China's Government-Controlled Economy Leaves a Mark on the Machinery Market

Two Chinese equipment makers recently made acquisition bids for Putzmeister. The government decided which one emerged a winner

Two recent examples from China illustrate how difficult it is for a single-party government to relinquish control of a vast country's economy after decades of central planning. Despite outward appearances of a market economy, Chinese government intervention is still very much in evidence. And it can make doing business in China a rough-and-tumble experience.

Recently two Chinese equipment manufacturers, Sany and Zoomlion, made acquisition bids for Putzmeister, the German concrete pump manufacturer. The Chinese government had to approve the deal because of the government’s need to closely control capital flows out of the country. A recent article in the Shanghai-based First Financial Daily said the Chinese National Development and Reform Commission had not given either bidder approval to acquire Putzmeister when Sany declared it was the winner.

Zoomlion had been invited by Morgan Stanley, Putzmeisters’ advisor, to bid. After securing what the company thought was approval from the government commission, Zoomlion signed an agreement with Putzmeister. But in late January Sany Heavy Industry announced it would pay $426 million to buy a 90% stake in Putzmeister, while its investment partner, CITIC PE Investment (Hong Kong), would purchase the remaining 10%. The deal between Sany and Putzmeister was finalized in March.

The Sany announcement sparked protests at Putzmeister's headquarters by the company's German employees. Putzmeister Machinery Shanghai suspended operations, with assembly-line workers complaining about the company's pay policy. The decision to suspend operations was made at an employee meeting where a Putzmeister executive announced several new policies. After the acquisition by Sany was confirmed, employees expressed their concerns over the company's personnel plans. Sany president Xiang Wenbo told the Chinese press that no employees would be laid off during the takeover. Putzmeister would also retain its independent brand and its management team.

The second example of Chinese government intervention is in the automobile sector, a little far afield from construction machinery, but the story illustrates the extent to which the Chinese government remains in control of the economy. According to an article in The Wall Street Journal, Zhejiang Geely Holdings Group that purchased Volvo Cars in 2010 wanted to establish a 50-50 joint venture with its Volvo unit and create a China-only brand. The Journal article went on to say that Geely initially sought a deal that would allow Sweden-based Volvo to build two factories in China, one for the Volvo brand and one for a second brand, and run them independently.

Chinese policy makers rejected the appeal because they consider Volvo a foreign car company – even though it is owned by a Chinese company – and China wants to protect its domestic car manufacturers. The China government’s decision means that Geely‘s Volvo will have to establish a joint venture with another domestic Chinese manufacturer.

Geely and Volvo applied to China's National Development and Reform Commission to create the joint venture and set up a new China-only brand. Volvo said it would prefer not to establish a China-only brand, but will do so only if required by the Chinese government.

As capitalist Americans, we have grown to insist on markets that have few regulations or barriers to entry; that promote robust competition. Trusting the market to select the best designs, select winners and losers, and set prices without intervention is sometimes referred to as "laissez faire" capitalism. The concept was first written about by Adam Smith in his book “Wealth of Nations,” published in 1776 where he described an unfettered market as behaving as if it were controlled by an “invisible hand.”

Although some western countries have drifted pretty far from Smith’s principle, his idea is still spoken and written about, especially by libertarians who incorporated Smith’s idea in their own motto to suit their belief, "that government is best which governs least.” The twist on Smith’s motto was actually written by David Henry Thoreau in 1849.

Sometimes we forget that the U.S. economy has taken more than 200 years to develop into the system we have today.

Governments that try to pick winners and losers usually do a poor job.

After nearly 75 years of communist rule, the Soviet Union collapsed and converted to a market economy for a number of reasons, among which was the fact that its centrally controlled economic system couldn’t provide its citizens with the basics to survive, notably food and shelter. More recently we’ve seen The Peoples Republic of China adopt a market economy system for the same reasons. Central planning couldn’t keep up with supplying the needs of 1.3 billion people. The Chinese leadership realized if they didn’t change to a market economy, they would lose control of the country just as the Soviet politicians did 20 years before.

Market economies have proven to be the most efficient method of delivering goods and services.

But changing the economy of a huge country like China is not easy and it will be years before government officials will allow a complete transition. The current situation can best be described as a rough-and-tumble environment with huge bets won and lost on unpredictable government intervention. As the Chinese government settles those bets, we can expect more intervention similar to that in the Putzmeister and Volvo deal.