Mud sticks for China’s warring heavy industries
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
In China, the stodgy world of construction equipment has become a hotbed of fraud accusations, espionage and attempted kidnapping. It shows what happens when fierce competition comes without clear rules.
Shares in Zoomlion, which makes pumps for liquid concrete and digging equipment, rose 6 percent on Oct. 28 after a newspaper that had questioned the company’s finances admitted it hadn’t checked its facts. Zoomlion, which denied the accusations all along, suggested an unnamed competitor was behind the rumours.
This is not the first instance of alleged foul play between rivals. Changsha-based Zoomlion and its cross-town rival Sany, effectively the Coca-Cola and PepsiCo of concrete pumps, have been fighting publicly for over a year. In July, Zoomlion denied media reports that it was behind an attempt to kidnap Sany’s chairman’s son. In December, Sany said it was moving to Beijing to escape “malicious competition”. Over the same period, both companies’ valuations and sales have slumped.
Rivalry should make companies more efficient, but the opposite has happened. One reason is that competition hasn’t been accompanied by capital discipline. Zoomlion is state-owned while privately owned Sany is large and well connected to the ruling Communist Party. Both can push banks around and access capital on good terms.
That encourages overexpansion and makes the crunch worse when it comes. Revenue at Sany and Zoomlion expanded by 50 percent or more in recent years. Both companies piled on new capacity, until sales collapsed in 2012. It should have been clear long before that such growth wasn’t sustainable.
China’s fuzzy accounting makes self-defence harder. Building equipment is particularly prone to confusion, since large items are often paid for over time, leaving lots of discretion on how revenue is recorded. Even if Zoomlion and Sany follow the norms to the letter, which both argue they do, widespread and justified scepticism of China’s accounting norms makes it hard for investors to be phlegmatic when rumours hit.
There are wider problems too. China’s poor protection of ideas makes intellectual property theft an obvious way to get ahead. That explains the machine makers’ numerous claims they are being spied on. The rule of law is also weak – as shown by the televised “confession” of the journalist detained for rubbishing Zoomlion. When rules are strong, getting ahead means making a better product. When they’re weak, it’s easier just to sling mud.