April 18, 2011

Flying High

Government-owned enterprises such as China Eastern Airlines are acting a lot more like public companies these days.

Sharon Kahn
Topics: China, Management
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Government-owned companies in China have profited mightily from their country’s burgeoning middle class. In recent years, many of these firms have listed themselves on public exchanges, spent billions on infrastructure and information technology, and put their financial houses in order. They’re now ready to go global.

China Eastern Airlines is a case in point. At a forum in April sponsored by the China Business Initiative at Columbia Business School’s Chazen Institute of International Business, Shaoyong Liu, the airline’s president and chairman, described how his two-year restructuring led to profitability even as the rest of the world was battling recession. While he acknowledged the company’s $11 billion loss in 2008, he noted, “It may have made sense to pare back, but we had to follow the Chinese way. We did not lay off a single employee, and, although we did reduce executive compensation, we did not cut employee salaries.” Instead, China Eastern increased workloads, spent more than $500 million on information technology, and last year merged with Shanghai Airlines. For 2010, the company reported a $1 billion profit.

Liu, a licensed pilot who flew the Airbus that brought him to New York for the forum, said that China Eastern is now poised to take the next, inevitable step: international expansion. “Our growth of the last two years reflects China’s growth,” he said, noting that the country’s GDP, while still strong, is projected to fall to single-digit annual increases. To maintain forward momentum, “our goal for the next five to 10 years is to establish a global brand,” said Liu. China Eastern has already additional landing rights outside China, including the Shanghai to Rome route it began flying in April, and joined the SkyTeam international alliance.

Other panel members echoed Liu’s ambitions. China Merchants Bank has remade itself from primarily a lender to a commercial bank with wealth management products, equity fund management, credit cards — and a much higher capital reserve margin, explained Weihua Ma, president and CEO. Although he still expects healthy expansion within China, Ma, too, is taking his company international, recently opening several branches in the New York City area.

“China Merchants’ ability to operate here says quite a bit about the company’s governance structure,” observed Richard H. Neiman, superintendent of banks of the New York State Banking Department, who was also on the panel. Noting that the only foreign banks to open US branches since the financial crisis have been Chinese, he added, “To be able to enter the United States, banks must meet stringent US standards and follow our regulatory structure. These are high hurdles.”

“The economic needs of all nations make isolation impossible,” concluded Liu. “Through isolation strategies, we can only build prisons. Instead, China can pursue opportunity through globalization.”

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