HONG KONG – China has lately been facing harsh criticism for the direction of its reforms of state-owned enterprises, particularly its strengthening of the role of Communist Party committees in SOE management. But while this might seem like a step backward for China’s market-oriented reforms, there are good reasons to boost oversight, at least for now. With China undergoing a fundamental transformation into an innovation-driven, knowledge-based, and services-led economy, its leaders must think carefully about how to reform the SOEs so that they can contribute to the new economy.
In the past, the role of the SOEs was clear. Over the last three decades, they underpinned China’s emergence as a global manufacturing powerhouse, by spearheading China’s infrastructure-construction boom. In the process, they became dominant, especially in sectors prone to natural monopolies (such as telecommunications and power) and key strategic sectors (such as steel, coal, and banking).
But the traditional single-sided markets where SOEs lead are now being disrupted by new technology firms like Alibaba and Tencent, which straddle multi-sided markets of production, logistics, and distribution by using unified platforms that benefit from economies of scale. By creating platforms for consumers and small-scale producers – what is essentially public infrastructure – these firms have directly challenged the SOE business model.
New digital platforms respond quickly and efficiently to public needs. These businesses are more collaborative or sharing than the traditional business of manufacturing, allowing consumers and smaller start-ups to shape products and services, from design to distribution. Given China’s population of 1.3 billion – a major competitive advantage in terms of innovation and purchasing power – these platforms can disrupt the incumbent one-sided market producers by offering superior scale, speed, and convenience, including access to global markets.