Chinese firms struggle to make progress

23 July 2012

BEIJING: Most major companies based in China are still not "world class", despite the fact they have enjoyed substantial growth in their revenues and status, research from McKinsey has argued.

Some 73 local organisations featured in the latest Fortune 500 list of the world's biggest corporations by revenue, a record high, and a group including 42 state-owned enterprises.

But Xu Haoxun, a director at McKinsey, suggested that fewer than ten of the 73 players that made Fortune's annual rankings could genuinely be described as "world class".

This failure is especially pronounced for state-owned enterprises (SOEs), which are typically dependent on favourable regulatory conditions and often operate monopolies in their home country.

McKinsey also found that China's largest state-run organisations logged a profit margin of just 2.2% in 2011, versus the average of 4.8% secured by non-financial businesses elsewhere around the world.

Sinopec, the energy group, was China's biggest firm and claimed fifth place in the Fortune 500. It logged $273bn in revenue, but a profit margin of 2.8%.

ExxonMobil, the US multinational from the same sector, and which took third spot, claimed $355bn in sales and margins of 8.6%.

"The growth of China's SOEs is mostly a result of their competitive edge in the domestic market, but these Chinese 'giants' face a lot more challenges when they enter the global market," Xu said.

Working alongside this trend, however, is the intense open-ness in many other areas of the Chinese economy, which often combine a need for high investment with low profit margins.

In response to these pressures, expanding overseas may provide the best route towards achieving long-term sustainable growth for Chinese brand owners, according to Xu.

"The best form of defence is offence, thus taking a slice of the global market is key to the survival of Chinese enterprises," he said.

However, achieving this goal will require business leaders to enhance the profitability and durability of their companies, improve management systems, and learn how to allocate budgets abroad.

"In the next five-to-ten years, China will need at least 100 CEOs with the ability to run Fortune 500 companies, 100,000 talented and experienced managers, and millions of skilled workers who can operate advanced equipments," Xu said.

Data sourced from China Daily; additional content by Warc staff