From Maoist self-reliance to international oil consumer: a resource-based appraisal of the challenges facing China's petrochemical sector

Abstract

Resource-based theories of the firm argue that the success of one firm over another is largely due to its resource endowments. Large enterprises have long been recognised as leading sources of learning innovation and growth. This is not just restricted to large firms in developed economies, but also applies to firms in developing economies such as China, where large firms have long and complex histories in the state bureaucracy. Focusing on the case of China's petrochemical sector, this paper argues that even if a sector has a long history in central planning, the critical resources of a firm matter. It shows how existing organisational resources inherited from the pre-reform era, when provided with the correct incentive structures, can survive economic transition and be successfully applied under market conditions. In the petrochemical sector a key inducement was the commitment of the state to expose the sector to international developments where possible. The paper describes how this commitment has resulted in a mostly positive adjustment, but has also created ambiguities over how resources should be developed in future in a rapidly changing global industry.

Keywords:

• critical resources
• firm theory
• petrochemicals
• oil
• China

JEL Classifications:

• D23
• L33
• L71
• P31
• P45

Acknowledgement

The author would like to thank Pauline Loong, Leo F. Goodstadt, Stuart Chiron, Ashley Alder, David Li, Mathew Yiu, Roger Luk, Simon Ogus, and Steven Green for their assistance with various aspects of the research fieldwork and Laixiang Sun and Christopher Howe for helpful suggestions.

Notes

Notes

1. This estimate is based on 2005 refinery aggregate capacities of PetroChina and Sinopec over China's total refinery capacity as provided by BP (2006).

2. For a review of the factors that differentiate the energy sector from other industries and how they result in a cautious approach to energy privatisation, see Andrews-Speed and Cao (2005). Williams (1975) suggests that the CCP's ideological aversion to foreign involvement stemmed from the pre-1949 exploitation of China's oil resources by Japan and international oil companies from the US and UK.

3. Sinopec Shanghai Petrochemical Company Annual Report (1996, 21).

4. Interview: Sinopec Head Quarters, Beijing, 12 August 2004.

5. Sinopec committed itself not just to complying with US accounting standards but also to reducing costs by US$1.6 billion and integrating modern technology. ‘Investors to China: Open those Books’ Businessweek Online, 23 October 2000.

6. Interview: Sinopec Head Quarters, Beijing, 12 August 2004.

7. See SPC International Listing Prospectus, 23 July 1993.

8. Standard Chartered Securities and Wardley Corporate Finance (the merchant banking arm of HSBC) withdrew from SPC's public offering. ‘The Reds are Coming’ Global Custodian, September 1993.

9. For example, in May 2007, Jilin Chemical entered a Merger by Absorption Agreement, which effectively saw PetroChina purchase the outstanding shares of Jilin and absorb them into the larger PetroChina group. See: http://www.jcic.com.cn/PROMPTER%20ANNOUNCEMENT%20IN%20RESPECT%20OF.doc

10. According to Sinopec, many workers took this offer and started their own businesses. Interview: Sinopec Head Quarters, Beijing, 12 August 2004.

11. Interview: Sinopec Head Quarters, Beijing, 12 August 2004.

12. ‘Petrochemical industry reels from oil price rise’ Peoples Daily, 28 August 2000.

13. Hong Kong Trade Development Council: Business Intelligence China-No.8, December 2001.

14. In July 2001, a litre of petrol cost 2.58 Yuan. In August, Sinopec was charging 2.41 Yuan/litre and PetroChina 2.36 Yuan/litre. South China Morning Post, 14 August 2001.

15. ‘Giants face off in petrol skirmish’ South China Morning Post, 14 August 2001.

16. ‘Giants face off in petrol skirmish’ South China Morning Post, 14 August 2001.

17. For example, between 1959 and 1974, China increased its crude oil production from 3.7 million tons to 65.3 millions tons. In 1960, China's refining technology was roughly equivalent to that of the US in the 1930s. By the mid 1970s, refining technology was roughly equivalent to that of any Western country in the late 1950s. Source: Williams (1975).

18. ‘Sinopec to Privatise Four A-share listed Subsidiaries.’ Sinopec Announcement, 16 February 2006.

19. ABB Press Release (Zurich), 12 September 2000.

20. Interview: Sinopec Head Quarters, Beijing, 12 August 2004.

21. ‘Exxon adds 500-outlet to deal to Sinopec stake,’ FT, 12 September 2000.

22. The agreement involved the investment of US$3 billion to expand capacity from 80,000 to 240,000 barrels per day and building of a new ethylene steam cracker. ‘Sinopec firms up alliance with Exxon’ CNN (Hong Kong), 22 October 2002.

23. ‘Sinopec buys unit from parent,’ FT, 12 June 2001.

24. The levy applies to the sale of locally produced oil that exceeds US$40 a barrel. Sinopec Announcement to the Hong Kong Stock Exchange, 3 April 2006.

25. Interview: Sinopec Head Quarters, Beijing, 12 August 2004.

26. ‘Beijing increases subsidy to taxi drivers following fuel price hike,’ Peoples Daily, 11 November 2007.