Business / Economy

Report: Tough road awaits 'Chinese challengers'

By Chen Xin in Tianjin (China Daily) Updated: 2012-09-12 08:00

As they attempt to achieve a greater international presence, large Chinese companies are facing slower market growth at home as well as fiercer competition from global peers, according to a report released on Tuesday.

In its report, the Boston Consulting Group identified 50 Chinese companies that are becoming major players on the world stage, including Geely, Lenovo, Huawei, and the Industrial and Commercial Bank of China.

Geely acquired Volvo Car in 2010. Lenovo bought IBM's personal computer business in 2005, and ICBC is the world's largest lender by market value.

"We selected those challengers mainly according to their international presence, revenue from overseas and business models," said Ted Chan, a partner and managing director of the consulting group.

These companies, termed the "Chinese global challengers" by the report, have annual sales ranging from $180 million to around $300 billion. Nearly half of them are private and 26 are State-owned. Thirteen generate more than half of their revenue from overseas, according to the report.

These companies posted 20 percent average annual sales growth between 2001 and 2011. But their stock market returns have cooled off since the start of 2011 due to pressures on profitability.

In 2011, the average profit margin of the companies was 11 percent, while that of global peers stood at 18 percent, putting downward pressure on the stocks of the challengers, according to the report.

"(The period of) easy growth for those Chinese companies might have come to an end, and it may be time for them to move beyond the advantages they have historically enjoyed - a large domestic market, competitive cost position and strong state support," said Christoph Nettesheim, managing director of Boston Greater China.

The consulting firm forecasts that China's GDP growth in 2012 is to settle below 8 percent, the lowest increase since 1991.

Nettesheim said the major headwinds the Chinese global challengers will face during their global expansion are rising costs and the absence of competent management abilities.

China's cost advantage is shrinking as labor and other input costs rise, according to the report. Manufacturing labor costs are expected to rise by at least 10 percent annually between 2012 and 2016, five times as fast as in many developed nations and twice as fast as developing markets, such as Thailand and Vietnam.

The report said although some Chinese companies have built global business through mergers and acquisitions, few have developed a mastery of processes involved, such as post-merger integration.

Executives of many large companies in mature markets understand the typical pattern of strategic preparation, execution and integration required for success. But for many Chinese executives, these are still foreign concepts. Their deals frequently fall short of their original goals, according the report.

Furthermore, multinationals are already starting to adapt to the early successes of Chinese challengers, according to the report.

For example, Ericsson's acquisition of some of Nortel's wireless equipment businesses solidified the company's position and helped prevent Chinese competitors from getting a foothold in North America, according to the report.

To help Chinese companies achieve stronger competitiveness in global expansion, the report suggested some strategic initiatives - Companies should take advantage of overarching trends, such as the rise of the middle class. They should strengthen M&A capabilities, increase competitiveness by new means instead of just lowering prices, improve productivity, and develop global organization and management policies.

Hot Topics

Editor's Picks