Executive Briefings

Can Chinese Companies Compete on a Global Playing Field?

Considering the astonishing growth of China's economy over the past decade, it should come as no surprise that 73 Chinese companies showed up on this year's Fortune Global 500. That's up from 11 just ten years ago, but given that fact that the nation saw average annual GDP growth of 9.91 percent between 1979 and 2010, and is now the world's second largest economy, one might ask why more Chinese companies aren't on Fortune's list.

One might also ask how those 73 got there. Take a look at who some of them are. In the top ten we find Sinopec Group (at number 5) and China National Petroleum Corp. (6), both state-owned energy giants. At number 7 is State Grid Corp. of China, the country's largest electric utilities company. Further down the list are four state banks: Industrial & Commercial Bank of China (54), China Construction Bank (77), Agricultural Bank of China (84) and Bank of China (93). The top 100 also holds China Mobile Communications (81) and China State Construction Engineering Corp. (CSCEC) (100). Other industries represented by state-owned entities in the next group of 100 include insurance, telecommunications and natural resources.

I don't mean to minimize the effort that's required to become one of the world's 500 largest companies, but if you're owned and supported in part by the Chinese government, and enjoy a virtual monopoly in your area of business, there's a good chance that you'll end up ranking fairly high on anyone's list. You don't need to concern yourself with such qualities as risk-taking, entrepreneurial spirit and customer focus. On the contrary, you're likely to be viewed by the public as "bureaucratic, political and often customer-unfriendly," in the words of David G. Hartman and George F. Brown Jr., China practice director and chief executive officer, respectively, of Blue Canyon Partners, Inc. There are companies within China that are more market-driven, but they are dwarfed by their institutional counterparts.

Either way, success for Chinese enterprises has been all but assured in recent years. "The driving force propelling growth for both groups of companies [socialist and market-driven] and enabling their position on the Global 500 list is that they serve a population of 1.3 billion people whose average incomes have increased nearly six-fold in twenty years," Hartman and Brown write. "In some cases, maintaining a market position over time in a huge market that is growing that fast has alone been sufficient to allow them to move rapidly up the list."

It wasn't supposed to be that way, at least according to the rhetoric voiced by former Communist Party leader Deng Xiaoping, when he toured southern China 20 years ago. Deng read the riot act to enemies of reform. He wanted to inject the principles of a market economy into traditional, centralized state planning. In his vision, there was no inherent conflict between Maoist socialism and economic growth fueled by a business-oriented approach.

Everyone knows what followed: the breathtaking success of Guangdong Province and other parts of southeast China, which dangled a massive, cheap and pliant labor force as an incentive for global manufacturers to site operations there. Other entities got rich building the infrastructure that was needed to link those factories with the rest of the country. "With the reform message taken to heart by the nation, China was off to the races," write Hartman and Brown, "and two decades of remarkable growth and change has followed."

Of course, not all of the winners on the manufacturing side hailed from mainland China. Foxconn Technology Group, one of the world's largest contract manufacturers, is based in Taiwan. And most of the plants set up in southern China were entirely dependent on multinationals based in the U.S. and Europe, at least in the beginning. Those operations should be seen as distinct from the huge state-owned monopolies that were established to serve China's domestic energy, real estate and capital needs.

No doubt some of the biggest players would attribute their success not to state-sanctioned cronyism, but to the kind of individual initiative preached by Deng. CSCEC, for one, refers to itself as "one of the few state-owned enterprises with construction and real estate as its core business that has grown up through market competition without occupying large amount [sic] of state investment, national resources and business patents." Indeed, Hartman and Brown believe that entities like CSCEC will gradually become more market-oriented in line with a changing China.

But the emergence of a truly competitive spirit can be seen in another group: what Blue Canyon refers to as "Second Mouse" companies. The name comes from the saying, "The early bird gets the worm, but the second mouse gets the cheese." (Anyone sense another best-selling self-help book?) It refers to smaller, scrappier players that have prevailed through actual competition, both with Chinese and foreign rivals.

It's more a question of attitude than state control. Hartman and Brown cite consumer electronics leader Lenovo and Zhejiang Geely Holding Group, which have become legitimate global players through the acquisitions, respectively, of IBM's Thinkpad division and Volvo. Then there's telecommunications equipment and services provider Huawei, which began as a private startup and rose to the number-two position in its industry, behind Ericsson. While these companies have benefited from some government support, their success can mostly be chalked up to a traditional business - dare I say capitalist? - philosophy.

Only one problem: China is still, well, China. For all those supposed reforms, its authoritarian government doesn't permit the kind of personal freedoms that lie at the heart of Western capitalist economies. What's more, Chinese companies are far from establishing the strong brand identities that can challenge American and European multinationals. So are they a real competitive threat in the long term? I'll discuss that next.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article

Considering the astonishing growth of China's economy over the past decade, it should come as no surprise that 73 Chinese companies showed up on this year's Fortune Global 500. That's up from 11 just ten years ago, but given that fact that the nation saw average annual GDP growth of 9.91 percent between 1979 and 2010, and is now the world's second largest economy, one might ask why more Chinese companies aren't on Fortune's list.

One might also ask how those 73 got there. Take a look at who some of them are. In the top ten we find Sinopec Group (at number 5) and China National Petroleum Corp. (6), both state-owned energy giants. At number 7 is State Grid Corp. of China, the country's largest electric utilities company. Further down the list are four state banks: Industrial & Commercial Bank of China (54), China Construction Bank (77), Agricultural Bank of China (84) and Bank of China (93). The top 100 also holds China Mobile Communications (81) and China State Construction Engineering Corp. (CSCEC) (100). Other industries represented by state-owned entities in the next group of 100 include insurance, telecommunications and natural resources.

I don't mean to minimize the effort that's required to become one of the world's 500 largest companies, but if you're owned and supported in part by the Chinese government, and enjoy a virtual monopoly in your area of business, there's a good chance that you'll end up ranking fairly high on anyone's list. You don't need to concern yourself with such qualities as risk-taking, entrepreneurial spirit and customer focus. On the contrary, you're likely to be viewed by the public as "bureaucratic, political and often customer-unfriendly," in the words of David G. Hartman and George F. Brown Jr., China practice director and chief executive officer, respectively, of Blue Canyon Partners, Inc. There are companies within China that are more market-driven, but they are dwarfed by their institutional counterparts.

Either way, success for Chinese enterprises has been all but assured in recent years. "The driving force propelling growth for both groups of companies [socialist and market-driven] and enabling their position on the Global 500 list is that they serve a population of 1.3 billion people whose average incomes have increased nearly six-fold in twenty years," Hartman and Brown write. "In some cases, maintaining a market position over time in a huge market that is growing that fast has alone been sufficient to allow them to move rapidly up the list."

It wasn't supposed to be that way, at least according to the rhetoric voiced by former Communist Party leader Deng Xiaoping, when he toured southern China 20 years ago. Deng read the riot act to enemies of reform. He wanted to inject the principles of a market economy into traditional, centralized state planning. In his vision, there was no inherent conflict between Maoist socialism and economic growth fueled by a business-oriented approach.

Everyone knows what followed: the breathtaking success of Guangdong Province and other parts of southeast China, which dangled a massive, cheap and pliant labor force as an incentive for global manufacturers to site operations there. Other entities got rich building the infrastructure that was needed to link those factories with the rest of the country. "With the reform message taken to heart by the nation, China was off to the races," write Hartman and Brown, "and two decades of remarkable growth and change has followed."

Of course, not all of the winners on the manufacturing side hailed from mainland China. Foxconn Technology Group, one of the world's largest contract manufacturers, is based in Taiwan. And most of the plants set up in southern China were entirely dependent on multinationals based in the U.S. and Europe, at least in the beginning. Those operations should be seen as distinct from the huge state-owned monopolies that were established to serve China's domestic energy, real estate and capital needs.

No doubt some of the biggest players would attribute their success not to state-sanctioned cronyism, but to the kind of individual initiative preached by Deng. CSCEC, for one, refers to itself as "one of the few state-owned enterprises with construction and real estate as its core business that has grown up through market competition without occupying large amount [sic] of state investment, national resources and business patents." Indeed, Hartman and Brown believe that entities like CSCEC will gradually become more market-oriented in line with a changing China.

But the emergence of a truly competitive spirit can be seen in another group: what Blue Canyon refers to as "Second Mouse" companies. The name comes from the saying, "The early bird gets the worm, but the second mouse gets the cheese." (Anyone sense another best-selling self-help book?) It refers to smaller, scrappier players that have prevailed through actual competition, both with Chinese and foreign rivals.

It's more a question of attitude than state control. Hartman and Brown cite consumer electronics leader Lenovo and Zhejiang Geely Holding Group, which have become legitimate global players through the acquisitions, respectively, of IBM's Thinkpad division and Volvo. Then there's telecommunications equipment and services provider Huawei, which began as a private startup and rose to the number-two position in its industry, behind Ericsson. While these companies have benefited from some government support, their success can mostly be chalked up to a traditional business - dare I say capitalist? - philosophy.

Only one problem: China is still, well, China. For all those supposed reforms, its authoritarian government doesn't permit the kind of personal freedoms that lie at the heart of Western capitalist economies. What's more, Chinese companies are far from establishing the strong brand identities that can challenge American and European multinationals. So are they a real competitive threat in the long term? I'll discuss that next.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article