Preferential treatment of state-owned chemical enterprises

China's goal of self-sufficiency has led to a series of opaque policies, putting multinational chemical companies at a disadvantage. The network of state-owned enterprises with local customers, partners and governments helps them get preferential treatment in terms of regulation and law enforcement. Even where there seems to be no bias in law enforcement, state-owned enterprises tend to be less diligent in complying with laws and regulations and, in a sense, more passive. In contrast, multinationals accustomed to compliance are more likely to comply, independent of the level of inspection or interact with the government.

A huge and little-known access barrier faced by multinational chemical companies is that state-owned enterprises have achieved great success in rural areas, which is difficult and expensive for multinational companies. Most importantly, past estimates of distribution costs may be outdated.

The preferential treatment of state-owned chemical enterprises mainly includes three aspects

Financial support. State owned enterprises receive direct subsidies from provincial and local governments, which seek political asylum from consumers and local enterprises. In the medium and short term, the barriers to profitability of state-owned enterprises will be lower, but the lack of financial discipline may become a long-term strategic disadvantage.

Support preferential financing from state-owned banks. The state can also only provide R & D support to domestic chemical enterprises.

Commodity pricing. Oil is not really an open market in China. For state-owned enterprises, the fluctuation of crude oil price is limited to 4% every 22 days, but multinational chemical companies may be completely affected by the fluctuation of global oil price (except for the future appreciation of RMB). Falling prices sometimes lead to lower prices for state-owned enterprises. At other times, they may help multinational companies that make better contract or hedging decisions. However, since SOEs are usually able to borrow at low interest rates and obtain financing on non economic terms, most TNCs find that maintaining a regular supply of inputs puts them at a cost disadvantage.

From January 2009 to July 2011, China's oil prices rose at an annual growth rate of 67%, compared with 54% in the world. For multinational companies, it is very important to choose business strategies and partners that can pass on the rising prices of raw materials.

If there is no significant advantage in process technology, multinational companies will also find it difficult to compete in the commodity market because the central government has designated state-owned enterprises to expand their business.

Government concerns about energy supply will increase. Dependence on oil imports rose from 27% in 2000 to 50% in 2009 (see Figure 5). By 2015, it could reach 69%. In recent years, many observers have argued that China will not expand, but resource demand may change that. Recent conflicts with Japan, Vietnam and the Philippines over the ownership and use of offshore oil in the South China Sea reflect the government's sensitivity to this issue.

regulations. Environmental protection and transportation safety laws increase the cost of multinational chemical companies. For example, multinational companies are required to register exports of toxic chemicals at a price of $10000 per certificate, while less compliant domestic producers can save money. In addition, "independent innovation" regulations require government contracts to favor products with Chinese intellectual property rights.