Management in Chinese SOEs

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Management in Chinese SOEs

• Week 6

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Economic strength of SOEs

• State Owned Enterprises (SOEs) in China
• Numbered 11,000 in 1992
• 2.9 of all industrial enterprises
• 50 of Chinas industrial total value
• 67 of Chinas tax revenue

3
FDI Inflows to China
4
Reform pressure

• Management is under pressure to reform to meet
  changing environment
• But is effectively split between privatised
  sector SOEs
• The Open Door Policy of 1978
• Altered government policy towards SOEs
• Reform in 50s 60s alternated between
  centralized decentralized
• SOEs often subject to 2 systems
• The line central industrial ministry
• The block local government institutions

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SOE area of operations

• SOEs play a dominant role in
• Oil
• Telecommunications
• Aviation
• Power
• Steel

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Management traits

• Lack of co-ordination over enterprise goals
• Increasing bureaucracy
• Low levels of efficiency lack of accountability
• Increasing risk aversion
• Decision making reactions to instructions from
  government

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Distortions under central planning

• Under central planning markets for
• Production materials
• Capital
• Labour
• Technology
• No longer exist
• Support by soft budget constraints
• Little influence on inputs/outputs
• No concept of value creation

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Outcomes

• Misallocation of resources
• No price mechanism
• Lack of supply demand signals
• Leads to shortage economy
• Managers effectively government employees
• without managerial responsibility
• without developing the usual traits of managers
• Only slightly differentiated from other levels in
  pay terms

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Two stage reform period

• Aivazian, et al (2004)
• 1984 to 1993 first stage of the SOE reform period
• Government gave SOEs responsibility for dealing
  with their own gains and losses in the market
• Use of incentive contracts to govern the
  relationship between the State and SOE managers
• 1993 and ongoing
• Characterized by the conversion of SOE governance
  into that of a modern corporate governance
  structure

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Productivity improvements

• SOE productivity improved significantly after
  1978 due to introduction of some basic incentives
  schemes
• (Gabriel (2000) disputes this)
• Schemes gave firms more autonomy and allowed them
  to retain more of their profits
• Incentives of SOE workers strengthened via bonus
  payments and differing work contracts
• helped raise workers incomes and firms
  investments
• increased in the Chinese managerial labour market
  by linking managerial turnover to their
  performance

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The Sichuan Experiment

• In 1979 Sichuan Province
• Managers in 84 industrial enterprises given
  partial authority over
• equipment materials purchase
• labour hiring assignment
• pricing
• Allowed to keep part of surplus as incentive
• Extended to generalized policy

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Western governance reforms

• 1990s SOEs moved to marketization
  corporatization
• Many SOEs have become corporatized with State as
  major shareholder
• Zhang et al (2004) argue
• No longer sufficient for SOEs to have traditional
  organizational structure
• Enterprises must continuously re-examine
  employees skills, knowledge cognitive
  abilities to guarantee they keep up with
  competitive environment

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Adaptation failure

• In SOEs is failure to adapt..
• at management level or
• at worker level?
• Studies suggest Chinese workforce does not appear
  ready to function in market environment
• Difficulties in working outside of job
  description
• Risk averse
• what about JVs!!

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Effects of Corporatization

• Government attempts at corporatization to improve
  performance
• Zhang et al (2004) hypothesize
• Listed SOEs do better than unlisted in terms of
  learning practices and performance results
• Service oriented firms do better than
  manufacturing
• They embed their hypotheses in context of a
  learning organisation
• An organisation that learns and encourages
  learning among its people
• It promotes exchange of information between
  employees hence creating a more knowledgeable
  workforce
• This produces a very flexible organisation where
  people will accept and adapt to new ideas and
  changes through a shared vision

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Watkins and Marsick

• Watkins and Marsick (1993) in Sculpting the
  Learning Organisation define the learning
  organization as one that
• captures
• shares and
• uses knowledge to change the way the organization
  responds to challenges

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Theoretical Framework

• Central to this theoretical framework of the
  learning organization are
• seven complementary action imperatives
• create continuous learning opportunities
  (Continuous Learning)
• promote inquiry and dialogue (Dialogue and
  Inquiry)
• encourage collaboration and team learning (Team
  Learning)
• empower people toward a collective vision
  (Empowerment)
• establish systems to capture and share learning
  (Embedded System)
• connect the organization to its environment
  (System Connection)
• provide strategic leadership for learning
  (Strategic Leadership)

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Outcomes

• The outcomes were that listed companies did not
  perform significantly better overall
• Indeed on Team Learning Continuous Learning
  unlisted SOEs performed significantly better
• Companies in the service industry outperform
  manufacturing companies
• This suggests that
• Corporatization as a means of improving
  management practice was largely ineffective
• Manufacturing SOEs maintain a management
  mentality less open to adaptation than service
  industries
• There would appear to be (at least) an inherent
  capability to change
• But breaking of state-management links and
• The mentality that it creates is vital

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Change motivation

• Fang Hall (2004) point to motivation to change
• Without motivation change will not happen
• They consider that management style and
  motivation cannot be separated from
  organisational context
• If this is so the organisational context in SOEs
  needs to change internally before real change can
  occur

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SOE management culture

• Many managers Party appointed
• Feel they have triple responsibility
• Entrepreneur
• Government official
• Chief of the SOE community
• Managers most concerned with having good
  relations with superiors government
• Lack of correlation between managers compensation
  enterprise performance over-reliance on
  evaluations by government officials on manager
  performance

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Cultural context

• Traditional management (Fang Hall) is Confucian
  based
• Founded on
• harmony
• hierarchy
• humanness
• Respect for hierarchy is 2 dimensional
• Relationships
• enterprise-state
• inter-enterprise

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Chinese culture defined (Hofstede)

• High power distance
• indicates that inequalities of power and wealth
  have been allowed to grow within the society.
  These societies are more likely to follow a caste
  system that does not allow significant upward
  mobility of its citizens
• High uncertainty avoidance
• indicates the country has a low tolerance for
  uncertainty and ambiguity. This creates a
  rule-oriented society that institutes laws,
  rules, regulations, and controls in order to
  reduce the amount of uncertainty

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Chinese culture defined (Hofstede)

• Low individualism
• typifies societies of a more collectivist nature
  with close ties between individuals. These
  cultures reinforce extended families and
  collectives where everyone takes responsibility
  for fellow members of their group
• Opposite to optimal conditions for organisational
  change
• Therefore Motivation to change is weak

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Management stagnation

• Locked into standard practices
• Protection sideways moves for poor evaluation
• Good relations through other expenses accounts
• ----suggests resistant/bureaucratic/unresponsive
  system
• ---modelled on Korean Chaebol Japanese Keiretsu

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The Iron Rice Bowl

• SOEs have grown from an ideological concept that
  emphasises the states guidance in all affairs
• no concept of an external labour market
• employees were assigned to enterprises by the
  state under the iron rice bowl employment system
• permanent employment
• job security
• cradle-to-grave welfare coverage
• Recruitment and allocation to firms
• issue of employment permits
• transfer and dismissal of employees
• all subject to the official approval of state
  personnel departments

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Effects of the iron rice bowl

• Leads to
• Overstaffing
• Featherbedding - enterprises were overstaffed and
  there were low levels of productivity.
• Job for life tradition low labour turnover and
  therefore traditionally low labour market fluidity

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Case study in SOE

• Lewis (2002) carried out a study of personnel
  practice at Sinoelectronics
• SOE but part-owned by foreign investor
• Manufacturing consumer electronics mostly
  domestic market
• 5 plants
• 7,000 employees
• 80 production 20 management

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Sinoelectronics

• Employee involvement at Sinoelectronics was very
  weak.
• Trade union dealt with welfare not pay
  conditions
• Web-based bulletin board for staff comments set
  up
• mostly critical postings attacking senior
  management
• alleged abuse of position
• claiming spurious expenses
• finding jobs for friends family

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Sinoelectronics

• Managers were thought to be poor at
  inter-personal communication
• Upward and downward communication was difficult
  or non-existent
• There was a general acceptance of some element of
  corrupt commercial practice in Chinese commercial
  life
• There is evidence of over-staffing and little
  expertise in staff selection
• Managers were also constrained by a pay budget
  which emphasises welfare benefits
• Weaknesses were found in communication between
  managers and employees
• The lack of expertise in HR management as a
  result of the legacy of the iron rice bowl
  employment system

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No win situation

• Mitsuhashi et al. (2000) sum up the practical
  implications for Chinese enterprises
• the over-45s have experience but insufficient
  skill, the 25-45s lack both skills and experience
  and the under-25s have potential skills but no
  experience
• They argue for
• need for performance management involving
  individual job objectives, performance targets
  and measures, regular feedback on progress and
  individual training and career development and
  reward outcomes

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Additional studies

• Wei et al (2003) examined profitability in 208
  privatised companies and found improvements in
  performance in those where state ownership was
  less than 50
• Zhao Zhu (2004) broad study of labour force
  characteristics
• Although there is evidence of continuing
  political selection
• Promotion processes have become increasingly
  rationalized
• Leading to
• Increasing role of education
• Noticeable age restrictions
• Active replacement of old bureaucrats
• Great impacts on vacancy-chain effects on
  promotion patterns
• But processes is slower in state sector

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Summary position

• There is an inherent problem for SOE management
• Ideologically SOE represent the state
• If SOEs are radically westernised does this
  undermine the role of the state?
• There seems to be general theoretical practical
  consensus that SOE management practice is overly
  formalised, unresponsive rent-seeking

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Opposite views?

• Su Yi (2001) suggested that WTO would create an
  organisational conflict
• The need to be competitive globally
• Creating clash of corporate ideology (US v
  Chinese)
• The article suggests that
• With time the difference between the 2 styles
  will diminish through a normal maturing process
• The question of western and Chinese style,
  the SOE and non-SOE will gradually fade away.

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Toward a new management?

• Does the influence of competition create a hybrid
  management type part Chinese/part-Western?
• Is it an applicable concept in SOEs?
• Warner (1995) referred to HRM with Chinese
  characteristics

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Cost cutting in staff levels

• Benson Zhu (1999) case studies of 6 Shanghai
  SOEs highlight tension between state intentions
  and state directives
• E.g. need to be profitable leads to reducing
  staff levels (xia gang)
• Official unemployment rate in 1998 was 4
• Benson Zhu estimate 21 - 23
• Difficulty of absorbing workforce with weak
  labour mobility
• Lack of good social security system

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Unclear orders

• Ambivalent signals to management
• Provision of Settlement of Surplus Labour
• Gives guidelines to SOEs that want to reduce
  their labour surplus
• But requires them to
• retrain existing employees for any new positions
• or allow employees to take extended leave
• find or create suitable jobs for redundant workers