Progressing through transformation

About report

"Progressing through transformation - study on SOE reform in auto industry" is the 7th publication of SOE reform whitepaper series, and it's the first attempt to look into the impact of SOE reform from the industry perspective. We surveyed top executives from auto SOEs to understand the impact of SOE reform on these companies, and presented several case studies on how to tackle the challenges that may encounter when driving SOE reform.

Viewpoints / key findings

China auto industry is experiencing a number of serious issues, such as the structural overcapacity and the stimulus policies brought forward the demand of auto consumption at the expense of future sales growth. Thus, SOE reform becomes one of the driving forces to settle the industry contradiction and push it forward. Following is a summary of SOE reform trends and the key findings of the SOE reform survey in the auto industry.

Trends for auto SOE reform:

• Though SOEs hold the majority market share of China auto industry, their economies of scale failed to bring higher efficiency and enhance the competitiveness. The management efficiency at SOEs could be further improved.
• In the long run, the state-owned automakers' profitability will be challenged as the withdrawal of stimulus policies, couple with the intensified market competition will trigger the periodic downward pressure on car consumption. 
• The current salaries of top executives in auto SOEs are significantly lower than those in auto MNCs and private enterprises, which frustrated their work enthusiasm and brought higher risk in brain drain.
• It could be predicted that: the reform process will speed up, the reform scope coverage will be broader, the equity ratio of state-owned capital in the mixed-ownership is expected to increase, the non-public entities involved in mixed-ownership reform will hopefully get more institutional guarantee in the board composition and operational decision-making, etc. The reform will become a driving force to tackle the challenges in the industry and push it forward.

Key findings from the survey:

• More than 60% respondents believed that the main challenges facing China auto industry are structural overcapacity, the backward management of auto SOEs, and the stimulus policies brought forward the demand of auto consumption at the expense of future sales growth.
• SOE reform is an urgent task for China auto industry, while the top executives are cautious on its prospect, with more than 70% respondents being neutral or even pessimistic.
• The next step of the reform will center on the mixed-ownership, bringing in strategic investors through implementing employee share-ownership and improving modern enterprise system. Then, to the end, increase the securitization ratio for state-owned assets via group or partial IPO.
• Over half of the respondents were pessimistic on the prospect of liberalizing the restrictions on the share ratio of auto joint ventures, and believed that joint ventures could not play a role in the mixed-ownership reform. While about 30% respondents indicated that foreign companies could involve in the SOE reform through the internationalization process of "One Belt and One Road" initiative for China auto companies.
• Another priority for auto SOE reform is to establish a market-based system for talent management. 64% respondents said that differentiating the compensation allotment will be a major task of the reform, and followed by implementing the professional executive recruitment and the board of directors mechanisms.