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SHORTLY before his confirmation as China’s “paramount leader” in 1978, Deng Xiaoping paid a visit to fast-growing Singapore. He planted a tree on a hill overlooking Jurong, a bustling industrial park built on what was once marshy wasteland close to the city-state’s harbour. Singapore’s success as a trading hub impressed Deng, who imposed his vision of economic reform on China’s Communist Party the following month, at an historic meeting known as the “third plenum”.
Singapore, which has a population of 5m to China’s 1.35 billion, remains a source of inspiration for some Chinese reformers. On the eve of the latest third plenum, held earlier this month, the Development Research Centre (DRC), a government think-tank, advertised an ambitious set of reform proposals, including an overhaul of China’s inefficient state-owned enterprises (SOEs). Simply privatising these companies remains out of the question for China’s leaders. But there are alternatives, and Singapore provides one.
The DRC’s plan named Temasek, a holding company for SOEs in Singapore, as a potential model. It was created in 1974, when it inherited 35 companies from the finance ministry. Its inaugural portfolio contained several of the firms that made Jurong eye-catching, including its shipyard and its birdpark (pictured). In the four decades since, Temasek’s portfolio has both multiplied (it is now worth S$215 billion, or $172 billion) and gone forth: only 30% of its holdings remain in Singapore itself. Its domestic holdings are concentrated in what Singapore calls “government-linked companies” (GLCs), such as Singapore Airlines (of which it owns 56%) and SingTel, a telecoms company (52%).
Temasek’s charter obliges it to increase the value of its holdings over the long term. This is a remarkably simple aim compared with the Chinese government’s manifold ambitions. It wants its holdings to promote technological progress, favoured industries and national security, among other things.
As well as clarifying objectives, the Temasek model also allows the state to distance itself from the management of its enterprises, without relinquishing ownership. Temasek avoids meddling in the day-to-day running of the GLCs in its portfolio, which are free to hire professional managers at market rates. With a few exceptions, it does not directly appoint board members either. This is partly because it does not want to become privy to price-sensitive information that might limit its ability to trade shares.
Temasek has evolved into an active investor, but not an activist one, says Stephen Forshaw, its chief spokesman. Although it does not appoint directors, it does meet regularly with its wards’ boards to make its feelings known. It also keeps managers on their toes by enlisting outside consultants, such as Bain or McKinsey, to spot industrial trends they should be aware of.
Would the Temasek model help improve the efficiency of China’s state-owned enterprises? Only one (Singapore Airlines) or possibly two (DBS bank) of Temasek’s GLCs have established themselves as international brands, according to critics such as Chris Balding of Peking University. SingTel has made successful foreign acquisitions, but other GLCs have fared less well. STATS ChipPAC, a semiconductor firm, lost money in the second quarter of this year, as a result of the costs of closing a factory in Malaysia.
The few academic studies of Singapore’s GLCs are more encouraging, however. A 2004 article by Carlos Ramirez of George Mason University and Ling Hui Tan of the IMF showed that the country’s GLCs enjoyed a higher market value, relative to the book value of their assets, than comparable private firms. They also generated a higher return on assets, on average.
In judging the performance of Temasek’s GLCs, the counterfactual is important. They may not be as obviously successful as private titans from the region such as Samsung or LG. But they are not nearly as bad as most SOEs, including China’s. The enthusiasm for reform of SOEs in China reflects their deteriorating returns and accumulating debt. According to M.K. Tang of Goldman Sachs, their return on assets was 6.5 percentage points below that of other Chinese firms in 2012 and their shares trade at a growing discount. Even Mr Balding, meanwhile, is happy to fly Singapore Airlines.
WHEN Hewlett-Packard reported quarterly results on November 26th, Meg Whitman, the chief executive, noted that the performance of many of its businesses in China had weakened. HP thus joined a growing list of American technology companies which have given recent warnings of harder times for their Chinese operations. Some commentators—and the odd executive—have mused that Edward Snowden may have something to answer for. His revelations about America’s technological spying, it is thought, are leading Chinese customers to shun American gear.
Fears of a backlash had been reinforced on November 25th when Qualcomm, an American semiconductor designer, said it was under investigation by an agency responsible for enforcing China’s anti-monopoly law. Qualcomm says that it is not aware of doing anything that might break the law and that it is co-operating with the agency. Paul Jacobs, its boss, told the Wall Street Journal that “all US tech companies are seeing pressure in China” right now.
Many are, but the reasons for this are more numerous and complex than Chinese suspicion of American snooping. Take IBM. Its revenue from China plummeted by 22% in its latest quarter, compared with the same period of 2012. Big Blue admitted that internal “execution problems” were partly to blame. Less convincingly, it also cited a delay in the completion of China’s latest economic plan and hence the tech spending associated with it.
Cisco is also feeling a chill. In its latest quarter the Chinese revenues of the American maker of computer-networking equipment were 18% lower than a year before. Cisco also forecast that its worldwide sales would fall by up to 10% in the current quarter, partly because of weakness in China. Asked on an earnings conference call whether the Snowden affair was hurting business, Cisco executives said it was causing some Chinese customers to pause before making purchases.
But Cisco’s share of sales of routers and switches to internet-service providers such as China Telecom and China Unicom, and to other providers of web-based communications and internet-connectivity services, had been falling well before the spying imbroglio (see chart). David Krozier of Ovum, a research firm, says Cisco left itself vulnerable in China by failing to respond quickly enough to advances by rivals such as Alcatel-Lucent, of France, and Huawei, a Chinese company. Another American supplier, Juniper Networks, has managed to increase its share.
As for the Qualcomm investigation, it is tempting to see this as a further consequence of Mr Snowden’s mischief. But Qualcomm is not the only foreign company under the microscope. Recently others, including Danone, a French food firm, and Starbucks, an American coffee-shop chain, have been scrutinised for allegedly fixing prices or charging too much.
The Chinese government could instead be trying to send an unsubtle signal to Qualcomm. The company dominates the market for chips that let mobile devices use super-fast, 4G mobile networks, which Chinese telecoms firms are rolling out. The sudden scrutiny may thus be intended to ensure that Qualcomm asks only modest royalties of Chinese handset-makers.
All of this suggests the cost of Mr Snowden’s revelations has been modest. American firms are having difficulties in China partly because of their own missteps, but also because Chinese firms such as Huawei and ZTE have grown into powerful competitors. The American government has, however, made matters worse by seeking to deter firms in the United States from using Chinese telecoms-networking technology, on the ground that it could threaten national security. That is fuelling what Ed Maguire of CLSA, an investment bank, calls “tech mercantilism”. China had policies favouring local suppliers of tech equipment many months before Mr Snowden’s leaks. A tit-for-tat trade battle will do far more damage to American tech firms’ fortunes in China than reports of the shenanigans of their country’s spooks.
THE announcement by a Chinese military spokesman on November 23rd sounded bureaucratic: any aircraft flying through the newly designated Air Defence Identification Zone (ADIZ) in the East China Sea must notify Chinese authorities in advance and follow instructions from its air-traffic controllers. America’s response was rapid. On November 26th Barack Obama sent two B-52 bombers to fly through the new zone without notifying China (see article). This face-off marks the most worrying strategic escalation between the two countries since 1996, when China’s then president, Jiang Zemin, ordered a number of exclusion zones for missile tests in the Taiwan Strait, leading America to send two aircraft-carriers there.
Plenty of countries establish zones in which they require aircraft to identify themselves, but they tend not to be over other countries’ territory. The Chinese ADIZ overlaps with Japan’s own air-defence zone (see map). It also includes some specks of rock that Japan administers and calls the Senkaku islands (and which China claims and calls the Diaoyus), as well as a South Korean reef, known as Ieodo. The move is clearly designed to bolster China’s claims (see article). On November 28th Japan and South Korea sent aircraft into the zone.
Teenage testosterone
Growing economic power is bound to go hand-in-hand with growing regional assertiveness. That is fine, so long as the behaviour of the rising power remains within international norms. In this case, however, China’s does not; and America, which has guaranteed free navigation of the seas and skies of East Asia for 60 years, is right to make that clear.
How worrying China’s move is depends partly on the thinking behind it. It may be that, like a teenager on a growth spurt who doesn’t know his own strength, China has underestimated the impact of its actions. The claim that America’s bombers had skirted the edge of the ADIZ was gawkily embarrassing. But teenagers who do not realise the consequences of their actions often cause trouble: China has set up a casus belli with its neighbours and America for generations to come.
It would thus be much more worrying if the provocation was deliberate. The “Chinese dream” of Xi Jinping, the new president, is a mixture of economic reform and strident nationalism. The announcement of the ADIZ came shortly after a party plenum at which Mr Xi announced a string of commendably radical domestic reforms. The new zone will appeal to the nationalist camp, which wields huge power, particularly in the armed forces. It also helps defend Mr Xi against any suggestions that he is a westernising liberal.
If this is Mr Xi’s game, it is a dangerous one. East Asia has never before had a strong China and a strong Japan at the same time. China dominated the region from the mists of history until the 1850s, when the West’s arrival spurred Japan to modernise while China tried to resist the foreigners’ influence. China is eager to re-establish dominance over the region. Bitterness at the memory of the barbaric Japanese occupation in the second world war sharpens this desire. It is this possibility of a clash between a rising and an established power that lies behind the oft-used parallel between contemporary East Asia and early 20th-century Europe, in which the Senkakus play the role of Sarajevo.
Seas of troubles
Tensions are not at that level. Japan’s constitution bans it from any military aggression and China normally goes to great lengths to stress that its rise—unlike that of Japan in the 1920s and 1930s—will be peaceful. But the neighbours are nervous, especially as the establishment of the ADIZ appears to match Chinese ambitions in the South China Sea.
Chinese maps show what is known as the “nine-dash line” encompassing all the South China Sea. In the wake of the global financial crisis, perhaps believing its own narrative of Chinese rise and American decline, it began to overreach in its dealings with its neighbours. It sent ships to disputed reefs, pressed foreign oil companies to halt exploration and harassed American and Vietnamese naval vessels in the South China Sea. These actions brought a swift rebuke from America’s then secretary of state, Hillary Clinton, and China appeared to back off and return to its regional charm offensive. Some observers say that the government is using the ADIZ to establish a nine-dash line covering the East China Sea as well. They fear China’s next move will be to declare an ADIZ over the South China Sea, to assert control over both the sea and the air throughout the region.
Whether or not China has such specific ambitions, the ADIZ clearly suggests that China does not accept the status quo in the region and wants to change it. Any Chinese leader now has an excuse for going after Japanese planes. Chinese ships are already ignoring Japanese demands not to enter the waters surrounding the disputed islands.
What can be done? Next week Joe Biden, America’s vice-president, arrives in China. The timing may be uncomfortable, but it is fortuitous. Mr Biden and Mr Xi know each other well: before Mr Xi became president, he spent five days in America at Mr Biden’s invitation. Mr Biden is also going to South Korea and Japan.
America’s “pivot” towards Asia is not taken very seriously there: Mr Obama is seen as distracted by his domestic problems. Mr Biden could usefully make clear America’s commitment to guaranteeing freedom of navigation in the region. Japan and South Korea, who squabble over petty issues, need to be told to get over their differences. As for China, it needs to behave like a responsible world power, not a troublemaker willing to sacrifice 60 years of peace in north-east Asia to score some points by grabbing a few windswept rocks. It should accept Japan’s suggestion of a military hotline, similar to the one that is already established between Beijing and Washington.
The region must work harder to build some kind of architecture where regional powers can discuss security. If such a framework had existed in Europe in 1914, things might have turned out differently.
Baidu’s sights are set on the top. The company is already the undisputed leaderof the Chinese search market, but its ultimate goal is to become the “world’s biggest media company,” according to Kaiser Kuo, its director of international communications.
Co-founder and CEO Robin Li has said he plans to make Baidu a household name in half of the world’s Internet markets in the next ten years. With recent moves into Southeast Asia and Brazil, the company has already put its overseas plan into action.
Baidu is relying on the cloud to get there. By its own reckoning, it already operates the biggest cloud in China, and the company is actively seeking out developers and partners for its “Baidu Cloud” OS, which is built on top of Google’s Android. It has already teamed up with Dell and Changhong and is in talks with more than 20 manufacturers.
The Bear Paw
On a recent tour of the 91,000-square-meter Baidu headquarters in northwest Beijing, I definitely felt the similarities to the headquarters of other Internet companies in the California Bay Area. Kuo tells me that’s no accident.
Li and fellow co-founder Eric Xu both spent time in the Bay before returning to China to start Baidu. Legend has it that Xu and Li worked together on a documentary about American innovation and were so inspired by what they saw that they decided to build a Chinese search engine.
The facilities opened up in late 2009 and now house roughly 5,000 of the company’s over 17,000 employees. Hamish Mackenzie has been told the building is shaped like a search box, though it’s not clear to me what the difference between that and a rectangle is.
The ceiling of the lobby has a massive bear paw, a nod to the company’s logo, as well as a screen showing real-time searches being made on Baidu.
Upstairs, the paw turns out to be a series of pods, including an auditorium, nap rooms and women’s and mothers’ lounges. I forgot to ask whether they double asescape pods, but, frankly, I wouldn’t be surprised.
According to Kuo, there are 42 lounges on site to foster group work among employees. Baidu hires the majority of its workers straight out of undergraduate and master’s programs, so the average age at the company is just 26.
Other facilities on campus include a doctor, yoga rooms, and a cafeteria that feeds up to 1,200.
So far, Baidu’s work culture seems to be paying off. The company posted better-than-expected revenue of $859 million and earnings of $1.26 per share in its most-recent quarter. With a lofty target of deriving half its revenue outside of China by 2020, Baidu has given its employees the huge task of accomplishing an unprecedented international expansion in a few short years.
From the looks of it, the company’s ‘bear paw’ headquarters should help put that goal within reach.