Hosting China: Challenges with State Run Internet and Hosting Companies

25 Mar 2015 by Technology

"At one time there were literally hundreds of state run organizations in the US, UK and other western powers. Now that number has declined steadily as their ownership is transferred from government run boards to private.

While the western powers have made a huge move towards a small state run group of corporations, there is still a significant number owned by the ruling government of China. One of the new markets the government is interested in is internet and hosting companies.

This new government venture was requested by the state, who wanted more operations in aviation, power and telecommunications. Yet, while this is a move in the right direction and towards modern industries, there are still issues that China has to overcome if they want their internet and hosting companies to be a success.

The Challenges

Firstly, China hopes that its organizations and state operated enterprises (SOE's) can dominate the international market. Fewer than half of their organizations are actually close to occupying these heights and a staggering 80,000 enterprises (more than the total number SEOs in the US and UK combined) are in the '˜economic lowlands'.

The biggest block to this is that the temptation to expand their operations is too great. This is often because they have cheaper access to finance from government and state backed funding sources, favouritism from local governments in planning and land sales and limited monitoring from regulators.
While these may be seen as advantageous, there has been a clear case that the ROI has been significantly less than for private businesses. This led to the mass closing of the weakest firms, massive job losses and listing of the biggest companies on the stock market to make their operations more like that of a private organisation.
While the latter may help China backed SOEs from operating like the most successful US internet businesses, there is limited interest from outside China to invest. This has led to the returns being less than half of their privately owned counterparts. Profitability of the internet and hosting organizations has also been limited and now pale in comparison with private enterprises.

Resistance to Change?

One of the biggest challenges for internet SOEs is that China has seemed to be resisting the need to reform SOE operations like other economies around the world have. For example, their biggest oil producer, PetroChina, was supposed to be strong enough to avoid the need for change. Statistics have shown that their state run corporations can be highly inefficient and China has recently taken steps to solve this. However, Assets Supervision and Administration Commission, the state run agency, believes that the biggest SOEs are not performing as they should and are not maximising their opportunities and streamlining their efforts.
Without change, they will be unable to compete in an ever challenging economic environment with other internet and hosting companies who are willing to invest in new infrastructure and find new ways to deliver their products in ever more efficient ways.
At the same time, there has been evidence that the leaders of SOEs want to take their own direction. More than 100 officials from one SOE are now under investigation for corruption. China's leaders have also stated that they want strict pay caps for the bosses of SOEs. This is an attempt to ensure all bosses are following their instructions from the state. And that is probably the biggest challenge for state run internet and hosting companies: control from those who do not know the industry.
While clear leadership is essential in business, having leadership with no awareness of the industry is flawed. It could mean the wrong emphasis is pursued or that changes required to compete are made too late. Therefore, customers of state run internet and hosting companies will be at a disadvantage when compared to those from other organisations.

While state run organisations can have better financial backing than private organisations, there are several challenges for SOEs, especially in the internet and hosting industries. They will not be able to achieve the same efficiency levels as privately owned companies, nor will they be able to move fast enough to compete with industry rivals. This can impact upon the level of service and potential usefulness of the enterprises.

What are your concerns for China's state owned internet and hosting companies? Do you use one?"

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