SOE’s construction companies changing thier practice   Leave a comment

China has many SOE’s (State Owned Enterprises) Construction Companies. There are some of the largest construction companies in the world and they work both in China and outside China. Familiar names are China State Engineering, China Road & Bridge (China Communications Construction) Sinohydro, just to name a few.

Being SOE’s they are bureaucratic behemoths, employing thousands of workers and involved in hundreds of projects at anyone time. They are not always run with the most efficient modern management practices as profit is not always the ultimate goal of these companies.

As for construction equipment purchasing and management, they have their own unique set of practices. Usually, with these firms, they buy everything brand new from a dealer. They do not buy anything used (or very little, if they have to).

Often, they use these new machines on projects, which is all well and good. But the problem is that when it comes time to sell the machine, they are hindered by government accounting practices from selling such machines.

Why? Well, the government deems any piece of CE to be property of the state. As such, the selling and disposal of that property must follow very strict guidelines, in order to fend off companies (or individuals within those companies) from selling the machines for a low price (and then receiving a   from the buyer).

For the most part, the general rule is that the SOE is not allowed to sell the machine for less than book value. 99% of the time, the book value is almost always higher than the current market for that machine, making it almost impossible to do a deal. And because most equipment management departments know it is very difficult to sell these machines, they have no incentive to follow a proper maintenance program for the machine.

As an example of the extent of this problem, when I asked one of the major SOE’s how many large CE machines the group had in its inventory, he stated over 30,000 machines. When asked what was the utilization rate of these machines at any given time, he said it was usually less than 40%.

So for 60% of the machines (approx 18,000), they sat idle, earning no money for the SOE. In fact, they were costing the SOE money through depreciating, loss of interest, holding and maintainance costs, marketing and sales cost (if any). These 18,000 could be turned into cash if they sold at current market rates and the SOE could be taking that money and investing it in projects that would make the SOE money. Instead, the value sits in an idle machine that is costing the SOE money.

Even when the book value of the machine is written off (usually after 10 years), the market value of the machine is significantly less. Most likely the machine had been sitting idle for many years so seals and hoses would all need to be replaced. As the machine had no resale value to the SOE, the maintenance of the machine would have been minimal to begin with.  And operator practices in this part of the world are not the most conducive to maintaining a good used machine. In other words, the machine would be very rough and cost a lot of money just to get the machine back up to a marketable and saleable state.

And finally, if you are able to get your hands on a machine from any SOE, whether it be in good condition or not, you will have to pay some backhanders to the sellers.

But here is the whisper of change. SOE’s have realized that this is a very inefficient way to manage their fleets. In recent years, many of  the SOE’s have been turning to leasing and renting machines as a way to better maximize their cash and capital investment. The whisper is that starting in 2012, all SOE construction companies will not buy CE anymore and will be required to lease or rent machines needed for their projects.

This is a much needed change in their procedures and will make them more efficient and competitive. It will also root out chances for corruption both on the purchasing and disposal sides.

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