State Owned Enterprises (SOEs) con-tinue to occupy vast shares of China's domestic markets and play a vital part in the country's economic output. It is both wrong and dangerous to categorize them all as .basket cases. or 'dead ducks'. Any business operating in sector occupied in part by SOEs needs to fully understand the competitive nature of that entity, current status and the motivational forces surrounding its operation.

Would-be investors should not shy away from SOEs. Of course there are the good, the bad and the ugly but the reformation process offers an open door. policy to all reasonable proposals. It is not all doom and gloom. Many positives can be found, as recent research across a diverse group of SOE's revealed. One Municipal Government offered to 'open the doors' for this independent study in order to help facilitate its reformation process. So, what did the study reveal and what can we learn from it?

Process of change

No one should ever doubt the macro economic problem China faced and still faces with its SOE reformation. Timescales are more often than not driven by political rather than commercial con-siderations and do differ from region to region.

Many SOEs have now completed a process of transformation into share capital companies. Their general managers (GMs) are proud of the fact that they now operate in a market economy. The study revealed that in many instances it was hard and just what real decision making power these individuals had. More often than not, they were being orchestrated by this or that bureau, each with very little regard to the longer strategic viability, which the SOE in question could achieve.

The study went on to portray that this was not true higher up the political ladder. Many senior ficials had a clear vision, and amongst the real shapers and movers, the only limiting factor was the sheer scale of the task facing them. In one particular city, the municipal government had over 140 such enterprises under its direct in.u-ence. Such a span of control is not unusual. With the only evidence of real decision-making being apparent at the top, this may account for a less than desired speed of change.

All too often SOEs were .hung out' to at-tract foreign investment without any real viable prospect of ever doing so. It was not possible to ascertain the driving force behind this; it could have been a government-sponsored move to accelerate change, or maybe just a dying wish for that company. In some cases the investment opportunity was very logical and well thought through, in others it had major competitive impli-cations. There were cases where mergers of one more SOE were a logical conclusion, others wanted surgery to a greater or lesser extent, and course, there were the genuine basket cases.

Is the pace of change fast enough? Politically one must accept that it is. Changes have taken place without any signi.cant detrimental impact unemployment or signs of social unrest. Could be quicker and does it need to be quicker? The answer to both of these is most likely yes.

The positives

I would be wrong to assume that all sales were obtained by an arms-length, competitive tendering process, and the study did not attempt to cover this. What was apparent was the sizeable market share held by many SOEs, some of which ranked in the top group of companies when analyzed by size. Thus, SOEs have something to offer in regards to market entry and market share.

The asset base of many SOEs would be the envy of many businesses. While the buildings may look old and dilapidated, many house some remarkably modern equipment. A spinning and weaving busi-ness, for example, had equipment only a few years old the latest in technical development and all imported from Italy and Japan; a heavy machinery plant with a fully automated, robotic production line imported from Germany; a carbon .ber production facility imported from America the installed in China. There was no shortage of technically advanced equipment. This could be very important to potential investors and other interested parties because the huge cash injection often perceived as a need of SOE's is, in fact, not always required.

In one SOE, an exemplary managerial staff was apparent. The GM had a well-constructed business plan for vertical integration. He knew the market he was selling into, its competitive nature and its requirements. He controlled a highly motivated workforce. Where the management was more dy-namic, the workforce appeared industrious and highly motivated. One should not assume that the state sector has poor human resources. Because the state sector is perceived by many to offer more employment security, it is therefore viewed as a less risky source of employment than a foreign entity.

Many SOEs had well-quali.ed, technical expertise in abundance. Even the ailing SOEs were still recruiting and training very well. Lack of motivation, however, did not give a favorable im-pression and did injustice to a potentially produc-tive workforce. Training is regarded highly and is proactively encouraged by labour unions.

The negatives

A heavy machinery manufacturer had a specific team of people to pursue strategic investment objec-tives. All this team offered were individual parcels of land for any would-be investor to take over and develop. They were incapable of organizing a tour of the workshops and had no idea on which .oor the GM's office was located. No production was apparent and staff morale appeared very low. Un-fortunately, this gave an immediately unfavorable impression, and although it was indicative of the state the business was in, it did hide some of the more positive attributes, such as a skilled workforce and some very modern robotic welding facilities.

The GM of a decorative glass brick factory sat on a rusting production line for two years trying to entice foreign investment. He had never had a sales or mar-keting team because "The customers just came, but eventually they stopped coming". He had declined an offer to liquidate his assets because "it would give the buyer of his production line a competitive edge". Although very obvious in this case, one should never assume that buying into an SOE will bring a ready-made market, or that the enterprise actually understands the market for its products.

The carbon .ber business was so research oriented that it lacked any form or organization for commercial application in bringing its prod-ucts to the market. It was not uncommon to .nd management teams dominated by one discipline or another. A broad base of business-orientated managerial skills was often lacking.

Often the needs for diversi.cation were recog-nized but the ideas and plans were irrational. The chairman of a mining machinery manufacturer intended to get into agricultural equipment. This would have appeared rational and within the company's logical skill base, had it focused on heavy equipment (ploughs, discs, cultivators etc), rather than on more high tech equipment like har-vesters. More irrational was its desire to acquire foreign technology for the use of power plant ash to manufacture building bricks. One should never assume an engineering company, for example, is only involved in engineering. It may well own a restaurant, a hotel and a fieet of taxis. Not all of these may be immediately apparent.

Government attitude

The municipal government was highly support-ive of the study and welcomed its initial findings and recommendations, none of which were hid-den, but made public. There was evidence that they were proactively facilitating the reformation process. There is no doubt that it is a tremendous task, far greater than most CEO's of international conglomerates have ever had to face. This needs to be taken into account before becoming critical of SOE reformation. There was evidence of self-preservation in the bureaucratic myriad of lower ranking officers. The GM of one SOE asked for certain recommenda-tions to be put forward as part of the study on the basis that he himself felt he was not in a position to put them forward. This involved an obvious merger of two SOEs that operated under the close scrutiny of two different trade bureaus.

Is there a model for China to copy? Within the so-called Eastern Block, Poland started its reforma-tion process in the early 1990s. It has been painfully slow and only gathered momentum as Poland's accession to the EU became apparent. The Czech Republic, by contrast, went for mass privatization in the middle 1990s. It worked for them. The dimen-sions of China are so vast it is hard to follow any previous model. Given its one party system, with fewer political considerations, maybe a touch of the accelerator would not go amiss.

The future of SOEs

What conclusions can we draw from the study? Certainly, the terminology SOE will disappear for all but a few core industries. Many of the businesses themselves will not disappear. Most are already share capital companies even though the state remains the existing shareholder. The process of change will continue. Many SOEs will fall by the wayside and be liquidated from their existing (technically) bankrupt financial status. It needs to be acknowledged that the majority will survive in one form or another.

In this respect, they are no different from businesses in the private sector. Some will merge or be acquired by other entities (both foreign and domestic). There is growing evidence of this happening, although it is not always apparent because of the vast numbers that exist. Some, where strong management can unshackle the bureaucracy sur-rounding them, will take on an entrepreneurial .air and .ourish. Others will hang in there for many years to come, ending up operating at the low end of their respective markets and making just sufficient returns to survive.

SOEs cannot be firing fenced' and bypassed. For many businesses in many sectors, they remain competitors. For new investors it is vitally impor-tant to undertake due diligence, which often needs an investigative approach and thinking .outside the box'. For existing businesses, constant monitoring is essential. Unfair competition apart, SOEs are often unpredictable and irrational in the way they can in.uence a market. Where they are seen as a competitive threat, it is all the more important to get to know what, how and who is in.uencing them. This is not an easy task and cannot be achieved all the time. One must increase familiarity and respect them for what they are.

The reformation process is in full swing, but SOEs are likely to be around for a very long time yet. Unless you are immune to them, factor them in to your strategic business planning. There is no point in screaming "foul play". An SOE is just like any other commercial business, but with Chinese characteristics.