Socialism with an entrepreneurial face. How the Chinese state corporation CNBM does business in the world and in Ukraine

For almost 40 years now, the Chinese economy has been growing at a phenomenal rate. Scientists, entrepreneurs and politicians are puzzling over the reasons for this rapid development. The traditional recipe of Western countries for economic prosperity: private property, mechanisms for protecting rights to it, financial liberalization, as well as the democratization of political institutions, do not coincide with the engines of the economic success of the Celestial Empire.

Now CNBM is one of the largest public corporations in China.
Officially, the ideology of the ruling Communist Party in China is called “socialism with Chinese characteristics.” In fact, as many researchers note, this is the so-called state capitalism. That is, in the economy there is a significant share of the state, but at the same time all the features of the market economy work. One of the key symbols of this way of life has become Chinese state corporations: business giants run by the state. And if in Ukraine, as in most Western countries, it is generally accepted that the state is an ineffective owner, Chinese state-owned companies prove the opposite.

One example of the success of Chinese state capitalism was the CNBM Group – China National Building Materials, China National Building Materials Corporation Group. It was established back in 1984 and is managed by the Committee for Control and Management of State Property under the State Council of the People’s Republic of China.

Now CNBM is one of the largest public corporations in China. In 2011, it burst into the Fortune 500 list of the largest companies in the world. From the 485th place, the corporation soared to the 243rd line in the most prestigious rating of world business. By comparison, social giant Facebook is ranked 274th, while American financial conglomerate Morgan Stanley is 249th.

How the state became a businessman

The rebuilding of the Chinese economy on a new track began just at the dawn of the era of growth, in the late 1970s. Then the state weakened the control over production and the market, which is traditional for the socialist countries. They relied on foreign trade: gradually, entrepreneurs were given access to it by issuing appropriate licenses. As a result, it was small and medium-sized businesses that initially became the engine of China’s growth. Formerly considered backward, China got stronger and got on its feet, and the GDP product went up the hill.

From the 485th place, the corporation soared to the 243rd line in the most prestigious rating of world business.
Ambitions grew, and their implementation required significant funds. Therefore, Beijing is taking a risky step and creating free economic zones, where foreign investments that developed large corporate projects could enter. The government decided to make the coastal regions a platform for a “market experiment”. Throughout the 1980s, the number of free economic zones grew. The most important and famous of them was Shenzhen, and then the Pudong (Shanghai) region. And if at the beginning of the decade both were pastoral landscapes with rice fields and fishing villages, then in the 1990s, Shenzhen and Pudong entered the districts built up with prestigious skyscrapers, symbols of a renewed China.

Фото: генеральный директор CNBM New Energy Engineering Co. Юнчжи Чен 

 

In parallel, state-owned enterprises have become the main link in corporate reforms in science, education and the social sphere. They also changed significantly over the 1980s. The government intended, keeping them in state ownership, to make state-owned enterprises an analogue of market ones. The difference would be that instead of the traditional diversity of shareholders and fighting with other firms, enterprises would compete with each other. In the Celestial Empire, this was possible thanks to decentralization: regions and even areas within them often compete with each other.

However, the massive influx of foreign capital into industry, real estate and the service sector began to crowd out the Chinese manufacturer. Therefore, Beijing decides to adjust the economic growth model in order to restore the balance of domestic and foreign capital. From the early 1990s until today, China has continued to develop the market, pursuing a policy of macro regulation and corporatisation of state-owned enterprises. A new stage of reforms began already in the 2010s.

How public business is organized

Contrary to fears of a slowdown in China’s economy, China’s state-owned companies posted record profits last year. According to the Committee for the Control and Management of State Property, revenues of state-owned companies last year amounted to about $ 4.3 trillion, 10 percent more than in 2017. Net income, in turn, rose by almost 16 percent. Pen Huaguan, spokesman for the Committee, explains that these gains can be attributed, among other things, to the stable growth of the Chinese domestic market and government support. In addition, he said, state-owned companies also benefited from cost cuts, as well as the introduction by the state of new methods of performance management and risk management.

CNBM, as one of the key enterprises in China, is involved in innovation in the area of ​​government reform. For example, in 2016, the group was included in the list of pilot enterprises for mergers and acquisitions of central enterprises – then there was a reorganization and merger with another state corporation. And in December 2018, 11 state-owned enterprises, including CNBM, were included in the list of pilot enterprises of a new group of state-owned investment companies. In addition, the CNBM Group has already emerged as the world’s # 1 producer of cement, drywall and fiberglass.

 

Photo: Jinsong Zhang, CEO of CNBM International Corporation

The corporation is successfully exploring new markets for itself, having already become one of the world leaders in the production of equipment for renewable energy – wind blades and solar modules. CNBM has already become # 1 in Asia and # 3 in the world for the production of wind blades. But in the field of solar energy, the Chinese giant also has assets in Ukraine, in particular solar power plants in the south of the country with a total capacity of 267 MW.

The CNBM Group has already emerged as the world’s # 1 producer of cement, drywall and fiberglass.
The corporation itself explains that the internal reform of management mechanisms is constantly deepening. The effect that the government expects from public business is “creating a superposition”, as well as increasing the viability and accelerating the pace of development of the company. Although the results are already impressive: by the end of 2017, the corporation’s revenue amounted to $ 44.7 billion, while the total assets under its management amounted to $ 91 billion.

And the management of all this really requires considerable resources and a competent approach to its organization, so as not to hinder the business with the clumsy bureaucratic machine. For example, the CNBM Group now consists of 15 public companies, 26 research and design institutes, 33 national and industrial quality control centers, 11 government laboratories and technical centers, and 19 national standards committees. The state corporation is actively expanding abroad: CNBM is already represented in 28 countries, including Ukraine. In total, more than 250 thousand people work for it – this is practically the same as the population of the entire Ternopil or Lutsk.

Investment in green energy

The Chinese state-owned company is actively supporting the technologies of the future, striving to minimize the industry’s impact on the environment. The company supports such projects all over the world. For example, in Portugal, CNBM won a contract to build the country’s largest solar power plant with a capacity of 221 MW. Moreover, the corporation has agreed to build another 1 GW of solar power there in the coming years.

We are talking not only about infrastructure projects, but also about those that are closer to the immediate consumer. So, in 2016, the UK government supported a $ 3 billion deal between CNBM and UK companies WElink and Your Housing Group. Thanks to her, over the course of five years, the union of firms will create up to 25 thousand new homes, which will already be equipped with solar panels.

At the end of 2017, the corporation’s revenue amounted to $ 44.7 billion, while the total assets under its management amounted to $ 91 billion.
The Chinese state corporation also cooperates with the German industry. For example, in 2017, CNBM signed a $ 1.6 billion contract with solar module manufacturer Avancis in Germany. Together they will build the country’s largest thin-film PV module plant in China. “The ambitions of China’s solar energy programs are astounding,” said Oliver Just, CEO of the German company, at the time.

Great views from CNBM and Africa. Last year, a Chinese state-owned company invested half a billion dollars to create an industrial park in Zambia. On its basis, production facilities for the production of building materials and equipment for green energy will be organized. In addition, the state corporation is negotiating with the government of Ethiopia, where it is also ready to invest in solar energy to provide electricity to scarce regions of the country.

“In our business, we are moving from just contracting engineering and construction work to providing management services after the construction of factories. We already have a lot of data from our experience, which helps us to get better and also to cut costs,” comments The South China Morning Post Secretary of the Supervisory Board of the company Chen Zhenli. In Africa and the Middle East, where there is often a shortage of specialist managers, companies send their managers to transfer expertise and operational control.

Chinese state corporation in Ukraine

It is the Chinese investments that will revive the Ukrainian economy. Such thoughts have been voiced more than once by the government, in particular by the head of the Ministry of Economy Stepan Kubiv. It is difficult to argue with his words, because Chinese companies are ready to inject significant money for development in Ukraine. “China is a strategic partner of Ukraine, our common trade continues to grow. Kiev and Beijing have agreed that its turnover will reach $ 10 billion a month,” the minister said at the beginning of this year, citing statistics for 2018: $ 8.8 billion in mutual trade for 11 months against 7.7 billion for the entire 2017.

Last November, Kubiv, during a visit to China to participate in the China International Import Expo 2018, urged the Celestial Empire to begin negotiations on the creation of a joint free trade zone. “China has a great interest in the Ukrainian market. However, so far these are only intentions. To implement them, a number of issues still need to be resolved, a lot of work must be done. The most important thing is to ensure the safety of investments,” said Du Wei, Ambassador of the People’s Republic of China to Ukraine. In late April, Minister Kubiv will visit China again to participate in the second Belt and Road Forum.

China has great interest in the Ukrainian market. However, these are only intentions so far. To implement them, it is still necessary to resolve a number of issues and do a lot of work. The most important thing is to ensure the safety of investments, “says Du Wei, Ambassador of the People’s Republic of China to Ukraine.
It is important for global business to meet the needs of other countries. CNBM, for example, says it is making every effort to take into account the specifics of the region. In Ukraine, the Chinese state corporation takes an active part in the “Association of Ukrainian-Chinese Cooperation”, created for the partnership of organizations of the two countries. And we are talking not only about economics and finance, but also education, science, culture and sports.

“Working as part of an association, local representation, contacts with local and state authorities unambiguously increase understanding of the specific culture of the local population and the specifics of doing business. As a result, the company is flexible and adaptable, which in the long term brings a leading position in the international market,” say the corporation CNBM.

CNBM began to enter the Ukrainian market at the beginning of the decade, having invested about USD 1 billion in investments and trade finance in Ukraine. Then the Chinese state corporation supplied equipment for solar power plants for the notorious Activ Solar company. Subsequently, Activ Solar began to have financial problems; it owes hundreds of millions of dollars to the Chinese state corporation. As a result, CNBM took over all Activ Solar power plants to repay the debt.

There are many lessons to be learned from studying the Chinese model of doing business and managing large organizations. Moreover, Ukrainian business and the government will not have to go far for experience – companies from the Middle Kingdom are already here and are ready to continue developing relations not in words, but in deeds. Of course, it is worth remembering how important trust is for China – and in the language of government it means reform, protection of investments and property rights, and, of course, fair and fair rules of the game for everyone.

“The acquisition of control over these assets was carried out in exchange for the repayment of the unrecoverable and non-guaranteed debt for this amount on commodity operations for the supply of equipment. We had to legally protect our interests and, as a result, we took these stations to pay off debts,” explained the CEO one of the structures of the Chinese corporation, CNBM New Energy Engineering Co. Yongzhi Chen.

According to the Committee for the Control and Management of State Property, revenues of state-owned companies last year amounted to about $ 4.3 trillion, 10 percent more than in 2017. Net income, in turn, rose by almost 16 percent.
In 2016, the tariff for Ukrainian solar power plants CNBM was reduced, the company lodged a strong protest, and the situation is still not resolved. Jinsong Zhang, Chairman of the Board of CNBM International, reacted to the emerging problems as follows: “We are worried about the inconsistency of Ukrainian politicians with regard to renewable energy. If the policy is maintained and stable, naturally, we will invest many times more. If we suffer from deception, then investors will not be in principle “.

As a result, CNBM successfully operates its solar power plants with a total capacity of 267 MW in Odessa and Nikolaev regions and provides the population with electricity. The company calculated that in 2018 they provided “light” to 70 thousand households in Ukraine. The important thing is that it is environmentally friendly energy: solar power plants have reduced more than 300 thousand tons of carbon dioxide emissions into the atmosphere, making their contribution to the preservation of nature and clean air.

In 2016, CNBM and the Ukrainian Ministry of Energy signed a Memorandum of Cooperation. The Ukrainian government has pledged to protect the rights of investors and help the work of Chinese companies that invest in Ukrainian energy. Then it was about the investment in the modernization of equipment in the field for a total of about two billion dollars. “This is a new step that will bring our countries to a new level of cooperation,” Jinsong Zhang, head of the board of CNBM International Corporation, stressed then. He assured Kiev that the Chinese state corporation has both the experience and resources to modernize Ukraine’s energy sector.

The Chinese state corporation is also a major taxpayer. Its ten power plants have paid over 426 million in taxes over the past year. For comparison, Kyivenergo, which provides the capital with electricity, transferred 642 million taxes to the budget. In parallel, CNBM supports energy efficient and social projects in the region: installs energy-efficient windows and doors in schools and kindergartens, builds playgrounds and repairs roads. The company understands how important social responsibility is for foreign business in Ukraine, therefore it intends to continue to actively participate in solving the problems of the regions where 10 SES groups are located.

Social projects of CNBM in Ukraine:

Odessa region – Reni:
– replacement of window and door blocks with energy-saving ones in the Yagodka preschool;
– installation of energy-saving windows in the building of the secondary school-lyceum No. 6,
– construction of children’s sports grounds (Reni);
Odessa region – Kiliya:
– supply of an energy efficient water pump for the Svitlo utility company
– construction of children’s sports grounds.
Odessa region – Artsyz:
– construction of playgrounds
– repair of the heating system in Pavlovka

Photo: Consul General of China in Odessa Song Litsun visited the CNBM solar power plant in the Nikolaev region

  • Odessa region – Starokozachye:
    – replacement of the window with energy saving
    – construction of playgrounds
    Nikolaev region – Voznesensk:
    – installation of energy-saving windows in Taborovka
    Mykolaiv region – Berezanka
    – road repair,
    – installation of energy saving windows
    – school renovation
    – equipment of sidewalks for the House of creativity of schoolchildren

With China along the way

“The key issue of reforming in Ukraine should be the creation of independent, non-corrupt judicial bodies. Without fair justice and a transparent investment protection mechanism, further growth of the country’s attractiveness for an external investor is practically impossible,” the CNBM replies to the question of what changes they would like first of all see in Ukraine.

In addition, they say, in order to increase competitiveness, the basic reform should be the reform of the education system. “This will increase not only the international value of local personnel, but also give significant competitive advantages to local companies,” the state corporation from the Middle Kingdom explains.

And they do not forget about one of the main projects of Beijing in recent times – the concept of “One Belt, One Road”, which should link Europe and Asia with active economic corridors. Therefore, the CNBM advises, the reform of the transport infrastructure can make Ukraine an important center of trade between the Far East and the West, and hence significantly accelerate the country’s economic growth.

Minister of Economy Kubiv also speaks about the importance of participation in the “One Belt, One Road”. This initiative revives and reinterprets the ancient Silk Road – today China seeks to create new mechanisms for regional economic partnership, strengthen cultural ties, as well as support sustainable development. According to Beijing’s official data, “One Belt, One Road” covers most of Eurasia, both “new economies” and developed countries. This project covers territories with rich deposits of resources, 63% of the world’s population. The estimated economic scale is at least $ 21 trillion.

The Chinese state corporation is also a major taxpayer. Its ten power plants have paid over 426 million in taxes over the past year.
One way or another, as Harvard professor Neil Ferguson writes, one should not oversimplify and divide the world into “market capitalists” and “state capitalists.” “In fact,” he writes, “most countries are somewhere between these poles.” “The economic struggle of our time is not a confrontation between Chinese state capitalism and American market capitalism, with Europe somewhere in the middle. It is a challenge for all three regions: to find the right balance between the economic institutions that generate income and the political ones that regulate and distribute them.” …

There are many lessons to be learned from studying the Chinese model of doing business and managing large organizations. Moreover, Ukrainian business and the government will not have to go far for experience – companies from the Middle Kingdom are already here and are ready to continue developing relations not in words, but in deeds. Of course, it is worth remembering how important trust is for China – and in the language of government it means reform, protection of investments and property rights, and, of course, fair and fair rules of the game for everyone.

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