Early in my career I would often be asked if it was better to work with state-owned enterprises (SOEs) or with a privately-owned enterprise (POEs). For many years my standard answer was that it is better to try and stay in the private sector as much as possible. At that time, and in the markets and scale I was working on, the SOEs I encountered didn't seem to have the entrepreneurial fire and flexibility needed to meet the ever changing and sometimes frustrating needs of demanding export customers. Today, it's different because I am seeing SOEs who are making the tranisition to competing in the global economy
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SOEs typically have several disadvantages when competing against POEs.
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Legacy cost: Carrying the twin burdens of aging facilities and a large pool of aging workers, SOEs find themselves deferring desperately needed physical and human capital improvements to service the ongoing cash drain of large retirement plans. Also, as SOEs where not always "for profit," they can sometimes be tied to outmoded domestic pricing contracts that may lose them money but serve a larger political or strategic purpose instead.
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2x"W.j#F2i6v-mFOB Business ForumGeography: Many SOEs also face a geographic disadvantage in China's new economy. Originally, due to the quality of roads and lack of other needed communication and warehouse infrastructure, SOEs were often placed close to where their products were used in the domestic market, or placed far inland for national security reasons. This worked well when they only had to service a limited domestic demand. But in a global economy, where a factory may produce some parts and import others that are then assembled for re-export, being a long distance from the port can substantially increase costs. It is no accident that cities like Ningbo and Xiamen are booming. New factories that surround these and other port cities are able to take advantage of China's recent and massive infrastructure investments. Essentially, most other SOEs are tied to their historical inland location where development has been slower to come.
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/}'Y"f0T4d,QExperience: As many SOEs were established to serve the domestic China market, their experience in manufacturing and shipping export products can be limited. More than just technical limitations, SOEs have been slow to market themselves abroad and acquire the necessary support staff and language trained sales persons to bring in new export business.
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Structure: Stepping on to the sprawling campus of one SOE I work with is like step back into industrial history. Not unlike the great American factory towns of America's late 1800's like Pullman or Hershey, the layout of the town and factory is very rational and based on a city-planning model. These factories were designed when production cycles were long and unvaried and when capital equipment innovation occurred over decades, not years. In such a model, you might find one building for painting, two buildings for machining, a building for cutting, a building for welding and so on. Though this kind of planning makes for pleasant tree lined streets between the plants and looks neat and well organized, the economic reality is that this kind of organization, using separate physical locations, is long gone. Modern factories are oriented to minimize handling, transportation and storage during production.
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,X#m9r'm#q.~)oCulture: Like the buildings, the factory culture and expectations have also had to adjust to a global economy. Expectations of what an export-ready product is in terms of quality standards for factory and office cleanliness, packaging, documentation, credit, warranty and delivery are some times challenging for the SOE whose only previous experience has been selling to the domestic market. So the foreign buyer and the SOE have to be committed to each other for the long term to make that initial training payoff and to keep the difficult lessons learned fresh and current and without having to be constantly re-taught. Sometimes the process is more akin to an "un-learning" of habits that are no longer efficient or appropriate.
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&U:v.E(i b)G"F[A Professional Business Forum]Still, there are rewards to working with an SOE if you can manage the right relationship.
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$q9u5~"y:c6Q;u%V$W9twww.fobshanghai.comLower cost inland: Due the sometime-isolated location of SOEs, business expenses can be much lower than in booming coastal areas and seeming extra costs of transportation can be overcome by lower utility, overhead, labor and tax burdens.
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Improving roads: Recent improvements to roads have lessened some of the isolation of these plants and reduced the time and cost of transporting goods to port. The quality of lodging and communications are also improving.
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Access to better capital equipment: I have seen impressive and expensive pieces of imported equipment in these factories, such as robotic welding lines and high-quality inspection and imaging equipment. Being state owned, they also have priority and funding available to improve their capabilities that an upstart POE may not have.
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3f;g*w#J)]"F8E'|(`FOB Business ForumSupplier priority: SOEs can have an advantage in finding difficult and special materials due their generally preferred status with suppliers.
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Customer priority: There are not many places in China where you can still be first. Even if your job is not the largest project they may be working on, the uniqueness of what you are doing, and the fact that you may be among only a small group of foreign customers, means that you often will be treated well and find your production receives a higher priority than in other factories where you are just another purchase order to go out the door.
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_1\)x)L+I0y!E8m'|business forum,trade forum,business opportunity,Business China,Business India,Brazil businessWorking with an SOE is not right for every project. Finding the right SOE is hard work, whether well marketed or not. The challenges they face make their work - and, at times, yours - much more difficult. But if you have patience, a long term vision and a suitable project scale, you may give yourself a price and quality edge that is becoming harder and harder to find here in China.
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