Report: Tough road awaits 'Chinese challengers'

(China Daily)
Updated: 2012-09-14

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

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

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

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

These companies, termed the "Chinese global challengers" by the report, have annual sales rangingfrom $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 theirstock 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 at18 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 betime for them to move beyond the advantages they have historically enjoyed - a large domesticmarket, competitive cost position and strong state support," said Christoph Nettesheim, managingdirector of Boston Greater China.

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

Nettesheim said the major headwinds the Chinese global challengers will face during their globalexpansion 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 and2016, five times as fast as in many developed nations and twice as fast as developing markets, suchas Thailand and Vietnam.

The report said although some Chinese companies have built global business through mergers andacquisitions, 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 strategicpreparation, execution and integration required for success. But for many Chinese executives, theseare 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 Chinesechallengers, according to the report.

For example, Ericsson's acquisition of some of Nortel's wireless equipment businesses solidified thecompany'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 reportsuggested some strategic initiatives - Companies should take advantage of overarching trends, suchas the rise of the middle class. They should strengthen M&A capabilities, increase competitiveness bynew means instead of just lowering prices, improve productivity, and develop global organization andmanagement policies.

chenxin@chinadaily.com.cn

(China Daily 09/12/2012 page16)