Why Aren't Private Enterprises Growing?

Issue 485, September 6
Translated by Tang Xiangyang
Original article: [Chinese] 

August 29, the All-China Federation of Industry and Commerce released a list of “Chinese Top 500 Private Enterprises (2010)”, which indicated that the total profits of the top 500 private enterprises in 2009 are still less than the total profits of PetroChina and Sinopec. Additionally, the average profit ratio of the former is only 4.6 percent, far less than that of the latter, which is 16 percent. So, after years of development, why haven’t private enterprises grown?

Industrial entrance barriers are the biggest reason. Objectively speaking, enterprises in the energy sector, financial sector, and the telecommunication field have a decent chance of becoming industrial giants. This is evidenced by the enterprises listed by the “World’s Top 500 Enterprises” and the “Chinese Top 500 Private Enterprises” in recent years.

Industrial entrance barriers have long been a problem, and they are one of the more trying obstacles to the growth of China’s market economy. Private enterprises have hoped to enter these industrial sectors for many years, but they have never been permitted to do so. When the central government issued the 36 Guidelines to Promote Private Economy in 2005 it was widely lauded. But private sector development in the following years has been disappointing. The four trillion yuan stimulus package issued by the central government in 2009 roused debate around “state advancements at the expense of the private enterprises”. Several months ago the central government issued a new version of the “36 Guidelines” to encourage the private economy. But the new guidelines have met with lukewarm reception due to the previous disappointments.

As one guest of the Private Enterprises Pavilion of the World Expo stated, private enterprises have encountered many visible barriers in the past. With the “36 Guidelines”, the barriers have been removed in theory, but they are still present in reality. The “36 Guidelines” has actually made it impossible for the public to demand for the removal of de facto restrictions because they are absent on paper. This has resulted in more difficulties for private enterprises.

Another obstacle to the development of private enterprises is the uneven cost of resources among state-owned enterprises and their private counterparts. Two days after the publication of the Chinese Top 500 Private Enterprises, the All-China Federation of Industry and Commerce released a report comparing the conditions of state-owned enterprises and their private counterparts. The report shows that state-owned enterprises can acquire land, mining resources and a communications license at very low prices or for free, while private enterprises have no choice but to buy them from the government or on the market.

For example, PetroChina has purchased 42,476 plots of land at a price of only 1.75 yuan per square meter. Additionally, the company is able to access China’s oil resources through a comparatively low royalty rate, but sells its products at a price equal to the international market.

Another example is China Mobile, a company that uses the nation’s telecommunication channels for free. This past May, three Indian companies paid the Indian Government 14.6 billion US Dollars for a 3G license, based on India’s figures, a 3G license in China should be sold for 50 billion US Dollars.

Looking at the current competitiveness of private enterprises, if they had access to cheap resources and can sell their products at the same price as state-owned monopolies, private enterprises would outperform their state-owned counterparts.

But barred from entering state-dominated industrial sectors, private enterprises, if they want to grow, not only have to outperform state-owned giants, but also foreign competitors like Wal-Mart and Hewlett-Packard. This environment is much more complicated than anything the international companies have ever experienced.

Private enterprises have been living in an intensely competitive environment and things are getting worse. State-owned enterprises have cheap resources and their close relationship with governmental agencies makes it difficult for private enterprises to compete. Private enterprises have to continuously negotiate government authority and company interests to compete with state-owned enterprises. This has increased the cost of running a private enterprise.

Aside from external pressures, private enterprises are also facing internal problems. Judging from the Gome Electronics battle, we see the importance of proper handling in the relationship between founder and manager. Mismanagement and radical strategies have already led companies such as DeLong into bankruptcy. Currently, a large number of private enterprises who have earned a fortune in earlier years are now facing the problem of selecting successors as their founders retire.

It has not been easy for private enterprises over the past thirty years. They need time to develop. But if we can implement policy aimed at encouraging the market economy, break through the system of industrial entrance barriers and give equal access to natural resources, private industries will grow and they will naturally outperform state-owned enterprises.

This article was edited by Rose Scobie and Ruoji Tang