For the first time, China surpassed the US on the Fortune Global 500 list of the world’s largest corporations by revenue, with a record 124 Chinese companies listed, compared with 121 from the US.
The list, published in August, will play well among those in President Donald Trump’s administration who believe “China is eating our lunch” as its companies operate freely in the US, while Beijing continues to limit the operations of American firms in China.
But before ringing the alarm bells, we need to step back to consider the source of the information. Beyond the usual issue of data manipulation by Beijing (its 2019 Fortune list counted 10 companies from Taiwan), there is the constant issue of quality.
Many (73%) of the companies listed are large state-owned enterprises (SOEs) extensively supported and subsidized by the central government, while other companies have long sold into a 1.3-billion-person consumer bubble, with little or no competition from foreign companies.
Quality matters more than size
One way to measure quality is to look at profitability, and on this metric Chinese companies fall short of their international peers. The profit margin (profits/revenue) for Chinese companies was 4.5%, significantly lower than firms from Britain (5.9%) Switzerland (8.3%), the US (8.9%), and Canada (9.1%).
Another metric of quality is brand value. This year, China’s most valuable brands are valued at a sizable US$1.4 trillion but less than half of the value ($3.2 trillion) of the top American brands, according to a list compiled by Brand Finance. Nearly three times as many American brands than Chinese brands were featured on the Brand Finance list, although three Chinese brands do feature in the top 10.
Inside China’s largest banks
In China’s banking sector, the “big four” state-owned commercial banks, Industrial and Commercial Bank of China (ranked No 24 on the Global 500 list), China Construction Bank (30), Agricultural Bank of China (35), and Bank of China (43) all dominate the domestic banking sector. Yet despite the size of their revenues, these Chinese banks do not feature among the world’s most admired companies.
Why? Being state-owned, these banks have consistently been propped up with state capital and forced to lend to struggling businesses who produce goods or sell services in sectors without true demand, even more so in a world ravaged by a pandemic.
When banks are directed to lend to certain sectors or companies for political reasons, any sophisticated cash-flow analysis of profitability is simply not done. Chinese banks also lag behind their international counterparts in sophisticated product lines such as derivatives and foreign-exchange trading, while American banks continue to dominate asset-management and investment-banking league tables.
Moreover, Chinese banks have not been forced to evolve in the face of foreign competition, given severe restrictions on the operations of foreign banks in China. Foreign banks constituted a mere 1.6% of China’s banking assets as of May 2019, down from 2.3% in 2007.
According to Bloomberg News, these foreign financial institutions face a “lengthy and often opaque application process” compared with domestic financial institutions. Even if approved, foreign banks are then discriminated against, facing far more restrictions than domestic banks on foreign debt, guarantees, capital raising, and loan-to-deposit ratios.
During a financial crisis, foreign banks may not even be eligible for government support: during the 2007-08 global financial crisis, foreign banks in China were not eligible for subsidies, while capital controls required them to raise capital from local deposits.
How Chinese brands fare overseas
Some of China’s best-known companies and brands on the Fortune 500 list have been successful in international markets, including such technology companies as Huawei (No 49 on the list), Tencent (197), and Xiaomi (422), and such retailers as JD.com (102) and Alibaba (132).
But these Chinese brands are few in number and far less admired than many of their foreign counterparts such as Amazon (9), Apple (12), Costco (33), Facebook (144), Target (117), and Walmart (1), and would struggle to compete with these brands on an open and level playing field.
Facebook, Google and Uber are just a few of the foreign companies that have been blocked from competing in China, while Apple’s share of the Chinese market is just 6%.
According to the World Economic Forum’s Global Competitiveness Index, China’s economy ranks 28th in competitiveness, well behind to the top five (Singapore, the US, Hong Kong, the Netherlands, and Switzerland).
Large Chinese companies in the automotive sector, including SAIC, FAW, Dongfeng and Geely, have yet to achieve the quality levels and admiration of their international competitors such as Toyota and BMW.
The above are just a sample of the sectors where Chinese companies fail to compete at the top levels of international business, but they are growing and learning fast. In 2000, China had a mere 10 companies on the Fortune Global 500 list and the US had 179 companies listed.
There may well come a day when Chinese companies are eating America’s lunch. But by keeping in place significant restrictions on foreign investment, Beijing is signaling a lack of confidence in its 124 national champions to compete on a level playing field at home.
Most athletes recognize that the only way to improve their performance is to play against someone better, and as long as Chinese companies are protected against some of the most competitive multinational players in the world, they will fail to develop fully and will continue to lag behind their international competition in markets where price is not the only consideration.