15 years ago, Beijing made an important strategic decision about its sprawling aviation manufacturing monopoly, AVIC.
Dissatisfied with AVIC's slothfulness, and keen to promote competition, the state's planners split the company in half, creating two firms. Unimaginatively named AVIC-1 and AVIC-2, these entities continued to stumble, and in 2008 a decision was made to put them back together again. Today, the AVIC monopoly reigns once more, still ungainly and inefficient (although Beijing did make the sensible move to hive off the commercial airliner business into COMAC, where AVIC's influence has been diluted).
The AVIC restructurings didn't go well, in either direction. Is the experience about to be repeated in other strategic industries?
People close to the National Development and Reform Commission (NDRC) have let it be known that the centrally-owned portfolio of 112 SOEs – the backbone of China's state-capitalist economy – may be pared back to 30-50 companies through consolidation. China's two major locomotive manufacturers, CNR and CSR (the original SOE was split into North and South respectively), have been ordered to merge again, reportedly out of cabinet-level frustration that the two were over-competing against each other in overseas markets.
The re-marriage appears to have been under compulsion; no details have been forthcoming since the announcement on 30 December 2014, and CNR and CSR are notorious for their mutual hostility. Their managers are unenthusiastic about merging with the enemy. This is a shotgun wedding. As with AVIC, the process will be ugly.
Recently there have been reports that Beijing may recombine its three national oil companies. The reports have been greeted with disbelief by analysts, and denial by the companies themselves. Some investors, admittedly, would welcome the return of monopolistic profits. The logic of merging PetroChina (strong in onshore oil and gas), Sinopec (downstream refining and marketing) and CNOOC (offshore oil) supposedly is to create a mega-integrated petroleum firm, rather like the old CNPC but better equipped to compete overseas, i.e., 'we want our own ExxonMobil.'
If the SOE consolidation story is true, we might also see the re-melding of China Telecom and China Unicom back into something resembling their predecessor, the old fixed-line monopoly carrier. Years of painful separation would be undone. And so it would go, back to the future, for all of China's strategic industries (shipbuilding and shipping have also been mentioned) in the name of economic reform.
Tellingly, the explanation given by NDRC sources is that re-monopolisation will reduce overlap and replication: 'they're increasingly fighting among each other. That has led to lots of waste and inefficiency.' But 'each soldier fighting his own war' is exactly what happens in competitive markets.
Overlooking this reality, central planners are reaching back to their Soviet roots in seeking the unicorn of 'efficient monopolism.' They like the outcomes of capitalism, but they are still grasping for state-centric relevance. They are jealous of multinational companies and the dominant positions they hold globally. They admire the unexpected dominance of local private companies in new sectors like the internet. And they know that SOEs don't play well together and gorge on capital to over-build. In some cases, like steel, SOEs have openly defied orders to consolidate. The planners are frustrated that truly private actors are actually more coordinated. These bureaucrats, determined to cure the self-harm of overcapacity, are reaching for their shotguns to reverse years of competitive separation.
This is a mistake. Putting two or three mediocre businesses together seldom makes a good one.
Unless there are savage cuts to management ranks, the only result will be higher prices for consumers and thus a deadweight loss for the economy as a whole. If the market is to play a 'decisive role', as the administration has promised, competition, not consolidation, is the way to weed out inefficient capacity. If the Government is truly worried about overeager rivalry overseas, there are organisational alternatives (like joint ventures) to ensure cooperation.
Beijing acts vigorously against foreign monopolists, but it appears to take a contrary attitude to its own cartels.
Re-monopolisation, if it occurs, would be the third major enterprise reform measure that Xi Jinping's team has proposed. The first reform is the attempt to separate financially the Party's governance and executive management, aided by a brutal anti-graft campaign. This is popular and necessary, but it will be exceptionally difficult to unbind the incestuous links between the state's pure 'guardians' and the profit-seeking 'merchants'. Moreover it will be hard to attract talent when the message is 'you'll get nothing and like it', as one analyst puts it. The second reform is the promotion of 'mixed ownership', apparently based on Xi's own observations in Zhejiang. He admires the 'minben' businesses of the province which interweave private and government money. Geely Automobile might be a successful example, but there are other sectors like solar and shipbuilding where state support of entrepreneurs has created an industrial mess.
Even allowing for China's commercial exceptionalism, these two initial reforms will be challenging. They may even be contradictory: attracting private capital into sectors undergoing unpredictable corruption purges will be tough. This third step, cajoling SOEs to form giant national conglomerates, while still expecting private capital to play a decisive role in industry, is another dead-end.
Photo courtesy of Flickr user 2 dogs.