Friday, October 4, 2013

Why do Chinese SOE's manufacture goods that no one wants?

Because State-Owned-Enterprises (SOE's) are judged on employment, not on profitability.  Eye-popping article in Forbes:

Of the 100,000 machines manufactured in the last twelve months, some 60,000 were manually operated. This is the functional equivalent of making typewriters. When my friend told his contact that that world market for such machines simply didn’t exist, the SOE-operator explained that production could not be cut without laying off workers, so the company continued the rate and was simply storing the machines they knew they could not sell. ...

Of course, this makes it difficult to compete with SOE's:

I repeated the story of the SOE machine tool manufacturer to another American friend working as a the China CEO of an American software-as-a-service company. He nodded somberly: he was trying to recruit an executive from a state-owned competitor, having lost so many deals to the rival firm that he’d resolved to hire their sales leader. But during the interview, his prospective employee explained that sales executives at the SOE were not judged on profitability, but instead on the goal of growing the number of people employed by the company. Profitability was not a meaningful metric, since if an SOE ran into financial trouble, the government would simply give them more money. The American CEO was stunned: how can Western companies compete in China? Any product or service that can be replicated by a Chinese company will be and the foreign company beholden to Western shareholders and ethics standards cannot sustain.

HT:  April


  1. Our greatest glory is not in never falling, but in getting up every time we do.

  2. Very fantastic and well-written post.It,s extremely good and very helpful for me.Thanks for sharing this great post with us.

  3. That's pretty least the company executives incentives are aligned with the governments, right? They are acting very optimally, self-interestedly and rationally (Based on their options in the face of state-run everything). The rule of thumb is "just go along" and you won't have problems.