Going private

Did move make sense for Hisense?

Hisense has been a local champion in the city of Qingdao since the late 1960s, when it started to make radios under the brand name Red Lantern.

Later it branched out into televisions and household appliances, doing well enough to grow into a multi international corporation with listed units in Shanghai, Shenzhen and Hong Kong.

Through all that time Hisense had the Qingdao local government as the biggest shareholder of its holding group. But not for much longer. Late last month, the company announced that the Qingdao unit of Sasac, the agency that manages China’s state-owned assets, will sell just over 17% of the existing shares to “appropriately qualified investors”.

The sale will reduce the state ownership in two of Hisense’s key listed units: Hisense Visual Technology (a TV maker) and Hisense Home Appliances (which produces fridges and air-conditioners).

Local media has been keen to drum up the deal as another example of the so-called ‘mixed-ownership reform” in which state shareholdings are being sold down to private-sector investors. These newcomers are supposed to bring something different to the table, not just capital but a more disciplined focus on market realities, as well as better corporate governance.

Maybe that’s why investors were pleased by the news, with the share prices of both listed firms rising strongly on the day that the changes were announced.

Hisense is one of the last of the leading home appliance makers to embrace the mixed-ownership reform, following similar shake-ups. at Midea, Haier, TCL and Skyworth. Despite the shareholding changes, the companies’ top executives have all been able to retain their managerial control.

Late last year air-con giant Gree also saw the Zhuhai government selling down its longstanding stake to a consortium led by private equity investors (see WiC448).

In that case Gree’s relationship with officials in its hometown of Zhuhai is said to have soured over differences on dividend policy: the state shareholder preferred a regular payout, while Gree’s management wanted to reinvest profits in new ventures.

For Hisense the reasons look different. It has been laying off workers, blaming the Covid-19 pandemic for paralysing overseas sales. Appliance brands like Midea and Gree (both from Guangdong province) have also forged ahead of Hisense and Haier (also from Shandong). Provincial officials will be hoping that the introduction of new investors will protect jobs and close the gap between the Shandong producers and their rivals in the south.

The idea of mixed-ownership reforms was announced in 2013, although the focus was the larger, centrally controlled state enterprises such as Sinopec. There was then a long delay until companies including China Unicom and China Eastern Airlines were given the green light to actually bring in external investors three years later. The central authorities then began to allow SOEs under the control of local governments to experiment in a similar way. This is the programme in which Qingdao’s government is trying to bring new blood into Hisense.

Beijing has been sending mixed messages on how it wants to transform China’s economy. Senior leaders extol the virtues of the private sector, especially the country’s small and medium-sized companies. In the first major policy pronouncement of his presidency in 2013, President Xi Jinping’s government also said it would give market forces a “decisive role” in how the economy moved forward.

However, the government hedged its bets by saying it would protect the “leading role of the state-owned sector” as well. And later it seemed to point more purposely towards the state enterprises as the priority by supporting the emergence of bigger and stronger SOEs as a way of delivering on national priorities. Some bosses in the private sector cried foul, claiming that they were being squeezed out (see WiC428).

The push for mixed-ownership is better seen in this kind of context. The pace of implementation has been slow and few see it as a first step towards privatising large parts of the economy. The outside investors are supposed to bring an end to the SOE mentality, not to rid the economy of the SOEs themselves.

The China Daily reported this month that more than 1,000 mixed-ownership enterprises were created last year. At least Rmb150 billion ($21.18 billion) of new funding was unlocked as a result, it added. But measuring how the reform is improving corporate governance is a harder task. For instance, about a third of China Unicom was sold to 14 investors three years ago, but there isn’t much analysis yet of how they might have contributed to a more profitable performance.

One obvious potential pitfall in the plan is that the private investors still hold minority stakes, limiting their influence on decisionmaking. In China Unicom’s case, some of the new investors are also sworn enemies of each other (Baidu, Tencent and Alibaba, for example), which may make them less likely to act together against the state-controlled investors.

There are other trends too that run counter to the message that firms must be more market-oriented in their approach. One of the consequences of Xi’s anti-corruption drive is closer oversight for many of the state enterprises from the central government. More significantly, Xi has called for a more active role from the Communist Party committees that sit in the SOEs, as well as many of China’s largest privately-owned firms (see WiC376). In this respect the new discipline that is being demanded is more political in nature and less about market forces.

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