All those ‘O’s and ‘C’s, I just couldn’t resist it. So what the hell is this one about. Well, something quite important really. They are oil companies, and one of them is in China. Brad Setser has a great post on it. The issue is what China is starting to do with all those surplus dollars and euros she is accumulating:
“One of China’s largest state-controlled oil companies made a $18.5 billion unsolicited bid Thursday for Unocal, signaling the first big takeover battle by a Chinese company for an American corporation. The bold bid, by the China National Offshore Oil Corporation ( CNOOC), may be a watershed in Chinese corporate behavior, and it demonstrates the increasing influence on Asia of Wall Street’s bare-knuckled takeover tactics.
The offer is also the latest symbol of China’s growing economic power and of the soaring ambitions of its corporate giants, particularly when it comes to the energy resources it needs desperately to continue feeding its rapid growth.”
How far is CNOOC comparable to a Western private company in behaviour and how far is it state-owned and state-controlled ?
And what does China’s (and India’s) successes tell us about the idea that free markets are the best way to organize an economy ?
I have been thinking on the fine question you ask, and after some writing I am working on will respond.
The economist has a useful article on all this:
http://www.economist.com/agenda/displayStory.cfm?story_id=4102015
“How far is CNOOC comparable to a Western private company in behaviour and how far is it state-owned and state-controlled”
CNOOC is state controlled, as to ownership I’m not sure, it may be like many things a hybrid.
“And what does China’s (and India’s) successes tell us about the idea that free markets are the best way to organize an economy ?”
I would rephrase this: “And what does China’s (and India’s) successes tell us about the idea that free markets are the best way to *develop* an economy ?”
Clearly a hybrid mixed economy has a lot to offer a developing country. But before I get off into that think about Japan, Japan is not a market economy in the way that the US is, the whole social, cultural and economic structure is different. Some have called Japan financial socialism. And remember that before the Japanese started to get old, they had one of the most successful economies on the planet (as did the Germans).
India is a case apart, and would be best left for another day, but as far as China goes I imagine we will have something which is not that different from Japan.
In particular the Chinese government (and this part is of course different from Japan) will not want to lose control completely, so there will continue to be an ‘open’ competitive sector, alongside a less efficient, state sector where the goverment maintains its political capital. Again the French example springs to mind.
So who knows if the arrival of China and India will mean that 20 years from now we will be talking about the Asian (and not the Anglo-Saxon) model. Possibly we will. That’s the interesting thing about the future, its full of surprises.
On this particular round of ‘buy ups’, the Chinese would seem to be the direct beneficiaries of cheap credit in the US which they are effectively leveraging to buy up the brands, technology and management skills they so badly need. I would say it was a very smart move, and one which is only possible in this way because of the inter-locking corporate structure which follows from having a large state sector.This is what makes it possible to do the kinds of ‘double book-keeping’ involved in taking reserves from the Bank of China, recycling them through the banking system in the form of uneconomic loans, and using the cash to buy at above market price ailing companies, all paid for by the Fed. Of course, the Japanese Keiratsu have been doing similar things for years.
Then once you have the experienced management, the intellectual property rights (which they got from Rover – apparently by plying those responsible with strong liquor – without even having to take the company), and a nice friendly brand name (Thomson, Hoover), backed by the manufacturing facility inside China, you can practice ‘torrential rain’ exports (see the bicycle industry) to capture dominant market share. All in a good days work.
The whole point is that this model is capable of thinking strategically.
Wonderful comment Edward.
“How far is CNOOC comparable to a Western private company in behaviour and how far is it state-owned and state-controlled ?”
It is a big oil company. Don’t think you can really speak of private companies when you talk about oil companies
“How far is CNOOC comparable to a Western private company in behaviour and how far is it state-owned and state-controlled ?”
Here’s part of your answer in Bloomberg today.
CNOOC Ltd., China’s third-biggest oil company, will borrow $7 billion from its state-owned parent at below-market interest rates to finance an $18.5 billion bid for Unocal Corp. that topped an offer by Chevron Corp.
The parent company, China National Offshore Oil Corp., will give CNOOC a 30-year loan of $4.5 billion at a rate of 3.5 percent, Chief Financial Officer Yang Hua said. The parent also provided a $2.5 billion, no-interest bridge loan, Yang said. The yield on a 30-year U.S. Treasury bond is 4.2 percent.
It is a 70% daughter so this is not exactly proof that is is not run as a Western private company. I don’t think it is hard to find an example of a private company that has done the same.
Oil companies are way to big, way to important, need way to much money to operate and hardly employ people so in reality they are all state controlled companies that behave as privated companies on the short to medium term.
There is also the problem with Unocal which passes up on a higher offer. Can’t really claim that this is really the behaviour of a private company.