Has China arrived as a great business competitor? Consider this: You probably aren’t using a Lenovo personal computer or a Ningbo Bird cell phone. You may not even have heard of Haier appliances. Chinese-made goods fill American store shelves–but not Chinese brands. China, for all its very real progress and promise, has yet to establish a truly powerful global company.
That isn’t so surprising given that China only embraced markets in the 1980s. Its older, state-run companies don’t have much to sell overseas, and its best young companies don’t yet have the capital and savvy to operate abroad. It’s difficult, too, to build a brand in a country where intellectual property is not protected. So Chinese companies have mostly stayed at home, competing brutally there on price. Meanwhile, half of China’s exports to the United States are made in factories owned by foreigners; another 25% are designed and marketed abroad.
But global Chinese companies and brands will emerge sooner than you think. They are, in fact, beginning to appear now. They will be pragmatic hybrids, multinational in origin and pieced together from several companies–and quite powerful because of that lineage. Their appearance will be a crucial litmus test: China then will compete with us on all fronts, not just in production. The biggest remaining piece of the global competitive game will be in place.
“Global Chinese companies and brands will emerge sooner than you think. They are beginning to appear now.”
Chinese companies are advancing quickly in a unique era of fluid value chains. Disintegrating global companies have put proprietary technology up for sale; as a result, developing Chinese companies can leverage the strengths of established businesses. A Chinese automaker can buy a product development team from Italy. Shanghai steelmaker Baoshan buys the best Japanese equipment and technology.
Western companies will also provide established brands that China’s companies will ride into global markets. French-owned Thomson, which also owns the RCA brand, and TCL are merging their television businesses into a huge manufacturer with a mixed management team. Li & Fung, based in Hong Kong, will now design, source, and distribute Levi’s brand apparel for Wal-Mart. High-cost American and European companies are marrying their still-valuable brands to low-cost Chinese manufacturing engines.
This will be China’s first wave of global companies. The second will take more time. While also pragmatic, these will be wholly mainland-Chinese–grown-up versions of companies born in the 1980s, when China’s need for capital, technology, and management led it to allow overseas investment in major industries. This brought foreign know-how to key cities and regions and pushed new Chinese companies up steep learning curves.
These newcomers differ from China’s prototypical top-down, price-cutting, grow-at-any-cost monoliths in two important respects. One, they focus on profits, not simply volume. Two, they compete in original ways. China Merchants Bank is a 300-branch institution whose profits are growing twice as fast as revenue, approaching the returns of European banks. It creates new retail bank products and is adopting Western risk management and performance evaluation systems.
Legend, selling under the Lenovo brand, is China’s great hope in computers. It built its position on retail support to domestic customers and customized software to make computing easier in the Chinese language. Ningbo Bird this year will brand and sell more mobile phones in China than either Motorola or Nokia. In China, it is a phone fashion leader–much like Nike, it enjoys a savvy understanding of its consumers and brand. And Chinese companies are gaining traction in the automobile sector, currently dominated by foreign-brand joint ventures: NYSE-listed Brilliance Automotive, BMW’s partner in China, is now developing its own sedan and engine.
Even these most capable Chinese companies won’t soon go global. They all are still small: Haier Group, China’s poster company with strong management and a modern U.S. factory, is the only company close to global scale–but its revenues are just $9 billion. Just as problematic, China’s companies prefer to diversify rather than focus. They seem unwilling to miss any opportunity, a strategy that cost the Korean chaebol dearly. Ningbo Bird wants to try the auto business, of all things. Huawei, China’s leading network-router producer, has entered the mobile-phone market. Both risk dissipating capital and undermining their stock prices, raising the cost of global acquisitions.
But these barriers too will fall–and China’s time will come. Countries produce global competitors when they have both intense competition at home and enough scale to matter. So it is in China. There is too much commercial energy here, too much growing scale, and too much foreign help to keep its best companies hidden. Haven’t heard of Legend or Haier yet? Keep listening.
Thomas Hout and Jim Hemerling are senior adviser and vice president, respectively, at Boston Consulting Group. Hout is based in Hong Kong, Hemerling in Shanghai.