Corporate Reflections: Bright Dairy and Food witnesses China's SOE reform
State-owned enterprises have long been a crucial pillar of China's economic growth, especially in the early years of the People's Republic of China. As private business and foreign-owned businesses arrived in the market, however, the role and behavior of SOEs have become more complex. Bright Dairy and Food (BDF), one of China's leading dairy firms, has changed its ownership structure to meet the country's needs over the past few years.
The history of its predecessor can be dated back to the beginning of the 20th century, but the "Bright" brand itself was founded in 1950 under the state-owned Shanghai Milk Company. All production was navigated by the government to coordinate recovery from decades of wars. The planned economy remained unchanged for almost three decades, when increasing contacts with other countries began to bring with it the start of economic liberalization.
Yang Jiawen, head of the economics department at Shanghai Academy of Social Sciences, said the Chinese government realized that we had to introduce external resources and to learn how to utilize limited resources after China established diplomatic relations with the United States and Japan in the 1970s.
That meant more players, private and foreign in particular, entering the market. The government decided to enlarge and expand SOEs' autonomy and management authority. What was called the "modern enterprise system" was first launched on a trial basis with 100 SOEs in 1994. Two years later this brought the BDF into existence, a joint project between two SOEs – Shanghai Milk Company and Shanghai Industrial Investment Corporation.
Feng Xiao, deputy general manager of the company's production center, said they decided to employ national resources and work in the nationwide market since the company was first established in 1996.
"Because we faced a shortage of milk resources, we decided to manufacture our products in the north and northeast of the country," he recalled.
Shanghai's municipal State-owned Assets Supervision and Administration Commission was established in 1993, the first of its kind in China. In the same year, the CPC's Third Plenary Session of the 14th Central Committee decided on a major and daring move.
The plenum transferred more operational rights to the management of state-owned enterprises themselves – that included property rights, administrative power and responsibilities, and a separation of government from business decisions.
"Shanghai paid a lot of attention to mixed-ownership reform, from the very beginning. That's why the assets commission first encouraged companies to start the shareholdings system reform, transferring rights from single to multiple owners. Right after that came the issue of how to boost management vitality, and that is why the focus was shifted to the trading of shares. And finally that trading was opened to the public instead of being restricted to companies, when Shanghai began developing the capital market in the 1990s," Yang explained.
BDF's products. /VCG Photo
BDF's products. /VCG Photo
This is the development model that the BDF followed. Four years after its establishment, the company set up a shareholding system, becoming a stock-issuing corporation, and two years after that it went public on the Shanghai Stock Exchange. The 2002 listing valued the company at 975 million yuan, around eight times its initial registered capital.
By the year 2003, the number of manufacturing SOEs in the country had shrunk by 87 percent from 1978, but their output had soared by more than 1,500 percent over the same period. To revitalize productivity, in 2010 the BDF made another bold move, allowing over 100 senior leaders to hold shares. It thus became the first SOE in the city to implement what was called the "equity incentive" policy. And another import change was coming.
"Classifying SOEs into three major types was another innovative move from the city's State-owned Assets Supervision and Administration Commission in 2013 – competition SOEs, infrastructure construction SOEs, and public services SOEs. The first were to be treated normally, as they were charged with making profits and gaining market share. Most consumption goods companies fell into this first category. Neither of the other two types was charged with making money," Yang said.
As of the end of July this year, 75 percent of Shanghai's SOEs fell into the competitive category, 23 percent were in the public services sector and another seven percent in infrastructure construction. The BDF, of course, is one of Shanghai's leading competitors, and its latest expansion came just last year when it merged with an ice cream firm – Shanghai Yimin No. 1 Foods. Pu Shaohua, board chairman at Bright Dairy and Food, said consumers could get tastier ice cream more easily because of the resulting strong network and quality milk sources.
China's state assets regulator said last week that two-thirds of the SOEs have now introduced private capital, adding that the "equity incentive" scheme will soon be carried out by 10 more central SOEs and 171 locally-managed ones. The regulator also said that more than 70 percent of the SOEs that underwent ownership reform between 2013 and 2018 have posted positive profit growth.
Other than just making profits, some of the SOEs have devoted themselves to becoming platforms for the creation of other businesses. Shanghai Lujiazui Group, for instance, was set up in 1992 to facilitate Pudong New District's development, and that's obviously been a success. Shanghai Lingang Group was formed to attract businesses to the Lingang Special Area of the Shanghai Pilot Free Trade Zone. These SOEs have been and will continue to be the backstage heroes of other success stories.