The age of State Owned Enterprises ends with protectionism or bankruptcy
"The United States should view with suspicion the continued penetration of the U.S. telecommunications market by Chinese telecommunications companies," states the a special investigative report produced for the US government and released earlier in October.
The report is damning. "Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services."
Huawei is a telecommunications equipment manufacturer with over 140,000 employees and annual revenues of $30 billion. ZTE, similarly, manufactures telecommunications equipment, has 90,000 employees and revenues of $14 billion. Both are integrated into the world’s telecommunications infrastructure and both are Chinese companies founded by ex-military officers with close ties to the Chinese government and military.
Both are, effectively, State Owned Enterprises.
It seems like only yesterday that governments were praising China’s model of state-led and state-owned industrial policy as a way towards endless economic growth and social development.
That came as a worrying shock to economists and business analysts who regard such entities as monolithic deadweight dragging down productivity and killing investment. Yet China’s companies seemed to be the real deal. They posted profits and were globally competitive.
Behind the scenes, analysts have been poring over the data. An independent Chinese study declared that if all the hidden grants and subsidies to these SOEs were ended they’d all be losing money. Worse, their dominance of the Chinese economy is also destroying local innovation and investment. SOEs get preferential rates on loans, as well as surety on all debts from the state. SOEs are first on the list for tenders, or for anyone wishing to gain favour with the government.
All of this drives up the costs of doing business in China while doing little to broaden out the economy or create a market for innovation and investment.
The harm to Chinese interests doesn’t stop at the border. Myanmar – hardly a bastion of democracy and investor probity – has recently ended an agreement with Chinese SOEs regarding exploitation of minerals and energy. Canada has blocked CNOOC, a Chinese oil SOE, from buying Nexen, a local oil firm. Then there’s the US response.
All around the world, governments are looking at the dominance of Chinese majors and blocking them at the border.
How much of this is jingoistic protectionism and how much is legitimate fear of exploitation by agents of a foreign state? It doesn’t really matter. That SOEs are a bad investment choice for a state does not have to be a problem for other countries.
France massively subsidies their state-protected energy firms. When GDR Suez bought Britain’s International Power in 2010, French taxpayers became generous subsidisers of British energy consumption.
That SOEs are wasteful is a taxpayers’ problem first. However, that it is also tarnishing the reputation of all firms based in a particular country is vastly damaging.
The US report on Huawei and ZTE is likely to hurt business opportunities for a host of Chinese companies, many far removed from the state. Europeans don’t mind buying Apple phones or Toyota cars, but they do mind buying Chinese goods. How many manufacturers may need to shift their supply-chains to counter the mood?
All of this should give pause to governments believing that nationalising companies and running them as state-owned enterprises is some magic panacea to joblessness and economic growth.
At their worst, SOEs have an implicit guarantee from the state and will be bailed out should they go wrong. SAA regularly gets billions of rand in bailouts to support their badly-run enterprise. Eskom and Telkom are sub-functional. That guaranteed protection also drives out other investment. Private companies can’t compete and go out of business or don’t start at all.
Even assuming some miracle, though, and that SOEs do become world-beating behemoths, other governments will meet them at the border and say, "Stop. This far and no further."
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