In 1984 the largest company in the world was broken up. The US Justice Department accused AT&T, then known colloquially as “Ma Bell”, of unfair practices. Ma Bell had enjoyed a government-sanctioned monopoly on US telecommunications for 50 years, and used it to dominate related markets. Today the world’s largest power transmission company is facing similar pressure. But unlike AT&T, China’s State Grid Corporation appears to be coming out on top.
Earlier this month, Canadian mining company QuadraMining announced a plan to develop a Chilean copper mine with State Grid International Development, a subsidiary of the Chinese giant. Copper is used in transmission cables, and State Grid International wants to expand its supply. “[They have] collected information on more than 40 potential mining projects all over the world,” reports the Economic Observer.
But it wasn’t supposed to turn out this way. In 2002, the Chinese government split its national electricity monopoly into two main grid companies (State Grid and China Southern Power Grid), and several power generation companies. The State Council declared a policy of “plant-grid separation” that was meant to make room for competition.
“The initial motivation was to find out the true cost of power grid operations – if the grid companies only engaged in their core transmission business, then costing would be more clear and simple,” explained the New Century Weekly.
And under the State Council’s “major-minor business separation” policy, the grid companies were supposed to divest all non-core assets in ‘secondary companies’.
But the politically-connected utilities perceived things differently. Power shortages persisted for two years after the policy began, strengthening the grid companies’ arguments for ‘stability’ over competition. Reformers continued to argue for the divestments, but the utilities once again had the upper hand after snowstorms disrupted power supplies in 2008. Since then, State Grid’s size and power has only grown.
Last year, it purchased Pinggao Group and a controlling share in XJ Group – leading makers of electrical equipment. The company has spent more than Rmb12 billion ($1.75 billion) on acquisitions since 2005, and analyst Wang Yuquan told the Economic Observer he thinks “[they have] basically formed a complete industrial chain.”
“State Grid wants to build China’s Siemens,” another industry insider told the magazine.
That’s bad news for competing equipment makers, who say they’re kept out of the market. After failing to get State Grid’s recent acquisitions vetoed by the government, the China Machine Industry Federation said that State Grid’s acquisitions were “contrary to the spirit of fair competition”. The Federation points to a recent contract to build a “large-scale pumped storage unit”, which it says was awarded to a State Grid subsidiary without competitive bidding.
State Grid disputes claims that it’s violating limits imposed by the State Council. “We should not have an absolute limit to the expansion of the industrial chain,” contends senior State Grid advisor Zhou Xiaoquan. “There is consensus in the industry that hotels, hospitals, schools and other businesses are secondary,” explains the New Century Weekly, “but are electrical equipment design and construction?”
Some think the answer is an obvious one. “There is no need to redefine [what are] secondary businesses,” one government electricity regulator told local media, “[the reform document] made it very clear that monopoly power grid operators should withdraw from this field of competition.”
Fine words, but they are unlikely to put a stop to State Grid’s plans to vertically integrate. And to grow its share of the international market. A big ambition – which the government may covertly share – is to leverage its patents and economies of scale in building ultra-high voltage (UHV) grids in China to start exporting this same UHV expertise around the world (see WiC3).
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.