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SCMP Reporter

'Big is beautiful' may be Beijing's strategy of nurturing domestic giants to compete with international rivals at home and abroad, but some now wonder if the policy could snuff out the very element Chinese industries most need: competition.

 Analysts - citing the fiasco of South Korea's chaebol conglomerates in the past year - said if big state enterprises became even larger, they might enjoy economies of scale at the expense of fleet-footedness.

 Beijing has been promoting the policy of 'grappling large ones and loosening the small ones' to concentrate reforms on big state-owned enterprises (SOEs) through mergers and acquisitions.

 The plan gained momentum recently, when Beijing announced the merger of Yizheng Chemical Fibre, the world's fourth-largest polyester maker, with three nearby chemical plants - Yangzi Petrochemical, Jinling Petrochemical and Nanjing Chemical Industrial - in Nanjing, Jiangsu province.

 The new entity will house the mainland's largest petrochemicals, chemical fibres and fertilisers manufacturing base, with work being divided between them to avoid overlapping production.

 The cross-ministry agreement - the four enterprises belong to different bureaucratic organisations - will provide a case study for SOE reform at the 15th Party Congress which opens tomorrow.

 The formation of conglomerates is an integral part of the strategic structural change of the economy, which has at its core revival of the moribund state sector.

 Many agree that the mainland's industries are fragmented and too weak to compete with foreign businesses at home, let alone overseas, but they wonder if the government-directed policy of forcing giants to gobble up other companies - strong or weak - will achieve the desired results.

 Credit Lyonnais Securities Asia economist Joe Zhang said the Chinese-style chaebol plan would enable Beijing to remove regulatory barriers and allow companies to merge and consolidate, regardless of their location and ownership.

 The mainland's economy was characterised by the dominance of small firms, owned and operated by more than 40 central government ministries and four different layers of regional governments - province, municipality, county and village.

 'One may think this structure is competitive and efficient. But the truth is that all the state-owned companies have their own captive markets protected by their respective parents which double as industry regulators in many cases,' Mr Zhang said.

 As good companies could not drive bad ones out of the market, they all suffered from diseconomies of scale and an inability to conduct meaningful research and development, he said.

 In 1995, super-large and large industrial enterprises made up only 0.08 per cent of the nation's total.

 Take the mainland's car manufacturing industry. There are about 250 manufacturers, but their combined output is less than half that of General Motors.

 Even one of its largest domestic breweries - Tsingtao Brewery - has less than 3 per cent of the market, which has about 3,000 breweries. The fragmented industry has led to high unit costs in the absence of economies of scale.

 Resources are also wasted due to the problem of overlapping production by large and small factories.

 'In China, there are several million companies. The government is not able to establish large conglomerates in every industry,' Mr Zhang said.

 'It will only set up about eight to 10 in sectors such as hi-tech and capital-intensive industries so that they can compete in the international market.'  In South Korea, the chaebols , helped by low-interest government loans, catapulted the once war-torn country to an international economic force in the past 40 years.

 Last year, South Korea's gross domestic product per capita was US$10,850, compared with China's $650.

 The chaebols , however, are not without shortcomings - over-expanded and excessively geared. They are increasingly seen as dinosaurs blocking the way of South Korea's development with their monopolistic power.

 The collusive ties between the government and the family controlled conglomerates also are sources of corruption.

 The mainland may view the conglomerates as an ideal solution for domestic industries to take on their international counterparts. However, nobody can overlook the fact that difficulties and problems can arise easily in the implementation process.

 Dresdner Kleinwort Benson Securities (Asia) economist Qu Hongbin said: 'My concern is whether this kind of government-created conglomerates will reduce competition. The Government is actually creating big companies which can easily dominate a specific sector. That's not very good to encourage competition, which is crucial to China's transition.'  Concern also was raised that the Government would intervene too much - whether the conglomerates were inheriting enterprises or they were able to decide in which industry they could invest or which firm they could buy.

 'It will be like a forced marriage that some good companies are forced to take over bad ones, or they are bundled together without synergies. That's something we have to watch out for,' Mr Qu said.

 Some mainland economists said being big was not equivalent to an increase in competitiveness.

 They urged continuous reforms on the structural system of enterprises in order to make them 'real' enterprises.

 One way was to introduce a shareholding system which hived off ownership from management.

 This allowed managers to have more autonomy in managing an enterprise.

 Managers would strive to enhance efficiency as they were subject to the scrutiny of shareholders, though the state would maintain the largest share for the time being.

 They also called on local and central governments to stay away from operations of enterprises which should be run in accordance with market forces.

 The mainland is pinning its hopes on the Yizheng merger to blaze a new trail for SOE reform.

 The chances of success will be greater if Beijing takes precautions to prevent enterprises being turned into heavy-footed dinosaurs.



Bloated giants may weigh down progress