Submitted by Experience Not Logic Blog

This week’s Economist print edition has an interesting case study about Chinese tire manufacturer that’s On a roll, Triangle Group.

Triangle Group was founded by the Weihai government in 1976, and has since grown into one of the six largest domestic tire companies in China. The article notes that with its 1% global market share it is one of only two Chinese tire companies with “anything approaching a global market share.” As with many SOEs, Triangle became big, bloated, and unprofitable by the early 1990s. Then, in 1993:

A powerful chairman was installed who could run a business and negotiate the country’s complicated politics. The company reworked contracts, imposed a new approach to discipline and rustled up money (presumably from Weihai, Triangle’s parent) to invest in the production of modern radial tyres. Workers wear uniforms determined by rank, and every detail of operations, from the typeface to be used in correspondence, to the company song, to how a phone should be answered are recorded in an “enterprise culture” book. Order emerged, along with profits.

Recently, Triangle has negotiated deals to produce tires for Caterpillar and John Deere, and for one of Goodyear’s brands. Interestingly, a partnership with Caterpillar is something that Jack Perkowksi implied in his book was evidence of his own company making a reputation on the global market.

The big news is that Triangle is in the process of filing paperwork and approvals to cease being a SOE and become a publicly owned company. Samuel Zheng, a commenter on the article, argues that taking an SOE public is merely a way for SOE management to cash in on an IPO:

The go-public process for a Chinese SOE is more motivated by the management’s eagerness to pocket the so called “public owned” assets into their own bags. The case is the same with Triangle Tyre. Because for a government backed SOE, it does no need extra money to expand. The state owned banks are their caches of cash. The only worry for the management is that how can they legally benefit from the prosperous economy the most. Turning a state owned enterprise into a public comany is the most used practice. Just take a quick peek into the IPOs of Chinese SOEs, you will find out that these communist Chairmen, CEOs and directors are very generous to themselves.

Maybe this does happen. But, Triangle has built itself a strong business and is on the edge of having the reputation and resources to expand to a global market. This is a strong company with the potential to grow stronger. If management has acted so wisely in strengthening Triangle since 1993, it is difficult to see why management would simply cash in on an IPO when much greater rewards may be eventually reaped by turning into a company that can compete at the global level. Or is that too naive?