Why the Transformation of State-owned Chinese Companies Will Take Time

China’s ‘new infrastructure’ plan has become a buzzword for attracting more players and investments. Even as plans are afoot to attract new companies, traditional state-owned companies, more popularly known as Public Sector Enterprises (PSEs), are also keen to expand their role, so that they can catch up with the wave.

Since China’s reform and opening-up of the economy, CCP (Chinese Communist Party) has been striving to gradually allow the markets to play a decisive role in resource allocation, the situation in China’s state-owned companies is much more complex. Some big state-owned enterprises are entering the ICT market or considering to enter the market but things are not going well. Case in point – the acquisition of Global Switch by a Chinese consortium led by Chinese steel maker, Jiangsu Sha Steel Group.

Traditional Industry Faces Challenges

In the 2019 annual competitiveness ranking by World Steel Dynamics, five Chinese steel companies were among the top 50 companies.

The top Chinese steel maker is China Baowu’s Baoshan Iron and Steel Co Ltd (Bao Steel) which was ranked at No 15. It was followed by China Steel in Taiwan at 22, Anshan Iron and Steel Group Co Ltd (An Steel) at 24, Maanshan Iron and Steel Co Ltd (Ma’gang/ Ma Steel) at 31, and Jiangsu Shagang Co Ltd (Sha’gang/ Sha Steel) at 34.

As a key fundamental industry of the national economy, the steel industry, like other traditional industries, is facing challenges such as overcapacity, cost reduction, efficiency increase, energy conservation and emission reduction. Digitalization is the only way for the transformation and upgrade of the steel industry.

Bao Steel, the leader, is the first to have led the consolidation in the Chinese steel sector in the last decade, and has consistently expanded output through several mergers and acquisitions. In August 2000, Baosteel established a subsidiary called Bsteel which is fully owned by Baosteel to delegate its own e-business implementation and maintenance to a separate business unit. At the end of 2006, Bsteel transferred its ICT coding and development business to a similar company fully owned by Baosteel: Baosight (/Bao’Xin Soft). Baosight focuses on Baosteel’s internal ICT platform, ERP, production specific applications, ICT infrastructure operations and user support activities.

Now, Baosight has a bunch of data center facilities. Backed by the Baosteel group, Baosight enjoys significantly resources and cost discount, benefitting by the parent company’s extensive networks and partnerships. From October 2013, Baosight has completed the construction of Baozhiyun Phase I/II/III IDC project through a series of equity financing and self-financing in Baoshan District, Shanghai. The largest data center industrial base in Shanghai focuses mainly in wholesale business and then service outsourcing business (including maintenance and repair of information system, rail transit vehicle system control components, cloud computing operation service, IDC operation service) with an industrial scale of nearly 20,000 cabinets in 2018. The operating income has reached 1.29 billion Yuan at that time. In 2019, the fourth phase of Baozhiyun plans to add 9,000 cabinets so that the four phases of Baozhiyun reached total 27,500 cabinets. Besides, in 2019, the Wuhan Iron and Steel Big Data Industrial Park is set to be built with 18,000 cabinets in the following two years (Phase I: 2216 cabinets in 2019).

State-owned companies in steel industry has boosted a lot of initiatives to heighten its corporate competitiveness in the age of ‘big data’, steer its business direction to meet the market demands for information, and optimize the synergy between the traditional industry of steel manufacturing and the new industry of information technology. Despite the success of the transformation of Bao Steel, the other four Chinese steel giants are not going well when exploring new business.

Being a well-established enterprise in the steel manufacturing industry, Shagang (Sha Steel) has also committed to a business diversification to data and information technology since 2017. It became the controlling shareholder of Global Switch in 2019. Recently, the owners of Global Switch are exploring a sale that could value the London-based data center operator at 8 billion pounds ($10.9 billion) or more.

Challenges and Dilemma

From the time Deng Xiaoping unleashed market reforms in an effort to increase investments in China, the onus was always on the government to whole heartedly lead the investment symphony. The scenario continues till this date. Recently, China has begun rolling out its ‘new infrastructure’ campaign all around the nation, which provides an opportunity for all market players. Compared with the traditional infrastructure, the main force for the investment of the ‘new infrastructure’ are market players instead of the government. Favorable policies have been issued not only for domestic investors but also for foreign ones.

Now, China is working on expanding and opening up policies to foreign investment, even more.

Under the ‘New Infrastructure’ push, it seems that the strengths of state-owned companies are weakened (although still have great advantages especially in resources) and they are brought to the same starting point in the race with other players. The difference is that they have their own responsibilities and path to step forward.

‘New infrastructure’ is not a strong stimulus, but a new economic growth engine for China in the future, which also serves as the most active and productive driver that is full of opportunities for productivity factor optimization and potential improvement. As the new infrastructure is closely connected with the development of new technology, all state-owned enterprises need to achieve their industrial upgrading before they explore new fields.

Besides, in terms of investment, it involves new form to attract public investments. In the process of promoting the ‘new infrastructure construction’, more attention will be paid to explore the innovation of investment and financing mechanism, so as to further stimulate the enthusiasm of private investment, foreseeably through Real Estate Investment Trusts or REITs.

Over years of development, the marginal utility and earnings of the traditional infrastructure decreases progressively. The ‘new infrastructure’, backed by technological innovation, will create jobs and increase earnings in a short period, and facilitate structural transformation and upgrading, thereby bringing along a sound economic development in the mid-and-long term.

Although the role of State-owned companies has been proved to be important in this economy as they have traditionally assisted the government in reforms, they face the challenges they never met before. Not to mention the state is encouraged to divest from other industries by decreasing its ownership.

With the geopolitical situation entering another new normal with the election of Joe Biden and the US President and a pandemic that still continues to hover, investment flows in the future will strongly depend on how age-old enterprises adapt in the post-COVID world. The sooner State enterprises realise this fact, the better.

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