China Law Blog

I am glad you liked the post, Dan, but what do you have against the Oracle of New Jersey?? The only history most people know is from memorizing "We Didn't Start the Fire"!! You gotta respect that...

In the US the auto industry ought to be close to violating the Sherman anti-trust Act, especially if the Chrysler-GM merger goes through.

KK,

There are two kinds of people. Those who DARE ascribe NJ oraclehood to a B+ lounge singer and those who KNOW it belongs to THE Boss. I listen to the E-Street station on my sirius radio both coming and going to work EVERY day and then right before I lose the satellite signal when approaching my building's garage, I switch to a CD of The Rising. I don't gotta respect nuthin.

Greg:

Amen to that! Its just that, as a child of the 70s growing up the cultural morass that was the Minnesota, Billy Joel still retains some semblance of mystery and sophistication. How we ever produced Bob Dylan, Prince and the Replacements I'll never know!

You'll be glad to know that I am seeking professional help for this.

I aaaaaaaaaaaaaam an innocent maaaaan, oh yes I aaam, an innocent maaan, ooh oooh ooooh....

I disagree with this assessment.

The whole idea of "pre-consolidation" is a western idea which springs from the American experience with industrialization in the early 20th century. This experience has no relation to the Chinese experience that as China becomes more developed, unprofitable businesses will be forced into bankruptcy or be bought out by stronger competitors.

The Chinese central government in Beijing has tried to cut down the number of airlines and auto manufacturers, but has always encountered strong resistance from the provincial governments, who always sought to protect their own industries with the financial support of local branches of state-owned banks. The industries which do consolidate are logistics, shipping, etc. These are not viewed as prestige industries, and are often owned by foreign WFOEs.

As the Chinese economy stagnates, I see Chinese regionalism becoming stronger, not weaker. It is highly likely that provincial governments will introduce tariffs to protect their own industries, at the expense of the government and ministries in Beijing. If there is a complete breakdown of party cohesion, then you will have provincial governments which no longer hand over their taxes to Beijing. The only leverage Beijing will have over the provinces will be control of the military.

So I say that "pre-consolidation" is another one of those western notions which someone has tried to transplant wholesale to China, and simply does not reflect the ground realities in China.

@Paul Denlinger

Consolidation has already happened to some degree. If you need specific examples then look to the steel sector in China.
In the early 90s in shanghai steel production is shared between dozens of manufacturers. Now Baosteel controls roughly all production in shanghai.

Yes, it has happened in steel. This is because Beijing controls the financial pursestrings for steel especially tightly, and has been particularly aggressive in fighting the addition of what it considers to be excess steel manufacturing capacity.

But it has not happened in airlines or auto production. And many other industries. I would say that consolidation has happened in steel, but it is too broad a generalization to say that "pre-consolidation" has happened throughout industry in China.

Therefore talking about pre-consolidation throughout industry in China is a false conclusion and an incorrect observation.

@Paul Denlinger
The two examples you've listed are two sectors where we've seen double digit growth in demand for the past 10-15 years. Consolidation won't easily happen when revenue is good. At the first instance of over capacity then these industries will too be forced to merge. Btw the future is not too bright for local auto makers. They are now starting to feel the competition from foreign producers such as GM and Volkswagen. In fact domestic customers prefer the prestige attached to foreign models and have increasing wealth to purchase a higher priced car.

Steel consolidation happened in Shanghai strictly because, in the early 90s when steel consumption has yet to grow dramatically, firms were out competed by Baosteel who could produce higher grade steel products at lower cost.

Also consolidation has already occurred in most if not all heavy industry in China. Why not take a look at aerospace manufacturing , shipbuilding, electronics sector?

A much more telling example would be to observe the dairy industry now and see if pre-consolidation is at work.

For the most part, the part of the economy where you see consolidation is what Jack Perkowski, author of Managing the Dragon, calls the "foreign local market" See:
http://www.chinavortex.com/2008/06/getting-the-dragon-right/

However, there is a very large part of the Chinese economy, which Perkowski calls the local local economy, which is very fragmented, and where new companies are constantly coming in and competing on price. This economy mainly serves less well off Chinese and those in the inland provinces. With the recent collapse of financial markets, and the unfolding breakdown in trade finance, I see more companies and individuals leaving the local foreign market and rejoining the local local market, where the trend will not be consolidation but increased fragmentation based on price competition. This means that the trend towards consolidation, at least in some areas, will be reversed.

I do not disagree with you that consolidation is occurring in some industries and may continue in that direction. But I strongly disagree in extrapolating from that and saying that the whole Chinese economy is in a "pre-consolidation" phase, especially in light of current events.

Only about 400 million Chinese out of a population of 1.3 billion now feel wealthy. They have not been wealthy long enough to forget about the importance of saving money, the way Americans have.

And are now relearning all over again.