Wrestling ambition: for 30 years China overtook Russia

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In Russia used to think that China has achieved its economic success through effective state regulation, but where a big role there had the use of a purely market-based motivations

About 30 years ago, the Soviet Union and China started to implement an ambitious reform programme. Great neighbors then had a relatively equal economy: the USSR surpassed China’s GDP is only 5-6%, although per capita income four times. Soviet exports to China consisted of high-tech products more than 20% and passenger cars were sold in China, more than oil. The first agreement signed between the two countries after a long break, there was agreement on the construction and reconstruction forces of the Soviet experts of the industrial objects in China.

It’s been three decades; today, the “correlation of forces” reverse. In terms of GDP according to market exchange rates, China is ahead of Russia nine times (IMF, World Economic Outlook database, October 2016), by volume exports in 4.4 times, the pace of housing construction is 14.5 times, and for the length of modern highways — nearly 70 times. Many high-tech products, now make up the basis of Chinese exports, not produced in Russia at all.

The reasons for the incident are many, but today I would like to address only one of them — to strategy of development of separate industries and developed in China and Russia corporate cultures.

Private hi-tech

The late 1980s were marked both in Russia and in China, excessive demand for computers, copiers, equipment for wireless communication. In both countries, entrepreneurs began to specialize in the resale of imported machinery, although in the USSR at that time, produced its own computers (“Elektronika BK-0011”, “Micro-80” or PC “Agat”), and in China no — skolachivaya in this great state. Some of the enthusiasts decided to start their own production — and here the path began to disperse.

The main difference between Chinese and Russian hi-tech companies was not their first steps (Huawei started with the resale of imported PBX), and their ambitions. Business in Russia (for example, “Formosa” or R-Style) has been focused on gaining a certain share of the domestic market, while the founder of Huawei is Ren Zhengfei initially wanted to give your company a global scale, not intending to be limited by China.

Its first international contract to Huawei, which in Russia simply do not compare with anyone, received in 1997, and five years later brought the volume of foreign sales to $500 million This expansion required the utmost attention to new developments and R&D invest up to 20% of revenue, with most of the research divisions were created abroad, allowing you to better grasp the latest trends and become “their” in each country. By the mid-2000s, the company has achieved the status of the world’s best provider of telecommunication equipment and servers, having by that time a joint venture with 3Com, Siemens, Nokia and Motorola, and its sales abroad exceeded implementation in China.

It is important to note that the company has remained private and even created a special corporate culture of teamwork and working toward a common goal. Huawei is not listed on the stock exchange, but the sales growth rate in excess of recent years 30%. With the budget for research was $9.25 bln (more than was allocated by the Russian authorities at the Academy of Sciences in 2016), Huawei in terms of production of high-tech products ahead of many countries.

Large state-owned companies

Of course, coming from the Communist past, neither Russia nor China could not rely on the potential of large state enterprises. In 1987, the Soviet Union obviously was in the lead: we have, for example, has raised 1.35 million cars, and in China only 480 thousand

With one side of the border was dominated by the Volga automobile plant, on the other — the Shanghai automobile manufacturing company. Since the beginning of the 1990s, the paths of both state-owned enterprises sold in Russia for AVTOVAZ came talented financiers headed by Boris Berezovsky, in China, the authorities insisted on the establishment of a joint venture of SAIC and German Volkswagen. Its main objective was declared as the transfer to the maximum number of technologies and development of the company into “big school”, which was brought up the best shots for further expansion. In parallel, the state, represented by the Shanghai Committee of the party, it faced the task of creating the production of generic components that could be used at other Chinese car Assembly capacity. In exchange, the company received tax credits, the proceeds of which could be spent only for overseas expansion. In the early 2000s, through a new joint venture with General Motors SAIC acquired a 10% Daewoo, 48.9% of SsangYoung Motor, and also opened design offices and engineering centers in 14 countries. Over the past 20 years, the company never finished the year with a loss. In 2016 144 thousand of workers produced 6.5 million vehicles, while total revenue amounted to slightly less than $104,5 billion.

In Russia went the other way. AvtoVAZ today controlled by the state. The arrival of foreign investors (Renault) took place only in 2008. And the average annual production 2000-2015 was only 630 thousand cars, almost exclusively supplied to the Russian market and the CIS. Despite the fact that the Russian automotive market has grown rapidly, once a leading enterprise survived due to massive government support (more than 140 billion rubles in 2008-2015), capacity losses (in 2015 they accounted for 42% of revenue) and debt (80 billion rubles). In 2016, the efforts of 44 thousand workers from the conveyor descended 408 thousand cars Lada, Renalt, Nissan and Datsun, and the total revenue amounted to 184,9 billion rubles ($2.75 billion). The share of domestically produced components in the cost of the average VAZ of the vehicle does not exceed 40%.

An example of the Chinese and Russian automotive industry shows that the question of private or state ownership is the enterprise, not critical — more important than the strategy of its development. The result is known: in 2009, when China became the first automaker in the world, Russia has collected less cars than the Czech Republic.

The resources sector

It would seem that in conditions, when Russia is a net supplier of resources and is the largest seller of oil to the Chinese market, and China is a net importer and the largest buyer of Russian gas, Russian energy companies must stay ahead of the Chinese in almost all major indicators. However, this is not quite so.

In 1999, the Chinese state holding company CNPC established public company for the extraction and processing of oil — PetroChina. The main tasks assigned to her guidance was to increase production, including outside of China; the construction of modern oil refineries; the active development of chemical production — in other words, maximum diversification (both territorial and product). The company implemented this strategy quite successfully: by 2016, it became the sixth largest oil production in the world (4.1 million barrels. per day); opened four China’s largest oil fields, built refineries and 11 among 30 projects in oil production from Canada to Indonesia. Only 15% of the increase in production accounted for the purchase of already existing deposits, the rest was explored and launched by the company. By the end of 2015, revenue was $251 billion, net profit of nearly $6.2 billion, About 69% of its revenues from the sale of petroleum products and chemical products, with 82% of sales generated in China (report in 2015).

In 2001, “daughter of” state “Rosneftegaz” company “Rosneft”, was established by the Russian government’s agent in PSA projects, and its role in the Russian energy sector began to grow. Due to the absorption of Yukos (2004) and TNK-BP (2013), the company became the largest oil producer in the world among publicly traded corporations. However, the production growth for the years 2000-2016 175 million tons per year only 9.5% came from the organic growth of the company, all the rest was the result of mergers and acquisitions. The total revenue in 2015 was three times less than PetroChina, is of 5.15 trillion rubles ($84.5 billion) and net profit amounted to 356 billion roubles ($5.8 billion). 57% of produced oil is sold overseas in raw form (data from the annual report of PJSC “Rosneft” in 2015) and foreign extraction is quite small. At the current capitalization as of mid-February, Rosneft, PetroChina lost 3.4 times ($67,8 billion, compared to $229,4 billion).

Global competition

In Russia used to think that China has achieved its economic success through proper government regulation and skillful preparation of national development strategies. I am sure that these factors explain only a small fraction of the impressive achievements of our neighbour. Where large role played by us underestimate the use of a purely market-based motivations. In Beijing have long understood that if the authorities want to restrict competition within the country, they need to stimulate the output of the leading companies in the global markets, in order, colliding there with other major corporations, they then “internalizable” the effect of this competition in their own country. This became, in my opinion, the main reason of China’s success, while Russia’s desire to withdraw into its borders for the sake of creating artificial favorable climate for the “domestic producers” becomes a guarantee of the inevitable decline of our economic model.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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