Wednesday, January 21, 2009

An Ownership Conundrum for the State

Following the previous few days' posts here and here, today I just happened to be scouring the annual reports of Dongfeng Auto, trying to figure out who owns what.

Dongfeng Auto is one of only two Central SOEs in the auto business. It began life as "Second Auto Works" back in 1969, but at some point probably figured that if they were ever to become the largest, they would have to dump the name. (They claim to be the third largest behind First Auto Works and Shanghai Auto Works.)

The hard part about figuring out ownership of Chinese companies is that it is only possible when one or more of the entities is listed on a stock market. Otherwise, there really is no requirement for state-owned (or any non-listed company, for that matter) to divulge anything about the company.

Fortunately for us, Dongfeng has at least two listed entities. One, Dongfeng Motors Group Company (东风汽车集团股份有限公司) is listed in Hong Kong, and is represented by the green box below. The other, Dongfeng Auto Corp. (东风汽车股份有限公司) is listed in Shanghai, and is represented by the purple box at the bottom of the chain.

While I'm at it, I apologize for the rough nature of this sketch. I wasn't intending it for public consumption, but I later decided that it may be of interest to some readers. Also, this sketch is not intended to be a comprehensive picture of all entities in the Dongfeng group. My goal here was merely to lay out the chain of Central Government ownership which is represented by the colored boxes.

Photobucket

The interesting thing about this picture is that the central government, in this case, SASAC (the pink box at the top) is several layers away from the entity that actually manufactures cars: the purple box at the bottom.

If you do the math, the central government only controls roughly 20 percent of the real business (100% of 70% of 50% of 60.1%). Renalt/Nissan, on the other hand, controls about 30 percent of the real business (50% of 60.1%).

It seems to me that this is exactly the kind of situation that the central government is wanting to rectify. Auto firms have already been identified as among China's "pillar" industries, and the central government has already expressed its intention to consolidate its controlling ownership in these enterprises.

While I don't think the Central Government intends to order Dongfeng to abrogate its partnership with Renalt/Nissan, the minority shareholders in the two listed enterprises (小股东) may want to reconsider long-term ownership.