I’m in Beijing today, hosting a dinner honoring CEOs of Chinese companies on the Fortune Global 500 list. There are more than 100 of them – a head- spinning increase from the turn of the century, when there were only 10. Meanwhile, the number of U.S. firms on the Global 500 list has dropped to 128, from 179 in 2000.
But here’s the thing: most of the Chinese companies, including the top 12, are state-owned enterprises – companies like State Grid (#2), China National Petroleum (#3) and Sinopec (#4). They owe their size to monopoly positions in China’s massive market, and easy access to government credit. Their position says little about China’s ability to compete in the outside world. Indeed, those very factors often make it difficult for them to expand abroad: witness Australia’s reluctance to let State Grid buy sensitive network assets recently.
Tonight’s dinner is part of the run up to next year’s Fortune Global Forum, which will be held in Guangzhou in December. Earlier today, Guangzhou Vice Mayor Cai Chaolin and I hosted a dialogue with a number of Chinese business leaders focusing on the importance of openness and innovation in business. There was universal agreement that, more than ever before, successful global companies need to be open to outside influences, in a mode of continuous experimentation, and willing to tolerate errors and mistakes.
China’s state-owned enterprises, however, are better known for the opposite: cloistered thinking, massive bureaucracy, and risk aversion. “This is a challenge for state-owned businesses,” acknowledged Zhang Zhaoxin, president of state-owned Yuexiu realty and finance group in Guangzhou. “I hope the government will promote more open policies for state-owned enterprises so we can pursue innovation.”
To be sure, China has its impressive innovators – private companies like Alibaba, Tencent, Baidu and Huawei come to mind. And the Chinese government’s focused determination to create a culture of innovation is an impressive thing to behold. Cai Jian of Peking University told how his school has transformed itself in the last few years from an exam-driven culture to one where teachers have become coaches, classes have become workshops, and students compete to innovate.
Still, it’s difficult to imagine China taking the lead in global innovation as long as its biggest companies are in the government’s grip.
More news below. And a correction: In my jet-lagged brain fog yesterday, I wrote that two-thirds of the people in developing countries have had flat or declining incomes for a decade. I meant developed countries.
More news below.
• The Fed Is Wary of Trump’s Stimulus Plans
Federal Reserve officials cautioned on Monday that the incoming Trump administration’s economic plans should not be cast as if the economy is in crisis. The comments reflected a developing debate within the Fed over the impact of president-elect Donald Trump’s leadership of a Republican-controlled government. St. Louis Fed President James Bullard expressed concern that overly aggressive fiscal, tax and other changes could become inflationary given the economy’s current strength, while the Chicago Fed’s Charles Evans said “you don’t need explicit stimulus” with a jobless rate of 4.6%. Both agreed that measures to improve long-term productivity would be welcome, however. Evans singled out infrastructure spending and a more rational corporate tax regime. Fortune
• Korea’s President to Leave; Pressure Mounts on Chaebols
South Korea’s President Park Geun-hye bowed to mounting pressure and promised to resign in April, if she hasn’t already been impeached by parliament in the meantime. Park’s decision follows a wave of public revulsion at revelations of influence-peddling by a close associate, Choi Soon-sil. The heads of Korea’s eight largest companies, including Samsung and Hyundai, were brought before a parliamentary inquiry Tuesday and interrogated on national television about their role. Lawmakers are investigating why the companies repeatedly made donations to foundations controlled by Choi. Fortune
• Lego Shakes up Top Management in Strategy Change
Lego, the privately-held Danish maker of plastic toys, is restructuring to open itself up to more partnerships in new areas and geographies. CEO Jorgen Vig Knudstorp will take over as chairman and also become chairman of a new company called the Lego Brand Group, which he told the Financial Times will act “kind of like a private equity owner.” He’ll be replaced as CEO of the toy company by COO Bali Padda, the first non-Dane to take that position. Knudstorp said the Kristensen family, which still owns 75% of the company after four generations, has no plans to sell down its stake. FT, metered access
• Italy Is Preparing to Nationalize Its Biggest Problem Bank
Monte dei Paschi di Siena, Italy’s third-largest bank and the prime candidate for the title of ‘First Domino to Fall’ if the country mismanages the fallout from Sunday’s referendum, may be nationalized, according to various media reports. That would need special dispensation from European authorities, but would at least allow a new caretaker government to avoid a politically explosive bail-in of junior bondholders. MPS’s shares are flirting with a new all-time low this morning, while other banks are rallying on hopes that the precedent will allow them to be bailed out too. MPS had hoped to attract €1 billion from Qatar’s Sovereign Wealth Fund, but the Fund appears to have been put off by the prospect of political instability. In Rome today, President Sergio Matarella is expected to ask Matteo Renzi to stay on as Prime Minister at least until a budget law for 2017 is passed later this week. FT, metered access
Around the Water Cooler
• Social Media Giants Team up to Meet New EU Threat
Facebook, Twitter, YouTube and Microsoft announced a new response to fresh pressure from the EU to clamp down on hate speech and terrorist content on their networks. The companies said they will create a shared database with the unique digital fingerprints—called “hashes”—of terrorism images and videos that violate their content policies. By having access to this group database of identifiers, the companies believe they can more efficiently flag and potentially remove offending content if users attempt to publish it on their online services. The database won’t contain personally identifiable user information, however, and all of the companies affected will continue to make their own decisions on removing content and banning users. The collaboration raises the question of whether it could be a template for cooperation on suppressing fake news. Fortune
• McDonald’s Wants to Be the New Starbucks
McDonald’s is challenging Starbucks and Dunkin’ Donuts in the coffee business as part of an effort to attract more customers. The fast food company will reintroduce a newly branded McCafe, complete with upgraded $12,000 espresso machines, special deals for customers and a promise to buy more sustainably sourced coffee, to raise its profile. The initiative comes as McDonald’s struggles with a decline in footfall at its regular restaurants, symbolized somewhat poetically by the death last week of Michael Delligatti, the inventor of the ‘Big Mac’. Fortune
• Under Armour Secures First Major League Sponsorship Deal
Under Armour has confirmed a 10-year uniform partnership with Major League Baseball, its first-ever deal with a major U.S. professional sports league. The deal will begin in the 2020 MLB season and will give Under Armour exclusive rights for 10 years to provide MLB teams with all their on-field uniforms, including branded jerseys, base layer and game-day outerwear gear, and training apparel for all 30 teams that play in the league. CEO Kevin Plank called it a ‘watershed moment’. Financial terms weren’t disclosed, but the risk is that it may have overpaid after an extraordinary spike in ratings due to the Chicago Cubs’ recent World Series victory. Youth participation in baseball is down sharply and that could dampen interest in the pro sport in the years to come. Fortune
• Ford, VW Look to the Future With New Technology Bets
Ford and Volkswagen both took steps to beef up their presence in the emerging technologies and services that are increasingly dominating strategy in the auto sector. Ford Americas President Joe Hinrichs said the company would borrow some $2 billion–its first automotive-related long-term debt issue in four years–to fund investments in new technology (cash flow dropped sharply in the last quarter due to lower sales and higher recall costs). Meanwhile, VW launched Moia, a new vehicle for investing in diverse technologies, in Berlin. Moia will wrap in the Gett ride-hailing service in which VW invested $300 million earlier this year, and aims to launch an app-based shuttle service using electric vans next year. “Moia can help make everyone a customer of our company in some way or another,” in a world where the classic model of owner-users is rapidly changing. Fortune
Summaries by Geoffrey Smith Geoffrey.firstname.lastname@example.org;