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State-Owned Reinvention
SOEs restructure in order to shed inefficiency and bloat
By Deng Yaqing | NO. 10 MARCH 10, 2016


The booth of China Tower at the PT/EXPO CHINA event held in Beijing in September 2015 (CFP)

Since the Chinese Government launched its ambition to reform the nation's economic system and business management model in 1978, the vigor of state-owned enterprises (SOEs) has been constantly unleashed and strengthened. As the State Council unveiled a guideline to further SOE reform last September, an additional round of profound changes seems forthcoming.

On February 25, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) declared to initiate 10 reform pilots. The measures include underpinning the function and power of the SOEs' board of directors, recruiting and selecting managers in a market-oriented way, propelling mergers and acquisitions of enterprises under the supervision of the Central Government, and advancing mixed ownership reform, etc.

These pilots are expected to play an exemplary, innovative and leading role in the overall SOE reform, so that all SOEs can learn from them, and the existing system and mechanism can be renovated, said Vice Chairman of SASAC Zhang Xiwu. He also stressed that the merging and reorganization of central SOEs will improve the structure and layout of state-owned assets, enhance the efficiency of resource allocation and avoid the homogenization of the enterprises.

In 2015, SASAC accomplished a series of mergers and reorganizations among central SOEs. Those affected included CSR Corp. Ltd. and CNR Corp. Ltd., China COSCO Shipping Corp. Ltd. and China Shipping Co. Besides that, China's three major telecommunication operators—China Mobile, China Unicom and China Telecom—jointly founded the China Tower Corp. Ltd., which is now the largest telecommunication infrastructure builder and comprehensive service supplier in the country.

"By pooling the tower resources of the three giants and sharing them together, these telecoms operators were saved from the necessity of building 265,000 telecom towers last year. Roughly 50 billion yuan ($7.63 billion) was conserved," said Tong Jilu, General Manager of China Tower.

Reform should revolve around advancing quality and efficiency, and efforts should be made to further integrate and reshuffle SOEs, said Peng Huagang, Deputy Secretary General of SASAC, calling for improving the structure and layout of state-owned capital and spurring transformation and upgrading.

Cementing synergy 

Telecommunication towers and related ancillary equipment are integral parts of the mobile telecom network infrastructure. As mobile phones become increasingly popular, in recent years, the three operators have continued to expanding their mobile telecommunication network by building large quantities of towers separately, which often led to overlapping construction and a waste of resources.

To advance the sharing of telecom towers, in 2014, SASAC and the Ministry of Industry and Information Technology pushed the three rivals to spin off their respective tower resources and inject them into the newly established company China Tower. Last October, a government-backed investment company, the China Reform Holdings Corp., acquired 6 percent of the newborn tower builder. Meanwhile, China Mobile, China Unicom and China Telecom hold 38 percent, 28.1 percent and 27.9 percent, respectively.

There was demand for a total of 584,000 telecom towers throughout the three operators last year. China Tower has completed the construction of 485,000 towers so far. The establishment of China Tower has better served the construction of fourth-generation telecom networks.

"By integrating the resources owned by the three companies, industrial efficiency has been substantially jacked up, because the construction and land cost of telecom towers ate into about one third of operators' total capital expenditure," said Tong.

To avoid inheriting the common problems and shortcomings of old SOEs and sliding into monopoly and low efficiency, China Tower has been trying to take on an innovative system and mechanism. For instance, to maintain flat management and prevent redundancy, its headquarters in Beijing only has 89 staff members and seven departments, with 90 percent of its employees serving at the same basic level. Each and every purchase made by China Tower is transparent and open to the public on its online procurement platform.

Promoting mixed ownership is another focus of the ongoing SOE reform, and that's also what China Tower is prepared to explore in the future. "At the current stage, the time is not ripe to introduce other types of capital, because the company has not realized full operation and been tested by the market. Before diversifying its stockholders, it'd better get listed first," said Tong.

However, a major factor deciding whether a company can smoothly go public is its earning power. As far as China Tower is concerned, its profitability primarily depends on driving up the sharing of telecom towers.

Despite that the sharing rate of new towers is now as high as 74.7 percent, the rate is still lower than that of first-class tower companies in the world, admitted Tong. This year, China Tower aims to lift its average tenant number by 0.2 percentage points.


A telecom tower of China Tower in Beijing (COURTESY OF CHINA TOWER)

More efficient leadership 

According to statistics from SASAC, by the end of 2015, a total of 85 centrally administered SOEs had adopted a management system with a board of directors. Among them was the Xinxing Cathay International Group, a once unprofitable company which has since written a success story and even nudged into the Fortune 500 list.

In 2005, Xinxing Cathay was selected by the SASAC as a pilot company to adhere to a board of directors, while in 2014, it was again appointed to practice new systems of executive selection and recruitment, performance evaluation and salary management. From 2005 to 2014, the company witnessed an average annual increase of 33.17 percent in operating revenue, 19.88 percent in profits and 22.41 percent in total assets.

"In the past decade, Xinxing Cathay insisted on selecting and recruiting executives in a market-oriented way, and all its employees now have to retain their positions through competition," said Liu Mingzhong, President of Xinxing Cathay. He believes that the marketization of recruitment underpins corporate development and the rejuvenation of SOEs.

Opening the selection and recruitment of general managers to the market imposes pressures on the board of directors and executives to pursue healthy and rapid development. It also blazes a way for other reform measures, and stimulates the vigor and vitality of the company for future development, said Liu.

So far, Xinxing Cathay has recruited 386 senior managers, 10 of its 14 middle-level managers in its headquarters and 49 of its 55 ordinary management staff through the new systems of executive selection and recruitment.

However, the parent companies of many centrally administered SOEs are wholly state-owned and were registered in accordance with the Enterprise Law rather than the Corporation Law. The establishment and standardization of board of directors in these enterprises has to some extent broken the impression that wholly state-owned companies can go without the board of directors.

Moreover, maintaining checks and balances within the board of directors is integral to ensure correct decision making as well as its segmentation from direct execution. An advantage in standardizing boards of directors throughout SOEs comes in recruiting external people as directors and making sure that they account for more than half of the board. "In this way, the board of directors can maintain the balance of power better and optimize the decision-making mechanism of central SOEs," said Peng Jianguo, a research fellow from the research branch of SASAC.

"In the past, since all the directors were internal staff members, few of them dared to challenge the decisions made by the president. Now, before making decisions, the board has to carry out studies and investigations, prove the viability of its ideas, and fully exchange views with external directors," said Peng.

Copyedited by Bryan Michael Galvan 

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