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Transformation of Sinochem: Overall Marketization

Date:2011-01-15 Source:Sinochem Group

By Deshu Liu, President of Sinochem Group

As an almost “dead” company, Sinochem Group has a clearer understanding on how to survive, and is well positioned to avoid some mistakes already seen in the history.

Sinochem is an enterprise with “limited diversification in group companies and specialization in each business sectors”, engaged mainly in five sectors – energy, agriculture, chemicals, finance and real estate. It has a workforce of more than 40 thousand employees in over 200 operating units within and beyond China, and controls three listed companies - Sinochem International Corporation, Sinofert Holdings Limited and Franshion Properties. In 2009, Sinochem Corporation was established through overall restructuring and reorganization and serves as the major operating body for the Group’s major businesses. The year 2008 recorded the highest turnover of RMB 300 billion and the total assets has reached more than RMB 170 billion by the end of 2009.

As a trade company specialized in import and export of chemicals and other goods in the past, Sinochem is now accelerating the fostering of its own major services and featured commodities in the chemical area, to try to develop the domestic market and customers, while increasing the export of high-tech and high value-added products, and extends its business towards other stages of the industrial chain, such as energy, R&D, production and logistics, hastening its transformation from single import and export trade to comprehensive services.
 
“Reconstruction of Sinochem”
 
The year 1998 was a “water divide” in Sinochem’s history when the State conducted significant reform against the oil and fertilizer operating systems as the process of marketization moved further in China and the operation right for international trade was further open to the market, as a result of which Sinochem lost the exclusive operation right for its two key products within one year, and due to subversive changes occurring to the exterior operation environment, the traditional mode of operating as an import and export agent, upon which Sinochem had been depending for long, could hardly continue. What’s worse, the blind expansion and mismanagement in the former period caused the contradictions and problems accumulated in the Group to burst out during the Asian financial crisis, at which time the Group was pursued by foreign-funded bank creditors and its capital chain was broken, leading to a payment crisis which almost beat it down.

After surviving in such crisis based on the State’s support and own efforts, we realized that for traditional foreign trade entities getting used to planned economy, the overall transformation towards marketization was the only way out. Therefore, Sinochem has taken a series of significant initiatives to implement overall transformation and reconstruction which is referred to by us as “reconstruction of Sinochem”.

Specifically speaking, that means a thorough change to the rough and retarded management philosophy and pattern existing in the period of planned economy, based on the objective laws, which an enterprise should comply with when developing in the market economy, and to the mode of operating as an import and export agent which relied mainly on monopoly policies, and means overall systematical reform against every respect of the company, including the value and philosophy, development strategy, management mechanism, operating mode and the workforce, in order to alter Sinochem’s life “gene” by the roots to create a brand new Sinochem.

It could be said that over a dozen years of transformation towards marketization, the image of Sinochem has changed a lot. It has fostered strong capability for survival and development in the market economy, and experienced significant changes to its operating mode, management quality, size of assets and profitability, enabling Sinochem, an enterprise sparkling in the development history of China’s international trade, to rise again in the market economy, even getting stronger, to continue to make contributions to the whole country and the society.

As an almost “dead” company, Sinochem has a clearer understanding on how to survive, and is well positioned to avoid some mistakes already seen in the history.
 
“Effective Supplement to the Three Companies”
 
The oil trade played an important role in Sinochem’s history. Earlier in 1960s, we had already exported oil products to Albania and Vietnam to satisfy the State’s diplomatic needs. Later in 1970s, China exported for the first time 1 million tons of crude oil from Daqing to Japan, which was arranged by Sinochem.

It is 60 years of experience that enable Sinochem to take a strong position in the international oil trade. Sinochem has also established good partnership with the governments and national oil companies of many oil-producing countries, which constitutes effective supplement to the heavy energy demand in China. In addition to import, Sinochem also puts great efforts on international entrepot trade and has become an important crude oil supplier for a lot of countries. Moreover, benefiting from continuous innovations in the service mode and operating connotation of oil trade, the weighted average price of the crude oil for which Sinochem serves as an agent is generally lower than the international crude oil price at the same time and receives strong recognition from customers at home and abroad.

Additionally, Sinochem’s third-party oil warehousing and logistics service also enjoys superiority. The Group has begun to construct warehousing and transferring bases for crude oil and oil products since 1980s and 1990s. Currently, Sinochem has a warehousing capacity of 13 million cubic meters for petrochemicals, forming a warehouse network covering Changjiang Delta, Zhujiang Delta and those costal and riverside areas around Bohai Sea. As a result, Sinochem enjoys the largest commercial warehousing capacity for petrochemicals in China, and remains the leading position in China’s third-party petrochemical warehousing market. Based on such advantage, Sinochem has undertaken the mission of constructing and operating the State’s strategic crude oil reservoir, which is, as we know, Zhoushan national reserve base. Sinochem also successfully received and stored on behalf of the State the national oil products reserves in 2009, enhancing the position of Sinochem in China’s strategic oil security.

As for the energy sector, Sinochem is an effective supplement to the three top national oil companies. Sinochem defines its position as consolidating its advantages in import and export trade, international trade and warehousing and logistics services, on the basis of “two markets and two resources”, while extending its business towards upstream and downstream sectors of the oil industrial chain, in order to provide in multiple ways oil and gas resources to meet the needs of economic and social development in China. For example, Sinochem started from scratch in the upstream sector in 2001, to look for and acquire appropriate oil and gas resources in other countries, getting rid of the previous oil-trade-highlighted operation mode. For the enterprise, it would be less risky and quicker to get returns if it focuses only on domestic resources, but in consideration of the national situation, it would not be hard to see high need of oil and gas resources by China. Therefore, Sinochem intended ten years ago to “go global” to seek for oil and gas resources, which is necessary to meet the needs of the State and of the Group’s oil business transformation, despite the fact that heavy risks would possibly occur.

At present, Sinochem has possessed nearly 30 contractual oil and gas blocks overseas, with the remaining recoverable reserves within its equity coming to 542 million barrels, producing on an average 32.19 million barrels per year. Though the operation is not large in scale, it is not easy for Sinochem to count only on market operations to get such achievement without investment from the State. In the downstream sector, Sinochem’s distribution network for oil products covers the three economically developed regions – North China, East China and South China. As for the terminal market, Sinochem joins Total in building filling stations in Bohai Rim and East China, while constructing independently filling stations in Fujian Province.

When referring to the future development of Sinochem’s energy business, we envisage an internationally known oil corporation with a number of high-quality oil and gas resources and large world-class refining projects, strong comprehensive operating capability and excellent sustainability. To this end, the Group is having the construction of Quanzhou Petrochemical Refinery progressed on schedule, expecting it to become the most environment-friendly and competitive modern refinery in China using the best technologies available and to facilitate Fujian Province to grow into a modern petrochemical base of China.
 
Enhance the Competitiveness based on Internationalization
 
Sinochem is among the first enterprises in China that seek to go global, with its first factories built in other countries in 1980s. Recent years have seen big steps taken by Sinochem in overseas investment, including acquisition of a mass of oil and gas and natural rubber resources. A true international enterprise should base its fast growth on overall combination and application of such elements as global resources, markets and talents. The internationalization is not a goal, but a method used by Sinochem to increase its competitiveness.

There are two points to be highlighted by domestic companies when moving towards internationalization: first, a close integration with company strategies is necessary, which means a company must know clearly the purpose of its internationalization, what it wants and why; second, world-class management quality should be met, since the management capability is the cornerstone of successful internationalization. Unless a company has strong management capability, no expectations will be achieved even though it has got resources, brand and technologies from the international market.

Regarding Chinese companies, the internationalization does not depend upon the amount of capital, but upon global thinking, sense and vision, especially global enterprise culture, creating a cultural environment where all the employees work with each other regardless of nation, color and nationality.

Another point deserving attention is the utilization of international talents. One principle Sinochem has been observing after acquiring overseas enterprises is to employ local talents as far as possible, rather than dispatching staff from home to take over. For example, only three people were sent to Colombia by Sinochem after it acquired Colombian Emeralds, with those technology and management-related posts occupied by locals. A true internationalized company must be able to accept local talents. What Sinochem expects is to integrate its philosophy of “creating value and pursuing excellence” and its cultural value of “being a person: honest, cooperative, open to learn; doing things: diligent, innovative and pursuing excellence” with worldwide common philosophies, enabling these values to be understood, accepted and recognized by employees with different nationalities.