The very model of a modern Asian company?
China is getting ready for a substantial wave of privatisation of state-owned enterprises. The biggest centrally controlled state companies remain off-limits. But many firms controlled by provincial and local governments will finally go on the block, as Beijing clears some of the last bureaucratic obstacles. In recent months central government officials have even begun using the term siyouhua (privatisation), a previously taboo word.
Who will be the biggest beneficiaries? One obvious answer is privately owned domestic investment companies, which may try to buy up groups of companies and attempt to reassemble their assets in more profitable combinations. Deals made over the next few years could lay the foundations of the dominant Chinese conglomerates of the future.
The prototype for such a Chinese-style conglomerate is D'long, a Shanghai-based investment firm that now ranks as one of the country's biggest private companies, with 15,000 employees and annual revenues of US$4 billion. The company controls majority stakes in five listed companies, minority stakes in several others, and has investments in hundreds of unlisted private companies. D'long was founded in Urumqi in the mid-1980s by chairman Tang Wanli and his three brothers. Their first business was photo film processing, but they quickly diversified into trading flour, noodles and personal computers, and began investing in service and manufacturing ventures ranging from entertainment to food processing.
Agriculture-related business is a major interest: group companies now control dominant positions in several regional flour markets, and produce 85 per cent of China's tomato paste. But D'long's reach extends well beyond that: nearly half its revenue stems from financial services, and it also has a variety of manufacturing investments. D'long's apparent lack of industry focus has led many analysts to predict that it and other diversified Chinese companies will eventually crumble because of an inability to manage their disparate operations. But research by Harvard Business School professors Tarun Khanna and Krishna Palepu suggests that the conglomerate may be the very model of a modern Asian company. The largest and best-run companies in many Asian countries are conglomerates with a seemingly random array of businesses: the Tata Group in India, Sime Darby in Malaysia and Hutchison Whampoa in Hong Kong.
The reason, argue professors Khanna and Palepu, is that conglomerates can overcome the distortions, inefficiencies, regulatory red tape and information gaps that plague developing markets. This capacity makes their operating companies run better, since they can draw on the well-known group name to raise capital and on connections to acquire licences and government permits.
More important, conglomerates can provide an incubator for management talent. In small family controlled companies, managers have little hope of advancement. In conglomerates, many posts in operating companies are open to outsiders.
D'long may be groping its way towards Tata-dom, but a key difference between it and conglomerates elsewhere in Asia is government hostility. Most conglomerates prosper in part by exploiting favourite-son status with their governments. D'long, and similar private groups such as the New Hope Group, do not enjoy such treatment from a government still convinced that China's 'national champion' companies must be state-owned. Preferred access to capital markets, another conglomerate edge, is also closed to private groups. How D'long navigates such treacherous waters will be fascinating to watch.
Research by the China Economic Quarterly