May's announcement that the government would hire SOE senior managers through open recruiting instead of making inside appointments didn't create much of a stir among Mainlanders with foreign MBAs – the group that most handily meets the desired qualifications.
That is possibly because the MBAs were busy angling for careers in investment banking, management consulting and MNCs – or striking out on their own as entrepreneurs. Stacy Palestrant, executive director at US-based business consultancy Katzenburg Partners, says that, with so many opportunities in China, this group is looking past the SOEs.
Palestrant will know more as time goes on. She is leading a longitudinal study that follows the career of 115 mainland MBA graduates from top American MBA programs until the year 2024 as part of an effort gain insights into China's first generation internationally trained business leaders. MNCs are the most coveted jobs because the training they expect to receive," she says. "Training, development, opportunities and a sense of professionalism is what they want. There is a sense that there's less meritocracy [at SOEs]. They feel they will be objectively evaluated at an MNC."
SOEs, indeed, can be just about the worst place for a top MBA to go, according to Larry Wang, a Beijing-based executive headhunter with an MBA from the University of California, Los Angeles. "If you have a Wharton or Harvard MBA, going to an SOE can be career suicide," he says. "The SOEs have so much politics, bureaucracy and legacy."
Low pay scales at SOEs represent another downside. Though executive pay at state companies has been on the rise, it still lags far behind Western MNC packages. The chief accounting officer and assistant general manager at China's State Development & Investment Corp, for example, makes US$29,000 a year, compared to his MBA counterparts in Western firms, who start at about US$80,000.
Executive compensation at state companies tends to test the limits of "market socialism", making the leadership schizophrenic. As it tries to reconcile concepts of profit maximization and egalitarianism, Beijing is reportedly considering putting a ceiling on SOE executive salaries: no more than 14 times the average worker's salary. They might have been reading Paul Krugman in The New York Times, who complained in an August 23, 2002, column that CEO salaries in the US, only "40 times the average worker's generation ago, had climbed to a multiple of 500 since.?
Then there are some who argue the case for both market-driven and controlled outcomes simultaneously. Li Rongrong, China's State Assets Supervision and Administration Commission chairman, who has argued that salaries for key central SOE managers be market-driven, has also said the gap between management and workers should not widen further.
It is possible growing competition for talent will force Beijing to ease up. According to Deloitte Touche Tohmatsu, Chinese colleges and universities accepted 3.8m new students in 2003. With MNCs, SOEs and China's burgeoning private sector all racing to expand and grow, the pool of skilled managers risks running dry quickly.
"I believe as SOEs are increasingly exposed to market competition, they will be more keen on offering compensation packages for good talent, but it will take time," says Norman Sze, managing partner at Deloitte Touche Tohmatsu. Indeed, as he points out, some state companies have nearly caught up some respects: factor in housing and car perks, Sze says, and some key employees are already remunerated at near MNC levels.
SOEs' upside Helen Gao, a recent University of Chicago MBA graduate who coordinated corporate restructuring at China Netcom and China Telecom before she went abroad, warns against over-generalizing SOEs. While state companies may be thought of as synonymous with inefficiency, Gao says her experience at China Netcom and China Telecom proved otherwise. "Most of my job involved dealing with MNCs, and I don't feel they were more efficient."
Paul Denlinger, principal of consultants China Business Strategy, is writing a book on China's reforms and he agrees they sometimes get a bad rap. "When you look at these companies, you have to look at the board, at its constituency and at their background," he says. They are no longer as heavily packed with political appointees as one might think, he says, citing China National Offshore Oil Corporation, the country's third largest oil producer, which recently bid for US-based Unocal Corp.
For a country that has never witnessed an acquisition of such scale by one of its own, CNOOC's bold thinking set a new standard in his book. Denlinger predicts SOEs will get savvier as more private and foreign money, and management know-how come into play.
Gao argues China's state companies also offer opportunities at the top: "Except in rare cases, my feeling is that MNCs are not hiring Chinese for senior management positions, but the SOEs will give those opportunities to the locals."
But even she concedes state enterprises can be fraught with "complicated mechanisms," not least office relationships. "From some perspectives, relationships are more important than performance," she says.
Sze, however contends that the importance of relationships, or guanxi, is actually diminishing. The bigger challenge for overseas-trained MBAs is the culture shock. "They're not used to the local SOE environment, "Sze says. "The SOEs need to improve cultural integration and must have the right expectations. Success in other parts of the world doesn't always translate to local conditions."
Local conditions also include a hierarchical power structure that precludes teamwork so prized by MNCs – and foreign MBAs who can find themselves without any real authority to act, while locals view them with suspicion or jealousy.
Image makeovers needed
If SOEs have their image problems, so too do some MBAs. According to China Business Strategy's Denlinger, "[they] have a high view of their capability, but some don't meet the expectations."
To Fred Yang, a Stanford MBA who runs a Cummins Inc business unit in China where it generates around US$1bn in revenue, the younger MBAs don't yet have the "sophistication to deal with the SOE system."
Not that rebuilding a vast enterprise doesn't present compelling challenges: "Turning around something that huge is attractive." The problem is, Yang says, the SOE hierarchical structure doesn't allow for much autonomy. "The first generation of international Chinese business leaders that tries its hand at it will fail because of the cultural clashes."
Yang says it will take time for the old guard at state companies to trust the new generation of Chinese business leaders. China needs to go through the first round with the foreign MBA graduates to understand the value of an international background "before it knows how to leverage their expertise". Right now, the SOEs are in another world, he says.
Many SOEs are looking for foreign-trained executives to go public or attract investors, Yang says. "They want them for show, not for value, and as a result they really can't do much."
That could change when China fully and finally opens to foreign competition.