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estudos internacionais • Belo Horizonte, ISSN 2317-773X, v. 9, n. 1, (abr. 2021), p. 70-93
Business and development strategies in
China: inferences based on the evolution of
SINOPEC
Estratégias empresariais e de desenvolvimento na China:
inferências baseadas na evolução da SINOPEC
Estrategias de negocio y desarrollo en China: inferencias
desde la evolución de SINOPEC
Rubia Cristina Wegner
1
Marcelo Pereira Fernandes
2
DOI: 10.5752/P.2317-773X.2021v9.n1.p70
Received on: January 05, 2020
Accepted on: May 25, 2020
A
The purpose of this paper is to present Sinopec in the context of the transfor-
mations of property organization in China, especially the constitution of the
business sector under long-term national development strategies. A hypothesis
is that the growth of a large state-owned enterprise in China is on the one hand,
the benets of state support and on the other, the constraints imposed by such
benets on its business strategies of protability and eciency. In order to con-
rm this hypothesis, we analyze the evolution of the oil and gas sector in China,
from the point of view of the formation of its large companies. Next, Sinopec
indicators, relate to the company’s nancial development and strategies, are
analyzed for the period 1999 to 2016. We sought to highlight the evolution of
the company’s indicators compared to the national strategies adopted. Results
show that Sinopec remains dependent on the national economic development
strategies.
Keywords: Chinese company. Sinopec. Oil and gas industry. Multinational
enterprise. National development.
R
O objetivo deste artigo é apresentar a SINOPEC, avaliada como sendo a maior
empresa chinesa, no contexto das transformações, na China, da organização da
propriedade, especialmente, a constituição do setor empresarial sob as estraté-
gias nacionais de desenvolvimento de longo prazo. Uma hipótese aventada é
que o crescimento de uma grande empresa estatal na China está sob uma força
de dupla direção: de um lado, os benefícios do suporte estatal e de outro as
restrições desses benefícios sobre suas estratégias empresariais de lucratividade
e eciência. Para tanto, primeiro se analisa retrospectivamente a evolução do
1. Mestre em Desenvolvimento
Econômico pelo Instituto de Economia
da Universidade Estadual de Campinas.
Professora Assistente e coordenadora
do curso de Ciências Econômicas da
Universidade Federal Rural do Rio de
Janeiro (UFRRJ). Bolsista de Extensão
no País SA. Foi bolsista do IPEA (PRO-
-MOB) no projeto “Estrutura Socioeco-
nômica e Políticas para a Integração da
América do Sul”. Participou do projeto
“Perspectivas do Investimento no Bra-
sil” (BNDES) com o tema “Perspectiva
do Investimento na dimensão do Merco-
sul e da Integração da América Latina.
ORCID ID : 0000-0002-4824-8414
2. Economista, doutor em Economia
pela Universidade Federal Fluminense
(UFF/RJ). Atualmente é professor Asso-
ciado II do curso de Ciências Econômi-
cas da Universidade Federal Rural do
Rio de Janeiro (UFRRJ) e do Programa
de Pós-graduação em Economia Regio-
nal e Desenvolvimento (PPGER/UFRRJ).
Membro do Conselho Consultivo do
Centro Brasileiro de Solidariedade aos
Povos e Luta pela Paz (CEBRAPAZ).
ORCID ID: 0000-0003-4550-8564
71
Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
setor de petróleo e gás na China do ponto de vista da formação de suas grandes
empresas. Em seguida, são analisados indicadores da SINOPEC para o período
de 1999 a 2016. Indicadores esses relacionados à evolução nanceira e estratégias
da empresa – incluindo de mercado, de produção e de inovação. Procura-se des-
tacar a evolução dos indicadores da empresa comparativamente as estratégias
nacionais que foram sendo adotadas. Dentre os resultados, está que a SINOPEC
mesmo com todo o crescimento experimentado, mantém-se muito dependente
das estratégias de desenvolvimento econômico nacional traçadas pelo Conselho
de Estado.
Palavras-chave: Empresa chinesa. Sinopec. Indústria de óleo e gás.
Multinacional. Desenvolvimento nacional.
R
El objetivo de este estudio es presentar la SINOPEC, que se con-
sidera la compañía china más grande, en el contexto de los cam-
bios en la organización de la propiedad en China, especialmente
la constitución del sector empresarial chino bajo sus estrategias
nacionales de desarrollo a largo plazo. Una hipótesis es que el
crecimiento de una gran empresa estatal en China se encuentra
bajo una fuerza doble: por un lado, los benecios del apoyo estatal
y, por otro, las limitaciones de esos benecios en sus estrategias co-
merciales de rentabilidad y eciencia. Con este n, primero anali-
zamos retrospectivamente la evolución del sector de petróleo y gas
de China desde el punto de vista de la formación de sus grandes
empresas. Los indicadorsaúde la SINOPEC luego se analizan para
el período de 1999 a 2016. Estos indicadores están relacionados con
la evolución nanciera y com las estrategias de la compañía, in-
cluyendo mercado, producción e innovación. Buscamos resaltar la
evolución de los indicadores de la compañía en comparación con
las estrategias nacionales que se adoptaron. Entre los resultados,
SINOPEC, a pesar de todo el crecimiento experimentado, sigue
siendo muy dependiente de las estrategias nacionales de desarrollo
económico esbozadas por el Consejo de Estado.
Palabras clave: Sinopec. Industria del petróleo y el gas. Multina-
cional. Desarrollo nacional
“Certamente, o que está sendo aplicado no nosso país é o sistema de economia
de mercado socialista. Devemos desenvolver a superioridade do nosso sistema
socialista e o papel ativo do Partido e do governo. O fato do mercado desempe-
nhar o papel decisivo na alocação de recursos não signica que o mesmo tenha
toda responsabilidade”
Xi Jinping
Introduction
Historically, a multinational company can be considered a cell of
the development model and of the international competitive strategy
of its home country. Despite having their own strategies, multinational
companies cannot be analyzed as isolated agents in the international
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estudos internacionais • Belo Horizonte, ISSN 2317-773X, v. 9, n. 1, (abr. 2021), p. 70-93
system of trade and investment. Major internationalization movements
were initiated from multinational corporations – for example, the frag-
mentation of production in the 1980s – which were backed by national
governments. Since it changed its Constitution, inserting the term “mar-
ket socialism with Chinese characteristics” in the early 1980s, the State
Council of China built large companies in pillar industries, such as iron
and steel, and oil and gas, which greatly expanded their presence abroad
from the rst years of the 21st century, when the Chinese going out strate-
gy began. These changes were made based one a series of reforms in the
property regime, innovation law, regulation of foreign investment, tax
reform, banking system, etc.
Academic studies on the so-called “Chinese presence” are recur-
rent, i.e., on the inux of direct investment of Chinese companies in
developing countries (OKAZAKI ET AL, 2011; CINTRA, 2013; PINTO;
CINTRA, 2015). In general, these studies are characterized by the inves-
tigative concern to determine the weight of Chinese long-term economic
development interests in the strategies of their multinational companies.
While its place as the arm of the Chinese state bureaucracy is only analy-
zed in terms of an opposition between Market Economy and Command Eco-
nomy. It is from this perspective that business in China is usually consi-
dered as a process in formation, especially by multilateral organizations,
whose nal result will only occur with privatization and/or opening to
foreign competition. In this country, the large international Chinese sta-
te enterprise has been forged since the reforms of its oil industry in the
1980s and 1990s to respond to signs of a reduction in the productivity
level of the oil and gas industry. The Company Law of the People’s Republic
of China was drafted based on the professionalization of the oil industry
with China National Petrochemical Corporation (SINOPEC) and China Natio-
nal Petroleum Corporation (CNPC).
After this period of property reorganization, the central Govern-
ment has kept 106 State enterprises in its organization chart, 47 of which
were in Fortune Global 500 list in 2014. In 2013, the major SOEs (yangqi)
controlled more than US$ 5.6 trillion in assets, US$ 690 billion of which
were overseas (LEUTERT, 2016). These companies hold vice-ministerial
level ( fubuji), which gives their executives a political elite status, occu-
pying prominent positions in the Chinese Government. Better adminis-
trative positions depend on their ability to achieve benets for their res-
pective state-owned enterprises, even if in competition with other indus-
tries. The space of the Communist Party of China (CPC) in the corporate
decision-making eld is quite signicant, which in conventional theory
is only considered in terms of being ‘good’ or ‘bad’ for market eciency.
That is why business in China is considered as incomplete or inecient.
In China, the role of the energy sector in its long-term economic
development process is largely exercised or implemented in collaboration
with large state-owned enterprises. Sinopec, China’s largest state-owned
enterprise and the fourth largest company in the world, based on Fortune
Global 500 of 2016, has been forged within the limits of state planning.
These limits can be understood as market delimitation and denition of
the very structure and competition pattern of such market, always follo-
73
Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
wing economic development needs, as it has happened with the energy
matrix. Since the late 1990s, with the restructuring of the oil industry,
Sinopec has been divided into the Sinopec Group and Sinopec Corp. In
theory, the latter deals with core businesses and reports to the former,
which deals with non-core businesses and reports directly to the State
Council. In practice, a precise separation between them is quite dicult
due to the confusing information published about it and even the pecu-
liar characteristics of what in the West is understood as Chinese privati-
zation. Understanding the evolution of the large Chinese company, espe-
cially in the oil sector, is relevant to understanding the country’s develo-
pment strategies.
Therefore, in this paper, we believe that in order to comprehend
the activity of Chinese companies abroad, one must rst understand the
companies themselves. For example, the 13th Five-Year Plan formalizes
initiatives such as One Belt, One Road and Made in China 2025, which are
basically articulated within Chinese state-owned enterprises. Since the
promulgation of these plans, scholars such as Majerowicz and Medeiros
(2018) have pointed to the general orientation of Chinese policy to rea-
ch deeper positions in the international value chain. Thus, the choice of
SINOPEC as the object of study for this paper occurred for four main
reasons: (i) its investments in South American countries, such as Rep-
sol-SINOPEC, especially its Brazilian pre-salt projects; (ii) is one of the
oldest Chinese companies and has experienced – as well as other large
Chinese companies in the oil sector – structural transformations (‘corpo-
ratization’), internationalization and, more recently, technological mo-
dernization and (iii) productive relationship confronts it with guaranteed
access to oil and price stability in China and (iv) the company has built
a strategic organizational policy to respond to changes in the Chinese
domestic market as well as international competition requirements. The
main objective of this paper is to analyze Sinopec, using the following
elements: (i) theoretical review of the Chinese oil industry and the Chi-
nese state-owned enterprise and (ii) annual Sinopec reports and Xinhua
network reportage, as well as notes published on the State Council websi-
te. In addition to this introduction and the nal considerations, this paper
is divided into two main sections: (i) it will present the general context
of the oil and petrochemical industry in China and (ii) analyze the essen-
tial aspects of the evolution of Sinopec within the Chinese development
strateg y.
Company and national development strategy: oil and gas industry in China
In 2011, China became the world’s largest energy consumer and
the second-largest oil consumer, coming from a scenario that began in
1993 when it became a net oil importer. Estimates from the International
Energy Agency (IEA) currently indicate that 85% of China’s domestic de-
mand is met by imports, even after having remained as one of the largest
producers throughout the 1960s and 1970s. In 2006, its oil consumption
was 353 million tons with persistent annual increases, until it reached 578
million tons in 2016. Production did not keep pace with this growth. In
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estudos internacionais • Belo Horizonte, ISSN 2317-773X, v. 9, n. 1, (abr. 2021), p. 70-93
2006, Chinese oil production was 184 million tons; in 2016, the country
produced 199.7 million tons of oil. In addition, its proven reserves
3
tota-
led 16.4 billion barrels in 1996, increasing to 20.2 billion barrels in 2006
and 25.7 billion barrels in 2016 (BP, 2017). The level of proven reserves in
China has not grown much over the years, which may have been one of
the key variables in the denition of the sector’s development strategies.
Adapting the planned rates of economic growth, changes in the
population’s consumption patterns, as well as the development and in-
ternational presence guidelines expressed in successive ve-year plans to
the functioning of the energy sector is a challenge. These challenges are
not limited to the institutional structure of China’s energy industry, after
all, supply and energy eciency are completely attached to the support
for the country’s economic development model. Aspects such as conser-
vation, emission reduction, and use eciency increase make up the most
recent premise of the country’s energy policy. At the beginning of the 21st
century, imported oil accounted for 32% of domestic consumption, and
in 2012, it increased to 57%. Oil and gas transportation challenges have
been overcome with an increase in gas pipelines, although geopolitical
risks remain high. In 2012, there were 70 thousand kilometers for oil and
40 thousand for natural gas. In this regard, agreements with neighboring
countries and state support for the construction of transport logistics are
key (MEIDAN, 2016).
In such scenario, large national oil companies continue to be the
main agents in implementing the guidelines included in the ve-year
plans, even though they are subject to a greater number of requirements.
This section seeks to clarify the construction of large Chinese oil compa-
nies and the institutional structure of this industry.
Resource allocation through the formation of state-owned corpora-
tions and the oil and gas industry in China
Initially, during the Maoist period, the Chinese oil and gas industry
was erected under the premise of energy self-suciency. The discovery
of oil in northwestern China in the late 1950s, more specically in Da-
qing, located in the Heilongjiang Province, represented a solution to the
interruption of technical and economic cooperation with the USSR given
the Sino-Soviet conict. The share of oil in China’s energy matrix went
from 2.5% in 1960 to 13.5% in 1968 and this industry has become a pillar
industry within the PRC’s state planning. The trajectory of the Daqing
well has become a model (‘spirit of Daqing’) to China’s long-sought pro-
ductive development and led to the emergence of a political oil elite – ‘oil
class’ –, which put the matters of this industry in evidence in the ensuing
ve-year plans – thus, scal and political resources –, at least until the
Cultural Revolution (LIEBERTHAL; OKSENBERG, 1988). Regarding
the government-company relationship of this period, Nolan (2001) em-
phasizes that there have always been doubts about the Daqing format,
i.e., whether it should be a company or an oil well.
Despite a crippling interregnum for the ‘oil class’ (1966-1976), coal
and oil production expanded annually at a 13% average rate, and by 1978
the country was the fourth largest energy producer in the world and the
third largest consumer. Industrialization and urbanization on an intensi-
3. It is what a given country can reason-
ably count as quantities of oil available to
be marketed (‘commercially recoverable’)
from a given date. The exploration
of these deposits will depend on the
economic conditions, the operational
methods, as well as on governmental
regulations.
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Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
ve scale boosted the demand for oil, although there was a logistical mis-
match between oil production and exploration and the possibility of mee-
ting the demand of industrial consumer centers. It was estimated that in
the 1980s China would become the world’s oil giant. However, in 1979,
production grew by only 2%, and between 1979 and 1983, it stagnated
at 100 million tons, while investment in the sector fell. In 1984, produc-
tion increased again to 137 million tons, and the country, contrary to
the World Bank predictions, exported the largest volumes in its history
(CHOW, 1991).
Thus, in the Maoist period (1949-1976), the oil industry experienced
considerable advances in exploration, extraction, as well as in transpor-
tation and conservation techniques, though using obsolete techniques
compared to developed countries. At the end of the Cultural Revolution,
the political oil class recovered its participation, but investments in the
sector remained low. Even with a signicant recovery of the volumes pro-
duced, a short-term institutional action was observed in 1984. The con-
cern consisted in maximizing short-term production, which prevented
China from facing its geological and technological limitation. Supply and
demand were determined by quotas, product prices were kept low and oil
wells were not allowed to withhold revenues.
Incentives of productive units to increase their productivity were
minimal, and they remained dependent on the central government to
make new investments. In order to meet the demand for industrializa-
tion and urbanization deepened by the 1978 reforms, new oil wells would
have to be drilled, and exploration techniques would have to be impro-
ved. Chow (1991) believes that throughout the 1980s the State Council
has sought to correct the policy error of the 1970s, expanding exploration
eorts in order to increase the country’s reserves. The premise of self-
-suciency shifted to decentralization and corporatization in order to
become a business-oriented policy.
All oil exploration, production and renery construction activi-
ties were under the direct control of the Ministry of Petroleum Industry
(MPI). State planning organized or centralized decisions and operations
of production, transportation, administration and marketing of oil and
its by-products, as well as exploration campaigns and provision of state
nancial resources (ZHANG, 2004). Until the 1980s, China’s petroleum
and petrochemical sector operated under a single large company run by
the central ministries. Domestic prices were not formed according to the
rules of the international market. Two major changes were conducted in
the early 1980s, the decentralization of control, with the creation of large
corporate groups, and the introduction of the responsibility system, follo-
wing the example of agriculture.
Chinese oil companies used to play the role of ‘administrative enti-
ties’, more so than of ‘economic entities’. The Central State Council main-
tained its authority over pricing, production and distribution targets for
oil products, as well as strategic investment decision-making (ZHANG,
2004). With reforms toward price liberalization, labor and production
costs started to rise and companies incurred higher costs, while having to
act to contain the ongoing inationary process. The scenario presented
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on the occasion of the 7th Five-Year Plan justied that, in 1989, the State
Council decided that the sector would undergo further reforms, which
should be more gradual and imply greater state control (KONG, 2010).
The State Council opted for a reform of the institutional structure
of its huge sector, instead of assuming a great risk under a big contract
system, in which companies would have to produce 2mb/d or 100 million
tons. The rst stage consisted of the creation of two large companies:
(CNPC) and (Sinopec) and a smaller one, the (CNOOC). In 1983, Sinopec
(downstream) was created through a merger of the Ministry of Petroleum
Industry (MPI) and the Ministry of Chemical Industry (MCI), maintai-
ning a signicant part of the bureaucratic cadre of both ministries in its
management. It was a ministerial-level company under the direct super-
vision and control of the State Council. Its responsibility was to formu-
late rening and petrochemical policies – including the development of
resource allocation and pricing plans –, besides producing to serve the do-
mestic market. Sinopec was meant to be centralized as a modern global
company, while its subordinate companies maintained great autonomy
and developed a corporation identity in the opposite direction of their
parent company.
In this context, in order to respond both to the weakening of the oil
industry and to the rise in ination that contributed to the 1989 protests,
there was a period of intense discussion and political experiments within
the State Council and the leading group in the early 1990s, which gave rise
to the large oil business groups. The decision to modernize the oil indus-
try by dividing it in downstream, upstream and midstream did not t the
allocation of resources via market or the responsibility system. A two-tier
system was introduced: rened products obtained from low-price crude
oil should be sold at a low price and the rest at high prices (NOLAN, 2001).
In 1993, price liberalization began, and the state stopped selling crude oil
at the State Low Price. Faced with domestic demand pressures, the State
Council allowed a growing commercialization outside state allocations,
which resulted in a chaotic situation.
In the mid-1990s, consumption began to outpace production and
rened products were also included in price liberalization. In 1997, the
warning signal was triggered: international oil prices fell by 15% and do-
mestic prices did follow the drop. Crude oil users were under great pres-
sure, which encouraged smuggling. In 1998, there was little doubt that it
was essential to increase competition among state-owned enterprises. In
1998, the MPI was reorganized into CNPC (upstream) at the bureaucratic
level. CNPC then gained control over the assets that used to belong to the
MPI, which was a milestone. A market orientation coordinated by the sta-
te was initiated among the companies in the sector. The price system for
crude oil was changed and adapted to the international market. Reforms
are now under way to separate government bureaucracy from business
operations, including authorization to retain prots.
At the end of the 1990s, the central government began to restructu-
re the functions and activities of the main state-owned enterprises to raise
the production capacity of the oil industry. Company verticalization was
one of the initiatives. Resources of large state-owned enterprises were
77
Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
reallocated to form big vertical groups that could perform other activities
along the production chain. In addition, the State Council allowed the
entry of foreign companies to function as an instrument of technological
and managerial upgrading (FRISCHTAK; SOARES; O’CONNOR, 2013).
In the face of the imminent competition with foreign companies, such as
Exxon Mobil and British Petroleum, the Chinese government carried out
the broadest restructuring of the petrochemical and oil industry. After
the establishment of the Shanghai and Shenzhen Stock Exchanges in
1990, public listing was used since the mid-1990s as a controlled privatiza-
tion tool of the state-owned enterprises that had a competitive potential
and of the pillar industries. It was a period of overwhelming pragmatism,
in which China’s external presence and economic growth depended on
the introduction of capitalist tools in both the business sector and the
nancial system
4
. Since 2001, China’s capital market segmentation has
been in A Shares, which refer only to Chinese companies and are listed in
Renminbi. Only Chinese citizens can trade A Shares. H shares are traded
on the Hong Kong stock exchange and play a growing role in the public
listing of Chinese companies in general.
In 1999, Sinopec and CNPC assets were organized geographically
within China: East and South for Sinopec. It transferred 19 petrochemical
companies to CNPC, 14 of which were production units and 5 commer-
cialization units. CNPC transferred 12 companies to Sinopec, 11 of which
were in production and exploration. However, “The two giant compa-
nies were empowered by the State Council to make their own investment
decisions, including forming joint ventures with foreign companies and
raising their own nancing”. (NOLAN, 2001, p. 472). As in other pillar
industries, there was a separation between core business activities, whi-
ch became joint stock companies with listed shares – in this case, Sinopec
Corp. – and non-core business activities, which became limited liability
companies (subsidiaries).
The formation of large Chinese corporations (or corporatization
process) occurred as competition with global companies became immi-
nent, given national growth and development objectives. State-owned oil
exploration and rening enterprises – such as the Sinopec case analyzed
here – as well as metallurgical, electrical, and military equipment enter-
prises became large corporations, following the policy of mergers and ac-
quisitions in the late 1990s, which included their subsidiaries and culmi-
nated in a vertical integration. These companies were internationalized
in the 2000s (going out), after experiencing a new reform that made them
business corporations and their subsidiaries limited liability companies.
With the administrative decentralization at the beginning of the
21st century, the State Council begins to face another challenge: large
state-owned oil companies were integrated, while the central adminis-
tration of the oil industry remained fragmented. In 2003, following these
reforms, the sector experienced a phase in which the premise was the re-
construction of its productive capacity. The creation of the State-owned
Assets Supervision and Administration Commission of the State Coun-
cil (SASAC) in 2003, and the recentralization of the energy authority in
2008 with the creation of the National Energy Commission, were measures
4. We suggest reading Okazaki, Hattori
and Takahashi (2011).
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estudos internacionais • Belo Horizonte, ISSN 2317-773X, v. 9, n. 1, (abr. 2021), p. 70-93
aimed at regaining central government’s control over the oil industry.
SASAC is responsible for the executive control over the policy of the cor-
poration (state-owned enterprises in general, in which they hold a stake).
It has power upon regulation reforms regarding state-owned enterpri-
ses, strategic investment thinking, nancial planning of the corporation,
asset management, and property rights registry. SASAC may be conside-
red as the representative of a modern system of property rights, i.e., an
agent of state ownership in the large state-owned enterprises (CHEN,
2013). SASAC is subordinated to the State Council and to the Central
Organization Department (CDO), which is controlled by the (CPC), and
determines which CPC cadre will hold executive positions in Chinese
state-owned enterprises.
On the other hand the entrepreneurial restructuring of the sector
in 1998-1999 and the institutional restructuring in 2003 did not reach a
nal design. In the 2000s, large Chinese oil and gas companies became
quite powerful inside China, gaining autonomy from the government
within the framework of the going out policy. In 2011, Beijing reorgani-
zed the executive cadre of CNPC, CNOOC and Sinopec (groups), evi-
dencing (or retaking) CPC’s control over the rms of the industries that
are pillar for the country’s economic development. In the same way,
they tried to control the enrichment of the executives of the oil compa-
nies and open the way, through a severe policy of ght against corrup-
tion, to promote a certain restructuring of the sector, so that the State
Council would not have its action limited in the companies of the oil
and gas industry. Finally, the 12th Five-Year Plan (2011-2015) established
among its missions that the State Council should redistribute wealth
from its corporate entities to families. The growth of large Chinese oil
companies throughout the rst decade of the twenty-rst century has
challenged the CPC’s governance of SOEs and increased competition
among these companies.
BRI, Made in China 2025, and the activity of Chinese state-owned
enterprises: a new impulse for large state companies
The Belt and Road Initiative (BRI) was ocially announced by Xi
Jinping in 2015, but its design was launched in 2013. Since then, it has
become China’s key foreign policy project, especially within its Asian
neighbors, as well as African and European countries. In fact, this initia-
tive has led to increased investment by Chinese companies at a time of
comparatively lower economic growth rates (OCDE, 2018).
Formally, BRI consists of 6 (belt) routes or main corridors, na-
mely: (i) New Eurasia Land Bridge (western China to the west of Rus-
sia); (ii) China-Mongolia-Russia (northwestern China to the southeast
of Russia); (iii) China-Central Asia-West Asia (west of China to Tur-
key); (iv) China-Indochina Peninsula (southwest China to Singapore);
(v) Bangladesh-China-India-Myanmar (southwest China to India) and
(vi) China-Pakistan (west/south of China to Pakistan). The (Road) con-
nection occurs through the following ocially disclosed routes: (i)
China-Indian Ocean-Africa-Mediterranean, (ii) China-Oceania-South
Pacic and (iii) China-Europe-Arctic Ocean (CHINA, 2017). There are
at least 68 countries involved with 270 projects signed, totaling US$
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Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
900 billion. More than agreements for physical connection infrastruc-
ture projects, BRI is a multilateral organization between developed
and developing countries around issues such as investment promotion
and trade opening.
The initiative marks the ‘dream of the great rejuvenation of the
Chinese nation’. Not only because it revives the silk route of imperial Chi-
na in the 21st century, but also because it establishes a structural chan-
ge in the international insertion pattern of this economy. Made in China
2025
5
can be understood as a complement to this initiative. The MDI
was developed by the Chinese Academy of Engineering and the Chine-
se Academy of Sciences based on the German program Industrie 4.0 and
consists of major projects aimed at making the Chinese industrial sector
able to compete with advanced nations and face competition in wages
with neighboring nations in Southeast Asia. Moving from ‘factory of the
world’ to global industrial power and becoming a world power in indus-
try research and development in 2049 is one of the main premises of the
Chinese economic development project (EUROPEAN CHAMBER, 2017).
Some of the major projects of MIC 2025 include building industry in-
novation centers, intelligent and sustainable manufacturing, innovation
in disruptive equipment, such as electric vehicles, sustainable trains, etc.
Projects of this size include 10 sectors considered key, such as aerospa-
ce equipment, robotics, electric and low consumption vehicles, electrical
energy equipment (RIHO, 2015). Industry remains the engine of the cou-
ntry’s economic growth, but it assumes that a world power must have a
technologically developed industry.
In this context, companies, especially the state-owned ones, are
challenged in terms of management techniques, the role of managers,
and procedure standardization, i.e., they have to boost R&D and pro-
duction. The goal of diversifying the energy matrix and tightening the
policies regarding large oil companies renews the strategic objectives for
the industry. It includes hunting high executives and less communication
between the top managers of these companies and the State Council, ma-
king the implementation of pricing and fuel certication policies stricter,
and opening international competition in products such as natural gas.
At the beginning of the rst term of Xi Jinping, it was expected that his
actions would be aimed at reforms to open the Chinese economy, which
in fact did not happen. MIC 2025 maintains traditional Chinese industrial
policy mechanisms – such as subsidies and state control – including mer-
gers and acquisitions of state and private companies.
Resource allocation via the formation of state corporations in China: the
Sinopec case
In order to understand the growth of Sinopec from 1983 to 2016,
some notes are necessary: (i) the existence of a group and a corporation
bearing the name Sinopec is the result of a property reform carried out
in the 1990s, which separated operational activities and generation and
retention of prots from the State Council – the corporation is constitu-
ted of core businesses, and the group of non-core ones (See section 2.1);
5. It was launched on May 19, 2015 as a
newsletter by the State Council.
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and (ii) in the early 2000s, also following the strategy of increasing the
eciency of state-owned enterprises, it was transformed in a joint-stock
company, i.e., the corporation China Petrochemical Corporation (Sinopec
Group Company) was established by transferring its core businesses as well
as its assets and shares to China Petroleum & Chemical Corporation (referred
to as, the corporation)
6
. There is a hierarchy between Sinopec Corp. and
its subsidiaries, by which they operate in specialized segments within the
oil industry, and Sinopec Corp. holds control over all of them. Therefore,
(iii) the company that has to report to SASAC (i.e., the State Council) is
Sinopec Group, the parent company of Sinopec Corp. It should be empha-
sized that this division, is not fully elucidated on their annual reports or
even their respective websites.
Throughout the 2000s, Sinopec Corp. gained strength, becoming
one of China’s largest energy and chemical companies, integrated in
upstream, midstream and downstream. Its main operations include explo-
ration and production, transportation via pipelines, oil and natural gas
marketing, petrochemicals, synthetic bers, fertilizers, export and im-
port, research and development (R&D), development and implemen-
tation of information technology. Its operations in several segments,
besides exploration and production, places it in a prominent position in
terms of policy development and execution. The company’s indicators
and lines of action exert inuence upon dierent productive sectors in
terms of cost of life and national energy security, especially due to its
energy eciency.
Its shares listed on the Hong Kong stock exchange are denomi-
nated H-Shares, while the ones traded in Shenzhen and Shanghai are
A-Shares. The shares of state-owned enterprises, such as its parent com-
pany China Petrochemical Corporation, are state-owned shares. In 2001,
there were 5 shareholders with state-owned
7
shares – Sinopec Group alo-
ne held 55% of interest – and other 5 H-Share shareholders – including
HKSCC
8
with 10.33%. In 2005, as part of the launch of the go global
strategy, this composition changes considerably: China Petrochemical
Corporation increases its stake to 71.2%, and HKSCC becomes the only
H-share holder. The others become 4 state-owned funds and 4 A-Share
shareholders. Since 2008, China Petrochemical’s shareholding has in-
creased, surpassing 70%, while HKSCC’s reached more than 20% in
2016. The other A-Share shareholders take turns with interests that do
not reach 2%, each. It is noteworthy that as of 2013 the company’s re-
ports will include the names of A-Share shareholders in Mandarin, but
no longer in English (HKSCC, 2014).
Oligopoly and vertical integration as engines of sectorial development in
China: Sinopec
The change in the organizational structure of Sinopec in 1999,
when the company became a joint-stock company with the creation of
Sinopec Group, represented a fundamental step towards a new expansion
trajectory. From the point of view of Sinopec, its vertical integration with
CNPC allowed both companies to acquire complementary assets, R&D
6. The valuation of assets was carried
out jointly by China United Assets
Appraisal Corporation, Beijing Zhong
Zheng Appraisal Company, CIECC
Assets Appraisal Corporation and Zhong
Fa International Properties Valuation
Corporation (“registered valuers”) in RMB
98,249,084,000 (SINOPEC, 2009).
7. The shareholders and their respective
equity stakes were as follows: China
Petrochemical Group Company (55.06%),
China Development Bank (10.12%),
China Cinda Assets Management Corp
(10.05%), China Orient Management
Corp (1.5%) and China Huarong Asset
Management Co. (0.68%).
8. Hong Kong Securities Clearing Com-
pany Limited (HKSCC).
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Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
capacity, and articulate their technology in upstream and downstream. Si-
nopec and CNPC joined the international oil and gas market. Both have
grown their assets and come to dominate China’s oil and gas industry. In
practice, their nancial autonomy has also allowed them to expand in the
global market in terms of oil exploration and production opportunities,
which especially over the course of the 2000s.
Regarding Figure 1, it is important to clarify that the core acti-
vities of Sinopec Corp. are in exploration and production, rening and
chemistry, and marketing and distribution – and therefore it operates
in midstream, upstream and downstream. Its main products are crude oil,
petroleum derivatives, natural gas and chemical industry products (e.g.,
synthetic rubber, ethylene, etc.).
Figure 1 – Sinopec Corp.: Organizational structure
Source: Sinopec (2015).
The oil and gas industry operates in China under an oligopoly, in
which price formation is determined by the State Council, and imple-
mentation and supervision by the NDRC. When it changed into a publi-
cly traded company, its pricing and production decisions became more
complex, since they had to ensure protability and also comply with na-
tional price rules. Chart 1 shows some facts about its pricing policy in the
Chinese scenario of the oil and gas market. Facts are based on informa-
tion provided by the company itself. Considering the period 2001 to 2016,
Sinopec Corp.’s pricing policy combined specic distribution strategies
and diversication of natural gas production. Strategies included impro-
ving its logistics network and establishing contracts (coordination) with
crude oil suppliers. Coordination has been Sinopec Corp.’s main strategy,
due to the national scenario.
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Chart 1 – Segmentation of Sinopec Corp.’s market and distribution strategies
Period Domestic scenario Sinopec’s price policy Market and distribution policy
2001-2006
Refined products market was not well
developed. Disorganized competition. Pricing
mechanism for refined products made refine-
ries hesitate.
Domestic crude oil price followed interna-
tional prices. Demand for refined products
increased a lot.
Coordination with other suppliers. Brought
difficulties with pricing mechanism to
central government.
Increased number of gas stations. Incre-
ased coordination with COCO companies
(company-owned and company-operated).
Prices started to follow Singapore, New York
and Rotterdam international prices. State
Council set domestic market fluctuation at
8% instead of 5%. Could have increased
corporations autonomy to adjust prices.
Remained affected by pricing policy (spread
between domestic and international).
2008-2009
International prices rose significantly and
then fell sharply. Domestic petrochemical
prices fell sharply. In 2009, demand for refined
products increased 10.2%.
Effort to ensure supply. More intensive use
of pipelines. Positive changes in quality
standards.
Concern about meeting increased demand.
2012
Intensification of crude oil price fluctuations.
Number of vehicles in circulation increased.
Increased its market share by using coordi-
nated logistics, improving quality control,
and implementing operational adjustments.
Central government made 8 scheduled
price adjustments to reduce spread
between prices charged by corporations
and the ones indicated by the State Council
formula.
2013-2015
Domestic prices more subject to international
price fluctuation. Change in consumption
structure, continuous increase in demand for
higher quality refined products. Demand for
diesel fell considerably.
Implementation of program for improved
quality control. Production of natural gas.
Increased pipeline network.
Had to deal with crude oil price fluctua-
tions. Diversify energy sources.
2016
Demand for refined products increases timidly
– gasoline increased 1.3% and diesel 2.2%
Followed strategy of investing in gas
pipelines and expanding sources.
Price setting following floor price.
Source: The authors (2017), based on company’s annual reports.
As the information in Chart 1 indicates, the domestic demand for
rened petroleum products not only increased but also became sophisti-
cated, i.e., the Chinese urban population started to demand higher quality
fuels. Even though price control by the State Council via NDRC has decli-
ned compared to 2001, it still persists. Fuel prices inuence not only the
cost of living of the population but also the cost of production. Thus, the
role of a company in a socialist market economy, even if it has nancial
autonomy, is restricted by decision limits regarding price mechanisms.
The data in Figure 2 suggest that the fuel price index has always re-
mained at higher levels than the general price index since 1998, when the
oil and gas industry was restructured (corporatized). As a net importer of
crude oil, the dependence of China’s oil and gas industry on the internatio-
nal price trajectory is permanent, as the information in Chart 1 suggests.
Its national oil and gas companies – Sinopec, CNPC, CNOOC, PetroChina
– play a fundamental role in guaranteeing the supply of these products at a
certain price. However, according to the data in Figure 2, fuel price trajec-
tory has reached much higher levels than the general price index since 2000.
Between 1994 and 1999, the fuel price index remained closer to the general
price index. With the vertical integration of the sector, the distance between
the fuel price index and the general price index became larger. Between
2000 and 2011, it can be said that fuel prices have always been higher than
the general index. This distance decreased considerably since 2013, when
the State Council changed its policy towards the sector. That is, although it
is said (MEIDAN, 2016) that Xi Jinping’s anti-corruption policy is mainly ai-
med at increasing the eciency of companies in the sector, there are already
perceptible results (Figure 2) regarding the cost of living of the population.
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Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
Figure 2 – Evolution of general price index and general index of fuel prices in China
(1994-2015)
Source: The Authors (2017) based on China Statistical Yearbook (2016).
The multidimensional and departmentalized format of the large
enterprise is studied for large traditionally established rms, which have
accompanied and induced all major changes in the patterns of competi-
tion, market structure and sectoral innovations of capitalism. Chinese
companies, such as SINOPEC, exhibit a complex structure, which can
be linked to that traditional structure. However, its division in Sinopec
Group and Sinopec Corp represents a link to both its growth strategies
and national development policies. The Sinopec Group are related to
the formulation of general policies of human resources, external aairs,
science and technology, planning and development, among others. The
corporation – Sinopec Corp -, in turn, is formed by the articulation bet-
ween Sinopec Group, public and institutional investors (SOE’s and the
Chinese government). Its organization, its departments, reects the im-
plementation of the Sinopec Group guidelines, as outlined in Chart 1
reect a upward trend in fuel and energy prices in China, which has led
to pressures on Petroleum.
Energy development and national sovereignty: diversifying and meeting
the demand
In this item, we seek to raise some indicators of SINOPEC Corp
in terms of production growth and strategy. At the end of the 1990s Si-
nopec produced 0.78 million barrels per day (NOLAN, 2001). In 2008,
the company was producing 322 million barrels (MMbbl) of crude oil
per day, 371 million barrels or equivalent (MMBOE) of oil and gas and
293 billion cubic feet (BCF) of natural gas. Not to mention its rening
capacity of 175 million tons in 2008, since rening is its original core
business. Between 2001 and 2008, the company expanded considerably.
On the other hand, between 2008 and 2016, the company signicantly
changed its production strategy. In the scope of the central government’s
goals of diversifying China’s energy matrix, natural gas became the main
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product of Sinopec Corp. Its production increased to 766 billion cubic
feet in 2016, at the expense of crude oil, which dropped to 303 million
barrels. While CNPC’s strategy is to integrate its activities and increase
its market share in downstream, the main strategy of Sinopec Corp. is to
acquire more assets in natural gas (EIA, 2015). Chemical products have
also gained more space in its product portfolio, especially synthetic re-
sin: it starts at 9 thousand tons in 2008 and reaches 15 thousand tons in
2016 (SINOPEC, 2009; 2017). The data in Table 1 provide evidence of the
evolution trajectory of the production levels at Sinopec Corp. The com-
pany continues to be a leader in downstream.
Table 1 – Sinopec Corp.: exploration and production data (2008-2016)
2008 2009 2010 2012 2014 2015 2016
Oil and gas (MMBOE) 370.87 377.45 401.42 427.95 480.22 471.91 431.29
Crude Oil (MMbbl) 322.02 327.62 327.85 328.28 360.73 349.47 303.51
Natural Gas (bcf) 293.07 299.01 441.39 598.01 716.35 734.79 766.12
Reserves
Proven reserves of crude oil and natural gas (MMBOE) 2,961 2,920 3,963 3,964 * 2,243 1,552
Proven crude oil reserves (MMbbl) 6,959 6,739 2,888 2,843 * 2,243 1,552
Proven natural gas reserves (bcf) 4,121 4,043 6,447 6,730 * 7,570 7,178
Source: Sinopec annual report several years.
*This year, data disclosure format was so detailed it was difficult to compile it for
presentation.
Sinopec was one of the market instruments used to address the
complexity of the country’s supply and access to oil, and to diversify sour-
ces. Between 2008 and 2016, even in a scenario of oil price reduction, Si-
nopec Corp. maintained its investments in gas exploration projects, and
oil exploration and production, including well discoveries in dierent re-
gions of China. In 2012, the company increased its product mix, with a
larger production of items such as gasoline, jet fuel and high value-added
products (SINOPEC, 2013). This change happened due to uctuations in
the international oil price, which jeopardized the central government’s
goals of providing domestic energy supply.
The projects are in line with the assessment of Wang (2016) that
the strategy of the large Chinese state-owned oil and gas companies, es-
pecially Sinopec, is to integrate oil and gas, petrochemical and renewable
energy businesses. The company has expanded its oil and gas exploration
and production (upstream) strategy. As Wang (2016) highlights, the deve-
lopment of upstream operations occurs in northern China, in the Shengli
well, Tahe elds, and gas pipelines. The Mineral Resources Law of the
People’s Republic of China establishes that mineral resources belong to
the State, property rights are state-owned and exercised by the State Cou-
ncil, and exploration licenses are granted by departments.
However, in 2013, Sinopec Corp. decided to postpone many of its
planned downstream investments due to renery overcapacity in China,
along with serious environmental disputes. Figure 3 begins the histori-
cal data series in 2008, since the company’s annual reports did not inclu-
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Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
de information on its rening capacity until 2007. In those years – until
2008 – Sinopec Corp.’s rening operations relied primarily on crude oil
imports or companies such as CNPC and PetroChina to meet the natio-
nal demand for fossil fuels. In 2006, 70% of its source of crude oil was
imported (more than 100 million tons). The data in Figure 3 suggest that
the volume of gasoline, kerosene and diesel sales has evolved above the
production capacity of Sinopec Corp., and rening eciency has been
maintained at more than 95% each year (SINOPEC, 2007).
Figure 3 – Sinopec Corp.: evolution of refining capacity in million tons (2008-2016)
Source: The authors (2017), based on company’s annual reports.
In this scenario, the State Council has encouraged competition in
rening to meet the domestic demand. The atomization of rening is a
constant reality in China. In the 1980s and 1990s, when the State Council
tried a non-capitalist and modern company format, the number of re-
neries increased signicantly, which reduced Sinopec Corp.’s rening ca-
pacity. More recently, this ‘phenomenon’ has happened again with small
companies known as teapots – small reneries which, despite not having
a letter of credit, have fostered the positive trade balance of oil and oil
products in China. However, this state initiative to stimulate competition
in rening has proved negative for its rening capacity.
It is correct to assume that the chemical products operation is the
one that has experienced greater diversication. This decision of the cor-
poration cannot be considered apart from the group. A State logistics and
infrastructure initiative as Belt and Road (BRI), launched within the fra-
mework of the ‘Chinese dream’ or the ‘rejuvenation of the nation’ and
which has been a symbol of the country’s external presence, is an oppor-
tunity for the Chinese oil and gas industry to expand its capacity to trans-
port imported oil.
In this article, we intend to deal with the elements that allow
us to understand Sinopec – traditionally studied by Western authors
as a purely inecient company – as a multidimensional rm that has
been consolidating itself as an administrative organization since the
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1980s, reecting dynamic responses to the administrative structure to
Chinese national economic development guidelines – here a dierent
element compared to other oil companies. Still, the distribution of re-
sources to Sinopec and its expansion of operations to dierent markets
– natural gas and operation in new countries – reect a management
response focused on its growth. Expansion of the company has been
built by productive opportunities for the construction of new produc-
tive capacities.
State-owned enterprise in China have always played an im-
portant role in the Chinese economy and maintain – despite the va-
riety of readings on their influence on the direction of policies in
the long-term accumulation strategy – their economic legitimacy in
the country. The organizational structure of Sinopec, presented and
discussed in this subsection, exposes a governance that responded to
the role conferred to Sinopec in the integration to the international
market, to forms of financing via share systems. Above all, it expo-
ses a dynamic and pragmatic response from the central government
regarding market ownership and structuring – demarcating competi-
tion between companies in the sector. In fact, state-owned enterprise
constitutes, as Naughton and Tsai (2015) point out, the nucleus of
“market socialism with Chinese characteristics”, set out in the coun-
try’s Constitution and reaffirmed in all official government and CPC
documents. State-owned enterprise thus makes the structure of a go-
verning party fruitful.
Profitability of the Chinese State-owned Enterprise vis-à-vis National
Economic Development Strategies
In this subsection, we seek to present indicators related to the
expansion of Sinopec, that is, its market and productive capacity buil-
ding are articulated by its managerial capacity. In the 2000s, the Chi-
nese government ostensibly encouraged the internationalization of oil
companies to acquire and control oil exploration and development pro-
jects abroad. The fulllment of its internal demand and the reduction
of its dependence on the trajectory of international oil prices are some
of its main motivations. Between 2003 and 2012, 85 Chinese investment
projects in the world’s oil and gas sector were announced, worth US$
130 billion. Sinopec Corp. had 35 announced projects (US$ 65 billion),
a signicant participation in the State Council’s internationalization
strategy. Its internationalization is one of the instruments for China
to ensure access to sources of crude oil. However, the data in Figure 4
suggest that the company’s production of crude oil abroad is still much
lower than its domestic production, not representing 15% of Sinopec
Corp.’s total oil production in the period considered. From 2009 to 2013,
this share was even lower, ranging from 8.2% to 5.6% (SINOPEC, 2003;
SINOPEC, 2014).
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Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
Figure 4 – Evolution of the share of crude oil production abroad in relation to domes-
tic production (2008-2016)
Source: The authors (2017), based on company’s annual reports.
As of 2008, all the company’s annual reports reinforce the commit-
ment to its prot orientation, being attentive to the promotion of cost
discipline and eliminating low-eciency gas stations. Sinopec joins other
Chinese state-owned enterprises whose operations must serve private
and state interests (KAPLINSKY, MCCORNICK; MORRIS, 2007).
Although it is a public company, its growth is dependent on the
Chinese long-term development strategies. In the last few years, some
phases can be highlighted, namely: (1st) Strengthening of the go out stra-
tegy between 2005 and 2008; (2nd) Centralization and operational ex-
pansion of core businesses in 2008; (3rd) Peak of the period of expansion of
investments abroad and of oil prices in 2009-2011. Expansion of chemi-
cals and natural gas operations; (4th) Revision of management and stra-
tegies after growth came to a halt, 2012-2015; (5th) Belt and Road Initiative
(BRI), from 2016.
In 2008, Sinopec Corp. concentrated its core business activities by
both centralizing sales and acquiring renery, oil production, and gas
pipeline assets from China Petrochemical Corp. There were also improve-
ments in oil exploration and production technology – such as the develo-
pment of the Puguang gas well. The company’s operation scale increased
signicantly in 2008. Compared to 2005, its operating income increased
81.7%, its total assets 40.8%, and the distribution of dividends was positi-
ve (SINOPEC, 2009).
Figure 5 suggests that since 2003 the company became ecient
in terms of its net assets structure compared to 1999-2002 levels, espe-
cially when associated with the period of high oil prices and the policy
of funding its internationalization. From 2010 to 2015, the decline is
constant until there is a rise in 2016. During this period, the company
experienced a strong restriction within the price policy adopted by the
State Council. The sector as a whole lost its communication channels
with the State Council and companies were forced to implement poli-
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cies that raised their costs, such as reducing emissions and increasing
fuel quality. The reversal of this negative scenario in 2016 was mainly
due to the expansion and improvement of logistics in the crude oil mar-
keting thanks to BRI.
Figure 5 – Sinopec Corp.: evolution of return on liquid assets
9
, % (1999-2016)
Source: The authors (2017), based on Sinopec Corp. annual reports.
In terms of net income, Figure 6 suggests that between 2008 and
2013 the company reached a considerable amount, while this upward
trajectory began in 2003, after its public oering. Although the com-
pany has advanced in its operation (Figure 1) and market strategies, its
protability is closely linked to international oil price levels and to na-
tional policies. More specically, the dierence between domestic and
international prices. In 2008, the sharp fall in protability shows this
restriction.
Figure 6 – Evolution of Sinopec Corp. (1999-2016) net profit in RMB million
Source: The authors (2017), based on Sinopec Corp. annual reports.
9. In its annual reports, this company
presents its financial indicators – such as
operating income, return, net assets, etc.
– following the rules of China Accountig
Standards for Business Enterprises and
International Financial Reporting Stan-
dards (IFRS). That is, after presenting the
information according to China’s account-
ing standards, the company presents
them based on IFRS standards. In 2006,
the Ministry of Finance of the People’s
Republic of China (MOF) signed a new
set of accounting standards – Account-
ing Standards for Business Enterprises
(ASBEs) – which is convergent with IFRS
international standards and also with
Generally Accepted Accounting Principles
of the United States (US GAAP).
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Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
Between 2008 and 2012, the increase observed in company as-
sets was basically due to a rise in oil prices. In 2012, the increase can
also be explained by an expansion in the operation scale and the im-
plementation of planned investments. Between 2013 and 2015, the
company strengthened its strategy of investing in the quality and ef-
ficiency of its operations. Figure 7 suggests that, as Sinopec Corp.’s
net profit grew steadily (2001-2007), shareholder composition chan-
ged in two ways: (i) Sinopec Group’s shareholding increased and (ii)
HKSCC’s shareholding also increased. While HKSCC’s interest in-
crease was gradual, Sinopec Group’s was abrupt. As early as 2003, its
shareholding increased considerably. In the domestic scenario, the oil
and gas industry faced a not so positive scenario in terms of purchasing
price (Figure 2) and the profitability levels of Sinopec Corp. (Figure 6
and Figure 7) followed that trend. Even with the advances in explora-
tion and production (Figure 2), the company’s production of crude oil
did not increase and its proven reserves maintained a significant de-
crease (Table 1). On the other hand, natural gas has become the main
product of the company (Table 1).
Figure 7 – Evolution of net profit paid to Sinopec Corp. shareholders (1999-2016) in
RMB million
Source: The authors (2017), based on Sinopec Corp. annual reports.
The data in Figure 8 suggest that in the period of the most se-
vere crisis, from 2012 to 2015, the ratio between net income and num-
ber of employees remained more stable compared to the evolution of
net income (Figure 6) and net income for shareholders (Figure 7). This
movement occurred through an increase in employee layos. In 2012,
there was a reduction of 1,024 employees; in 2013, there were 7,528 less
employees compared to 2012; the same pattern was repeated in 2014 and
2015. Between 2001 and 2015, workforce reduction was taken seriously,
with an average of 5,000 layos per year. However, in 2016 the number
of employees reached a higher level than in 2001.
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Figure 8 – Evolution of the ratio between net profit and number of employees of
Sinopec Corp. (2001-2016)
Source: The authors (2017), based on Sinopec Corp. annual reports.
Supporting a society that has become urban and industrialized
implies more complex decisions on production and investment for oil
and gas companies, and for Sinopec Corp. in particular. Since produc-
tion is no longer centrally planned, the prospects of sales in the Chine-
se domestic market are uncertain. Its nancial autonomy, evidenced by
its transformation into a joint-stock company between the late 1990s
and the early 2000s, faces a number of constraints posed both by the
international price scenario and by the domestic scenario of the oil
and gas sector. Comparing the trajectory of data on protability and
return on assets of Sinopec (Figures 6, 7 and 8) with data on prices – of
fuels and in general – (Figure 2), it is noted that the company is still
struggling to strengthen its competitiveness, besides international pri-
ce uctuations and national regulations. In fact, crude oil production
has evolved much less than the production of natural gas and chemi-
cals (Table 1), and Sinopec’s production of crude oil abroad represents
only a small part of its total production (Figure 4), which indicates the
company has diversied its production in the oil and gas sector. Con-
ventional notions that it is an inecient company whose function is
to stabilize prices and guarantee high employment levels do not hold
up (Figure 7). On the other hand, since it is a company whose majo-
rity shareholder is a state-owned enterprise (Sinopec Group) that holds
more than 70% stake, and whose directors are appointed by the CPC,
it cannot be considered independent of the ve-year plans.
Final considerations
Sinopec can be considered a prot-oriented and shareholder-dri-
ven business involving a series of industrial processes in diverse seg-
ments of petroleum and petrochemical products. It can also be con-
sidered a business with a hierarchical administration based on orders
from executives. It is quite true that these executives are chosen within
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Rubia Crisna Wegner, Marcelo Pereira Fernandes Business and development strategies in China: inferences based on the evoluon of SINOPEC
the framework of the CPC cadre, i.e., their guidelines for Sinopec Corp.
are not always in fact designed for Sinopec Corp. It is possible to distin-
guish dierent hierarchical levels, even though there is a latent conict
in China over the remuneration of the executives of its state-owned
enterprises – especially over salary dierences. In general, the treat-
ment given to Chinese companies in the Western literature is that of
companies or inecient or growing due to state nancial and technolo-
gical support. In this article, we sought to start a dierent perspective,
namely, to point out that the great Chinese company – conglomerate
or corporation, as it was called in this article – has its own codication
of the strategies to be adopted, as well as follows general policy focused
on its growth and expansion. On the other hand, they are state support,
which especially for the nancing of R&D projects and internationali-
zation represents a possible competitive gain. Possible because the en-
vironment for innovation in China may be less favorable to companies
than its western competitors.
It should be noted that the company has developed an integrated
petroleum engineering system for oil and gas exploration and produc-
tion: prospecting, geophysics, drilling, well logging, mud logging, well
bottom operation, oil facility construction and machine manufactu-
ring. It is the largest in China in rening and marketing. It also controls
gas stations and distribution centers. In R&D activities, its focus is ups-
tream exploration and production, rening and petrochemicals, while
Sinopec and its subsidiaries independently develop specic technology.
A modern rm has two growth engines: (i) continuous – basi-
cally, growth produces more growth – and (ii) co-evolution – growth of
the rm and industry. It becomes clear that the question is not only the
emergence of the large modern enterprise, but also the emergence of
industry, an environment that inuences the enterprise in terms of its
external resources. The industry is more subject to broader issues than
the rm is. In the case of the Chinese oil industry, many aspects must
be considered, but in these nal considerations we would like to draw
attention to the antitrust and innovation laws.
The growth of Sinopec Corp. cannot be considered as a result
of its management capabilities alone. Its strategy of expanding assets
in exploration and production – especially in gas –, including the dis-
covery of new wells and the development of suitable technologies for
its exploration, is clearly related to Chinese national strategies and to
international competition. The challenges of management and prota-
bility modernization are increasingly present, and their confrontation
or solution depends on the policy guidelines of the State Council. If for
some scholars, it is agreed that China is a capitalist country, structures
like Sinopec contribute to raise doubts about this prognosis.
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