While the number of Chinese multinationals is increasing, they need to up their game by strengthening their innovation capacity
Chinese multinational companies (CMNCs) have a significant presence on the world stage, some 129 of them making it to this year's Fortune Global 500 list of top companies, up from just three in the first Global 500 list published by the magazine in 1995.
Also, for the first time, the number of Chinese companies on the list surpassed those of the United States.
However, while the CMNCs have expanded greatly in size, profitability is nothing to brag about yet. CMNCs on the list registered profits of $3.5 billion, compared to an average of $4.3 billion for the entire 500 companies. And, remove the 11 Chinese banks from the list, and CMNCs' average profits dip to $1.93 billion, far lower than the $5.28 billion average profit of US companies on the list.
This profit gap can be linked to three key issues: the focus sectors of CMNCs, their innovation capabilities and their utilization of global value chains.
Compared to those of the US, fewer Chinese companies are profitable in emerging industries. Most CMNCs in the Fortune 500 list focus are in heavy industries, finance, and real-estate; Chinese companies in emerging industries rank far down the list.
So while Chinese technology companies are expanding fast, there remains a huge gap between them and US technology companies. Among CMNCs, only Huawei made it to the top 100, being ranked 61. In contrast, Apple ranked 11, Amazon 13, Alphabet 37 and Microsoft 60.
These US tech companies were significantly more profitable than Huawei, despite the Shenzhen-based enterprise's rapid rise in recent years. Apple's annual profits of $59.5 billion were more than six times Huawei's and even Microsoft, ranked just one place above, doubled Huawei's profits. These profit signals show there is room for improvement in realizing innovation as a lasting competitive advantage.
CMNCs also have room to grow in terms of fully utilizing global value chains. According to the 2018 Top 100 CMNCs and Transnationality Index, co-published by China Enterprise Confederation and China Company Association, the average transnationality index of the top 100 CMNCs is 15.80 percent, much lower than that of global top 100 MNCs (66.1 percent). This indicates that the ability of CMNCs to integrate resources on a global scale remains relatively weak.
Global top 100 MNCs recruit talent from around the world, reducing costs through international division of labor and selling their products and services to international customers. In contrast, Chinese corporations tend to rely heavily on the domestic market. While the number of globally-oriented Chinese enterprises is increasing, there remain challenges to overcome.
Also, in the current wave of anti-globalization, Chinese companies face obstacles from protectionism, unilateralism and greater scrutiny of foreign investment.
There is a need for CMNCs to up their game to build innovation capacity and global competitiveness. The following steps can help achieve this.
First, CMNCs should recruit more international talent, as it plays a vital role in improving innovation capability. Only when CMNCs "go out," recruit and cultivate international talent will they be able to optimize the use of global value chains, adapt to overseas markets, and localize products. Xiaomi's achievement, climbing the Fortune Global 500 list in just nine years, cannot be separated from its international talent strategy.
When it was founded, Xiaomi recruited high-level talent from Google, Microsoft and other well-known MNCs to develop its brand strategy. On entering overseas markets, Xiaomi has worked closely with local talent to integrate its brand into these markets and ensure products meet customer needs. Other CMNCs expanding overseas could also benefit from such a globally-oriented talent strategy.
Second, China should continue to deepen its reform and opening-up to create a favorable environment for Chinese companies to strengthen their competitiveness. Interacting and competing with world-class enterprises is essential for CMNCs to sharpen their abilities on the global stage.
In the globalized digital economy, the distinction between domestic and international markets is disappearing. Only through open competition and innovation can CMNCs grow strong and smart enough to be true world-beaters.
Third, China should continue to promote free trade agreements (FTAs) to open up new market opportunities and safeguard the interests of CMNCs in overseas markets.
Over the last 18 years, Chinese companies have benefitted from greater market access under the WTO, which also gives them mechanisms to address unfair non-tariff barriers.
Now that WTO is not as effective as it used to be, China needs to promote more regional FTAs to support the globalization of its enterprises, such as the Regional Comprehensive Economic Partnership (RCEP) and Free Trade Area of the Asia-Pacific (FTAAP). China could also consider joining the Comprehensive Progressive Trans-Pacific Partnership (CPTPP), which came into force at the start of this year.
While Chinese enterprises have gradually integrated into the global economy and become global leaders over the past two decades, for the next phase of globalization, it is imperative that Chinese enterprises continue to explore new ways of not only being large, but also smart and sustainable.
Dr. Wang Huiyao is president of the Center for China and Globalization, the largest independent think tank in China, with over 100 researchers and members of staff.