Internationalization Strategy at Sinopec Group - Case Study Example

Internationalization Strategy Internationalization Strategy One outstanding feature of the reforms in the economy of China has been the persistent promotion of business groups. Questions emerged on a business group in China and why they are formed. what are the internationalization strategies they conform to paying particular attention to market-seeking, efficiency-seeking, resource- seeking and strategic asset seekingand what kind of functions they perform in China’s transition help us to comprehend the economy of Chinaand its transition for groups involved inOutward Foreign Direct Investment1. The National Bureau of Statisticsof China (NBSC) defines a business group as an association with parent-filial system as the main body that combines other firms through operational or financial ways2. In China, the business groups owned by the state control more than 80% of China’s economy in terms of strategic asset seeking, market sales, employment and resources. In the recent years, the Chinese government has encouraged the development of private sectors but they do not have much power over the state owned. The groups not owned by the state accounts for nearly one-half of the largest business groups in China. Their sales revenue, resources, assets and employment are less than one fifth. Sinopec China Petroleum & Chemical Corporation or Sinopec is a listed company on domestic and international stock exchanges with integrated upstream, midstream and downstream operations based on its legacy asset base. Sinopec Group is strong oil & petrochemical core businesses and a complete marketing network3. By last year, Sinopec was the largest company in revenue collection worldwide and the second largest chemical producing company.The businesses of Sinopec include exploration in oil and gas, refinery, marketing, production and sales of petrochemicals, chemical fertilizers, chemical fibers and other chemical products. It also offers storage and pipeline transportation of crude oil and natural gas, importing and exporting crude oil, natural gas, petrochemicals and refined oil products and has applied integrated research and application of technology and information in production. Sinopec Group has established a consistent corporate governance structure and adopted a centralized decision-making management system, has delegated authorities at different levels with operations handled by specialized business units.  It is composed of more than a hundred auxiliaries and branches includingequity-holding and equity-sharing companies that are wholly-owned that are engaged in exploring and producing oil and gas, chemicals, refinery, marketing, R&D as well as foreign trade. Principal markets and business assets are located in the middle, east and south part of China’s location of dynamic economy4. Sinopec Group has gone globally generally by engaging in four types of strategies. The Market-seeking strategy seeking to expand its export channels to enhance market share and sidestep trade barriers. Efficiency-seeking OFDI had little drive for Sinopec group to go globally due to the relatively low costs of its petroleum products in China. Also, fuelled by rapid economic growth, Sinopec’s OFDI has become closely associated with a binge in seeking resources in countries and regions such as Latin America (Brazil), Australia and Africa (Angola, Cameroon, Nigeria and Sudan). Driven to acquire knowledge, technology as well as foreign brands, Sinopec’s OFDI has resulted in the company’s investments in the highly developed economies of Europe and North America (Hanson, 2001). Some of the countries where Sinopec has invested are characterized by relatively weak institutions, partial protection of the rights of intellectual property, high levels of state intervention as well as unstable systems of corporate governance. In Africa, Sinopec signed an evaluation deal with Gabon in 2004, a memorandum of agreement that was aimed at showing the desire to develop exploitation, exploration, refining and export activities of oil products between China and Gabon. Sinopec Group in November the next year declared their motives to partner with CNPC to buy an oil field in Sudan and added it was interested in expanding its business in the country. On 15 October 2012 Sinopec Group also completed the purchasing of 20 oil wells that belonged to TOTAL E&P in Southern Nigeria, a fare deal that was amounted to $2.45 billion. It was a outstanding accomplishment in the organization’s motive to fully explore the oil-rich African countries known for their natural resources endowments (Hanson, 2001). In the year 2011, Sinopec also announced it will invest $5.2 billion in purchasing a 30% stake in the Brazilian unit of Galp_Energia SGPS SA an amount that was put to record OFDI ( In Hong Kong). Sinopec Limited - Sonangol E.P. in Angola Sonangol E.P, was established in 1976 and has been a vital source of income for the Angolan government ever since, that has entered the international oil field by cooperations, JVs and sharing agreements. In 2006 the two SOEs, Sinopec and Sonangol, formed a JV named Sinopec Sonangol International (SSI) which gave Sinopec 75% of the stake. Sinopec’s investment in the Angolan oil assets of the official amount of $2.40 billion USD an acquisition was known to cover oil reserves of 3.2 billion barrels that together would contribute to enhanced production capabilities of 100.000 barrels bpd, (China Daily, 2006), with a total capacity that would then amounting to 240.000 bpd (Macauhub, 2006c). Angola on the other hand, would enjoy a boost in their FDI inflows as the SSI’s winning bid of the oil blocks was the world’s highest for a bid of that type. In addition, the deal would provide the country with financial support intended for social projects amounting to some $200 million USD and from a business point of view; eased access to the fast-growing Chinese market which would promote GDP growth (Campos & Vines, 2008). Moreover, as a result of increased bilateral trade between the two countries during the time of the investments, the ambassador in Angola stated that China’s largest trade partner following South Africa was no other than Angola (Macauhub, 2006). Sinopec resource-seeking motive in Angola was as a result of low level of natural resources in China, the home country. This is advanced towards increasing efficiency in production of its petroleum products to achieve an economic advantage. The consequences of these OFDI strategies have had positive outcomes like creation of jobs, improvements in infrastructure, hospitals and schools. In Sinopec’s JV with Sonangol, they mutually developed and explored oil reserves where the collaboration led to shared knowledge. The investments of Sinopec increased bilateral trade between China and Angola (Alves, 2010). Sinopec has been constantly increasing investments into the energy sector over the recent years to accelerate development both locally and internationally. They have gained access to more oil and natural gas resources along with renewable sources to increase the gross amount of resources together optimizing the energy mix. This is achieved through adapting various innovation theories, management of resources with updated technology that has seen achievements in high quality development with good benefits economically. Sinopec has pressed ahead in diversifying its crude import due to the unstable situation in North Africa and the Middle Eastand this has strengthened international cooperation with exploration on more resources and mitigated risks in supply5. Sinopec has adopted multiple trade patterns, has optimized logistics and transportation that has seen expansion in the gross volume of international trade. This move has guaranteed a stable supply of oil and gas to the domestic market6. Sinopec has also emphasized on development and utilization of new types of resources like the development of unconventional hydrocarbon resources as well as biomass energy along with clean utilization of coal. Sinopec in 2011 became the first company to possess the proprietary bio-jet fuel production technology with a capability of productions in large scales. Sinopec has the longest pipelines for oil products, the most extensive service station network and the largest storage capacity that fuels all types of vehicles including trucks, cars, motorcycles, agricultural vehicles and even ships. Sinopec has made significant steps in keeping pace with the cutting-edge technology through innovation of science and technology, together with a high quality workforce. Through strategy of integrating its businesses, Sinopec has extensively explored research and developed applications and forward-looking technologies that provide clients with diversified products with high performance. It has sharpened the R&D capabilities and realized common development with their partners and clients by achieving better research results. Research and developments in technology have played an important role in discovering, developing and utilizing energy resources, upgrading oil product quality, optimizing chemical product mix, conserving energy, cutting emissions and fighting against climate change7. China Petroleum & Chemical Corporation (Sinopec Company) (HKEX: 386; CH: 600028; NYSE: SNP) announced that it had uploaded its 2014 Annual Report on Form 20-F with the United States Securities and Exchange Commission. Sinopec applied for a total of about four thousand patents locally and abroad in the year 2014, with about three thousand approved. During the same year, Sinopec won one National Patent Gold Award, 4 first-place awards, 5 Awards of Excellence and eight second-place awards for National Science and Technology Advancement. Marketing and distribution In 2014, Sinopec initiated business restructuring in the marketing segment by introducing private capital. It signed capital issuance agreements with twenty-five investors that laid the foundation for further transformations. Again, it transformed the operational systems and mechanisms of marketing through exploration of multiple business models.After these, they aredevelopedthrough innovations. Currently Sinopec has received around RMB105billion of equity financing in accordance with that initiative8. That year experienced a slower growth of domestic demand for oil products particularly for diesel. Sinopec adjusted its marketing strategy by strengthening its efforts in marketing through massive productions of high-octane gasoline and jet fuel that led to increase in total sales volume9. It expanded its retail volume by networking and branding as well as improving customer services at stations. It further expanded the non-fuel businesses, provided one-stop services by providing fuel cards, self-mobile apps and improved the customer experience. The revenue of the non-fuel business increased by 28% to RMB17.1 billion in that year. The overall sales capacity of refined oil produce was 189 million tons, an increase of 5.1% more from the previous year, with domestic sales rising by 3.4% to 171 million tons and retail rising by 3.6%. The working profit of this fragment was RMB29.4 billion, signifying a decrease of 16.2% compared with the previous year, 2013, mainly due to adoption of high cost inventory. Health, safety and the environment In 2014, Sinopec robustly implemented a development strategy in green and low-carbon and its Clear Water, Blue Sky environmental protection plan. They officially launched the Energy Efficiency Doubling initiative that increasingly advances carbon asset management. It improved its work safety and accountability mechanism through conducting checks on safety and focusing on identifying and eliminating potential hazards10. They constructed emergency response capabilities and developed IT applications for managing safety. It followed standardization, protection and safeguarding the health of its employees in an attempt to strengthen its work force (Tan, 2002, p.73). Capital expenditures This year witnessed the optimization of asset portfolio and investment activities by Sinopec. The total capital expenditure was RMB154.640 billion a decrease of 4.2% comparative to plans at the beginning of the year. Exploration capital in production segment was RMB 80.196 billion mainly in explorations in Jiyang trough, tahe oilfield, Sichuan Basin and Ordos Basin; liquefied natural gas (LNG) projects in Shandong and Guangxi; in constructing long-distance oil and gas pipeline projects as well as overseas projects11. It added crude oil capacity of 4.36 million tons and natural gas capacity of 5.9 billion m3 per year. A 9.5 million tons per year refining capacity was added along with acquiring 37.5% shares of Yanbu Refinery. The marketing and distribution division capital expenditure for marketing was RMB26.989 billion that was majorly for development and renovation of service stations and construction of oil product pipelines and oil depots. 556 service stations were added for the year. The Capital expenditure for chemicals segment was RMB15.85 billion majorly for Chemical Industry (Ningxia) Company Ltd and the coal chemical plant at Sinopec Great Wall Energy as well as the Qiluacrylonitrile project. The corporate and other segment capital expenditure was RMB 3.648 billion, primarily for IT application projects and R&D facilities (Keister L., 1998, p.241). Conclusion Business groups greatly influence the transition of China’s economy. The state-owned business groups control a substantial part of the economy. The dynamic and historical analysis of various business groups in china, the type of ownership on group affiliation effect, the intervention of the government on their operationsand the association between business groups and monopoly power are of great significance in modeling China’s economy12. Sinopec’s glorious mission is to guarantee security of energy nationwide. They rely on technology and persistent efforts of the employees along with sophisticated management board to diversify energy mix and resources to improve its service network to enhance capability of energy supply. Human potentials are limited but oil and gas resources are unlimited. Sinopec has deployed utmost efforts to explore mote resources that are sufficient, reliable, stable and safe to the public supply. Bibliographies Chen, Aimin and Li Ping, 2003, the Formation, Restructuring and Performance of Chinese Enterprise Groups: the Case of Liaoning Province, CRCES working paper No.2003001 Fu Chengyu,Chairmans Address, China Petroleum & Chemical Corporation, May 13, 2011. Granovetter Mark, 1994, Business Groups, in Handbook of Economic Sociology, ed. By N.Smelser, and R.Swederg, chap.18. Princeton University Press, Princeton. Keister L., 1998, Engineering Growth: Business Group Structure and Firm Performance in China’s Transition Economy, The American Journal of Sociology, vol.104, No.2, 404-440 Khanna T. and Rivkin W.J., 2001, Estimating the Performance Effects of Business Groups in Emerging Markets, Strategic Management Journal, 22, 45-74. Lee K. and Mark S., 1991, Privatization in China’s Industry, China Economic Review, Vol.2, No.2, pp157-173. Lu, Y. and Yao, J., 2006, Impact of State Ownership and Control Mechanisms on the Performance of Group Affiliated Companies in China, Asia Pacific Journal ofManagement, 23:485-503. National Bureau of Statistics of China, China’s Annual Book of Large Business Groups (2004-2006), the Press of Chinese Statistics, Beijing. Stark, D., 1996, Recombinant Property in East European Capitalism, American Journal of Sociology, 101,993-1027 Tan, J., 2002, Impact of Ownership Type on Environment-strategy Linkage and Performance: Evidence from a Transition Economy, Journal of Management Studies, 39, pp333-54 The2014 Annual Report on Form 20-F with the United States Securities and Exchange Commission:http://www.sinopecgroup.com/group/Resource/Pdf/2013_Annual_Report.pdf Yiu, Daphne, Garry D. Bruton and Yuan Lu, 2005, Understanding Business Group Performance in an Emerging Economy:Acquiring Resources and Capabilities in Order to Prosper,Journal of Management Studies, 42:1. Alves, A. 2010. The Oil Factor in Sino–Angolan Relations at the Start of the 21st Century. China in Africa Project, paper no 55. South African Institute of International Affairs. February 2010. Campos, I. & Vines, A. 2008. Angola and China: A Pragmatic Partnership. CSIS Conference – Prospects for Improving US-China-Africa Cooperation. London. March 2008. China Sonangol. 2012. About Us. http://www.chinasonangol.com/about_us.html Accessed 16 May 2014. Hanson, G. (2001): “Should Countries Promote Foreign Direct Investment?”, G-24 Discussion Papers 9, Center for International Development Harvard University. United Nations Conference on Trade and Development. Macauhub. 2006a. Chinese-Angolan company proposes to pay US$2.2 billion for two Angolan oil blocs. http://www.macauhub.com.mo/en/2006/05/10/982/. Accessed 5 May 2014. Read More