Dealing with State-owned Enterprises & State Capitalism*

Transcription

1 Dealing with State-owned Enterprises & State Capitalism* Trends and Lessons Learned * Results/Insights based on joint research project between Prof. Roger Moser, Mr. Pascal Unger and Josef Mondl, University of St.Gallen Prof. Dr. Roger Moser / Josef Mondl May 2014, University of St.Gallen, Switzerland

2 Page 2 Session objectives. Introduction Understanding: What is state-capitalism, how do stateowned enterprises work and why do they matter? Discussion: How different are state-owned enterprises (SOEs) from privately owned firms? Insights: What are key issues when dealing with SOEs? Lessons Learned: How to deal with SOEs in China what do experienced managers recommend?

3 Page 3 Introduction State Capitalism and State-owned Enterprises What are we talking about? State Capitalism An economic system in which governments manipulate market outcomes for political purposes. Governments embrace state capitalism because it serves political as well as economic purposes not because it s the most efficient means of generating prosperity. Ian Bremmer, 2009 Four primary actors of state capitalism National Oil Companies (NOCs) Sovereign Wealth Funds (SWFs) Privately Owned National Champions (NCs) State-owned Enterprises (SOEs) Source: Kremer, Harvard Business Review, 2009

4 Page 4 The influence of state capitalism on the markets in emerging economies is substantial. Introduction

5 Page 5 Back-up: The influence of State-owned Enterprises in various industries. Introduction

6 Page 6 State-owned enterprises in India - What are the key issues? Concept In India, State-owned Enterprises are labeled as Public Sector Undertakings (PSUs) Multiple principals with multiple objectives Delays in decision making Compensation concerns, corruption and lack of transparency Lack of accountability Lack of autonomy in decision making Career decisions of PSU managers lie with investigation agencies PSUs and their administrators have mostly grown up in the license raj and have never worked in a competitive environment.

7 Page 7 Concept Public Sector Undertakings in India Challenges for Western companies dealing with them. Near impossibility of identifying the actual decision maker(s) Lack of motivation to do business with Western companies No clear company strategy to build your own promotion strategy upon Endless bureaucratic hurdles to deal with Widespread corruption and lack of transparency No reliability with respect to schedules / time plans Western companies need to have local expertise and personal networks with PSU managers to more or less efficiently deal with Public Sector Undertakings in India.

8 Page 8 Concept State-owned enterprises in China - What are the key issues? No separation of ownership and control Decentralization of decision making and lack of autonomy in decision making Strong government influence and involvement No clear strategic focus Guanxi (network) entanglement within SOE Economic performance not major objective SOEs and their managers are not only culturally different from a national culture perspective but even from a company culture perspective (from a Western profit-oriented company perspective).

9 Page 9 State-owned enterprises in China - Challenges for Western companies dealing with them. Concept Near impossibility of identifying the actual decision maker(s) Reluctance of individual managers in SOEs to take on responsibility Relationship building (Guanxi) is essential to do business in China even more so with SOEs Causing the loss of Mianxi with one SOE manager might lead to endangering the whole business in China The strategy of a SOE can be subject to sudden changes ultimately the party decides Shareholder value maximization is not the ultimate goal of a SOE and its managers

10 Page 10 Concept State-owned enterprises in China Good practice recommendations (1/2). Be well informed about all potential decision makers (and their backgrounds) before getting into contact / negotiations. Be well informed about the political entanglements of the SOE and the government s priorities, policies, plans. Avoid stereotyping Chinese SOEs. Do not simply rely on arguments with respect to the economic and/or technical benefits of your proposal. Put extensive considerations into all types of potential risks involved for the decision makers from the SOE. Connect the potential benefits of your proposal with the career paths of the decision makers from the SOE.

11 Page 11 Concept State-owned enterprises in China Good practice recommendations (2/2). Be careful when trying to exert influence on the supervisors of the SOE. Face-to-face meetings is a must in relationship building in China but has its own traps with respect to dealing with SOEs. Do not risk trustful relationships whenever possible. Always ask why? when negotiating with Chinese SOEs but apply the necessary caution. Find an appropriate middle man / intermediary. Be prepared for after-contract signing negotiations. Do not loose patience.

12 Page 12 Exercise From theory to practice dealing with critical situations when doing business with SOEs in China.

13 Page 13 Background Information Introduction: The Chinese (SOE) mindset in a nutshell (1/2). 5 Core Elements of Chinese Thinking Chinese Language Mianzi (Face) Law of Yin & Yang Midstream Living Chinese Connectedness

14 Page 14 Background Information Introduction: The Chinese (SOE) mindset in a nutshell (2/2). Chinese Leadership Top-down Approach «Make no mistake who is the boss» Micro-management is common Need-to-know based communication Work Ethics The more you do, the more likely you will make a mistake Follow orders regardless Get in (the right) line The more you say, the worse, too!

15 Page 15 Framework: 6 Issues when dealing with SOEs Economic Considerations Network (Development) Challenges Product Adaptation/ Promotion Doing Business with SOEs Cultural Differences - Corporate Level - Individual Level Political Interferences Regulatory Issues/Law Enforcement

16 Page 16 Framework: Importance of each dimension getting it right the first time. Analysis

17 Page 17 Framework: Importance of each dimension How to get into business with SOEs. Analysis

18 Page 18 Framework: Importance of each dimension Difficulty to Preventatively Preparing the Situation. Analysis

19 Page 19 Business Development Process Framework: How to deal with SOEs from economic reasoning to political problems. Economic Dimension: What are the key objectives of SOEs? Network Dimension: How to get in contact with senior executives of SOEs? Cultural Dimension: What is the mindset of SOE managers? Political Dimension: Which role does the government play in decision making?

20 Page 20 Analysis: Economic Dimension. Business Development Process Objective: «To understand the role of profitability seeking in deals with SOEs and what other factors are also important.» Situation: «A Chinese SOE has similar business proposals from a Western company and a Chinese private company. Despite the Western offer promising higher financial profits at lower operational risks for the SOE, the Chinese private company wins the deal.» 1. What are the issues in this situation from your perspective? 2. How would you (re)act as manager of the Western Enterprise?

21 Page 21 Business Development Process Analysis: Economic Dimension Issues Identification. 1. What are the issues in this situation from your perspective? Stronger personal and business relationships to the Chinese private company. Increasing nationalism («buy Chinese») trend (potentially supported by pressure from the government). Cultural differences as deal breaker. Lower risks involved when doing business with Chinese private firms. Better incentives and potential bribes from Chinese private firms.

22 Page 22 Analysis: Economic Dimension (Re)action. Business Development Process 2. How would you (re)act as manager of the Western Enterprise? Find out what the real reason behind the decision was (lessons learned for the next offer). Re-approach the management and indicate again the benefits for the SOEs and the personal career advancements of the senior executives. Potentially approach the parent company of the SOE. Highlight the global opportunity provided through the collaboration with a Western company vs. the national opportunity provided by a Chinese private firm. Keep improving the relationship and think long-term.

23 Page 23 Analysis: Network Dimension. Business Development Process Objective: «To understand how Western companies efficiently and effectively get into and maintain the relevant networks to meet SOE executives and do business successfully.» Situation: «The CEO of a Western company wants to start doing business in China with a Chinese SOE and wonders how to best get in touch with senior executives at Chinese SOEs in the relevant industry.» 1. What are the issues in this situation from your perspective? 2. How would you (re)act as manager of the Western Enterprise?

24 Page 24 Business Development Process Analysis: Network Dimension Issues Identification. 1. What are the issues in this situation from your perspective? Executives of Chinese SOEs are very busy and have no pressing need to do business with Western companies. It is very important to access the right level/the right people at the SOE but it is very difficult to find out what it is/who they are. The right introduction into the network is critical. No network no relationships no business. Usually the Western approach is far too direct.

25 Page 25 Analysis: Network Dimension (Re)action. Business Development Process 2. How would you (re)act as manager of the Western Enterprise? Collect as much information as possible upfront. Use the network of other Western companies, Chambers of Commerce, Foreign Trade Commisions and the Embassy OR hire a network Go in through the SOE s middle management and involve your own CEO once the top management at the SOE can be accessed. Use a senior Chinese translator. Make sure to follow Chinese standards during first meetings with SOE senior executives.

26 Page 26 Analysis: Cultural Dimension (Corporate Level). Business Development Process Objective: «To understand which business culture aspects have what kind of effect on the strategic interests of a SOE (apart from P&L focus).» Situation: «A Western company has been negotiating with the executives of a Chinese SOE for a while. The product offered by the Western company would clearly strengthen the competitive position of the SOE in an increasingly competitive industry segment. However, the discussions with the SOE are constantly delayed and no decisions are made.» 1. What are the issues in this situation from your perspective? 2. How would you (re)act as manager of the Western company?

27 Page 27 Business Development Process Analysis: Cultural Dimension (Corporate Level) Issues Identification. 1. What are the issues in this situation from your perspective? Deal conditions are causing the delays Incentives for negotiation partners are insufficient or negotiation partners are not the decision makers Cultural differences are standing in the way SOE is generally not interested or has other options

28 Page 28 Business Development Process Analysis: Cultural Dimension (Corporate Level) (Re)action. 2. How would you (re)act as manager of the Western company? Use contacts of people in your network Intensify communication Understand and address executives personal interests Step back a bit and wait while working on relationship building Identify and focus on the actual decision makers Have a Plan B ready

29 Page 29 Analysis: Political Dimension. Business Development Process Objective: «To understand how political entities can exert influence on a SOE and to what extent.» Situation: «Towards the end of the negotiation process with a Chinese SOE, the senior executives say that they need 3 ministries to sign off on the deal before they can sign it, and that they are not sure whether all of them are willing to support it.» 1. What are the issues in this situation from your perspective? 2. How would you (re)act as manager of the Western Enterprise?

30 Page 30 Analysis: Political Dimension Issues Identification. Business Development Process 1. What are the issues in this situation from your perspective? This does not have to be an issue as it is often the case. Can be a test to see whether the Western company is willing and able to use its network in China to support the deal. Potential negotiation tactic to improve the deal conditions. Excuse for an easy way out.

31 Page 31 Analysis: Political Dimension (Re)action. Business Development Process 2. How would you (re)act as manager of the Western Enterprise? Seek advice from trusted sources. Proactively ask early in the negotiation process which ministries will have to give their approval later. Have an experienced Chinese lawyer by your side with good local connections. Be patient and do not rush into renegotiations. Offer the SOE support if deemed appropriate.

32 Page 32 Lessons learned: Best practice recommendations for Western companies dealing with Chinese SOEs. Summary Preparation: Collect as much information as possible upfront and put extensive resources into the analysis it helps to understand the different motivations of the key decision makers. Access: Go in through the middle management it helps to turn them into your ambassadors therefore, make gift giving as transparent as possible and be as generous as possible within corporate guidelines and reconsider business relationship if expectations are out of proportion. Potentially involve an unrelated third party to do the payments. Promotion: Increase the status of your product/service it helps to sign a technology license and ask for high tech enterprise status. Finalizing: Proactively ask early in the negotiations which ministries will have to give their approval later on. In sum, creating mutual vulnerability through overlapping networks forms the core of doing business with State-owned Enterprises.

33 Page 33 Summary Lessons learned: Global Account Managers need to focus on creating overlapping networks with SOE executives as customers or complements. Economic Considerations Network (Development) Challenges Product Adaptation/ Promotion Importance of Mianzi Efficient Positioning Understanding State Capitalism Overlapping Networks / Mutual Vulnerability Risk Management Chinese Mindset Reducing Ambiguity & Uncertainty Cultural Differences - Corporate Level - Individual Level Political Interferences Regulatory Issues/Law Enforcement

34 Page 34 Summary 1 Summary: SOEs pose special challenges for Western companies especially for Account Managers

35 Page 35 Back-up: Framework Summary Cultural Dimension (Corporate Level). What are the issues in this situation? Your reaction as manager of a Western company?

36 Page 36 Back-up: Framework Summary Cultural Dimension (Individual Level 1). What are the issues in this situation? Your reaction as manager of a Western company?

37 Page 37 Back-up: Framework Summary Cultural Dimension (Individual Level II). What are the issues in this situation? Your reaction as manager of a Western company?

38 Page 38 Back-up: Framework Summary Economic Dimension. What are the issues in this situation? Your reaction as manager of a Western company?

39 Page 39 Back-up: Framework Summary Network Dimension. What are the issues in this situation? Your reaction as manager of a Western company?

40 Page 40 Back-up: Framework Summary Political Dimension (1/2). What are the issues in this situation? Your reaction as manager of a Western company?

41 Page 41 Back-up: Framework Summary Political Dimension (2/2). What are the issues in this situation? Your reaction as manager of a Western company?

42 Page 42 Back-up: Framework Summary Product Dimension. What are the issues in this situation? Your reaction as manager of a Western company?

43 Page 43 Back-up: Framework Summary Regulatory Dimension. What are the issues in this situation? Your reaction as manager of a Western company?