How China has combined socialism and market forces is seen vividly in the Global 500 list
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Fortune just released the list of the 500 largest firms in the world, documenting 73 Chinese companies among the world’s largest, up from only 11 companies just ten years ago.1 It was only twenty years ago that Deng Xiaoping’s tour of southern China announced the replacement of a planned, centrally dictated economy by a market economy. China’s role as the home of 73 of the world’s largest companies underscores the incredible strides that have allowed the Chinese economy to transition from a backwards and closed country to a global economic powerhouse.
How China has combined socialism and market forces is seen vividly in the Global 500 list. At the risk of oversimplification, we can see that there are two types of companies in that list. There are “mostly socialist” companies, largely the government enterprises occupying spots near the top of the Global 500 list, and “mostly market” companies, the smaller, fast moving companies who win in tough competitive settings.2
It is these firms in the bottom half of the Global 500 list (and even more frequently in the roster of the next 500) that should be the focus of attention of western companies, as competitive threats and as acquisition targets. In China and elsewhere, they have won their market positions in tough competition with Chinese and foreign competitors.
When asked by Fortune to comment on the remarkable rise of Chinese companies, we noted the presence of new companies like Lenovo and Geely that grew up by first selling “good enough” products to the large mid-tier market in China and later expanded to become global players (by acquisition of the Thinkpad division and Volvo, respectively).
These are companies that haven’t simply ridden the wave of China’s growth, but have thrived in the new environment of the market economy and in the process have created what we believe is a distinctive Chinese business model, defined by the way they compete and win. We have described them as Second Mouse companies, from the saying “The early bird gets the worm, but the second mouse gets the cheese.”3 As we have studied these companies, we have become convinced of the viability of their skills in the mid-tier markets across the globe. They have mastered fast-follower competencies, learning world-class manufacturing and sourcing practices, being quick to market, borrowing the best features from global products, and focusing innovation on cost reduction rather than adding features to which the mid-market is largely indifferent.
Many Second Mouse companies now accrue more than half of their revenues outside China. To some extent, their position on the Global 500 list is more like that of large companies from small countries; they are on the list because they’ve become successful in global markets, not simply because of their leadership in their home market.
In hundreds of interviews with modern competitive Chinese companies, “a better price-performance ratio” is stated as almost a national motto when it comes to company market strategy. Huawei is a poster child for this philosophy and has used it to rise from a private startup in a country just starting to build its telecommunications infrastructure to #2 behind Ericsson globally by offering belter value to customers. While government support was no doubt quite important in selling into China’s state-owned telecom industry, Huawei didn’t become a supplier to 45 of the 50 largest service providers in the world or to the #2 position in its industry without competitive strengths.
Many of the firms on the Global 500 list (and many who will challenge for positions over the next decade) have found a way to deliver value to customers in a hotly competitive market, not only in China, but increasingly around the world. The end of their story will be more like Huawei’s – global market leaders with a market-changing value proposition that resonates in developing and developed countries alike. Such firms will become world leaders, with significant shares of their revenues earned outside China. For western firms thinking about the future competitive environment or looking for acquisitions that can bring new competencies into their corporate portfolio, it is these latter firms that must remain in the spotlight.
David G. Hartman is Blue Canyon Partners’ China Practice Director. He has previously served on the faculty of Harvard University and as executive director of the National Bureau of Economic Research. He has been an active participant in China’s markets for over twenty years, speaks Mandarin, and resides in Beijing. His clients include a roster of Fortune 500 firms and Chinese companies.
George F. Brown, Jr., is the CEO and cofounder of Blue Canyon Partners, Inc., a strategy consulting firm working with leading business suppliers on growth strategy. Along with Atlee Valentine Pope, he is also the author of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press of Austin, TX. See www.bluecanyonpartners.com for more details.
Drs. Hartman and Brown have written extensively on the emerging challenges of the next generation of competitors from China, including articles published in Industry Week, Business Excellence, Chief Executive, Sales and Service Excellence, Industrial Distribution, iP Frontline, and numerous other periodicals.
1. Fortune Magazine, July 2012. Also on-line at http://features.blogs.fortune.cnn.com/2012/07/09/global-500-intro/.
2. We are sure that the Chinese government would not support our characterization, believing that all Chinese firms reflect both market and socialist characteristics, but we see a useful distinction here.
3. See George F. Brown, Jr., and David G. Hartman, Are You Ready to Take on China’s Next-Generation Competition, Chief Executive, September 2011, and Second Mouse Tales from China, iP Frontline, February 2012.