China Shenhua Energy Co.
Thriving on China's Hunger for Coal
How does a state-owned energy company achieve the seemingly contradictory goals of generating high profits and carrying out government missions?
Thriving on China's Hunger for CoalBy Sara Wu
From CommonWealth Magazine (vol. 397 )
In February a massive snowstorm engulfed China, interrupting power lines across the country. As soon as disaster struck, Chen Biting, chairman of China Shenhua Energy Co. (CSEC), lead a team of top executives to the company's coalmines in Inner Mongolia.
With temperatures of 26 degrees Celsius below zero, Chen wore a thick fur coat but still trembled from the fierce cold as he addressed some 1,000 coal miners from the highest point of the open-pit mine: "The motherland needs us. We need to give something back to our country. The Shenhua spirit is to make our contribution without fearing difficulties and hardships."
Instead of returning home for the Lunar New Year, which fell in early February this year, miners at the Shendong, Ningmei and Shaanbei facilities stayed put to ramp up production. Encouraged by overtime pay and cash incentives, they energetically pitched in, boosting production by 50 percent in February, so that supplies to customers could be increased to 140 percent of the contracted amount.
More than 100 million people were affected by power outages when the snowstorm brought down power lines. China was able to quickly help the blacked-out areas only because CSEC immediately boosted coal production and supplies to the country's major power plants.
China's Energy Lifelines
China still depends mainly on coal for power generation. CSEC, which is 80 percent owned by state-owned Shenhua Group, sells 300 million tons of coal per year and holds a virtual monopoly over China's coal market. More than 50 percent of its revenue stems from coal sales to China's five largest power companies, as well as the major electricity utilities in the economic powerhouses of Zhejiang, Guangdong and Shanghai. The coal producer virtually controls the lifelines of China's power generation.
Thanks to its outstanding business performance and corporate governance, CSEC has become a model that other state-owned enterprises try to emulate. Business analysts describe it as a "modern company with a Chinese character."
In CommonWealth Magazine's Top 1000 Listed Companies of Greater China 2008, CSEC ranked 36 in terms of revenue. With net profit after tax of NT$100.9 billion, it ranked 17th among the most profitable enterprises in Greater China.
But CSEC is not only a strategic partner for Chinese power companies, it also supplies coal-hungry Taiwan. Last year the company sold 3 million tons of coal to Taiwan's state utility Taiwan Power Company (Taipower) and another 3.4 million tons to the island's industrial giant Formosa Plastics Group, which makes CSEC the largest coal exporter to Taiwan. On top of that it also exported 4 million tons of coal to Formosa Plastics' power plant in Zhangzhou, in southern China's Fujian Province.
"Taiwan is a coal-scarce area, so it needs a stable coal supplier. Moreover, Taipower has not built a new power plant in the past decade. All its plants run at full capacity every day. The situation is very tight," says CSEC vice president for coal marketing Hua Zeqiao, who once visited Taiwan for negotiations with Taipower.
CSEC owns the largest coal reserves in China and the second largest in the world. It is also the largest publicly listed company in China, and second largest in the world, in terms of coal sales.
But CSEC is making big money not only because it dominates China's coal market, but also because it distinguishes itself from other companies in its management.
Its extraordinary profitability can also be traced to two main factors. First, coal demand presently outstrips supply. Since world supply is shrinking while China's coal hunger increases, coal prices have been skyrocketing just like oil prices.
The dearth of coal has been caused by declining production in Australia and Indonesia, as coalmines in these two important coal-exporting countries have been hit by flooding and torrential rains. At the same time demand for coal in South Africa, China and India keeps rising rapidly, so that prices have gone through the roof.
Since oil prices and coal prices are directly related, coal prices invariably follow suit when oil prices soar, figures attest. Last year CSEC's price for coal in long-term domestic sales contracts rose 7.6 percent. Due to the depreciation of the U.S. dollar, the dollar-based coal price for long-term export contracts went up by an even higher 9.9 percent, which allowed CSEC's revenue and profits to grow.
"Nonetheless, we still quote the lowest price of all domestic coal producers," Chen is eager to point out.
Aside from a favorable external environment, CSEC also has a competitive edge thanks to its model of vertical integration.
CSEC is a mammoth organization that vertically integrates coal, rail transport, ports, shipping and power plants.
The conglomerate owns a total of 68 independent mines across China that it is gradually modernizing. Coal mining has a long history in China. The predicament of miners who risk their lives under perilous and inhumane working conditions has often been portrayed in movies and novels. But you won't find such scenes at the mines that CSEC runs. They are fully mechanized and automated. Instead of explosives, the most advanced imported and automated coal mining machinery is used to exploit coal resources.
"Nowadays, you can go into the mine wearing a suit and a necktie. You will only need to wash your hands and face when you come out, but won't have to take a shower," says Chen, in describing how much mining has changed since the old days. Since 2000 not a single mining accident involving more than three people has occurred at CSEC's mines, which means the company meets international safety standards.
A Modern Company with a Chinese Character
Looking at Chinese state-owned enterprises solely from the Western perspective of maximizing shareholder value will definitely not do them justice. As World Bank senior vice president Justin Yifu Lin has pointed out, many Chinese natural resources or monopoly companies have taken advantage of state-owned resources to grow large, so that they do not operate entirely according to the rules of market competition.
So what does it take to make an outstanding CEO of one of China's state-owned enterprises? Those CEOs are not measured against the yardstick of creating maximum value for shareholders alone.
CSEC is a typical case in point. Tang Wei, director general of the Department of Taiwan, Hong Kong and Macao Affairs in China's Ministry of Commerce, believes that CSEC is a company with a Chinese character that also meets Western capital market requirements for modern enterprises. On the one hand, it needs to achieve the Chinese government's political missions; on the other hand, it must post significant business results.
CSEC was spun off from a subsidiary of another state-owned enterprise, the Huaneng Group, in 1995. In the thirteen years since, the enterprise has performed well in management, customer relations and capital markets. Its portfolio now includes 35 subsidiaries and affiliated companies.
Its institutional shareholders include the Chinese State Council's State-owned Assets Supervision and Administration Commission, as well as U.S. communications giant Motorola and a subsidiary of Singapore's Temasek Holdings.
It is the Chinese government's task to train CEOs for its state-owned enterprises. Every CEO has a track record in politics as well as in corporate business and they are, of course, all loyal members of the Chinese Communist Party (CPC).
Many bosses of Chinese state-owned companies have been trained at the CPC Central Committee's Party School and have often been sent abroad for further training. The Singapore government and the GE Training Center, as well as many renowned business schools, have all trained Chinese corporate leaders. EMBA courses at China's most prestigious universities such as Beijing University, Qinghua University and the China Europe International Business School have also been popular choices.
After undergoing various kinds of training and studies, these cadres often first serve as top officials in local governments before being assigned CEO posts in state-owned enterprises. As a result their vision and sense of responsibility completely differs from Western-style corporate executives.
Before joining the world of corporate business, Chen had served as deputy governor of Jiangsu Province. During his term as deputy governor, he built close ties with Taiwanese entrepreneurs who invested in Suzhou, Kunshan and Wujiang, and he was also in charge of finding investors for the China-Singapore Suzhou Industrial Park, a joint project with a government-backed Singaporean consortium. In 2000 he joined the Shenhua Group as president, working as a trusted aide to the chairman before becoming chairman himself. In November 2004 he was also appointed chairman of its subsidiary CSEC.
Chen believes that Chinese-style management teams have particular advantages, noting, "People that rise from the masses have a broader vision, a stronger ability to take charge and a stronger sense of responsibility. They will make a better leadership team."
When still vice governor of Jiangsu Province, Chen was once invited for dinner at the home of Singapore's senior minister Lee Kuan Yew. Chen points out that Singapore's Temasek Holdings has provided many opportunities to Chinese cadres, including top managers at CSEC, to learn about modern business management in special courses.
CSEC's story reflects the special character and achievements of Chinese state-owned enterprises. On the one hand, they are dominant or even monopoly companies. On the other hand, they have proven able to absorb copious knowledge about business management and administration in Western capital markets, thus successfully modernizing the traditional Chinese state enterprise. Yet the foremost objective of state-owned enterprises is still the development of society, since "China" is their major shareholder and owner.
Translated from the Chinese by Susanne Ganz