Negative Impacts of Privatization Methods on International Business MethodImpact Restitution...

Negative Impacts of Privatization Negative Impacts of Privatization MethodsMethods

on International Businesson International Business

Method Impact

Restitution to Emergence of aoriginal owners business class

eager to do internationalbusiness but too

small to matter

Negative Impacts of Negative Impacts of Privatization MethodsPrivatization Methods


Method Impact

Sale of state property - May transfer welfarestate activitiesnew foreign owners

- Existing managers mayresist new control

Negative Impacts of Negative Impacts of Privatization MethodsPrivatization Methods


Method Impact

Mass privatization Managers & employees may retain control

State interference may continue

New domestic owners not interested in foreign investors

Soviet Command SystemSoviet Command SystemImpact on Current Impact on Current

EconomyEconomy Command System Current Economy

Taxing “surplus” → Confiscatory taxes Consumption limits → Shortage of retail services Price controls → Prices liberalized, controls

on key products remain


EconomyEconomy

Command System Current Economy

Vertical integration of → Vertical integration of large firms large firms firms (lack of flexibility) Weak accounting → Weak accounting for

risk and value


EconomyEconomy

Command System Current Economy

Import substitution → Some import policies substitution

policies remain

Corruption = Corruption

Problems Encountered by U.S.Problems Encountered by U.S.

Investors in RussiaInvestors in Russia

Asset stripping Joint venture partners or companies seeking foreign capital look good on paper but

are in poor shape

(Gazpom)



Extortion Payments for “security

services” can be high.

Marketing and Transportation difficulties, distribution communication difficult,

few stores exist



Control Commercial law regarding

property rights is weak.



So why bother?

U.S. Investors in ChinaU.S. Investors in China

Industries

• chemicals • non-electric machinery

• food products• transportation

equipment

• service firms • consumer goods


Goals

• avoid Chinese trade • export of low- barriers tech, low cost products• match E.U. and • develop local Japanese competitors’ marketsstrategic moves

• obtain infrastructure contracting work


Government Requirements (occasional) • technology transfer • hiring and training

local managers• export orientation • location in

designated areas• many industries off • local contentlimits

• use of designated trading and distributionorganizations

ChinaChina More Worry Over Loans More Worry Over Loans

NYT 5/10/02

ChinaChina More Worry Over LoansMore Worry Over Loans

Banking system dominated by four giant commercial banks, all state ownedUnder Mao banks were used to funnel state subsidies to local enterprisesHow much companies received had nothing to do with how much was repaid1999 Government directed $179billion write off (12%) of outstanding loans


Foreign banks have less than 2% of all deposits and loans

WTO rules call for opening banking system to foreign competition over the next 5 years


Dai Xianglung, Head of Central Bank recently said 25-30% loans are not being repaid Standard & Poor estimates it is 2X as bad as stated, i.e., 50% loans are bad US banks with assets > $1billion just 1.5% of loans are more than 90 days overdue In Japan bank bad loans are not not more than 15%


Banks are propping themselves up by issuing more loans at “furious” rate often for vaguely described projects with little discernable effect on improving the economy More stringent rules on loans will push bad loan % even higher Goal = reduce bad loans to 15% in 5 years


Bank of China China Construction Bank Industrial & Commercial Bank of China Agriculture Bank of China

Preparing to sell minority stakes to offset bad loansBank of China furthest along – expects to sell stock in HK and NY this year

Bank of ChinaBank of China

NY Times 2/1/02


Lax banking practices in China:

$320 mio bank funds diverted through unlawful loans, off-the-books granting of LCs and issuing bank bills


Lax banking practices in Hong Kong:

Scheme to launder $73 mio from Kaiping, China branch


Lax banking practices in US:

Preferential treatment of “certain” customers: fraudulent LCs, pledged assets sold

$20 mio fine for similar practices in US


Lax banking practices in Canada:

RCMP investigating money illegally taken from Bank of China ended up in Canada


“These incidents are only the tip of the iceberg”

“Every bank in China has problems like this.”

Reports from China’s audit office indicate illegal use of 160 bio renminbi ($20 bio)

Foreign Fund Firms Face Foreign Fund Firms Face Hurdles in ChinaHurdles in China

As China joins WTO - European and US fund firms competing to find Chinese partners for access to:

$600 million invested in Chinese stock market

Hundreds of billions stashed away in bank deposits, state pension funds and social security


Proposed rules: Joint Venture (very costly) – buy 33%

stake, paid for in cash Buy 33% stake in existing domestic

fund manager; possible increase to 49% in 3 years

Almost all of the 15 Chinese companies have agreements with foreign fund


Buying in a 33% stake in Chinese fund managing $1 billion is a steep price

Convince shareholders to pay cash for company they can’t control?

Buying in also buys into past liabilities


Setting up joint venture with Chinese funds time consuming and at a disadvantage against the top established Chinese funds


Why only these two options? Chinese Securities Regulatory

Commission (CSRC) has limited resources Foreign joint venture creates a new

category requiring another level of regulation

CSRC may also be favoring domestic funds to ensure they are in good shape before partnering with foreign funds

Chinese Multinationals?Chinese Multinationals? Name a famous global Chinese brand?

Tsingtao Beer

Ever heard of: Haier Group?

Chinese Multinationals?Chinese Multinationals?

Haier Group – China’s largest appliance manufacturing company

Haier Group Haier Group

In 1990s opened factories in 10 countries

In 2000 opened $30 mio factory in US

Haier GroupHaier Group Camden, SC plant makes compact

refrigerators sold by Wal-Mart, Home Depot, and others

Captured 30% US market share

Haier Group Haier Group

Shipping from China costly and takes 40 days

Able to put “made in USA” on products Cheap R&D & machinery shipped from

China provide cost advantages

Haier GroupHaier Group Rolling out other products for US:

• Freezers, air conditioners, flat panel TV, DVD players, microwave ovens

US sales about $500mio – 85% imported – US company is profitable

Negative Impacts of Privatization Methods on International Business MethodImpact Restitution...

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