An article that appeared on the reuter’s website on Sunday March 24 detailed that one of China’s largest largest oil refiners, Sinopec, will pay nearly 1.5 billion dollars for over seas gas and oil producing assets. Sinopec’s purchase of over overseas assets represents a restructuring of their asset structure. Resultantly, it is thought that Sinopec is poised to observe a boost in profits. What I found interesting about the article is a parallel with Chinese Roads American Wheels. Since Sinopec receives most of its crude oil from overseas markets, and it has announced that it will form a 50/50 joint venture with its parent company. Joint ventures were a common theme in the production of automotives in China, and it now appears that it is also an important component in the production fuels they run on. I’m interested to see if it is China’s intention to absorb the technologies of the parenting company and then attempt to refine oil unaided as in Chinese Roads American Wheels, or if the joint venture is simply birthed out of the desire to reduce costs.
Ah, this can simply be a move downstream – buy into the overseas refining capacity that ships products to China to try to control margins. Or a free cash flow story: with money to burn, this is a “safe” way to extend their managerial empire – better than unrelated diversification.
Do we know what kind of specific regulations are in place concerning joint ventures in this industry in China? Especially when it comes to American companies, could be very interesting to see if they are similar to the automotive industry in the 1990s. Also, what will China’s apathy toward environmental regulations affect these types of joint ventures?
I agree with the professor’s comment that this is a common move by companies involved in a certain industry to go back up the chain of production to sieze more profits and more streamline the whole production process. The interesting twist that this particular situation presents is that it is not a private company, but instead state controlled ventures that are using this vertical integration.