companies working for the auto industry groups also hope to benefit from greater scale. As with assembly then, the merger and acquisition activity among the leading supply and service groups has been striking. The numbers of suppliers in manufacturing and services are set to fall further as favoured firms follow assemblers into new markets, such as China, India, Brazil and Eastern Europe, setting up parts plants in the shadow of the new assembly lines and taking over design work. Many of these emerging first-tier component makers can already be identified. Although they are not household names like the assemblers they supply, they are of equally great importance to the auto industry and shed a special light on the nature of current change. Consolidation among these groups has been rapid. The increasing importance of supply firms, however, has generally been overlooked. As one of the few analyses of the current restructuring in big business notes, the general perception is that widespread outsourcing has resulted in a ‘deverticalized industrial landscape’ and the characterization of this process as one in which: industries are evolving toward smaller, highly specialized firms, each of which has shed its con-core activities to focus on a few core competencies. The deverticalization trend looks very different from the supplier’s perspective . . . Increased outsourcing has also, in many instances, vastly increased the scale of suppliers operations. (Sturgeon 2002: 455) In fact, many supplier firms are now found among the largest firms in the world: ‘between 10 to 20 per cent of the Fortune 500 companies conduct the majority of their business as supplier of core firms’ (Ruigrok and van Tudler 1995: 165). It is interesting that the reasons for the growing importance of large supply firms have not yet attracted a great deal of research. The process is only just beginning to be understood. It appears, however, that the ‘extended firm’ model now adopted in the auto industry has, basically, built upon and refined the original Toyotist model of the most successful Japanese producers. Japanese enterprises sought to ‘quasiexternalize internal units into subsidiaries, while simultaneously quasi-internalizing numerous outside smaller companies and subcontractors’ (Shimotani and Shiba 1997: 25). By so doing they were able to ‘expand their boundaries beyond the limits of the firm’ (Shimotani and Shiba 1997: 25). Large TNCs today have also extended their firm boundaries by developing a network of large-scale suppliers around them.

122 The national team in international comparative perspective To add to this, however, they have also started to produce on a far larger scale and across a greater geographical area than ever before. Rapid global firm-level restructuring among assemblers and suppliers, increased production volumes via the introduction of global platform strategies and brands, increased R&D expenditures and decreased product development times, with ever more sophisticated products, now characterize the global auto industry. The search for scale, in particular, appears of great importance. An era in which nationally supported domestic champions existed has rapidly been replaced by one in which only a relatively small number of very large firms – ‘global champions’ – have come to dominate global production. This poses new challenges for catch-up. Indeed, against these changes in the global auto industry the logic and plausibility of China’s current plans to nurture large internationally competitive groups are brought into question.

The national team and China’s auto industry The national team, as noted earlier, spans a number of important industries. Most of these groups are industry leaders, often constituting the bulk of national output in their respective industry sectors, linking closely to them the future of many areas of Chinese industry. A number of reasons, however, make the auto industry a particularly interesting industry and one applicable in further addressing the topics in hand. China has seven large enterprise groups in the national team from the auto industry (Table 3.4).13 Auto enterprises are therefore well represented in plans to develop the large-scale sector. The six large assembly groups, consisting of many hundreds of member enterprises, represent the core of China’s auto industry. They include the ‘big three’: First Auto Works (FAW), Second Auto Works (Dongfeng), Shanghai Auto Industry Corp. (SAIC) and the ‘little three’, Tianjin Auto Industry Corp. (TAIC), Yuejin Auto Group and Heavy Vehicle Group (HVG). A component producer, Wanxiang Group, was also included as one of three TVEs in the second batch of trial groups. A number of the other national team groups, such as those originally in aerospace and defence industries, have also become major producers.14 The six main assembly enterprise groups have grown steadily in size, incorporating new members and extending their activities throughout China’s provinces. SAIC, Dongfeng and FAW, the latter two the original basis of China’s auto industry, had come to form the backbone of the industry and were pioneers in enterprise group formation. By the late 1990s the largest groups such as FAW and Dongfeng had incorporated many hundreds of member enterprises around the core members of their groups (Table 3.4). Numerous joint ventures in assembly and component manufacture, however, had also been established within the groups. With WTO entry approaching a flood of new foreign assembly projects were being launched, particularly in the rapidly growing small passenger car segment of the market. TNCs have now stepped up their investments in the goal of further penetrating the Chinese market. At the domestic level, as Chapter Four showed, the creation and institutional transformation of the national team of enterprise groups was initially spurred by the

The national team in international comparative perspective 123 visits of Ma Hong and the SCDRC to a small number of auto groups, including Dongfeng, Yiqi and HVG. It is important to stress again that these groups were pioneers, inspirational in catalysing the further development of the entire national team and policies to promote the large-scale sector. Dongfeng played a particularly prominent role, with the first enterprise group policies based upon research undertaken there in 1986 (see Chapter Three). The enterprise groups in the auto industry remain of special significance and are still regarded as important symbols among China’s largest industrial enterprises. They remain closely linked to the State Council and related policy-making bodies. The comparison of efforts in China to nurture auto groups is especially symbolic today when considered in the light of the success of their Japanese and South Korean counterparts and China’s desire to emulate them. These earlier efforts to nurture large groups represented some of the most successful efforts of industrial policy and firm-level catch-up yet witnessed. China’s auto industry, therefore, is an important benchmark for gauging the success of Chinese industrial policy. There remain a number of other important reasons why the auto industry is of particular interest in studying the emergence of enterprise groups. As auto manufacture requires the assembly of many thousands of discrete parts along complex supply chains, this produces the need for close interaction in production between many enterprises, giving rise to the ‘complex ancillary of networks’ between firms that characterize enterprise groups (Chandler 1990). Unsurprisingly, it is also a highly capital-intensive industry, epitomizing the Chandlerian large modern industrial corporation. The gradual historical process of national domestic industry consolidation, followed today by an apparent global industry consolidation, is also well understood by Chinese policy makers. They have noted, for example, how in the United States auto industry there were up to 140 fragmented vehicle manufacturers in the 1900s. Within 40 years this number had decreased to twenty-four, by 1950 twelve, and by 1980 just four (ZQGN 1997: 5). Now only two major independent groups of American origin remain. Policy makers, noting this historical trend, hope to accelerate artificially this process of consolidation, explored in Chapter Two, in the hope that internationally competitive levels can be quickly achieved. Already a small number of capital-intensive large domestic groups have emerged. LMEs already produce over 78 per cent of the total sales value in the auto industry, although they have negligible exports and no foreign-based facilities as yet (ZQGN 1998: 48). Auto production is also a very important direct and indirect contributor to economic growth in China, making it a pillar industry. This is because it has significant linkages with many sectors of the economy, such as steel, glass, rubber, machine tools and increasingly electronics. It is estimated, for example, that for the United States 70 per cent of natural rubber, 49 per cent of synthetic rubber, 60 per cent of industrial robotics, 40 per cent of machine tools and 11 per cent of steel are used in the auto industry (COL, 21 June 2000). As a result, every unit of value created in the auto industry creates approximately two and a half in related industries. It is estimated that China’s auto industry already consumes 6 per cent of national steel production, 95 per cent of gasoline, 29 per cent of diesel, 15 per cent

124 The national team in international comparative perspective of machine tools, 46 per cent of rubber and 6 per cent of paint production. These related industries employ over 24 million people (COL, 12 January 1999). It is already a large industry in China in its own right, producing nearly 5 per cent of China’s total industrial output value (ZQGN 1998: 48, 512). In the case of China, auto production is already an important ‘engine of growth’. Passenger vehicles are an integral part of the boom in a range of ‘new’ consumer goods industries that has been driven forward by rapid income and demand growth (Lo 1997). The income elasticity of demand is high and this will further its development and overall importance to Chinese industry and the economy as a whole. The auto industry was also one of the first industries in China to introduce an official and comprehensive state-led industrial policy with the status of a pillar industry.15 In 1987 and later in 1994 official policies were drafted. It is unsurprising then that a leading representative of MOFTEC recently noted that ‘examining the relationship between China’s WTO entry and the auto industry will yield valuable lessons for other industries’ (Zhongguo Waizi, November 1999). Foreign penetration of China’s auto industry, however, is already very high, there already being over 600 joint ventures created in the period 1981 to 1998. The auto industry has been the recipient of approximately 7 per cent of all inward FDI in China during reform (CD, 7 March 2000; CDBW, 21 September 2000). Auto enterprises, as one might expect, are also among the largest and most transnational in the world. In 1997, for example, ten of the twenty-five largest TNCs ranked by foreign assets were auto assemblers (WIR 1999: 3) as were four of the top ten largest global corporations in the global Fortune 500 (and twelve of the top 100). Including component makers, thirty large enterprises in the Fortune 500 produced auto-related products. This included the top three, GM, DaimlerChrysler and Ford, with combined assets of $600 billion and a work force approaching one and a half million (Fortune, 2 August 1999). The challenge facing China’s auto industry in nurturing indigenously owned groups is formidable. Scale A key issue in auto production, as noted, relates to scale. The account of the global auto industry already presented suggests that scale, if anything, is even more important than in previous eras. It is hardly surprising then that Chinese policy has attempted to concentrate production in the auto industry by promoting the national team groups as key production bases. China’s industry, unfortunately, remains very small in international perspective, with output approaching two million units. This is less than a quarter of GM or Ford’s annual output. The total sales value of China’s auto industry is also significantly smaller than that of a global champion. Despite this, China’s auto industry has grown quickly over reform and holds even greater growth potential. It has also followed the general pattern outlined in Chapter Three of increasing concentration within capital-intensive industries. In 1986, for example, it was reported that LMEs produced only 25 per cent of gross industrial output value and only thirty LMEs existed in the auto industry. In 1990 this rose to seventy-three and by 1997 there were over 440 LMEs (Lo 1997: 178). By that time,

The national team in international comparative perspective 125 furthermore, over 90 per cent of investment, 85 per cent of technicians, 93 per cent of fixed assets, 93 per cent of taxes as well as nearly all of the industries’ profits were found in these large-scale enterprises (ZQGN 1998: 52). By the late 1990s there were only thirteen enterprises that produced over 10,000 vehicle units, constituting over 90 per cent of national output. This led one policy maker to optimistically claim that ‘the era where China had over 120 enterprises producing one million autos is over, and a new era is dawning where only a few large enterprises will remain’ (COL, 1 December 1999).16 So, despite its comparatively fragmented structure, it is important to recognize that there has been an emergence of large-scale production in the auto industry.17 Figure 5.1 illustrates province-level shares of national output broken down by contribution according to scale of enterprise for 1997. It highlights two important points that characterize China’s auto industry. First, production has become concentrated within the national team groups. By 1998 there were just seven enterprises classified as ‘super large’ and these already produced 34 per cent of total national output value (ZQGN 1998: 48). The tallest columns in the foreground represent the ‘super large’ producers. Of these seven enterprises, six belonged to the national team auto groups (five, however, had large joint ventures with the global auto industry champions China hopes to catch). These enterprises were based in Tianjin (4.8 per cent of national sales), Jilin (Yiqi, 7.9 per cent), Shanghai (Shangqi, 10.1 per cent), Jiangsu (Yuejin, CNAIC, 2.1 per cent) and two in Hubei (Dongfeng, 5.4 per cent). These six joint ventures alone produced 30 per cent of the national sales value. By the end of the 1990s a strong bias towards the national team members already existed. However, the establishment of large joint ventures within these groups has also led to the increasing importance of foreign TNCs, raising the question of how China’s indigenously owned auto industry was to develop further. Second, Figure 5.1 highlights the fact that fragmentation within the components industry persists. Component manufacture remains dispersed across China, made up by many small-scale producers. This is represented by the many shorter columns stretching across numerous Chinese provinces. Table 5.4, looking at the component sector in more detail, also shows that no Chinese component groups have yet been classified as large or super large producers. Instead, the vast majority of component makers are recorded as being only small in scale. Many are also loss makers. As might also be expected, of the many small-scale producers officially recorded, output remains biased towards the larger enterprises, as are profits.18 Of the total national component sales value 16 per cent was attributed to the small-scale sector, which was the only net loss-making group. Small component enterprises, however, were still significant employers, employing 25 per cent of the component workforce, highlighting the relative labour intensity of the small-scale sector and illustrating the importance of these small plants in providing local employment opportunities. It is against the background of a highly fragmented indigenous component industry, and the increasing importance of component groups to auto production, that the challenges facing China’s auto industry become more evident. Chinese policy makers claim to have noted current restructuring trends in the international auto industry and hope to ‘vigorously push forward the pace of restructuring and

Guangxi Hainan Sichuan Chongqing Guizhou Yunnan Xizang Shaanxi Gansu Qinghai Ningxia Xingjiang

12

Guangdong

10

Hubei Hunan

8

Henan

6

Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong

4

Hebei Shanxi Inner Mongolia Liaoning Jilin Heilongjiang

2

0 Beijing Tianjin

Province

Figure 5.1 Province shares of national output by enterprise size for the auto industry, 1997.

Source ZQN 1998: 48.

Percentage share of national output (sales)

Enterprise size

small medium-2 medium-1 large-2

large-1 Super large

The national team in international comparative perspective 127 Table 5.4 Auto components enterprises, share (per cent) of various indicators in total components production

Number of enterprises Total sales share (current prices) Total export share Share of value added Share of workforce Share of technicians Share of net fixed assets Share of total debt Share of total profits

Large2

Medium1

Medium2

Small

200 59 62 64 41 45 60 50 95

116 11 13.0 10 13 14 12 14 4

284 15 14 13 21 20 16 19 1

1018 15 11 13 26 22 12 18 –8

Source: ZQGN 1998: 61.

as soon as possible create several large internationally competitive groups’ to be achieved ‘using focal groups that produce 90 per cent of national output’ (China’s EM Digest, 7 March 1999). To this end, the 1994 auto industrial policy advocated the formation of two to three large components groups in 60 key component areas. Given the current global trend towards consolidation among component suppliers in which ‘the number of suppliers for many key parts will be whittled down to two players, maybe three’, this policy appeared the only plausible way forward if China was to have any hope of creating competitive component groups (ZQN 1996: 5). Little progress, however, has been made in implementation, and as shown, component manufacture remains seriously dispersed and small scale. Indeed, only recently have the national team auto groups even started to unify their component purchasing accounts on a national basis. Unlike the global industry, therefore, which has reined in its suppliers in order to cut costs via global procurement, large indigenous Chinese groups remain far behind. It is unsurprising that China’s chief WTO negotiator specifically recognized that the continued weakness of auto parts manufacturing hindered the rapid growth of China’s indigenous auto industry. Global auto champions in China Foreign direct investment has been of considerable importance for China’s rapid development. One estimate reports China had received in total over $300 billion dollars in direct investment by 2001. This compared with only $9.5 billion in Korea and $35 billion in Japan by the mid-1990s (COL, 15 February 2001). Over 180,000 foreign-invested enterprises employing 20 million people already produce over 20 per cent of China’s industrial output (COL, 13 March 2001). Unlike the successful policies to nurture large corporations in Japan and Korea, therefore, China already faces stiff domestic competition from foreign corporations across many of its pillar industries, complicating industrial policy. As regards investment in the auto industry, by the end of 1995 companies from twenty nations had already set up 353 ventures in China’s auto industry, mostly joint ventures due to the strict investment

128 The national team in international comparative perspective regulations. By 1997 the total had risen rapidly to 580, with over 500 involved in component supply (ZQGN 1998: 222). Unsurprisingly, by the late 1990s most of the assembly groups with critical mass had established production and distribution networks in China.19 These usually took the form of joint ventures with the existing national champion groups. GM, for example, in the late 1990s, established the largest American joint venture in China, Shanghai GM with SAIC (totalling $1.6 billion investment). Within only several years of opening, its market share approached 10 per cent of the sedan market. GM’s Shanghai plant, based upon leading production methods adopted from GM’s leading Eisenach plant in Germany, has recently introduced a small family car (the Sail, complementing the up-market Buicks and people carriers and also using the same platform). GM has also looked to take control of a leading mini-van producer (Wuling) as well as developing significant links with Jinbei in northern China (producing Chevrolet Blazers). Ford, a late entrant to China, has plans to develop a small passenger car with Changan Auto Group in Chongqing, complementing the Ford Transits it produces with Jiangling Motors. Mazda, a Ford partner, plans to establish a car production base in South China’s Hainan. Toyota, after recent negotiations, has established a large joint venture in Tianjin to produce up-market passenger vehicles under the Toyota brand name. DaimlerChrysler’s Beijing Jeep, a long-running joint venture, has also recently been injected with capital to help promote a new product, the ‘Heroic’. Citroen, which has a large sedan joint venture with Dongfeng Group, also plans to introduce new models, including the Picasso, a model new to Europe in 1999. VW has announced some of the most ambitious development plans. It is introducing a version of the Polo, a small affordable family car, and has plans to introduce a number of new models each year involving billions of dollars of investment with plans to develop a small vehicle designed specifically for the Chinese market. Guangzhou Honda has also reaped successes with its Honda Accord model. Various truck and bus manufacturers, such as Volvo, DaimlerChrysler and Toyota, have now also established facilities in China. Rapid localization of components suppliers As might be expected given the description of the trends in the global auto industry, the assembly champions have been closely followed to new markets by their firsttier component supply groups, implementing their global platform strategies and providing just-in-time deliveries of key parts. This has been promoted by the extreme weaknesses in China’s indigenous industry already described. Not only, therefore, is assembly increasingly dominated by TNC activity, so too is component supply. VW alone claims to have brought over 160 suppliers and over 200 patented technologies into China in the past 15 years. The likes of other large TNCs such as Delphi, Lear, Visteon, Magna, TRW have also established numerous ventures in China. Delphi, for example (GM’s divested component group), had seven Chinese joint ventures by 1995, which had risen to fifteen by 2000, totalling half a billion dollars of investments. It is one of the largest components producers in China with an established technical and training centre (JAC, 30 June 2000). Shanghai

The national team in international comparative perspective 129 Delphi Emission Control Systems Co., for example, is the only supplier of complete catalytic converter systems in China, giving it a near monopoly on the domestic market. Bosch, another large first-tier supplier, has also invested a total of half a billion dollars, giving it an important market position. Its UAES joint venture (established in 1996), manufactures engine management systems (EMS). Again, it is the only one in China capable of manufacturing EMS control technology. As a result, it commands 95 per cent of the domestic market (COL, 17 Nov. 1998). Michelin, a major tyre manufacturer, epitomizes the aggressive entry into China of large suppliers. It recently took a majority share in the largest and most successful tyre group in China, Shanghai Tire Group, heralding the demise of the indigenously owned tyre industry. Although China has about 300 tyre manufacturers, probably more than any country in the world, their combined output is less than that of one global champion like Michelin or Goodyear. Only Shanghai Tire Group ranked among the world’s top fifteen in tyres, with 30 per cent of China’s market (ZQGN 1999: 319). The $320 million take-over deal amounts to one of the largest foreign take-overs yet in China’s auto industry. The Chinese tyre group, as with other components makers, could not meet the quality standards that the assemblers demand in their global platform strategies. It was thus forced to withdraw: ‘one of the key criteria is the increasing emphasis that the major OEMs are putting on achieving a world-wide platform technology standard and Shanghai Tire lacks expertise in the use of silica tires’ (COL, 28 July 2000). Bridgestone also has several joint ventures in China, as does Goodyear. The tyre sector, like many others, is rapidly coming to be dominated by the few remaining global tyre producers as the global assembly groups pull their extended networks of suppliers with them to develop new markets. The example of the tyre industry points towards the likely trend in other areas of component production. Most large ‘tier-one’ suppliers have already entered China’s market. Lear, a global leader in seating (22 per cent of global market), already owns five subsidiaries and two joint ventures. TRW has five China ventures. Denso has established six joint ventures since 1994 (air conditioners, alternators, starters, amplifiers and ignition coils, electronic control equipment and small motors). Johnson Controls has a battery joint venture supplying Volkswagen. Valeo, France’s largest component group and a global leader in several areas has eleven operating units in China, producing lighting systems, wipers, climate control, clutches and electrical systems. Hella, a leading tier-one supplier of lighting, electronic equipment, sensors and complete vehicle front-end modules is VW’s main headlamp supplier. It has two plants in China, supplying FAW and Shanghai VW. Federal Mogul (among-global top fifteen independent suppliers with over 300 operations across twenty-four countries) has five plants in China supplying Shanghai GM and FAW. Faurecia (the result of Bertrand Faure takeover by Ecia, PSA Citroen’s component arm, now the European leader in automotive seating with 25 per cent market share and third globally) has four plants in China. The growing importance of large foreign supply groups is reflected by their market shares, which have risen dramatically. By 1998 of 60 major component sectors, foreign-funded enterprise already contributed 50 per cent of production in

130 The national team in international comparative perspective eleven sectors and their market shares exceeded 20 per cent in twenty-nine sectors (ZQGN 1999: 318). During the 1990s in a relatively short period, large foreign component groups rapidly penetrated the Chinese market. The story of China’s auto industry is now increasingly linked to that of the large TNC global champions entering the region. The logic driving the restructuring of the global auto industry, furthermore, dictates that with liberalization only a few global champions in both assembly and component supply will become predominant. The failure of industrial policy? It is against this background, in which an onslaught of foreign investment is gradually replacing or assimilating the fragmented indigenous assembly and component industry, that China’s efforts to promote restructuring to produce large internationally competitive indigenous groups must be considered. As early as 1987 plans to co-ordinate the development of the industry by overseeing technology transfer and developing a private vehicle market were put forward. Later in 1994 another updated policy was published. The main goals were to concentrate production in key groups, upgrade technology, develop the passenger car industry and promote domestic private demand. By that time, large-scale importation of technology and production facilities had already taken place, often led at a regional level by local authorities. Entrance of foreign groups, however, was still strictly controlled in the hope that Chinese groups would be able to adopt the technologies of their foreign partners while limiting their participation in the Chinese industry. The policy, although set out with clearly defined objectives and an appealing logic, did not pay attention to implementation. This was also retarded in part due to the intervention of local authorities that had come to take a close interest in their local auto groups. The goal of ‘merging China’s top 13 auto manufacturers into three conglomerates’, for example, has not yet been realized because of regional protection. Whereas in South Korea, ‘the state ruthlessly restricted the number of automobile firms in the pursuit of economies of scale’, policy has not been so rigorously enforced in China (Lo 1997: 175). Auto executives at SAIC and FAW when questioned about the possibility of merger between their two large groups, which has an appealing economic logic, still declare such action as ‘impossible’ owing to the regional interests of local government. VW, by contrast, considers merger of its Chinese operations as an eminently sensible goal. Whereas the search for consolidation and scale has been ongoing in the global market, fragmentation has been allowed to persist in China. In 1997, the licenses of thirty enterprises that continued to produce less than 100 vehicles a year were withdrawn. Although policy makers considered this an important step, it did not constitute the type of strong-handed enforcement needed. As with assembly, the component sector has not witnessed adequate enforcement of policy. It has also been starved of investment, receiving less than one-third of the total investment in the country’s auto industry from 1981 to 1995. Explicit plans were put forward to form several indigenous groups across sixty key component areas in 1994. As already described, however, foreign tier-one TNCs are

The national team in international comparative perspective 131 increasingly influential in the component sector. China’s auto industry is still the most protected in China, with average tariffs of 55 per cent (80–100 per cent on passenger vehicles). WTO entry will see these decreased within 5 years to only 25 per cent, with serious repercussions for indigenous producers. It is estimated, for example, that nearly half a million auto workers will have been made redundant after 7 years of WTO accession and only forty of 136 assemblers will remain. According to China’s chief WTO negotiator, lowering of barriers will promote co-operation between Chinese and foreign transnational auto companies in all areas. It is argued ‘China must be a good partner today, in order to compete and surpass others tomorrow’ (FT, 30 May 2000). It is difficult at present, however, to see how China’s indigenous auto industry will surpass TNC rivals via a policy of joint venture cooperation. It is more likely, as is currently happening, that indigenous enterprises will be gradually assimilated into TNC operations. Owing to the continued concentration of production in trucks, it has been suggested China may still be able to reach international competitiveness in truck production. Large obstacles, however, still exist for catch-up in truck manufacture. Many remain convinced, particularly those in China’s industry, that it is truck production that will suffer most with WTO entry. Even though Chinese trucks are relatively low priced compared with their foreign counterparts, they are predominantly medium duty with sub-200 horsepower engines compared with the 400–600 horsepower engines of the United States and Europe. China’s national team groups, furthermore, have yet to develop large engines. Existing environmental standards fall well behind international levels. In terms of design and craftsmanship, the gap between Chinese and Western manufacturers is considered large. It is said in China that making trucks requires only ‘a grammar school education, sedans a college degree’. According to a leading executive from Dongfeng Group, based on a recent research trip to Europe, the only advantage Chinese manufacturers have is their low price. However, a flood of used truck imports from developed countries upon entry to WTO will undercut even this. Dongfeng executives now believe the gap between Chinese trucks and foreign ones is widening at an alarming rate. In the 1950s this was calculated at 10 years, but now it is reported to have increased to 30 (COL, 30 May 2000). Furthermore, unlike the passenger car industry, truck manufacturers have been slower to develop partnerships with Western groups. The truck components industry is considered even more of a problem. While two giant transmission groups, for example, already dominate the European and American markets, no Chinese component group can even be considered a ‘little giant’ in truck component manufacture, following the evidence given in Table 5.4. According to Dongfeng executives, faced with European competitors, Chinese manufacturers ‘must go on the offensive, aided by the government’ if they are to ‘save themselves from extinction at the hands of other WTO members’ (COL, 30 May 2000). It is still unclear, however, exactly what sort of policies are required to achieve this goal, other than continued protection from vastly superior competitors.

132 The national team in international comparative perspective Product development Aside from issues of scale, a key element of China’s tenth 5-year plan in the auto industry was the promotion of product development capabilities in the major groups. The strategy upon which China’s groups have embarked, however, already relies heavily upon the global assembly giants for technology. Unlike the South Koreans, by comparison, who decided from early on to ‘invest in in-house technology even if outside is cheaper’ (Amsden 1989: 21), China’s large enterprises have not developed the necessary drive or culture to learn from their foreign counterparts. They have been more passive partners in their joint ventures. As a result, China’s national champions have already become heavily reliant upon the very international competitors they hope one day to catch-up. It has become increasingly clear though that these TNCs are not foolish enough to be forced out of the market by the very entities they help. Until recently, for example, TNCs had been reluctant to introduce advanced technologies. It was estimated in the mid-1990s, for example, that ‘30 per cent of China’s auto and auto related companies use technologies that meet the international standards of the 1980s, 30 per cent have upgraded to this level while 40 per cent are still way behind’ (JAC, 12 July 1999). As a result, technologies that are key to sedan production are still controlled by the foreign investors of joint ventures and the industry’s ability to develop and design new products is unsatisfactory. The production of Shanghai GM’s Buick models, however, has brought with it advanced technology and triggered a wave of new investments by the likes of VW to update old models. This has been triggered by WTO entry and the prospect of exporting from China. Nonetheless, until quite recently, VW’s Santana was a model derived from a 25-year-old platform. Even with the introduction of new advanced technologies, in the absence of any history or capability of product development, it is highly doubtful whether China’s chances of developing its own internationally competitive groups are greatly improved. The claim that ‘during the tenth fifth year plan the sector aims to establish its independent product development capability’ seems remarkable given that Shanghai VW engineers can barely make the simplest improvement: ‘after sending a team of personnel to Brazil and Germany, the only alteration it could accomplish was to add about 100 millimetres to the length of the car’ (COL, 7 December 1999).20 The State Council may have decided to ‘support improving product development at China’s three flag ship auto makers’ (Jingji Cankao Bao, 15 January 2000). There is little evidence, however, that they can yet compete with their foreign counterparts or that much progress has been made in this regard. During an era in which the largest TNCs are increasingly centralizing their research and development, increasing overall spending and expanding their product lines, this does not bode well for China’s auto groups. In a number of crucial aspects China’s national team groups remain far behind the global champions of the auto assembly and component industry they aspire to catch-up. Not only are their product development capabilities virtually non-existent, the component supply industry remains seriously fragmented with a large number of small-scale backward producers. Assemblers, furthermore, also remain relatively

The national team in international comparative perspective 133 small in scale and heavily dependent upon their foreign partners. The logic of the global big business revolution in the auto industry suggests, furthermore, that only a small number of large assembly and component groups will come to dominate the global auto industry. The story of the development of China’s auto industry is increasingly linked to the large TNCs entering China. Even though the large enterprise groups of the national team increasingly dominate China’s auto industry, these in turn have unwittingly become increasingly dependent upon the TNCs they hope one day to catch-up. This brings into question the important role envisaged for the national team groups as leaders in intensifying international and domestic competition.

Conclusions There has been an unprecedented restructuring in the global auto industry. What has been referred to as a ‘global big business revolution’ appears to be well underway. Little work on this phenomenon has yet been undertaken even though it is clear that restructuring of historic magnitude is taking place among both assembly and supply groups in the auto industry. The nature and implications for China, a nation attempting to build a batch of large ‘national team’ groups have briefly been considered, building on the findings of previous chapters. Following the policy of ‘grasp the large, let go of the small’, and focusing on ‘the key few’, China has embarked upon an ambitious policy to develop ‘national champions’ in the auto industry. At both the central and lower levels policy makers have attempted to promote firm-level catch-up. China has selected six groups from the auto assembly industry in the national team of 120 centrally supported enterprise groups and these have quickly grown. The global big business revolution, however, has reshaped the auto industry in a number of ways. Most strikingly, a new concept of scale has emerged, as have new production methods, involving a restructuring in the relationships between supplier firms and core assembly firms. Lean production techniques, facilitated by the introduction of global platform strategies, have been at the heart of this restructuring. This has involved a rapid movement from Fordist mass production to quasi-Toyotist methods based around principles of lean production, now on a new global scale. This has been facilitated by a wave of huge transnational mergers and acquisitions. The development of global platform strategies, global brands, the introduction of new information technologies to coordinate all aspects of enterprise behaviour and increasing investments to emerging and developed markets characterize this era. Partly as a result of greater liberalization as well as the adoption of these new strategies competition has become more intense than ever before, in both assembly and component supply. Many former national champions have accepted defeat and been incorporated into the larger global groups. These include the likes of Nissan, Volvo, Saab, Fiat, Seat, Daihatsu, Samsung, Mitsubishi, Isuzu and Chrysler, to name but a few. It is especially symbolic for China that all but the most successful auto groups from South Korea and Japan have also been absorbed into the few remaining volume producers. Established producers with brand names, advanced product development

134 The national team in international comparative perspective capabilities and significant scale (in comparison to China’s groups) have looked to form alliances or sell up during the 1990s. The two largest examples are Chrysler and Nissan. Shared platforms, global component purchasing, global R&D centres and global brand portfolio management have been steadily introduced within these new partnerships. It begs the question of whether it is realistic to believe that China’s national champions can survive in the liberalised environment of a global level playing field. VW, China’s largest foreign TNC, has already admitted it would like to buy out its joint venture partner in Shanghai and consolidate component purchasing and platforms. The likes of GM, Ford and Toyota, as well as their first-tier suppliers such as Delphi, Visteon, Denso and Valeo, have all entered China’s market. With the greater market freedoms WTO will usher in, it seems inevitable that China’s most successful indigenous component and assemblers of the national team will be further absorbed into the international operations of the global champions now emerging. In fact, China’s auto industry has already been rapidly, if perhaps unwittingly, integrated into the global strategies of leading auto assembly and component enterprises. Industrial policy has for two decades limited foreign entrants and brokered for advanced technology transfer. The emergence of indigenous product development capabilities, increasingly important in international competition, however, has been practically non-existent. Indigenous Chinese producers, such as those in the national team, have not absorbed technologies to develop their own products following the Japanese and Korean models. Lacking such capabilities indigenous enterprises have in turn been unable to develop their own indigenous brands. Commitments to freer markets embodied by the WTO agreement now make it highly unlikely that indigenous Chinese groups might emerge in the same way that successful Japanese and South Korean groups did. Indeed, it seems that some Chinese policy makers and manufacturers have already accepted this impending reality. China’s chief WTO negotiator recently commented, for example, that the best way forward for the auto industry is ‘to become an overseas production base for TNCs and to become a link the international production chain and a part of the global sales network’ (Zhongguo Waizi, November 1999). The confidence that with ‘three or four auto giants as its backbone by 2000, the country’s auto industry has a future’ has been replaced by the sobering belief that even with such groups, indigenous auto producers will ‘find it difficult to survive’ (Zhongguo Waizi, November 1999). Analysis of the auto industry suggests some Chinese policy markers are now becoming increasingly aware of the difficulties of supporting their national team groups after entry to WTO. Previous chapters in this study identified the emergence of the large-scale sector and within this the growing importance of the national team of 120 state-supported enterprise groups. This chapter, in the light of previous findings, has briefly looked at a specific industry example and looked at the nature of the current business revolution as well as the implications this has for China’s plans to develop internationally competitive groups. Although China’s auto enterprise groups from the national team may have made important progress and contributed to domestic growth they still remain far behind their international counterparts. These have also

The national team in international comparative perspective 135 rapidly penetrated China’s market in recent years and the national team members have become increasingly dependent upon them. New evidence for a number of other industries, including aerospace, steel, petrochemicals, power equipment, pharmaceuticals and coal suggest these industries will also face similar problems to the auto industry (Nolan 2001). The prospects for China’s national team enterprise groups do not look good in the context of closer economic integration.

6

Conclusions

the proponents of competing paradigms practice their trades in different worlds . . . [they] see different things when they look from the same point in the same direction. (Kuhn 1970: 150)

A vast wealth of literature has emerged studying the large enterprise groups of Japan and South Korea and their role in those countries economic development. It is remarkable in the light of these debates, not to mention recent WTO entry, that no such studies have yet isolated the increasingly important contribution of China’s largest enterprise groups to her economic development. It is also remarkable that so little has yet been made of the current transnational consolidation ongoing among the world’s largest TNCs. This study, building on certain themes of the lateindustrialization literature, has attempted to fill some of this vacuum by providing one of the first accounts of the emergence of China’s large-scale sector with specific reference to the relatively small number of large enterprise groups that are coming to dominate it, the ‘national team’. Among other things it has shown how the state sector has increasingly become concentrated in a small number of very large-scale enterprise groups, many of which have now been included in provincial or national level ‘teams’. It focused in detail on the national team enterprise groups as these are of special importance, not just in size, but also as role models for lower level teams of enterprise groups. They are also among China’s largest and most important enterprises, of great symbolic importance in China’s endeavour to promote the large-scale sector and more fully integrate with the international economy. Efforts to nurture the national team are in fact remarkably similar in spirit, if not exact detail, to earlier efforts in the most successful late-industrializing nations such as Japan and South Korea. This study has noted, however, that China’s efforts to construct large corporations have coincided with a period of unprecedented restructuring among the world’s largest TNCs as well as in an environment of growing political pressure for liberalization.

Conclusions 137

China, large enterprises and the global business revolution Within the discipline of economics the role and importance of the large corporation has been conceived of in quite different ways. Neoclassical tradition has tended to explore economic questions from the perspective of a resource allocation problem and as a result the large corporation has often been viewed in a negative light. Large corporations are often only held up as examples of possible market failure. For many economists, therefore, as Chandler notes, the large corporation has been singled out as ‘little more than an extractor of monopolistic or oligopolistic rents . . . a prime example of an inefficient, bureaucratically managed organization’ (Chandler 1990: 593). As well as harbouring these negative sentiments towards the large corporation, traditional approaches have often avoided detailed research into the nature of the firm, treating the firm as a ‘black box’, within which little is known. Coase was one of the first to point out the inconsistency of this approach. It is, after all, the entrepreneur or manager in the firm who undertakes the role of the market mechanism in directing economic activity within the firm. Later works, such as those of Chandler, built upon this line of thinking and explained in greater historical detail the role of the ‘visible hand’ of management and the central role of large corporations in economic development. Large corporations remain of central importance to developed market economies, not only in production, employment and trade, but also in research and development. Yet, as Chandler has noted, the history of such corporations has only just begun to be studied (Chandler 1990: 628). These conflicting views on the role of the large corporation in development have found their way into two competing paradigms in the modern-day development debate. As a result much of orthodox mainstream work, particularly that on China, has at times overlooked the importance of the large corporation. Chapter One pointed out that China, like earlier late-industrializing nations such as Japan and South Korea, has actually pledged itself to promoting large enterprises. The main part of this study turned to the controversial subject of China’s large-scale sector with the aim of explaining the nature and significance of large corporations in China’s development. A specialized literature, to which these chapters contribute, has now developed around this subject. Most previous accounts of China’s rapid economic growth have tended to attribute it to the emergence of the small-scale private sector. The ‘shoots’ of new enterprises reacting to the ‘sprinklings of market reform’, in this view, are considered the ‘engine’ of growth. Chapter Two, looking in more detail at China’s LMEs (a broad measure of the large-scale sector that has commonly been used) turned to examine the background and surrounding debates concerning the emergence of large industrial enterprises in China. Complete accounts of China’s remarkable economic performance over reform must include and adequately explain the role of the large-scale sector. This is not least because within the industrial sector, which has been key to China’s rapid growth, the contribution of large corporations has actually increased over reform. LMEs have grown up throughout nearly all of China’s regions, often in upstream heavy industries such as steel, chemicals and petrochemicals, electricity generation and supply, mining, electronics, general machinery, automobile manufacture and

138 Conclusions the like. Large corporations appear to have emerged in specific sectors where economies of scale and scope exist. Their emergence actually follows a historical pattern that has great similarities to that of today’s advanced economies in earlier periods. Thus in the context of the economic history of today’s leading economies, the growth of large corporations in China does not seem so strange. Indeed, it seems far more remarkable that much of the mainstream analysis and policy advice has failed to appreciate the obvious need for fast-growing economies to develop economies of scale in upstream industries. The omission of more detailed analysis on the large-scale sector may in part be attributed to the fact that much research on China has been determined by an a priori commitment to certain values enshrined in the development literature, such as the belief that private ownership is intrinsically superior to public ownership. The new evidence now emerging, however, seriously questions this view. Large-scale industry, in which state industry has become increasingly concentrated, has now been found to have recorded favourable productivity and financial performances in comparison to other sectors of the economy, such as the small-scale TVE sector (Lo 1999). This raises important questions about some of the mainstream analysis that attempts to dismiss large enterprises as the dinosaurs of China’s economy, as well as the policy prescriptions based upon this analysis. Chapter Two goes on to provide evidence to show that in many respects it is the large-scale sector, which itself also has important linkages to the small-scale sector, that may be thought of as the ‘foundation for recent growth’ in China. The country’s large enterprises, like those in earlier periods in today’s most developed nations, have emerged only in certain capital-intensive, often heavy industries. Much of the mainstream analysis of China’s economic development over reform tends to overlook the role of the large-scale sector and as a result only partially explains the reasons for China’s rapid development. The national team of enterprise groups Building upon these observations Chapter Three went on to examine what it isolated as a key segment within the large-scale sector. Just as in Japan and South Korea, China’s large-scale sector has increasingly become concentrated in a small number of state-promoted enterprise groups. The State Council and other related policymaking departments have supported various initiatives to help promote large state enterprises. Of greatest importance among these efforts, although not generally recognized in any of the mainstream literature, have been the attempts to develop two batches of very large enterprise groups, now totalling 120. This chapter was based upon detailed research into each of the individual national team groups as well as related state policy. Research visits were made to a number of groups as well as to an important government think-tank involved in promoting and standardizing the enterprise group trials. Nearly all of the national team groups are industry leaders. Along with their cousins belonging to the many provincial teams, these large groups have rapidly come to dominate much of the large-scale sector. They now contribute about 11 per

Conclusions 139 cent of China’s total GDP, according to one official estimate. Aggregate studies on LMEs alone, although useful in revealing important trends and the broader arguments, do not adequately capture the process of concentration within the largescale sector. Neither do they provide much of an insight into the institutional transformation of the large-scale sector or the role of state policy in precipitating this process. Chapter Three, therefore, described at a broad level China’s policies to develop large multi-plant industrial corporations as part of a first attempt to shed light on this fascinating and highly significant component of China’s industrial reforms. It showed among other things how these large groups have long been part of China’s industrial strategy. The first policy steps were initiated as early as 1986 at several large auto groups. The direction of this policy, which was initially pragmatic, gradually became more focused. It settled on what policies were to be introduced and also expanded them to cover a growing number of enterprise groups in a broader range of industries in different regions. The experimental ‘groping for stones’ approach by the early 1990s had emerged with greater shape and clarity. New measures were introduced and the scope of policy greatly expanded. The institutional development of the large-scale sector continued to develop momentum over the 1990s with the development of the single-track planning measures, expansion of financial companies within the groups, clarification of ownership rights, the acceleration of stock market listings both domestically and overseas, the annexation of research and development centres as well as continued financial support through the banking system. Some of the institutional innovations mirrored those already found in large modern corporations elsewhere, again highlighting that the growth of the large-scale sector was not an irregularity, but was more a natural phenomenon of rapid economic growth and development. The objective of forming large enterprise groups became increasingly oriented towards meeting the threat of international competition by the late 1990s. While initial policies stressed the role groups could also play in easing transition problems, such as ‘making good the entire state industry’ by incorporating loss-making small enterprises and ‘leading their activities’, by the mid-1990s the goal of competing with the world’s leading TNCs had emerged as a key target. It was increasingly being recognized that ‘in reality, international economic confrontations show that if a country has several large companies or groups it will be assured of maintaining a certain market share and position in the international economic order’ (Wu Bangguo, Jingji Ribao, 1 August 1998). Despite the call to develop the small-scale private sector by orthodox practitioners, the Chinese government maintained confidence in the belief that large industrial corporations remained an ‘underlying dynamic in industrial capitalism’. The findings of Chapter Three, furthermore, argued that policies introduced to the national team members helped promote an institutional sophistication, with some evidence that these measures contributed to financial and productivity performance. At a microeconomic level the evidence emerging suggests that the specific characteristics of enterprise groups may promote economic performance. At the broader level, Chapter Three also showed that the national team members have established themselves in the key pillar industries isolated in Chapter Two, those ‘most crucial to the strength, continued growth, and

140 Conclusions defence of a modern, urban industrial and technologically advanced society’ (Chandler 1990: 257). While it is still too early to pass any definitive judgement, it may well be that the policies employed to promote groups have contributed towards their improved performance. The main contribution of Chapter Three was to highlight the growing importance of China’s national team of enterprise groups in pillar industries and explain the role of state policy in ‘grasping the large’. China’s national team is likely to become ever more prominent as China deals with the challenge of closer international integration that entry to WTO will bring. The national team enterprise groups in an international comparative context, the auto industry The policy of promoting the national team has gradually progressed from domestic concerns to those related to the ongoing integration with the international economy. As noted earlier in Chapter Two, the development of the Chinese economy is ‘increasingly hinged upon the improvement of the international competitiveness of LMEs’ (Lo 1997: 6). With a view to placing China’s efforts to build large corporations in a relevant context, Chapter Four briefly explored the pace and magnitude of international restructuring currently found among the largest corporations today. It argued that a remarkable transformation is presently taking place across a very broad range of industries, including primary, secondary and tertiary industries. Natural resource sectors such as mining and forestry, manufacturing industries such as electronics and autos, as well as service companies such as investment banks, transportation groups and insurance companies, have all taken part. Few sectors appear to have been left untouched in the current transnational ‘merger frenzy’. As a result of this activity, in some key sectors the number of dominant global players has already been whittled down to a few enterprises. Global oligopolies are starting to take shape and the evidence points to a rise in global firm-level concentration. Industries, such as oil and petrochemicals, autos, aerospace, power equipment and pharmaceuticals stand out as some examples. Many of these firms originated during the nineteenth century ‘second industrial revolution’ in the advanced capitalist economies of the United States and Western Europe. Some have also emerged from the more successful late-industrializing nations such as Japan and South Korea. The general perception among those in industry is that the trend towards global consolidation will continue as large firms position themselves to be among the leaders in their fields. UNCTAD has already warned that current trends may one day call for a new, global approach, to competition policy. Just as the second industrial revolution in nineteenth century America threw up some ‘first movers’, the current transnational merger activity is also creating a batch of first movers, although now at a global as opposed to national level. Little academic research has yet broached this question or the implications of the transnational merger wave of the late twentieth century. This may in part be attributable to the suspicion of the large corporation that remains a feature of the mainstream. The broad look at the industry evidence presented in

Conclusions 141 this study, however, suggests that a remarkable process of lasting significance is currently unfolding. Across nearly all the sectors in which China has hopes of developing large internationally competitive corporations, and particularly those of the national team, large transnational ‘mega-mergers’ have taken place leading to the emergence of some formidable potential competitors for the national team members. Greater investment liberalization, investments in information technology, increasing dependence on the ‘extended enterprise’ via outsourcing and platform strategies, development of globally recognizable brands and the powerful support of bullish stock markets in the 1990s have been integral factors driving this revolution. The search for greater scale, not only in production, but also in lowering costs in branding, marketing and product development, appear also to be vital today. As UNCTAD has noted, ‘scale is crucial parameter’ in this revolution (UNCTAD 1998: 25). The large modern industrial corporation, central to the economic development of advanced capitalist economies, is undergoing a rapid transformation. It is against this background that the policy of promoting China’s national team as the vanguard in its efforts to compete internationally must be considered. Just as the rise and fall of Japanese and South Korean groups has greatly influenced global capitalism, it is also inevitable that the success or failure of China’s efforts to promote large groups will have far reaching implications for the international political economy. Chapter Five, exploring the question of catch-up at the level of the large enterprise in more detail, therefore returned to look at the global big business revolution by looking at a sub-section of China’s largest enterprise groups from the national team in an international comparative perspective. Chapter Four had already briefly broached this question by describing the global industry rationalization taking place across industries from which China has chosen the national team members. The auto industry has grown very rapidly in China, has important linkages to other sectors and is of special significance because of the attention it has received through industrial policy. A number of important national team enterprise groups, among China’s largest, are also auto manufacturers and these were among the very first pioneering trial groups selected in 1986 by the State Council. This makes the auto industry a particularly interesting and symbolic case to study. It is also an industry that has experienced extremely pronounced international restructuring in recent years, among both assemblers and extended suppliers down the value chain. There can be little doubt that the so-called ‘global big business revolution’ of the 1990s has thrown up a small number of extremely large enterprises which may now realistically be considered ‘global champions’. This is true of light and heavy vehicle auto assembly as well as component manufacture. Only six global assemblers with ‘critical mass’ in light vehicles remain, for example, and the 1990s have seen a series of unprecedented ‘mega-mergers’, including DaimlerChrysler, RenaultNissan, the sale of Volvo as well as the purchase of numerous equity stakes in Asian producers. In heavy trucks only a few large groups are emerging. Further down the supply chain it is predicted as few as twenty to thirty mega-suppliers, or ‘systems integrators’ in the component industry will vie to service the ‘vehicle

142 Conclusions brand owner’ assemblers now emerging. The likes of Delphi and Visteon (Ford’s and GM’s former component arms) stand out as good examples. Assemblers as vehicle brand owners are increasingly divesting themselves of manufacturing responsibilities. Some predict that one day assembly will almost be entirely contracted to the ‘extended enterprise’ of suppliers. The auto industry is undoubtedly at the forefront of the global business revolution. Because of this the changes that have taken place within the Chinese auto industry, in some senses, pale into insignificance when compared with the historic events taking place in the global industry. The brief analysis of China’s auto industry presented in this chapter suggests that despite the declared intention of building internationally competitive groups on the part of Chinese policy makers, such a goal already appears unrealizable. China’s largest groups, perhaps unsurprisingly, still lag well behind their foreign counterparts. Poor implementation of the national auto industrial policy and continued provincial intervention have not helped in the quest to catch-up. Even with a rigorously enforced policy, however, it still seems highly improbable that China’s auto groups would have been significantly closer to catching-up with their international competitors. The ongoing rapid international restructuring taking place in the auto industry has invoked, among other things, a new concept of scale. This has led to an acceptance among many medium-sized producers that merger or sell out during the 1990s was the only option available. Examples include Fiat and Volvo in Europe, Chrysler in the United States and Nissan in Japan. The logic driving the big business revolution dictates that a new era in which a small number of very large producers dominate global auto markets has already arrived. The example of the auto industry shows that China may already be too late in its efforts to create its own global champions. Extending the analysis across other sectors, as some recent case study work has done, it has been shown that the prospects for successful firm-level catch-up are equally bleak across a wide range of other sectors (Nolan 2001). In numerous areas such as aerospace, iron and steel, pharmaceuticals, telecommunications, power equipment, construction machinery, electronics, all types of mining as well as numerous services such as airlines, retail and investment banking, insurance and the like, China still faces serious hurdles.

Theory and policy lessons Before finally reconsidering some of the practical implications of the findings of this study, the broader theoretical implications should first be noted. Although this study has been highly descriptive, investigating an area it considers of special contemporary significance in China, it is believed the findings also have implications for development theory. As noted at the beginning of this study and again in the introduction to this chapter, there has been and remains a tendency for the competing orthodox and heterodox development paradigms to ‘see different things’ even when they ‘look from the same point in the same direction’. Hence the different perspectives on the reasons for China’s successes over reform. As also noted earlier, the interpretation and subsequent policy prescriptions related to three major

Conclusions 143 economic and political events, the East Asian miracle, reform of the centrally planned economies and the Asian financial crisis, also exhibit the same type of polarization in opinion. It is therefore perhaps unsurprising that, as with the earlier debates, explanations for China’s recent economic development have also become split along the fault lines of these competing paradigms. By looking at China this study has attempted, among other things, to contribute further towards an ‘empirically relevant theory of both the general paradigm of late-industrialization and its special variants’ (Amsden 1989: vi). The view taken here is that even until recently the late-industrialization literature had largely excluded China from its remit of study and therefore the lessons had not been fully digested. Detailed empirical work on the large-scale sector and the role of state policy, for example, a key focus area in the late-industrialization literature, has only just started to emerge on China. Instead, debate on China’s economy had often looked to detailed issues related to the transition from central planning without considering the broader implications for the development literature. Just because China has embarked upon a transition from central planning, however, should not mean China’s development experience cannot also be applied to the broader development debate. China, as already noted, could justifiably be considered as equivalent to twenty or more separate nations because of its size. Under this assumption, as already stressed, China would be home to over twenty of the world’s fastest growing nations over the past two decades. This rapid growth in many respects, therefore, appears even more impressive than that of either South Korea or Japan in earlier decades. It is strange then that the lessons of the Chinese experience have yet to be fully incorporated into current development thinking. When the large-scale sector is included as an integral element of China’s growth process it becomes apparent that difficulties emerge with many of the mainstream orthodox explanations for China’s development. These have to explain why large state-owned enterprises have grown quickly in number and size, why they have done so in certain industries and why the performance of these enterprises, over extended periods of reform, may have outperformed that of small-scale private enterprises. The orthodox type theory examined here, epitomized by the World Bank studies, alludes mainly to the ‘sprinklings’ of market reform and the ‘shoots’ of small enterprises as an explanation for China’s rapid growth. It overlooks growth in large-scale enterprises, ignores the history of industrial capitalism in which large enterprises have been prominent, and as a result, overlooks the processes of change that have led to only a small number of large preferred groups becoming of pre-eminent importance in Chinese industry. It is reported the 120 national team groups produced over 35 per cent of total industrial output value by the end of 2000 (Chapter One). Although the growth of small private enterprises and the importance of greater marketization of the economy cannot be ignored, a serious weakness of these orthodox type studies has been the ready willingness to dismiss the largescale sector. As explained, this in part is due to the belief that ownership is a key variable determining performance. As a result the institutional transformation of the large-scale sector and important measures, such as those of State Council to

144 Conclusions nurture the national team, are overlooked. Once the role of the state is ignored, however, heterodox thinking predicts a far less complete account of the growth and development process. Indeed, without considering the role of the state policies to build the national team in China, much of the institution building within the large corporation, looked at in Chapter Three, is missed. As one business historian has put it, when the state is omitted it becomes a story without a key actor, equivalent to ‘Hamlet without the prince, or at the very least without the queen’ (Chandler 1997: 544). Accounts adopting ideas from heterodox-based work on late industrialization, focusing on empirical matters including the development of new institutions, the large-scale sector and the state’s role, show that far from only being driven by the ‘shoots’ of new small private enterprises, China’s recent growth has also been intimately linked to incumbent large state-owned enterprises and the state. A historical perspective, incorporating lessons from the emergence of large corporations in other nations, shows that the emergence of China’s large-scale sector, far from being an anomaly, appears instead as a natural economic phenomenon of economic and industrial development in which large corporations have emerged in particular industries. It is unlikely the differences between heterodox and orthodox economists will be quickly resolved owing to the ideological gulf that separates the two schools. The debate at times has even been reduced to ‘a case of paradigms talking past each other’ (Wade 1990: 345). It is therefore more likely that economists will go on seeing ‘different things’ when looking at the same set of circumstances for some time to come. While it has not been the main intention of this study to address the broader debate enshrined by the competing development models, it is inevitable that such a study will have implications for this debate. The implications of this research on China’s large-scale sector suggest for one thing that the line and method of enquiry pursued in heterodox-type thinking, because it stresses the importance of large enterprises and the state, can greatly help in facilitating a fuller picture of the processes of economic development. The Chinese example shows that an empirical approach, looking at large enterprises and groups, helps to bring to the fore an important area of research that has until quite recently remained dormant. Mainstream accounts therefore are complemented in important ways by the new investigations into China’s large-scale sector, which draw from the lessons of the late industrialization literature. Implications for transition orthodoxy policy The transition literature to an extent can be thought of as an offshoot of the broader development debate. Many of the major talking points are found to rest upon similar themes, such as the virtues of different ownership systems, market structures and market liberalization. This study has not gone into great detail on the subject of transition because a number of detailed studies have already pointed out the very important implications of China’s gradual and pragmatic approach to reform, of actively creating large corporations via proactive state measures for the transition literature (Nolan 1996; Lo 1997, 1999). It also takes the view, looking towards the

Conclusions 145 future, that China’s ongoing international economic integration with the global economy is of more relevance today than the transition debate, hence the focus on the international comparative element. Nonetheless, the lessons of China’s approach in developing large enterprise groups are worth noting. The passive plant-level privatization and market liberalization attempted in Eastern Europe and the former Soviet Union (EEFSU) were undertaken in the belief that market forces would quickly lead to the emergence of large, modern, multi-plant industrial enterprises. Little attention, on the other hand, was paid to the possibility of actively building large corporations, as China has done, using pragmatic gradualist policies, such as those described here. China’s emphasis on slowly turning round state industry by focusing on developing large multi-plant enterprises in pillar industries, while privatizing small-scale state industry, by contrast with EEFSU, appears very successful. The gradual introduction of markets coupled with pragmatic efforts to free-up large enterprises, based upon a clearer understanding of the development of advanced capitalist systems, has allowed China to maintain economic growth and steadily move towards a desired goal of creating the institutions found in and around large enterprises. As one of the few other detailed studies on China’s large groups concludes, ‘the successful diffusion of the business group concept to China indicates that firms in Vietnam, Eastern Europe, and others undergoing the transition from socialism might benefit from the deliberate formation of business groups with specific structural characteristics’ (Keister 1998: 436). Indeed, of the few studies yet undertaken on China’s enterprise groups, all believe their role to have been beneficial (Keister 1998, 1999; Smyth 2000). There may well, therefore, be a case for advocating the promotion of enterprise groups in economies undergoing rapid structural change, such as those making the transition from central planning. Above all, the Chinese approach to reform testifies to the effectiveness of pragmatism, of ‘seeking truth from the facts’, avoiding dogma and experimenting with policy. Part of the reason why Chinese policy makers have been successful must lie in the fact that they have not been blinkered by a priori commitments to any particular economic paradigm but have instead drawn from the lessons of the historical development of capitalist economies. The findings of this study point to numerous important areas for future research. It has only scratched the surface, for example, in its analysis of the big business revolution. There can be little doubt that profound changes have taken place in the auto industry in the last decade. We are still, however, a long way from fully understanding the nature of these changes, not to mention those in other industries: ‘much more work needs to be done at every level on each industry in each country’ (Chandler 1990: 628). We still know relatively little about the nature of global firm-level concentration in the twenty-first century or of whether these current trends might require a new global approach to competition policy as UNCTAD has warned. While it has been suggested here that a definite economic logic has driven the current transnational merger wave in the auto industry, we still cannot be certain that in the end it will be value enhancing in other sectors. Clearly, a great deal more research is still required on the nature of the big business revolution. So much has happened and so quickly that there still remains a great deal we would

146 Conclusions also like to know about China’s reforms. In particular, more work on the nature of province-level policies to promote batches of enterprise groups will no doubt greatly contribute to our understanding of ‘grasping the large’ and the role of state and big business in China’s late industrialization. At the same time more work on ‘letting go of the small’ and the small-scale sector, particularly its linkages with the largescale sector, is required. As regards the national team groups, it is evident that this study only constitutes a first step in this subject area, highlighting its important presence. More detailed work on the exact nature and impact of policy is still needed, particularly the ongoing efforts to restructure these large corporations after WTO entry. While there are numerous areas of further research that this study points to, at a broader level it has also argued that the lessons gleaned from China’s experiences over reform should be more fully incorporated into the development literature. China, as everyone knows, is a huge country that has grown extremely rapidly. Its experiences should therefore be more prominent in shaping development thinking. Going forward The main point of this study has been to contribute to our understanding of the role of the large-scale sector in China’s reforms by looking at the national team of enterprise groups that has come to dominate it. It has also briefly investigated the nature of the current big business revolution and the implications for these groups. It has shown that China’s national team groups, contrary to popular belief, have contributed in important ways to China’s rapid industrialization and growth. Whereas they were originally promoted for purely domestic considerations, increasingly they have come to be seen as China’s vanguard in its ongoing integration with the international economy. There can be little doubt that China now stands at a historic and unprecedented juncture in its history. China’s entry to WTO heralds a new era of close integration with the global economy, with profound implications for culture, politics and economics, both in China and the rest of the world. It was noted far back in Chapter One that Marshall, a forefather of modern economics, once argued that all firms must eventually wither and die, even the largest, like trees in a forest. If this were indeed the case the job for China’s policy makers today in promoting the national team would be immeasurably easier. As it is, however, it has become increasingly clear that the rise and fall of large corporations is far from a reality of modern economic development. Some large corporations do wither and die, either in the form of bankruptcy, merger or take-over. At the same time, however, there also remain a number of enterprises, the winners of marketplace battles, that have survived and become ever larger. History now suggests that in fact only a relatively small number of elite enterprises, some finally emerging after many decades of marketplace competition, are coming to dominate wide spectrums of economic activity. The basis and spirit of Marshall’s argument, one still believed in by many influential policy-making institutions, needs to be seriously questioned in the light of the historical reality presenting itself today: only a small

Conclusions 147 number of super large firms are coming to dominate across a broad range of economic activities. If China’s national team members are unsuccessful in their efforts to catch-up, which looks increasingly likely, the future of global capitalism will look significantly different from that currently envisaged by China’s top leaders.

Appendices

Chronology of business group-related policies 1980: ‘The State Council’s provisional regulations on pushing forward economic linkages’. The first policy responding to developing inter-firm linkages. 1981, April: Erqi (later Dongfeng) becomes a pioneer enterprise group by forming ‘Dongfeng Joint Management Company’. Using the Second Automobile Manufacturing Factory as its base a joint management company was formed with eight other companies. Layers within the group subsequently developed. 1984: Enterprise autonomy widened as large enterprises are passed from central to provincial and city-level authorities. This leads to the early development of economic linkages between emerging economic units. 1986, March: ‘Rules on pushing forward problems concerning horizontal economic linkages’. Basis for early formation of groups. From 1979 until its publication has been referred to as the ‘gestation period’ in the formation of business groups. 1986, March: State Council Development Research Centre, led by economist Ma Hong undertakes a survey of Erqi. Makes four recommendations to the State Council, including starting to experiment with business groups. By 4 April the trial at Erqi is approved. 1986, April: ‘On Dongfeng Joint Management Company undertaking preferential planning status’, the first trial policy measure resulting from the research at Dongfeng is endorsed by State Council. 1986, June: ‘The National Enterprise Contracting Meeting’ led by CRES takes place at the large steel group Shougang and discusses enterprise restructuring, including merger and contracting. In September another meeting is held, entitled ‘Enterprise merger, turning around debt and increasing profit’. These two meetings along with an earlier March meeting push forward enterprise merger reforms. Shougang, like Erqi, develops as a pioneer group in reforms. 1986, 6 October: ‘Notice on Jiefang, Dongfeng and Heavy Vehicle Group linked management enterprises carrying out single track planning’. The work at Erqi was expanded and experimentation in the development of large enterprise groups widened to three groups.

Appendices 149 1987, April: ‘Temporary regulations of large industrial joint management companies carrying out the single track in the national plan’. Subsequently twelve groups are elevated to separate planning in the national plan and thirteen establish finance companies. 1987, December: ‘Some opinions on constructing and developing business groups’ was published by CRES and the then State Economic Commission. It consists of eighteen points and was the first high-level document to explain the enterprise group strategy. From the March 1986 document until this time is considered the ‘developmental stage’ (chuangjian jieduan) of business group development (ZJTZN 1989: 93). 1988: Enterprise contracting and merger and the development of stock systems appear which start to break through the policy of ‘three no changes’ (san bu bian), restricting the ownership of enterprises, administrative subordination and the handing over of public finances. The enterprise groups now enter their ‘growth’ stage as important barriers to their expansion are removed. 1988, March: CRES and Hebei provincial government hold a meeting in Baoding, a pioneering city in merger and take-over activity, to discuss ‘consolidation’. Later in May CRES holds ‘The National Meeting of Enterprise Groups’ in Luoyang. Delegates of groups exchange views and forward suggestions to the State Council. 1988, August: A group from the Central Committee of Economics and Finance listen to a report given by CRES and in response decide to choose a small number of focal enterprise groups to undergo more trials involving the enlargement of their economic rights. The concept of developing a larger batch of trial groups starts to emerge more clearly. 1989: Establishment of National State Capital Management Office. Dongfeng discusses property right problems and proposes some solutions, to which the newly established office agrees. It empowers Dongfeng with independent state capital management rights, pushing forward the core of the enterprise group and development of the modern corporation. Dongfeng leads the way in this trial. 1989, December: CRES holds enterprise group organization and management meeting in Shenzhen. State Planning Comission and SETC along with various industrial departments and banks attend the meeting. Efforts are made at finding ways of promoting the emergent ‘national team’. Discussions on implementation of the ‘six unifications’ policy, later published in 1991 document landmark document, are undertaken. 1991, December: ‘Notice on choosing a batch of large enterprise groups to undergo trials’ is published (policy number 71), fifty-five groups are included in the national team and trials are proposed. Many of the team members, including Yiqi and Erqi, have been involved in pioneering the reforms over several years. 1992, September: The ‘National Exchange Meeting’ takes place in Guizhou Province. The State Planning Commission, CRES and State Council Economic and

150 Appendices Trade Office attend, along with 130 delegates from the fifty-five trial groups. The groups complain of excessive local government and departmental interference. The main difficulties arise over profit-sharing agreements and the ‘core’ enterprise or mother companies complain they still lack funds needed to create greater internal ‘cohesion’. The trial group members suggest national investment policies be inclined towards the groups, finance companies be further promoted and in particular that they be allowed stock market listings. 1992, September: ‘On the method of implementing the empowerment of trial business groups with state capital management rights’. Empowers the mother company to take control of close members of the group. The ‘mother’ company system begins to take shape. 1992, November: Document on establishing finance companies published. Until now only seventeen finance companies have been established. 1993, November: 14th Party Congress calls for clear property rights and the use of capital ties to unite business groups. This is part of a broader message in which the use of the modern enterprise system is promoted as the basis of state enterprise reform. 1994: Trials with three national holding companies are started. 1994, 1 January: Published China’s enterprise law which was to be the basis for the modern corporate system as well as the legal basis on which enterprise groups could be standardized. 1994, 18 April: Officially established ‘Association for the Promotion of China’s Group Companies’ with a total of seventy-four members (later expanded to 110) including all fifty-six centrally chosen trial groups as well as members which joined in the later 1997 batch. 1994, November: Selection of 100 enterprises to undergo trials with the introduction of the modern corporate system. 1996, September: ‘Opinions of business groups being empowered with state capital management rights’. Further clarifies the earlier 1992 policy that passed on close members of the group to the core enterprise and established the ‘mother’ company system. Policy on finance companies is also issued which restricts finance companies’ activities to members of the group and to those enterprises which have at least one quarter of their stock held by the mother of the group. 1997: Preferred LMEs chosen by SETC are increased from 300 to 512. At least seventy-four of these are members of the trial business groups. 1997, December: ‘Opinions on Deepening the Trial Work on Large Enterprise Groups’ is published, sixty-three groups are added to the national team and the direction of policy is changed to focus on the use of the modern corporate system and corporate law. Three TVEs are included in the groups.

Appendices 151 1998, June: ‘National Enterprise Group Convention’ is convened to discuss ways of implementing the 1997 document.

Extending the ‘grasp the large policy’ By 1997 the enterprise groups of the national team had expanded to 120 and China’s large-scale sector was increasingly being concentrated in these large groups. Various new policy initiatives also aimed at ‘grasping the large’, though not specifically directed at the national team groups, had also evolved. A number of trials are involved in the policy to ‘grasp the large’ and many of the trials with large enterprises overlap with those to promote enterprise groups. Unlike those of the national team, which date back even earlier, most of these trials appeared to start in the 1990s. China’s policies to develop the large-scale sector are complicated and there has been some confusion about exactly what these are. It has been reported, for example, that all of the 500 or so focal (zhongdian) LMEs belong to the trial enterprise groups. It has also been misconstrued that there are 300 separate LMEs receiving preferential banking policies when in fact these 300 LMEs were the original focal LMEs that were then increased to 512 (Smyth 2000: 722). In 1999 it is also reported that there were only fifty-seven trial groups when in fact by late 1997 this number had already increased to 120. The following sections attempt to clarify the nature of these measures more clearly. Support for 520 ‘focal’ (zhongdian) large enterprises By 1997 the SETC had extended support measures to 520 focal LMEs. This batch was expanded from an initial 300 to 512, leading finally to the current 520 (Zhou 1997: 66). The measures related to the focal LMEs are shrouded in greater secrecy than those related to business group development, although they are still very important. They appear to orient, among other things, around closer relationships between the banking sector and the chosen LMEs. The 520 LMEs in this ‘vanguard’ were among the largest in the state sector. Although they constituted just 1 per cent of all state firms they accounted for over 55 per cent of state assets, 60 per cent of sales and 80 per cent of taxes of the state industrial sector (CD, 14 January 1998). They were therefore very large enterprises and produced a significantly large proportion of the LME sector’s output. Among these selected LMEs at least seventy-four were also close members of the 120 trial business groups (Table 3.4). It is not clear, however, to what extent they were all integrated within the 120 business groups. Vice-premier Wu Bangguo in a speech referred to the trial groups as ‘belonging to’ the LMEs . Elsewhere it has been suggested ‘the central government has chosen 512 enterprises to form the basis of these enterprise groups’ (Smyth 2000: 722). However, it also appears that many of the LMEs are not linked in any way to the 120 national team enterprise groups. It seems inaccurate to claim these focal LMEs form the ‘basis’ of the groups.

152 Appendices LMEs experimenting with ‘modern corporate systems’ There is a strong desire to transform state-owned enterprises into autonomous selfgoverning entities by divorcing ownership from control and installing full-time professional managers as opposed to government bureaucrats. Just as the second industrial revolution of the nineteenth century witnessed an important split of management from ownership and a renewed focus on managerial skills, so too today is China trying to move down this path. This has proved problematic, as there are strong incentives for local governments and departments to intervene in the running of state enterprises. To develop further a modern corporate system, governed by ‘enterprise law’, important trials, overseen by the State Council, have experimented with the introduction of modern corporate systems. As with other reforms in China, this started in a relatively small number of LMEs, totalling just 100. These 100 LMES were chosen in November 1994 and were basically all largescale enterprises: twenty-eight were classified as super-large, sixty-seven large and only five medium-sized enterprises. Of these 100 LMEs at least twenty were also core or close members of the 120 trial enterprise groups in the national team (Qiye Guanli, 1 January 1995). These enterprise groups are therefore closely tied to the development of the modern corporate system in China. The 100 LMEs and their group enterprises employed over one and a half million people. Most, if not members of the national team of enterprise groups, were members of other large enterprise groups (Huang et al. 1998: 35). One survey, for example, shows that the enterprise groups in which the 100 LMEs were involved had an average of twenty members (Zou and Zhang 1991). The introduction of the trials with modern corporate systems, as with the enterprise group policy, has rapidly spread to other province-level enterprises which have also been keen to experiment. Thus the creation of enterprise groups and related policies, such as the introduction of the modern corporate system, have quickly filtered down after initial experimentation and fine tuning. By 2000, it is reported that 84 per cent of the 520 key SOEs were involved in these corporate reforms (CD, 12 December 2000). Trials with greater flexibility in enterprise restructuring Closely related to the restructuring of the large-scale sector are reforms in a number of trial cities which have helped promote enterprise restructuring. These have recently been broadened to cover over 100 cities. These reforms were first started in sixteen large cities in 1994 at which time they accounted for 21.3 per cent of China’s LMEs (CRES Research Group 1998: 627). Shortly afterwards two more cities were added and by 1996 the number had risen to 58. By 1997, 111 cities were involved (SCDRC, ZJN: 707). The trials were promoted under the slogan of ‘youhua ziben jiegou’, literally translated as ‘improve the capital structure’. Their purpose was to allow large enterprises greater flexibility in laying-off workers and undertaking capital restructuring, particularly take-over or merger with other enterprises. This measure constituted a very important step in the movement to the creation of large enterprise groups.

Appendices 153 National holding companies Another important experiment in enterprise restructuring and the development of enterprise groups was the introduction of trials with large national holding companies. Trials started with three nation-wide groups, two of which (AVIC and Sinopec) were also included as members in the national team in 1991. The creation of such trans-regional groups had similarities with earlier fundamental changes in the nature of the United States large corporation during the late nineteenth century. The historic New Jersey general incorporation laws of 1890 authorised, for the first time, the creation of national holding companies in the United States. As a result enterprises were able to exchange their stock for that of the newly formed holding company and gain a smaller share of a larger company. This was a breakthrough at the time as it ‘centralised legal control of the constituent firms’ which was a ‘prerequisite for centralising the administration of constituent companies’ and allowing rationalization (Chandler 1990: 73). Rockefeller’s Standard Oil Trust was one of the first to follow this path, rapidly expanding to dominate the market. Chinese policy makers also hope that these large groups will be able to dominate their respective industries by using the holding company system to co-ordinate the activities of big business.

Spread of policy to lower levels The national team groups are found throughout China and have become a feature of nearly every provincial economy. When the presence of provincial groups is considered it becomes even more evident that at the heart of the large-scale sector lies a relatively small number of state-sponsored groups. Chapter Two discussed the rapid growth of large enterprises in China during reform. It did not, however, indicate the extent to which these enterprises were recipients of favourable local policies, which is one purpose of Table A.1. Although many of the national team business groups are trans-provincial and some transnational, making it difficult to generalize about the location of their operations, investigation of the 120 preferred business group and 520 focal LMEs, gives an indication of where these groups originated from. It also illustrates the extent to which the policy of ‘grasping the large’ has spread throughout China’s regions. A large number of the trial groups, 33 per cent of the total, originate from either Beijing, Shanghai, Shandong or Guangdong. Of all the preferred groups and enterprises, 9 per cent originated from Beijing alone, reflecting its proximity to policy makers, and the top six provinces alone were responsible for 47 per cent. Preferred enterprise groups and LMEs, therefore, are still concentrated in a small number of provinces and cities, predominantly coastal regions. This has been so throughout their development. Even as early as 1991, of the 431 province and statelevel enterprise groups recognized at the time 47 per cent originated from Shandong, Guangdong, Shanghai and Jiangsu (CRES, ZJTGN 1992: 307). These provinces have therefore led and maintained their leadership in the development of large enterprise groups. Certain provincial governments such as Guangdong and Shandong

154 Appendices Table A.1 Provincial locations of China’s preferred large-scale enterprises and groups in the late 1990s (a) Number of large enterprises

Beijing 215 Tianjin 277 Hebei 328 Shanxi 130 Inner 82 Mongolia Liaoning 489 Jilin 168 Heilongjiang 277 Shanghai 587 Jiangsu 552 Zhejiang 332 Anhui 191 Fujian 93 Jiangxi 103 Shandong 738 Henan 323 Hubei 298 Hunan 209 Guangdong 655 Guangxi 152 Hainan 24 Sichuan 383 Guizhou 98 Yunnan 91 Shaanxi 203 Gansu 93 Qinghai 31 Ningxia 28 Xinjiang 49 Total 7199

(b) Number of ‘focal’ large enterprises

(c) Number of 120 national team groups

(d) Number of groups which are ‘focal’ and in the national team

(e) Column b/a, see notes

(f) Preferred groups in province teams

27 10 31 14 8

32 2 3 2 2

13 2 3 2 1

12.6 3.6 9.5 10.8 9.8

— — 15 — —

38 13 19 47 29 11 12 11 9 41 22 22 16 44 12 1 28 7 12 7 9 2 4 5 512

6 4 5 11 6 2 2 0 0 6 5 7 0 8 1 0 8 3 0 3 0 0 0 2 120

5 2 2 4 5 0 2 0 0 4 4 5 0 8 1 0 7 1 0 3 0 0 0 0 74

7.8 7.7 6.9 8.0 5.3 3.3 6.3 11.8 8.7 5.6 6.8 7.4 7.7 6.7 7.9 4.2 9.4 7.1 13.2 3.4 9.7 6.5 14.3 10.2 n.a

10 15 — 50 40+ — — 40 — 136 — — — 66 20 — — — — — 12 15 — 50 —

Sources: column a, SSB, ZTN 1998: 438; columns b and c, SETC June 2000. Notes: (a) is the number of large-scale enterprises in 1997; (b) the number of 512 preferred LMEs, 1997(c) the number of 120 trial enterprise groups; (d) the number of 512 focal LMES which are also members of 120 trial groups; (e) is (b)/(a) the focal LMEs expressed as a percentage share of each provinces LMEs; (f) is the number of groups in various province level teams.

Appendices 155 were arguably the pioneers in developing ‘provincial teams’ of groups via preferential policies. Today, such tactics have been adopted by the likes of Liaoning (10 big groups), Jilin (15), Shanghai, Jiangsu (3–5 super large groups and 40 to 50 smaller ones) and Fujian, to name but a few (Table A.1). At the city-level extensive efforts have also been undertaken. The provincial and city-level focus on ‘grasping the large’ via provincial and city-level teams is one of the remarkable features of business group expansion and one that warrants more research. When it is remembered that the new evidence explained in Chapter Three shows many of these large enterprises have actually performed well, the significance of state policies to ‘grasp the large’ becomes more apparent. The enigma of China’s LMEs becomes even more complex when this apparent link to systematic industrial policies is made.

Appended key policy documents State directive from December 1991, policy document number 71 The State Council endorses the State Planning Commission, State Commission for Reform of the Economic System and the State Council Production Office’s request for permission to choose a batch of large enterprise groups to undergo trials (24 December 1991). The State Council agrees with the State Planning Commission, the Commission for the Reform of the Economic System and the State Council Production Office’s ‘Request for permission to choose a batch of large enterprise groups to undergo trials’. It now transmits these to you and asks that they be thoroughly and diligently implemented. Enterprise groups have emerged as a new type of economic organization in response to the objective need for large-scale production in our socialist planned economy. In order to promote the healthy development of business groups the State Council has decided to select a number of large enterprise groups in staged batches to undergo trials. Successfully completing the trial work is of great importance to promoting the structural reform of enterprises, pushing forward efforts in the rationalization of the factors of production, giving thorough play to the leading role of large and medium state run enterprises, creating and synthesizing superior enterprise masses, improving international competitiveness and further improving macro-economic stability. Forming enterprise groups should lead to productivity gains and the development of more advanced products, as well as the improved utilization of technology and natural resources. Developing business groups is a long-term undertaking, however, and every region and related department must strengthen its organization and leadership with regard to this work. Lessons should be gleaned from experience and, at the same time, caution and care must also be exercised so that unworkable solutions are not imposed from above. We must avoid trying to develop business groups too fast, in one go, using only a single solution. We should gradually develop our business groups in line with the growth of the economy.

156 Appendices Request for permission to select a group of large enterprise groups to undergo reform State Council: According to and in the spirit of the State Council’s ‘On selecting about 100 large enterprise groups to undergo trials’, the State Planning Commission, State Commission for Reform of the Economic System and the State Council Production Office together have undertaken research and beneath are the findings to the requested and related questions: 1. Choosing a batch of trial groups should achieve the following goals: It should reform enterprise organization. This mainly means resolving the ‘large and complete’ and ‘small and complete’ problem, related to the low degree of specialization, enterprise dispersion, replication of production and the inability of achieving economies of scale. It also means reforming the industrial structure and product structure so as to generally increase economic efficiency. It should push forward the rational allocation of the factors of production. This in particular means breaking through regional and departmental barriers so as to realize beneficial synergies between enterprises that can give play to the full potential of productive capabilities. It should form superior masses and co-ordinate the roles of members and thoroughly give play to the leading role of large enterprises and concentrate financial capital so as to undertake unified planning. At the same time it should promote the positive role of group members: promote scientific research, production, the circulation of assets, services, the capability to develop new technology and new products and better adjust to the changing demands of the market economy. It should increase international competitiveness. Steadily occupy and increase the share of international markets so as to become the major force in international competition. By means of creating and controlling a batch of large enterprises as the core of the enterprise groups the state will be able to more efficiently lead the economic activities of a large number of small and medium enterprises. 2. In order to realize the foreseen goals the trial enterprise groups must meet the following conditions: They must have a strong core member of the group that has the capability to act as an investment centre. The core can be a large-scale production or service enterprise or even a capital rich holding company. They must have a multi-layered structure. Apart from the core enterprise there must be a number of enterprises in the close layer and it is best a number of semi-close and dispersed members exist. The group’s core and other members must by means of capital ties and joint management of production form a complete and integrated management system. The core enterprise should establish stock control over the close layer of member enterprises. Semi-close members should gradually develop capital links with the core and close members. The core of the enterprise group and other members all possess independent legal person status. This is the main difference between an enterprise group and an individual large enterprise.

Appendices 157 The trial enterprise groups should be formed in accordance with these above conditions, those trial groups that still do not possess these conditions must actively work to develop them. 3. In choosing the trial enterprise groups we must respect the following principles: Group selection should correspond to national economic development strategies and industrial policies. In production, construction, investment and trade the groups should occupy important positions. Advocate the adoption of stock holding between enterprises using the company system, co-ordinate beneficial relations between central and local government departments, core enterprises and member enterprises and thoroughly promote the positive roles of all parties. Promote the development of trans-regional, trans-departmental competitive enterprise groups and forbid the creation of industry or regionally based monopolies. Support the separation of enterprise and government responsibilities. The core of the enterprise group should not assume the functions of governmental industrial supervision nor should governmental industrial departments change into enterprise groups. In developing and choosing the trial groups we must both be enthusiastic but at the same time careful and cautious so as to avoid the unchecked proliferation of enterprise groups. According to the above principles the first batch of trial groups have been chosen. 4. The trial business groups meeting conditions for single track planning should carry out the single track in national or provincial level plans according to their particular circumstances. Groups that influence the entire national economy and a great many people’s livelihood, as well as those that produce goods geared to the whole country, should use the single track planning method at the national level administered by the top administrative body for the given industry. The national plans of those enterprise groups carrying out the single track in the national level plan should be examined and approved by the State Planning Commission and relevant departments then assigned to specific sectors. Other enterprise groups may undertake the single track at the province level with province level management and may establish direct links with the necessary national departments. The standard single track includes the core enterprise and the close layer of members but does not include semi-close and dispersed members of the group. The main contents of the single track include: (1) plans regarding output of main products; (2) basic construction and investment in technological upgrading; (3) the use of foreign investment and technology imports; (4) the main materials and energy allocation plan; (5) science and education plans; (6) labour and wage remuneration plans; (7) financial plans. [Responsibilities of different departments omitted.] 5. The main activity of the core enterprises of the trial enterprise groups’ regarding close members is to implement the ‘six unifications’.

158 Appendices The basic requirement of the ‘six unifications’ is to ensure the realization of unified development strategies and plans within the groups. At the same time it should not interfere with the member enterprises independent legal person status jeopardizing the willingness of group members to positively contribute to the group. The main contents of the ‘six unifications’ are: (1) the core enterprise should unify the development plan and annual plan of the group and report it to the responsible industrial department; (2) the contracted core enterprises sign a general unified contract with the state, close members of the group should then make contractual agreements with core enterprises; (3) the core enterprise should be responsible for loans needed for important basic construction and technical renovation projects, those currently having difficulty meeting this condition should gradually implement it; (4) international trade and related commercial activities should be unified under the core enterprise; (5) the capital of the close members of the group should be unified under the core enterprise which will be supervised by the State Capital Management Department; (6) the main managers of the close layer of enterprises will be unified under the core which will have the right to appoint or dismiss managers. The ‘six unifications’ of the close layer with the core can be carried out by a variety of means: (1) the core may invest in close members stock and become controller of these enterprises by establishing mother/son company relations, using the status of mother company to implement the ‘six unifications’; (2) the core enterprise may contract or rent the close layer of enterprises and implement the ‘six unifications’; (3) if the enterprises are both state owned and in agreement the close enterprise may be managed under the core but still maintain its independent legal status; (4) the State Capital Management Department may empower the core enterprise with the rights of the close members as part of the ongoing trial with reform of enterprise property rights. 6. The trial enterprise groups’ management system. Regarding the management of trial enterprise groups: (1) for those trial groups undergoing the single track at a national level run by administrative departments, these will be supervised directly by the State Council; (2) those not undertaking the single track at this level will be managed by the organs that they are currently administered under; (3) the main managers of the trial groups (president and chairman) will be entitled access to vice-ministerial level publications and broadcasts, as well as being able to participate in meetings and educational activities and receive other privileges available to vice-ministers (though not including wage, medical insurance, accommodation, or car privileges or general everyday living related expenses). The political privileges are not extended to the position of enterprise groups, of the internal institutions, or other member enterprises. Their positions should not be upgraded because of the political privileges of president and chairman. Concerning the political and management status of the Party Secretary in the trial enterprise groups, it is suggested the Department of Organization of the CCP creates guidelines based upon the above stated principles.

Appendices 159 7. The trial enterprise groups must support reform of tax-profit channels. All those that have already implemented the separation of tax-profit channels should continue to use it, those that have not yet should continue to implement this method. 8. The trial enterprise groups must gradually establish finance companies The main duty of finance companies is to increase the groups’ internal circulation of funds, including construction funds. They must also broaden methods of raising capital and those given approval can also issue bonds and stocks. Finance companies must meet certain criteria laid down by the People’s Bank of China in order to be established. Groups must actively pursue the formation of finance companies meeting these criteria, after which they will be approved case by case. 9. The trial groups must gradually be endowed with rights to import and export. [Details on rights to import and export and on visiting foreign countries are omitted.] 10. Approval of the Trial Business Groups. [Details of formalities needed for approval, relevant bodies to consult etc. omitted.] 11. The government must urgently research and formulate concrete methods of managing the trial business groups. An enterprise group is not the same as an individual enterprise, joint-management enterprise or the common system of linking dispersed enterprises. The enterprise group has general internal stock participation and stock control relations. The government’s current enterprise management method does not meet the actual requirements for overseeing enterprises, all departments must therefore closely research the methods of overseeing and handling business groups, the main are: the method of empowering groups with rights to manage state capital, methods of managing the registration of groups, financial accounting systems and management methods, overseeing state administrative managers within the groups, the management of wage remuneration, statistical rules relating to enterprise groups, public finance, tax, the oversight of goods and materials and so on, and as quickly as possible disseminate and implement them. State Planning Commission State Commission for the Reform of the Economic System State Council Production Office 28 August 1991

160 Appendices Policy document of April 1997, policy document number 15 The State Council endorses the State Planning Commission’s, State Economic and Trade Commission’s and the Commission for Reform of the Economic System’s Opinions on Deepening the Trial Work on Large Enterprise Groups. State Publication (1997) Number 15 (29 April 1997) The State Council concurs with the State Planning Commission, State Economic and Trade Commission and the Commission for Reform of the Economic System’s ‘Opinions on Deepening the Trial Work on Large Enterprise Groups’ and now transmits this to you, please diligently and thoroughly implement it. Deepening the trial work on large enterprise groups is vital in pushing forward economic system reform and promoting economic growth. According to the demands of creating a modern enterprise system and making good the entire state economy we must focus on grasping a batch of large enterprise groups, unify and push forward a large number of enterprises’ restructuring and development, promote structural adjustment, achieve economies of scale, improve the management and efficiency of state capital and positively promote the role of these backbone largescale enterprise groups in the national economy. The State Planning Commission, State Economic and Trade Commission and the Commission for Reform of the Economic System must strengthen their planning and leadership of this work, every region and every department must actively co-operate in creating a good external environment for the expansion and development of large enterprise groups. The State Planning Commission’s, State Economic and Trade Commission’s and the Commission for Reform of the Economic System’s Opinions on Deepening the Trial Work on Large Enterprise Groups (8 April 1997) State Council: In order to adapt to the demands of the establishment of the socialist market economy, in the spirit of the fifth plenary session of the 14th Party Conference that ‘the state must focus on making good a batch of large backbone enterprises and groups’ and according to the demands of the State Council on selecting the second batch of trial groups, here we present our opinions on the trial work, selection of trial groups and related questions: 1. The necessity and goals of deepening the enterprise group trial work. Since issuing ‘The State Council Endorses the State Planning Commission, State Economic System Reform Commission and the Sate Council Production Office’s Recommendations on Choosing a Group of Large Enterprise Groups to Undergo trials’ (State Publication (1991) Number 71) the trial work of the first batch of 57 groups has achieved notable success and has basically achieved the stated goals. Mainly this is manifested in: the use of capital ties linking the members of the groups clarifying internal relations within the group; expanding the functions and power of the groups, gradually pushing forward structural reforms and attaining

Appendices 161 efficiencies through economies of scale to create highly competitive groups; the deepening of the enterprise groups’ internal reforms, pushing forward the internal management mechanism and the overall level of management; creating greater homogenization among the nation’s groups. Now the development of the economy and society has entered a new phase. The economic system has been transformed from the traditional planned economy to a socialist market economy and the economic growth mechanism has transformed from extensive growth to concentrated growth. In establishing the socialist market economy the direction of state enterprise reform is the establishment of the modern corporate system, implemented under ‘The Company Law of the People’s Republic of China’ (hereafter abbreviated as the ‘company law’). As opening to the outside continues enterprises will face more severe domestic and international competition. As a result the development of the economy has entered a crucial stage in which these two basic transformations must be made according to the requirements of establishing the modern corporate system and making good the whole state economy. Deepening the trial work with large enterprise groups is a vital necessity. The deepening of the trial work of the large enterprise groups must achieve following main goals: (1) In certain key areas of the national economy and key industries batches of large enterprise groups should actively be encouraged to play a backbone role. (2) At the end of this century the mother and son companies of the large enterprise groups should establish modern corporate systems and become self governing, responsible for their own debts and development; self-disciplined defined legal entities in a competitive market system. Capital must be used as the main link in the mother/son company system. (3) Pushing forward the rational circulation of factors of production and the superior allocation of resources, as well as the structural reform and development of a group of enterprises, creating economies of scale and increasing the competitive capabilities in domestic and international markets. (4) Improving the operation of state capital and its efficiency and safeguarding the growth of the value of state capital. (5) Transforming the functions of government administrators gradually realizing the separation of government and enterprise. Promoting trans-regional, transindustrial economic linkages, increasing the ability to regulate the national economy. 2. Establish the use of capital as the main link in the mother/son company system. (1) According to the relevant rules of the ‘company law’, standardize the trial enterprise groups, gradually sort out the groups’ internal property rights and form the mother/son system based on the use of capital links as the main bonds. The trial enterprise groups’ mother companies can normally transform themselves into limited companies or with more than two shareholders, the trial enterprise group’s son company should normally be restructured into limited companies or share holding companies with more than two shareholders. (2) Clarify who is responsible for investing capital in the mother company. If the trial enterprise group’s mother company is a fully state owned company, then the

162 Appendices responsible body for its investment should be the investment institutions empowered by the state or organizations empowered by the state. A small number of mother companies meeting the right criteria may, with the approval of the State Council, become organizations empowered with the authority to manage state capital. (3) Establish scientific and democratic management and policy-making systems. The trial enterprise groups mother and son companies must, according to ‘company law’, establish legal person administrative organs and separate their activities. The enterprise groups mother company and son companies chairman and board of directors must be appointed according to the ‘company law’ and company constitution. The President is appointed by the board of chairman and the chairman may not serve as the president concurrently. Fully state owned groups approved by the State Council may be allowed temporarily to have no board of chairman. (4) The trial enterprise groups must, according to the demands of establishing the modern corporate system and related state rules, promote reforms on labour, personnel and wage compensation; strengthen internal management and according to related state rules establish pension plans, medical care, redundancy and unemployment benefits; gradually become separated from non-production related functions and find appropriate measures to deal with the non-production related workforce. 3. Further strengthen the function of the trial enterprise group’s mother company. The trial groups’ mother companies must formulate strategies such as those concerning the development of the entire group, structural reform in the group and beneficial co-operation agreements and the likes so as to completely give play to its leading role. It gradually should become its main provider of capital, technology and co-ordinator of foreign investment and technological exchange, as well as other important management roles. The mother of the trial group, according to the nature of its industrial development and the market for its products, should approve the groups management system and perfect the group’s constitutional system, standardizing relations between mother company and members of the group, and increasing the overall benefits of the group and strengthening its competitiveness. (1) Strengthen the investment function of the group’s mother company. Small scale fixed investments beneath the restricted limits corresponding to the State or local policies can be carried out by the group’s mother company but should be declared to related departments. [Investment guidelines omitted.] (2) Strengthen the financial role of the mother company. The mother company in the trial enterprise groups on the approval of the State Council and related departments may issue shares on domestic and international stock markets. In issuing corporate bonds and selecting companies to be listed, those meeting the necessary conditions will be given priority. [Details of formalities omitted.] (3) On approval of the State Council and related departments the trial enterprise groups’ mother companies can enjoy the right to import and export and can engage

Appendices 163 in trade in products and complete sets of equipment related to the group. Son and member enterprises possessing the right conditions can independently apply for trade rights. It is encouraged that the groups’ products form the main complete sets of equipment exported. Those groups possessing the necessary conditions on approval of the State Council and related departments can engage in foreign engineering contracts related to that groups’ industry and foreign labour services. (4) All trial enterprise groups with the right conditions must establish technology centres and improve their technological upgrading, absorb and adopt imported technologies, and enhance the ability to develop new products and raise their international competitiveness. 4. Use all channels to supplement the trial business groups’ capital funds and give play to their role in structural adjustment. [Details on debt restructuring omitted.] 5. Strengthen the assessment and inspection of the trial enterprise groups. [Details on inspection omitted.] 6. Broaden the standardization and conditions of the trial enterprise groups. The criteria for selection of the second batch of enterprise groups are limited to: (1) those with conditions suitable for group development, belonging to key industries supported by state industrial policies; (2) comparatively competitive enterprise groups and groups strong in international markets; (3) the mother company is a state owned enterprise (enterprises of other ownership types will also be considered if they meet the right conditions). In choosing the second batch of groups the main conditions are: (1) it has already been or is in preparation to be approved by relevant state or provincial departments. (2) The group is capital rich, has a large production output or is important to trade or among the leaders in its industry. If the mother company is an industrial enterprise, it normally should be super-large in size. (3) The enterprise group has a comparatively good management record and has bright prospects, its management system is relatively perfected and the managers are of high quality. (4) The mother company does not assume the governments administrative management role. According to the above principles and conditions, via the approval of the State Council, the second batch of 63 large enterprise groups have been approved. 7. Effectively organize and manage the work of the trial enterprise groups. The State Planning Commission, State Economic and Trade Commission and the Commission for Economic System Reform should according to the separation of duties and demands of state publication (1991) number 71 continue their good work and all related local governments and the State Council’s related departments should continue with their positive co-operation. [Details of various commission’s responsibilities omitted.]

164 Appendices Other contents in state publication (1991) number 71 which are not in agreement with this document should now use this document as the guide. The related departments of the State Council should amend previous documents or issue new documents and jointly handle the publication with the State Planning Commission, the State Commission for Economic and Trade and the Commission for Reform of the Economic System in order to promote the trial group work.

Global market shares of various business activities Table A.2 Reported market shares for various products, business activities Firm

Business activity

Market Source share

Aerospace Boeing Airbus Bombardier Embraer Rolls-Royce GE Pratt & Whitney Pechiney

Commercial aircraft over 100 seats Commercial aircraft over 100 seats 20–90 seat aircraft 20–90 seat aircraft Aero-engine orders Aero-engine orders Aero-engine orders Aluminium aerospace products

70 30 38 36 34 53 13 40

Arianespace

Satellite launches/launch rockets

50+

MSDW, 1998 MSDW, 1998 FT Aerospace, 2000 FT Aerospace, 2000 FT, 6 March 1998 FT, 6 March 1998 FT, 6 March 1998 www.pechiney.com, 7 February 2001 FT,12 November 1997

Autos Ford/Mazda/Volvo GM DaimlerChrysler VW Toyota RenaultNissan

Automobiles Automobiles Automobiles Automobiles Automobiles Automobiles

16 15 10 9 9 9

MSDW, 1999 MSDW, 1999 MSDW, 1999 MSDW, 1999 MSDW, 1999 MSDW, 1999

Auto components Pilkington Denso GKN Tenneco Delphi Kayaba Lear Lear Lear Lear Kelsey Hayes Lucas Bosch (Zexel) Delphi ITT Bosch Bridgestone

Auto glass Air conditioning units Constant velocity joints Shock absorbers/exhaust systems Ride control products Ride control products Seat systems Door panels Floor and acoustic systems Full interior ABS brake systems Brake systems Diesel fuel injection pumps Diesel fuel injection pumps ABS brake systems ABS brake systems Tyres

25 22 40 25 21 14 22 7 14 19 16 25 52 21 25 31 19

FT, 21 May 1996 FT, 28 November 2000 FT, 22 July 1996 FT, 28 Oct. 1996 JAC, 31 August 2000 JAC, 31 August 2000 Annual report, 1997 Annual report, 1997 Annual report, 1997 Lear.com, June 2000 WAW, December 1997 FT, 8 May 1996 WAW, January 2000 WAW, January 2000 WAW, December 1997 FT, 8 May 1996 FT, 19 January 1996

Appendices 165 Michelin Goodyear Beru AG

Tyres Tyres Diesel cold start systems

Knorr Bremse AG Commercial vehicle braking systems Wabasto Sunroofs Building materials Lafarge cement Holcim cement

18 14 40 45

FT, 19 January 1996 FT, 19 January 1996 PR Newswire, 30 January 2002 FAZ, 25 January 2002

45

FT, 11 February 2002

8 6

FT, 21 August 2001 FT, 21 August 2001

Chemicals/Petrochemicals BP Amoco PTA BP Amoco Acetic acid (technology licenses) BP Amoco Acrylonite (technology licenses) Dupont Auto paint coating Dupont Titanium dioxide

37 70 90 30 21

Tioxide

Titanium dioxide

15

Shell

Bitumen

10

Annual report Annual report Annual report FT, 30 October 1998 CMR, 29 December 1997 CMR, 29 December 1997 Shell.com

11 10 9 8 45 20

FT, 24 November 1998 FT, 24 November 1998 FT, 24 November 1998 FT, 24 November 1998 FT, 11 September 1996 FT, 18 April 2000

30

FT, 18 April 2000

15 9 5 31

FT, 18 April 2000 FT, 18 April 2000 FT, 18 April 2000 FT, 5 July 2000

26 12 22 40

FT, 5 July 2000 FT, 5 July 2000 FT, 4 April 2000 FT, 19 September 2000 FT, 1 December 2000 FT, 30 March 1999 FT, 30 March 1999 FT, 30 March 1999 FT, 30 March 1999 La Tribune, 24 January 2002 FT, 15 October 2001 FT, 15 October 2001 FT, 14 December 1999 FT, 5 March 1999

Complex equipment Invensys Control/automation equipment Siemens Control/automation equipment ABB Control/automation equipment Emerson Control/automation equipment Fanuc Machine tool controls Heidelberger Printing presses Drucksmeschinen Heidelberger Non-newspaper offset printers Drucksmeschinen Xerox Printing presses MAN Roland Printing presses KBA printing presses CNH (Case/ Farm equipment New Holland) Deere Farm equipment Agco Farm equipment TAL/BT Industries Warehouse forklift trucks Rational Professional ovens Strix Schindler Otis Mitsubishi Kone Pinguely-Haulotte

Thermostats and switch on kettles Lifts Lifts Lifts Lifts Elevator nacelles

70 25 18 13 9 13

Ina/FAG SKF Timberjack Agusta-Westland

Rolling bearings Rolling bearings Forest machinery Helicopters

15 16 30 20

continued

166 Appendices Table A.2 continued Firm

Business activity

Market Source share

Knorr Bremse AG Bowe Systec

Railway braking systems High-speed paper management equipment

42 17

FAZ, 25 January 2002 FT, 7 January 1999

Fast-moving/branded consumer goods Coca-Cola Carbonated soft drinks Unilever Ice cream Nestle Ice cream Reckitt Benckiser Wash fabric care Reckitt Benckiser Dish-washing powder Proctor and Gamble Tampons Gillette Razors Fuji Film Camera films Chupa Chups Lollipops Nike Sneakers Fuji Camera film

51 20 6 23 38 48 70 35 34 36 32

Kodak

Camera film

35

Konika

Camera film

11

Japan Tobacco Imperial Tobacco Philip Morris BAT

Cigarettes Cigarettes Cigarettes Cigarettes

7 3.5 14 12

Annual report, 1998 FT, 19 January 1998 FT, 19 January 1998 NST, 10 February 2000 Reckitt.com MSDW, 1998 MSDW, 1998 MSDW, 1998 FT, 31 March 2000 MSDW, 1998 Business China, 30 July 2001 Business China, 30 July 2001 Business China, 30 July 2001 FT, 8 March 2002 FT, 8 March 2002 FT, 8 March 2002 FT, 8 March 2002

Industrial gases Air Liquide Air Products Praxair Nippon Sanso Air Liquide, Air Products, BOCa

Industrial gases Industrial gases Industrial gases Industrial gases Industrial gases

12 12 12 6 40

FT, 3 July 2000 FT, 3 July 2000 FT, 3 July 2000 FT, 3 July 2000 FT, 17 August 1999

17 34 20 15 15 41 16 85 20 25 45 15 85 90

FT, 27 October 1999 FT, 6 June 2000 FT, 6 June 2000 FT, 6 June 2000 FT, 6 June 2000 FT, 19 May 2001 FT, 19 May 2001 MSDW, 1998 FT, 1 February 2002 FT, 15 December 1997 FT, 15 December 1997 FT, 15 December 1997 FT, 29 April 2000 FT, 24 June 1998

IT/Electronics hardware and software Lucent Internet/telecoms equipment Lucent ATM carriers for ISPs Cisco ATM carriers for ISPs Alcatel/Newbridge ATM carriers for ISPs Nortel ATM carriers for ISPs Alcatel DSL Lucent DSL Intel Micro-processors AMD PC Micro processors Advantest Semiconductor test equipment Advantest Memory chip test equipment Advantest Logic test equipment Microsoft PC operating systems Microsoft Word processing applications

Appendices 167 Microsoft SurfControl Trend Micro Trend Micro Trend Micro Quadstone Amadeus/ Worldspan Sabre Cisco Cisco Corning

Business desktop computer applications Internet security Overall server anti-virus software

90

FT, 29 April 2000

12 33

Internet gateway anti-virus software Groupware anti-virus software

63

FT, 24 February 2001 PR Newswire, 6 February 2002 PR Newswire, 6 February 2002 PR Newswire, 6 February 2002 FT, 21 May 1999

31

Customer behaviour modelling 6 software Computerized reservation systems 35

FT, 23 June 1998

Computerized reservation systems Computer routers High end routers Optical fibres

33 66 80 50

DRAMS DRAMS

17 29

FT, 23 June 1998 MSDW, 1998 MSDW, 1998 FT, 15 November 1999 FT, 9 October 2001 FT, 17 January 2002

disk drives

13

NST, 13 October 1999

Disk drives

34

Compaq

Servers

20

HP Dell Palm Compaq Sony Nintendo Ericsson Nokia Motorola Oberthur3 Shlumberger Gemplus Shell Solar

Notebooks and desktop PCs Notebooks and desktop PCs Hand-held computers Hand-held computers Electronic games Electronic games Mobile phones Mobile phones Mobile phones Smart cards Smart cards Smart cards Solar cells

11 9 32 16 67 29 15 23 20 19 19 25 15

BP

Solar cells

20

Gulf News, 10 February 2002 NST, 23 November 2000 FT, 8 March 2002 FT, 8 March 2002 FT, 7 August 2001 FT, 7 August 2001 FT, 29 March 2000 FT, 29 March 2000 FT, 8 February 1999 FT, 8 February 1999 FT, 8 February 1999 FT, 1 September 1999 FT, 1 September 1999 FT, 1 September 1999 FT Germany, 24 January 2002 Annual report, 2001

Copper mining Silver mine production Blast furnace steel makers Blast furnace steel makers Blast furnace steel makers Free market alumina supplies Primary production smelted aluminium Primary production smelted aluminum

15 7 7 3–4 3–4 50 15

FT, 29 October 1999 FT, 22 June 1998 FT, 2 January 2002 FT, 7 August 2000 FT, 7 August 2000 FT, 31 October 2001 FT, 31 October 2001

8

FT, 31 October 2001

Hynix Samsung Electronics Eng Teknologi Holdings Bhd Maxtor

Metals and mining Codelco Penoles Arcelor Posco Nippon Steel Alcoa Alcoa Alcan

continued

168 Appendices Table A.2 continued Firm

Business activity

Market Source share

Packaging Toray Sidel Alcoa/Reynolds Alcan/Pechiney/ Alsuisse ICI

Polyester film PET plastic packaging machines Aluminium Aluminium

60 55 24 16

FT, 15 May 1998 Annual report, 1998 FT, 27 October 1999 FT, 27 October 1999

Waterborne lacquer for cans

21

FT, 21 November 2000

Paper and board Stora Enso Stora Enso Stora Enso StoraEnso UPM Kymmene

Magazine paper Newsprint Graphic paper/office paper Aseptic packaging Magazine paper

20 7 10 40 20

Annual report, 2000 Annual report, 2000 Annual report Storaenso.com Annual report, 2000

7 12 17 17 31 49 5 40 30

FT, 18 January 2000

Pharmaceuticals/Life sciences/Cosmetics Glaxo-Wellcome/ Prescription drugs: SKB central nervous system anti-infection respiratory anti-asthma anti-herpes Merck Prescription drugs: statin anti-cholesterol angiotension converting enzyme inhibitors Medtronic Implantable/interventional therapy technologiesc pacemakers Pfizer Warner Prescription drugs Lambert Novozymes Industrial enzymes Astra/Novartis Agrochemicals Bausch and Lomb Contact lenses 2001 Gambro Renal Dialysis machines, blood lines Products and dialysis concentrates L’Oreal Mass market hair colorants

Annual report, 1999

FT, 18 January 2000 Annual report, 1998

45

MSDW, 1998

50+ 6

MSDW, 1998 FT, 26 June 2000

40 25 17

FT, 20 November 2000 FT, 2 December 1999 FT.com, 6 January

15

Business Wire, 13 February 2002 Economist, 26 May 2001 Economist, 26 May 2001 Chemical Week, 23 January 2002 Chemical Week, 23 January 2002

32

Procter and Gamble IFF

Mass market hair colorants

13

Chemical flavours/fragrances

17

Givaudan

Chemical flavours/fragrances

15

Power equipment GE Siemens/ Westinghouse

Gas turbines (1993–8) Gas turbines (1993–8)

34 32

FT, 24 March 1999 FT, 24 March 1999

Appendices 169 ABB/Alstom Alstom

Gas turbines (1993–8) Heavy duty turbines

Others (including services) Barry Callebaut Industrial chocolate Whirlpool Major household appliances Enodis Fast food cookers/supermarket display units Shimano Mountain bike parts Top Glove Corporation Brita Stihl Assa Abloy Ingersoll Rand United Airlines British/Airways KLMd Star Alliance Goldman Sachs MSDW Gerling NCM Credit and Finance Marsh Aon Willis Reuters Bloomberg WPP/Young/ Rubicon Omnicom Frontline Frontline Boskalis/BHG Carnival Corporation Royal Caribbean Manpower Adecco Randstad Securitas

Rubber gloves

21 15

FT, 24 March 1999 FT, 13 February 2002

33 36 6

FT, 5 June 1998 Le Blanc, 2000 FT, 15 June 2001

30

Forbes, 21 January 1991 FT, 19 January 2002

8

Point of use water filters Chainsaws Security locks Security locks Passenger traffic Passenger traffic

85 30 12 6 6 10

Simon, 1991 Simon, 1991 FT, 8 March 2000 FT, 8 March 2000 FT, 24 July 2000 FT, 24 July 2000

Passenger traffic Announced global M&A Announced global M&A Credit insurance

22 40 33 25

FT, 25 May 2000 FT, 28 January 2000 FT, 28 January 2000 FT, 23 August 2001

Insurance broking Insurance broking Insurance broking Financial information Financial information Advertising

32 25 7 30 30 20

FT.com, 11 June 2001 FT.com, 11 June 2001 FT.com, 11 June 2001 FT, 12 May 2000 FT, 12 May 2000 FT, 12 May 2000

Advertising VLCC Suezemax Dredging services Cruise line berths

18 11 15 30–35 28

FT, 12 May 2000 FT, 26 October 2001 FT, 26 October 2001 FT, 22 June 2001 FT, 23 January 2002

Cruise line berths Temporary staffing Temporary staffing Temporary staffing Guarding operations

20 9 12 4 7

FT, 23 January 2002 FT, 19 August 1999 FT, 19 August 1999 FT, 19 August 1999 FT, 3 August 2000

Source: Appended from Nolan 2001. Notes: a Merger blocked by competition authorities. b Electronic chips that store information. Used in mobile telephones, pay-TV signal unscramblers and in the banking and retail sectors. c Including pacemakers, implantable defibrillators, leads, programmers for treatment of patients with irregular heart-beats. d Blocked by authorities.

Notes

1 Introduction 1 See Gore (2000) for an interesting summary of this debate. 2 The majority of challengers in the capital intensive industries of the twentieth century were not smaller firms that took advantage of changes in technologies and markets. Instead far more often successful challengers were ‘long-established companies, usually first movers, from other countries or from other industries in the same country. These established firms had the facilities and skills – the organizational capabilities – that simply were not available to new entrepreneurial entrants into an industry and that were difficult for smaller specialized firms to acquire’ (Chandler 1990: 602). 3 Economies of scale are defined as ‘those that result when the increased size of a single operating unit producing or distributing a single product reduces the unit cost of production or distribution’ and those of scope ‘result from the use of processes within a single operating unit to produce or distribute more than one product’ (Chandler 1990: 17). 4 A further two groups were later added to the first batch, increasing the total to fiftyseven. 5 In the ‘independent accounting sector’, which still constituted the majority of enterprise output. 6 The 2,302 provincial level enterprise groups accounted for just 1 per cent of the total number of independent accounting enterprises, a small number, but 51 per cent of all assets and 45 per cent of all sales (Yin et al. 1999: 132). 7 These data imply that even within the large-scale sector there are large size disparities and that the national team players are among the largest. A 1997 study into 1,254 large enterprises found only twenty-three had sales over 10 billion Rmb, accounting for only 2 per cent of the enterprises but over 30 per cent of sales and 55 per cent of the profits of these enterprises (CASS, ZGFB 1998: 115). 8 See SSB, ZJTGN for yearly updates on provincial and city level efforts at nurturing groups. Lower levels of governments have also initiated their own trials with the modern corporate system, there now being over 2,500 provincial level groups undergoing trials. 9 The five mainland companies were: China National Petrochemical Corporation (Sinopec), Industrial and Commercial Bank of China, Bank of China, China National Chemical Import and Export Corporation (Sinochem) and China National Cereals, Oils and Foodstuff Import and Export Corporation (COFCO). The last two are included in national team and Sinopec is experimenting as a national holding company. 10 In 1999, for example, 435 LMEs were closed, 78 SOEs were involved in debt-equity swaps involving $10.9 billion and 11 million workers were laid-off (CD, 26 January 2000).

Notes 171

2 China’s large industrial enterprises 1 It should be pointed out that LMEs may be thought of as ‘roughly comparable to the very large sector of other economies’ (Naughton 1994: 488). Nearly all employ over 500 employees (by 1998 large-scale enterprises employed 3,000 employees on average, compared to less than ten in the TVE sector (SCDRC 1999; SSB 1999; ZGFB 1999: 369)). 2 All statistical data in this chapter is township and village-level enterprise and above independent accounting enterprises. Although this is an imperfect measurement, in so far as it excludes some smaller-scale enterprises, it is sufficient in so far as it isolates the important industry trends. These are confirmed elsewhere (see for example Smyth 2000). 3 By 1997 there were 468,000 enterprises in the industrial independent accounting category. The number of LMEs increased in this period markedly, from approximately 5,000 to 24,000, up from 1.3 per cent to 3.9 per cent of the total number of all independent accounting industrial enterprises. 4 The definitions of LMEs appear to have remained consistent in this period, though more recently changes have been made in the use of criteria for determining LMEs. 5 For 1995 data exist on the GVIO of LMEs for the forty industrial sectors covered. Exact estimates therefore of the LME share of independent accounting above TVE level share of industrial output can be calculated. For 1987, however, no exact data exist for LME output value. Instead data from the Industrial Statistical Yearbook (1988) has been used to calculate the share of an equivalent proportion of the largest enterprises for each sector. An example best serves to illustrate the calculation technique. If 5 per cent of the total number of enterprises in a particular sector were classified as LMEs in 1995 then for 1987 the exact same proportion (i.e. 5 per cent) of the largest enterprises (based on the scale of employment) have been taken and total GVIO summed. This has then been expressed as a fraction of the industry sector GVIO. The resulting figure does not necessarily therefore refer strictly to LMEs for 1987 but does allow for accurate comparisons over time of the largest producers and their contribution for each industry sector. 6 Gross value of industrial output for township and above independent accounting enterprises. 7 Chandler (1969), for example, examines trends for certain industry sectors in the US in a relatively extended time period from 1909–63 and a close match can be found with these trends and those currently witnessed in China over the much shorter period of a decade. In the United States it was also heavy capital-intensive industries, such as chemicals, petroleum, transportation equipment and electrical machinery that experienced an increasing importance in the contribution of large firms. Others, such as leather goods, publishing and printing, furniture and apparel experienced the reverse. 8 Based upon accepted methodology of previous studies investigating enterprise performance. 9 The World Bank note there are 1,000 preferred large state firms. The experimentation with large enterprises is in fact, however, more complex, there being a number of interrelated trials. These include trials with 100 LMEs introducing modern corporate systems, 512 key LMEs and the 120 national team groups, as well as many provincial group trials. These are summarized in the appendices. 10 There are ten national team members dedicated to electronics production, accounting for over 30 per cent of national electronics production.

3 The national team of enterprise groups 1 The term ‘enterprise’ is used in this chapter even though it is subject to debate just when autonomous ‘enterprises’ started to emerge from the centrally planned system. ‘Plant’

172 Notes

2 3 4 5 6

7 8 9

10 11

12

13

may in fact be more accurate as many production units were still bound to the planning apparatus and governmental control. Building enterprises out of state plants and departments has been a key objective of enterprise reform. During the early and mid-1980s the policy of ‘three no changes’ (san bu bian) held back enterprise reorganization. LMEs are defined by industry on standard criteria specified by the State Statistical Bureau. Of these 431 groups 261 are reported as having large-scale enterprises at their core and twenty-seven had assets exceeding 1 billion Rmb (CRES, ZJTGN 1992: 308). This document is published in CRES, ZJTZN (1988: IX–17). By 1988, for example, Shougang had taken control of dozens of large enterprises (Nolan 2001). It was also at this time that the first articles on business groups began to be published in Chinese academia. The account of the emergence of the national team of enterprise groups is based on an interview with Chen Qiaosheng, a member of the Association for the Promotion of Chinese Enterprise Groups. They had also grown quickly. In the period 1991–6 the four trial steel groups increased their total capital by 295 per cent and sales by 146 per cent. In chemicals, the same respective figures were 314 and 131 per cent (SCDRC, ZJL: 708). The revenue of the top four groups alone more than quadrupled in relation to GNP, from 10 to 46 per cent over the same time period (Chandler et al. 1997: 337). Although not all of the groups are industrial enterprises (at least nineteen are classified as trade or agricultural groups) the majority are in fact based around industrial enterprises or have industrial enterprises as members of the groups. The trade groups, for example, appear to possess their own manufacturing facilities. It was at about this time that the policy of ‘three no changes’ (san bu bian) started to be relaxed. Among the first fifty-seven groups there were forty-six industrial groups, two foreign trade groups and five in transportation. In the second batch there were thirty-nine industrial groups, six in foreign trade, eight in domestic trade and transportation, four other groups (investment, regional development) and five in agriculture. In total there were therefore eighty-five industrial groups. There are many millions of TVEs already in China (over 20 million), employing 130 million people in total. On average, however, each TVE employs only about seven workers. They are generally small-scale concerns in light industries (ZGFB 1999: 369). Since 1990, however, most regions have seen the emergence of some larger TVEs, those possessing superior products, technology and management. Many of these have developed into trans-industrial enterprise groups. By the end of 1997 there were already 8,720 groups with sales of over 50 million Rmb and among these 3007 with sales over 100 million Rmb (ZGFB 1999: 369). Only fifteen groups, however, had sales of over 3 billion Rmb and none of the TVE enterprise groups had yet to make it into the ranks of the Fortune 500 largest global companies. It is argued that the ‘the beneficial role of enterprise groups and large backbone enterprises is becoming clearer by the day in TVE development’ (ZGFB 1999: 369). Although large TVE enterprises and groups constituted just less than 1 per cent of TVEs in number, they already accounted for nearly 10 per cent of total capital, 15 per cent of industrial value added, 14 per cent of taxes and 30 per cent of exports (ZGFB 1999: 369). Their products were of significantly higher quality, with 95 per cent meeting national quality standards. Large TVEs are of increasing importance. Some problems have also emerged with the finance companies. They remain unevenly distributed and heterogeneous. Within the trial groups, for example, some finance companies remained very small, with less than 100 million Rmb, while others exceeded this seven to eight-fold. By July 1995 the Bank of China had approved fifty-three finance companies, of which thirty-five belonged to the trial business group. These fifty-three

Notes 173

14

15 16 17 18 19 20

had total assets of 6.6 billion Rmb, equivalent to 1 per cent of the financial sector’s capital . By 1997 this had increased to nearly 2 per cent, and a further sixteen finance companies had been created, increasing the number to sixty-nine. In the early nineteenth century, for example, in the United States ‘insider lending arrangements developed in place of formal financial markets (Lamoreaux 1994, quoted in Keister 1999: 11). In these arrangements, ‘bank directors loaned funds almost exclusively to themselves and their friends . . . these informal lending arrangements came to resemble the business groups we see throughout Asia and Latin America’ (Keister 1999: 26). Including the 520 supported large enterprises. There are 500 province-level research institutes. Although this is less so for the national team members, with only ten reported as loss making in 1995. Of the 512 supported LMEs 36 per cent were listed, and among the 100 enterprises and groups experimenting with the modern corporate system, 48 per cent were also listed (ibid.). In 1997 there were 209 A share issues, seventy-nine of which were affiliated to the 120 enterprise groups and 100 enterprises experimenting with the modern enterprise system (SCDRC, ZJN 1998: 709). And that there are reasons for thinking that ‘these business alliances are exactly what China needs right now’ (Keister 1999: 25).

4 The national team and the business revolution 1 As Hymer predicted, the growth of TNCs has also tended to ‘centralize high-level decision-making occupations in a few key cities in the advanced countries (surrounded by regional subcapitals)’ (Hymer 1970: 446). Most of the largest 100 TNCs (which account for one-third of the assets of the world’s foreign affiliates) are headquartered in a few countries congregated in a few large cities. Among these 100 largest TNCs ten of the eleven largest French TNCs are headquartered in Paris; six of the seven United Kingdom TNCs in London; and the headquarters of five of the eighteen Japanese have the same address of Chiyoda-ku, Tokyo. Over half the 23,000 Japanese foreign affiliates are owned by TNCs based in Tokyo (Toyo Keizai, 1998). In Austria, 45 per cent of the country’s 1,617 TNCs were based in Vienna in 1994 (ONB 1996). Two-thirds of the headquarters of major Swedish TNCs included in a recent survey are located in Stockholm; this share has increased over time (WIR 2001: 59). 2 Measured by value added. 3 These included deals between Reed Elsevier and Wolters Kluwer (publishers), Guinness and Grand Metropolitan, Lafarge and Redland, Zurich and Britain’s BAT, Sweden’s Nordbanken and Finland’s Merita, Generali and AGF. 4 It went on to say ‘it may come to be seen as the moment at which European companies, famously fragmented in their individual domestic markets, at last embraced the panEuropean idea’. 5 Although most FDI is still located in the developed world the share of developing countries’ grew steadily for much of the 1990s (until 1997 and the Asian crisis), reaching 37 per cent (WIR 1999: 22). The financial crisis has been treated as a ‘window of opportunity’ by TNCs. South Korea in 1999 had a record $15.2 billion FDI inflow (Business Asia, 1: 2000), up from $3 billion in 1997 and $5 billion in 1998, also record years (WIR, 1999: 22). In the developing Asian region China remains the largest FDI host. It received about one-third of all developing countries FDI in the early 1990s. 6 Other large nations, such as India and Indonesia, by comparison with China, still only had a relatively small number of TNC foreign affiliates (several thousand) and the whole of the African continent had only 5,000 (WIR 2001: 239).

174 Notes 7 They contributed about 20 per cent of industrial output and paid about 20 per cent of central government taxes. 8 Because a number of utility companies with traditionally very large domestic assets have made large overseas acquisitions, and the largest TNCs are based on absolute value of foreign assets, the first impression given by the index is one of only marginal increase in the 1990s. However, if the new utility companies are excluded it is found the index of the top 100 TNCs increased from 51 to 56 per cent over the 1990s. This would be the equivalent of a company with 100,000 employees and $100 billion in sales and assets in the early 1990s today having 56,000 employees abroad and $56 billion in foreign assets and sales. For such a change to have taken place in the world’s largest 100 TNCs shows a significant rise in transnationality. 9 By 1999 there were 145 large deals involving listed companies, worth US$10 billion. In 2000 this rose to 177 deals reaching US$41.7 billion, valued at around the size of a single large ‘mega merger’, such as the Daimler Chrysler deal. 10 These have average assets of $9 billion and sales of $6 billion, exceeding most of China’s national team players (UNCTAD 1999, Chapter Three: 12). In terms of employment, however, they were smaller, employing only 35,000 people on average. China’s largest enterprises remain small-scale and bloated with large work forces in comparison to both large Western corporations and the largest TNCs based in developing countries. 11 This has entailed a quite profound reorganization of many brand portfolios. Unilever’s ‘brand cull’, involving three quarters of its existing brands, in which fewer stronger global brands have been nurtured, may guide the direction for future trends of brand management. 12 In the 1970s Boston Consulting Group formulated the famous ‘rule of three’: a stable competitive market never has more than three significant competitors (Ghemawat and Ghadar 2000: 66). 13 Despite the possibility of increases in concentration, it has also been pointed out that globalization, even if it might increase concentration, also ‘means an increase in competition and a reduction in monopoly power’. They point to the fierce nature of global oligopolistic competition: ‘Just ask GM or Ford what Toyota means for them’ (FT, 6 February 2002). Thus although the numbers of large firms may have decreased, competition appears to be stiffer than ever, presenting an even greater challenge for China’s national team groups. 14 Specialist transportation has also witnessed global consolidation. In lift trucks, for example, there remain thirty or so large firms that dominate the market, these are widely expected to consolidate to less than twenty within the next few years. 15 China’s largest producer Chalco is in eighth place with approximately 4 per cent of the global market share. 16 In 1999 the China Copper Lead Zinc Group (CCLZ), China Aluminium Corp (Chalco), and China Precious Metals and Rare Earth Corporation were also set up under central government auspices to own and operate state-owned non-ferrous metals mines, smelters, research institutes and their affiliates. 17 As with the auto industry, deals involving leading Japanese producers have also taken place. 18 Spin-offs from these newly merged companies in which they have divested themselves of ‘non-core assets’ have themselves thrown up a variety of globally leading companies in a range of areas. In 1999, for example, Novartis and AstraZeneca merged their agrochemical businesses to form Syngenta, a world leader in life sciences with 7 per cent of world crop protection sales. Various leaders in more obscure areas, such as orthopaedic equipment, contact lenses, heart valves, dialysis services and the like have also emerged. Even in diverse areas such as the global orthopaedics equipment market, for example, a divested arm of the pharmaceutical giant Pfizer has created a single company with 15 per cent of the global market.

Notes 175 19 Cimpor is the leading Portugese producer (and Europe’s seventh largest) and is particularly attractive because of its large overseas presence, particularly in Brazil. Over recent years it has made acquisitons in Spain (Corporacion Noroeste), Mozambique (Cimentos de Mocambique), Tunisia, Egypt and Morocco and several in Brazil. Overseas plants account for 51 per cent of its sales making it a highly desirable acquisition. 20 It is interesting to note that consolidation among retailers has sent ripples down their supply chains. As suppliers ‘succumb to pressure from retailers, perhaps a third of a supermarket’s lines could be sourced globally or regionally in five years, up from less than 10% now’ (Economist, 19 June 1999). 21 According to Cheng Zimin, a researcher with Chinese Academy of Social Sciences (CASS). 22 In Beijing, for example, the municipal government is striving to consolidate the city’s more than 3,000 retail chain enterprises and form five large supermarket groups. Shanghai, the biggest commercial city in China, has already set up five large-sized retail chain companies via mergers, alliances and shareholding.

5 The national team in international comparative perspective: the auto industry 1 A leading representative from Dongfeng Group stationed with the Association for the Promotion of China’s Enterprise Groups in Beijing was also interviewed. 2 According to Chrysler’s chief executive of the day, they ‘began by cutting costs and eliminating waste while preserving future product spending. We sold non-automotive assets. And we began to get lean. But as we trimmed our workforce, we also reorganised into (chassis) platform teams that design cars faster and more efficiently’ (FT, 4 October 1994). 3 By way of specific examples, it cut the number of its tyre suppliers from seven to two, paint suppliers from five to two and the number of wiring suppliers from fourteen to two. 4 Such as sheet metal stamping, car assembly, engine development, transmissions and electronics. 5 Before ‘Ford 2000’, regional centres had been responsible for local component sourcing. A highly publicized ‘World Integrated Purchasing System’ was introduced. 6 Bob Transou, Ford group vice-president responsible for manufacturing and the man who led the reorganization study team during the crucial early months of 1994. 7 Professor Garel Rhys. 8 A module is a pre-assembled unit of components and could refer to a dashboard, for example, or a braking system. These are supplied directly to assemblers for installation and sometimes suppliers even have their own workforce located within an assembler’s assembly plant. One advantage of this system, sometimes overlooked, is that labour costs are passed on to the less unionized work forces of lower tier suppliers. The average wage at a tier-one supplier, for example, is approximately $13 per hour, compared with $21 at GM, Ford and Chrysler (JAC, 28 October 1999). In many cases, suppliers are even stationed and work on the production lines of assemblers. 9 Already a new small-volume niche vehicle producer has emerged hoping to use the capabilities of first-tier components groups to design parts so that all physical manufacture will be outsourced. 10 Of these, seventy-three deals were transnational, almost half the total, and thirty-nine involved a non-European parent company either buying or selling an operation. 11 Of significance and note in the restructuring of the global auto components industry has been the lack of activity in Japan. During the 1990s sales slumped and parts manufacturers, locked in their long-term relationships with assemblers, were severely affected. It is estimated there are approximately 5,000 parts suppliers in Japan, many very small and it is predicted this number is likely to half (FT, 23 February 1998). The foreign

176 Notes

12 13 14 15 16 17

18

19

20

control of Nissan and Mitsubishi has already seen a number of large Western components groups, such as France’s Valeo, move into the Japanese market. The formation of a joint venture between Wallenius (Norway) and Wilhelmsens (Sweden), the companies claim. And 15 large focal trial enterprises from among 500 plus centrally supported trial LMEs, other backbone enterprises. Wanxiang started off as a bike repair garage and began manufacturing bike components; it rapidly expanded and managed early on to become a listed company. These include automobiles, machinery, electronics, petroleum and construction. It is considered they have high income elasticity of demand, require large-scale production facilities and have forward and backward linkages (World Bank 1997: 39). Recently it was reported 40 per cent of capacity at complete vehicle manufacturers lies idle (FT, 30 May 2000) Despite the growing importance of large-scale production facilities, labour productivity levels remained very low, less than one-eighteenth that of Japanese and many small-scale producers, particularly in component manufacture, remained (Jinrong Shibao, 1 February 2000). The larger enterprises still constituted the majority of output, with the ‘large 2’ category accounting for 59.3 per cent of total sales and 41.3 per cent of the workforce (ZQGN 1998: 61). The profits of the large-scale components producers were twenty times those of the medium-scale grouping. This highlights the far greater efficiency of the larger component plants in China. Distribution can account for up to a third of the total cost of selling a vehicle, hence it is very important to have fully developed distribution channels. Until recently, for example, VW’s venture with SAIC was controlled by the Chinese partner as it owned the distribution network through which all vehicles were sold. Foreign entrants, recognizing this problem, have worked to develop distribution networks. Toyota, for example, which has yet to develop fully production facilities, has already established sixty service stations that it plans to convert to dealership networks post-WTO in its bid to ‘grab’ a 10 per cent market share in 5 to 10 years. Shanghai GM has also very rapidly established a dealership network based around its pioneering Saturn model. It has more than sixty-eight dealerships in over sixty Chinese cities. VW has also attempted to wrest control of the dealership network. The development of foreign production facilities has been accompanied by that of dealership networks, increasing the market position of the global assembly giants. According to Yang Hua, director of the State Administration of Machine-Building Industry (CD, 3 July 2000).

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Index

Aeoloeus 67; see also Dongfeng Group agricultural groups 90 airline groups 83; consolidation of 105 aluminium 102 Amsden, A. 3; on subcontracting 31 Association for the Promotion of China’s Enterprise Groups 40, 50 auto industry 100; Chinese industrial policy 130; economies of scale in 114; extended firm 115, 119–21; global consolidation of 116; market share of TNC component groups in China 130; national team members in auto industry 100; pioneering groups 123; product development 132; reasons for its importance 123–4; restructuring of industry 111; scale in China’s auto industry 124; weakness of Chinese components industry 125–7 bad loans 62 banking support 61–3 building materials industry 104; see also national team of enterprise groups business revolution 92; drivers of change 97–8; global consolidation and 98–107 Caihong Group 71 chaebol 1 challenge of closer integration 12 Chandler, A. 7–10; and big business and drivers of change 97 chemical groups 79 China Lucky Film Group 89 China Zhenhua Electronics Group 70 Chinalco 102 Chrysler 112–13 CNOOC 101 coal mining groups 80

Coase, R. 6, 137 Commission for Reform of Economic System 11 competing paradigms of development 3, 32, 37 component supply in the auto industry 118; global value of 118; mergers and acquisitions in 119 concentration 27–9 consolidation in auto industry 116–17; among component suppliers 118–19; Chinese appreciation of historical trends in 123 construction materials 85 crony capitalism 5 CSCEC 85 Datong 102 Delphi 128 development economics 3 Dongfeng Group 55, 67; Dongfeng Joint Management Company 41 East Asian miracle 1 economies of scale 30 enterprise group definition 42; at the province level 12; see also national team of enterprise groups extended firm model 121; see also auto industry financial support of national team 61; see also national team of enterprise groups First Auto Works 67 first movers 8 first tier component suppliers 118; consolidation of 120 First Tractor and Construction Machinery Group 69

182 Index Fordism 111 foreign trade groups 82 forestry groups 104 Fortune 500 9 Founder Group 72 global champions in the auto industry 117, 119; their presence in China 127 global concentration 99; in aerospace 102–3; in the auto industry 100, 118; in building materials 104; in forestry 104; in iron and steel 100–1; in machinery and electronics 99–100; in metals and mining 102–3; in petrochemicals 101–2; in pharmaceuticals 103; in services 105 GM (General Motors) 113 grasp the large, let go of the small 2; policies to 10, 51–63; history of policy 44; problems of 15; signficance of policy for understanding China’s development 64 groping for stones 13, 55 guojia dui 1 Harbin Power Equipment Company 74 Heavy Vehicle Group 68; see also truck production in China heterodox approach 3, 144 historical perspectives on big business 7 Hualian retail group 106 Huaneng 73 Hymer, S. 92 industrial policy 48; in the auto industry 130 information technology 97; facilitating business revolution 97 institutional change 56 inter-enterprise agreements 41 internal finance companies 57–8 Japan 3; comparison with China 10, 22; comparison of enterprise groups 47; comparison of stock markets 61 Jiang Zemin 13 keiretsu 1 Keister, L. 58, 65 Kornai, J. 4 Kuhn, T. 1 large enterprises and development 5–10;

large enterprises in China 10, 25; see also LMEs late industrialisation 1 Legend 71 light industry 88 LMEs 20; in auto industry 124; geographical location of 24–5; large and medium-sized enterprises in general 20–30; linkages with small enterprises 30; ownership of 24–6; performance of 21, 29 Luoyang Bearing Group 70 Luoyang Floating Glass Group 104 Ma Hong 43 M&A in China 42; in rest of world, 94; impact on global concentration 94 management of state assets 58–60 market shares 164 Marshall, W. 6; analogy of forest 6; Hymer commenting on Marshallian capitalist 92; on implications of rise of big business for China 109 mega-mergers 95; in the auto industry 116 metals and mining 102 MITI 34 modern enterprise system 55; further details of experimentation 152 modularisation of components supply 119 Monkey King 70 multidivisional corporation 92 national holding companies 153 national team of enterprise groups 50; diversification 46–8; in the auto industry 100, 122; in the steel industry 101; institutional transformation 42–5, 56; petrochemicals 101; scale of 45–6; selection of 50–5; summary of 138 Naughton, B. 31; on comparisons with Japan 41 Nippon Steel 101 Nolan, P. 14; on concentration 23 orthodox approach 3; criticisms of 5–10; implications of 144; policy advice of 13 Panda Group 72 party conference 62 Penrose, E. 6 petrochemicals 101 Petrochina 101

Index 183 pharmaceuticals 103; enterprise groups 84; fragmentation in China 103 pillar industries 27; increasing concentration in 28; and industrial policy 48–51 pioneering groups 123 platform strategy 114; see also auto industry Posco 101 power equipment producers 100 preferential planning 57 private enterprise groups 90 property rights 34 provincial level auto production 126 provincial level groups 12; table with details of 154 qiye jituan 1; see also 39–63 retailing sector 105 Rubens Rupicero 93 Sanjiu Group 84 Second Heavy Machinery Group 69 sectors of the national team groups 50; see also national team of enterprise groups service industries 105–6 Shanghai Hualian Group 89 Shanghai Tianyuan Group 79 Shanghai Tire Group 129 Shenhua 102 single track planning 55–7; see also national team of enterprise groups Sinopec 101 South Korea 3; comparison with China 10, 22 State Council Development Research Centre 43

State Council directives 154–64; brief description of 11 steel groups 77; see also national team of enterprise groups steel industry 101 Steinfeld, E. 31, 34 stock market and group development 61 strategic integration 3; challenges of 12; difficulties with 3, 4 technology centres 60–1 Teece on role of large enterprises 63 Tianjin Auto Industrial Corporation 68 Toyotism 122 TNC restructuring 93; and the business revolution 94 trade groups 86 transition from central planning 4; 144–6 truck production in China 131 UNCTAD 2 VW (Volkswagen)114 Washington consensus 4 –5 World Bank 10; interpretation of China’s reforms 32–4; ‘sprinklings of market reform’ analogy 21 Wu Bangguo 10; on economic battles 14; on economies of scale and scope 39 Xinjiang Textiles Group 76 Xuzhou Construction Machinery Group 69 Yankuang Group 80 Yanzhou Group 102 Zhu Rongji 13