These days, we take the march of China for granted. Though its economic juggernaut has slowed, Chinese output is now bigger than that of the US by some measure. Strategically, Beijing is making waves as far afield as Africa and Latin America. Militarily, it is starting to become more assertive, particularly in its near waters. But what about corporate China? Will Chinese companies too take the world by storm? Is it only a matter of time before many of us are chatting on Chinese-made mobile phones and driving Chinese-built cars?
It certainly might look that way. After years in which state behemoths dominated China’s corporate landscape, suddenly a whole crop of private companies have broken through. Last year, Alibaba, the ecommerce giant, completed the biggest initial public offering in history, raising $25bn and establishing its market capitalisation at more than $200bn. Other technology groups such as Baidu, a search company, and Tencent, a social media and gaming company, have established dominant positions in China’s massive online marketplace. Even Xiaomi, a company that did not exist five years ago, has come from nowhere to become one of the world’s biggest smartphone manufacturers.
Surely, it is not too much of a leap to suggest that these, and other companies, could soon be making a splash internationally. After all, it is not all that long ago Japanese goods were written off as shoddy. Though the competitive challenge of companies such as Sony and Panasonic has come and gone, Japan has established world-class businesses from Toyota to SoftBank. So too has South Korea with Samsung and Hyundai. Why shouldn’t China follow suit?
There are at least four reasons why the likes of Google, BMW and Goldman Sachs need not be shaking in their boots just yet. The first was highlighted this month by Alibaba, which is facing a class action suit in the US over allegations that it failed to disclose important information ahead of its IPO. The suit relates to claims that Alibaba covered up discussions with Chinese regulators over its alleged failure to clamp down on fakes. In the long run, as its founder Jack Ma says, it may do Alibaba good. Part of the rationale for listing abroad is to be exposed to stricter norms. In the short term, though, the incident reveals a gulf between the regulatory environment in China and the US.
That gulf may play a part in other industries too. Banks used to a state-mandated spread between deposit and lending rates may struggle to assess risk outside China. Internet companies that have grown like Topsy behind the Great Fire Wall may find the going tougher on the other side. Xiaomi’s path to international expansion suffered a setback in India when a Delhi court ordered it to suspend sales pending resolution of a patent dispute with technology group Ericsson.
Third, fairly or unfairly, Chinese companies may be penalised because of their perceived relation to the Chinese state. The classic example is Huawei, a world-class telecoms company that has been unable to break into the US market because of suspicions in Washington that it poses a security threat.
Fourth is the question of brands. Until last year, not a single Chinese company made Interbrand’s top 100 ranking. Last year, Huawei broke into that elite club at number 94. At home, the ranking is headed by China Mobile, a company with almost no recognition abroad. This need not be fatal. Brand awareness follows success as well as the other way around. Yet the failure of Chinese brands to excite can hurt. The quality of cars produced by companies such as Great Wall and Chang’an has risen markedly in recent years, according to industry surveys. Yet none has acquired anything like the cachet to make a serious assault on US or European markets. A fifth and more subtle obstacle to international expansion is the sheer size of China’s domestic market. While South Korean, Taiwanese and even Japanese companies had little choice but to venture abroad, many Chinese businesses can grow fat at home.
None of these obstacles is insurmountable. Besides, barriers to entry in fast-growing developing markets are far lower. Even in advanced markets such as the US, only the reckless would bet against at least one or two Chinese companies making it big before too long. Though hardly a household name, who could have predicted that China CNR would make history by winning a $570m contract to supply subway cars to Boston’s transit system? As to the question of whether Americans will be driving Chinese cars any time soon. The answer is they already are: Zhejiang Geely bought Volvo five years ago.
By: David Pilling, February 4, 2015, Financial Times
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