:: Issue analyses

Chinese private enterprises: advances and drawbacks Shim Sang-Hyung Senior Business Analyst of POSCO Research Institute

I

n 1987, at the age of 43, Ren Zhengfei (任正非) founded Huawei Technologies Co., a telecommunications equipment and services company, in Shenzhen of Guangdong Province. The growth of this firm, with an initial capital investment of only RMB 20,000, has

been mirroring China’s economic growth, which began in earnest after China’s reform and opening-up. Last year, Huawei became the largest private company in China, with revenue of RMB 185.2 billion. Huawei Technologies Co. is now the world’s second largest networking and telecommunications equipment provider, after Ericsson.

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Noticeable growth of consumer goods and services companies On the list of China’s Top 500 Private Enterprises, released by AllChina Federation of Industry and Commerce (ACFIC) last August, Huawei

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stood out the most. It ranked first in 2010 in terms of revenue, a great leap up from 44th in 2008 and 39th in 2009. Huawei was followed by China’s largest private steel manufacturer Jiangsu Shagang Group. Suning Appliance, a leading consumer electronics company, ranked third. Total sales revenue of the top 500 private companies rose by 47.5% yearon-year. The total number of employees also went up by 24%, to 5.61 million, in the same period. This clearly shows that private companies are contributing more and more to China’s economic growth. In 2010, the lowest-ranked company on the list had operating revenue of more than RMB 5 billion. The annual list of China’s Top 500 Private Enterprises reflects the direction of China’s economic development. In 2007, six of the top ten companies provided fuels and raw materials for steel and metal production, but this number dropped to three in 2009, and to just one in 2010. On the other hand, consumer goods and services companies, especially those in telecommunications, electronics, automotive, and various retail and wholesale sectors, made a breakthrough. With the government tightening regulations on industries with high energy-consumption and pollution, and companies with obsolete production capacities falling behind, growth is slowing down in related sectors. However, consumer goods and services industries have been growing rapidly due to increasing domestic demand and implementation of policies supporting tertiary industries. Due to government policies regarding consolidation and other forms of restructuring, and intensified market competition, companies in the steel, metal, and cement industries have made a strategic choice to super-size. Good examples are Zhongtien Steel (中天), which came in 14th on the list, and Beijing Jianlong Heavy Industry Group (北京建龍), which took 15th place. Although 388 of the 500 companies on the list are located in East China, constituting an absolute majority, this is 17 fewer companies than the previous year. On the other hand, the number of firms located in West China has risen by 18, to 52. West China companies’ shares have increased by 10.6

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:: Issue analyses

Top 10 list of China’s top 500 Private Enterprises (Unit: USD 100 Mil.)

2010 Company

Industry

Revenues

1

Huawei (華爲)

Telecommunications, electronics

1,852

2

Jiangsu Shagang Group (沙鋼)

Steel

1,786

3

Suning (蘇寧)

Home appliance retail and wholesale

1,562

4

Lenovo (�想)

Telecommunications, electronics

1,467

5

Dalian Wanda (萬達)

Real estate development

772

6

Geely (吉利)

Automotives

683

7

Haihang (海航)

Shipping, logistics

649

8

Xinjian Guanghui (廣匯)

Retail and wholesale logistics

648

9

Yurin (雨潤)

Food and beverage processing

648

10

Guangsha (廣廈)

Construction

604

2007 Company

Industry

Revenues

1

Lenovo (�想)

Telecommunications, electronics

1,466

2

Jiangsu Shagang Group (沙鋼)

Steel

1,155

3

Suning (蘇寧)

Home appliance retail

855

4

Guangsha (廣廈)

Construction

409

5

Fosun Group (復星)

Steel, Department stores, Medicines, etc.

380

6

Yurin (雨潤)

Food and beverage

310

7

Jintian Copper Group (金田)

Copper

305

8

East Hope Group (東方希望)

Colored metal

295

9

China Oriental Group (中國東方)

Steel, insurance, securities

290

10

Rongcheng (榮程)

Steel

285

Source: All-China Federation of Industry and Commerce (www.acfic.com.cn)

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percentage points in the combined revenue, and 11.9 percentage points in the combined assets of the top 500 private companies. As progress spreads to inland China, more and more companies in West China are writing their own success stories. ○●

Government’s equal treatment of private and public firms It is noteworthy that private companies began entering strategic industries such as the advanced materials and new energy industries, and expanding investment in earnest, in line with government policies. The Chinese media reported that 62.8% of the top 500 private companies have either joined new strategic industries such as environmental protection,

If China wants to reduce inefficiency arising from government and public sector-oriented investments, China must encourage entrepreneurship by providing motivation, and distribute resources effectively

energy saving, advanced materials, new energy, new energy vehicles, and state-of-the-art information and telecommunications, or have expanded existing related strategic business. Last July, China’s National Development and Reform Commission

(NDRC) released a document, titled Opinions on the Implementation of Encouraging and Guiding Private Enterprises to Develop Strategic Emerging Industries, and expressed its commitment to providing private sectors with various industrial policies and financial support for their development in strategic emerging industries. The document states the Commission’s plan to make public funds for strategic emerging industries equally available to both private and public enterprises. Chinese Premier Wen Jiabao toured the Binhai New Area of Tianjin in October. He visited high-tech venture companies and held talks with entrepreneurs in the state-of-the-art equipment manufacturing, biotechnology, telecommunications technology, and other emerging industries to learn about their problems and difficulties. He stressed that in facing a

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:: Issue analyses

crisis, a country can survive only with a well-developed real economy led by innovation and high-tech industries, and that private enterprises should pursue development and progress in strategic emerging industries. The first time the Chinese government publicly announced equal treatment of both private and public sectors was through provisions on nonpublic economy released in 2005, also known as the Non-public 36 Articles. This law prohibits the government or public agencies from interfering with a private sector’s access to industries other than those prohibited to private investment. This was, at the same time, an admission of the fact that the public sector had been favorably treated. In May of 2010, the Chinese State Council released a new set of guidelines to promote domestic private investment: the New 36 Articles. The measures are aimed at lowering entry barriers for private companies in infrastructure, public services, and other public works. They also allow private enterprises to participate in M&A’s or other restructuring processes with state-owned enterprises, and include them in the government’s industrial upgrade processes, including indigenous innovation and globalization. However, private enterprises still feel discriminated against when obtaining licenses or approvals, because the new measures are not well implemented in practice. What is worse, various fee increases, financial difficulties, and economic slowdown have driven many small and medium enterprises to bankruptcy, creating a hot-button issue for the Chinese economy. ○●

Higher efficiency in private enterprises than in public enterprises The 2011 list of China’s Top 500 Enterprises includes 184 private enterprises. However, their total profits are only half that of the top 10 stateowned enterprises. This is because state-owned enterprises, spread across the petrochemical, information and telecommunications, and banking sectors, hold monopolies in the market.

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Huawei Technologies and its founder, Ren Zhengfei (任正非) Huawei, the world’s second largest networking and telecommunications equipment provider after Ericsson, is showing unprecedented success in globalization. It has most of the world’s 50 largest telecommunications service providers as its clients. More than 75% of its sales are generated overseas. Huawei ranked first on the 2011 list of China’s Top 500 Private Enterprises. Huawei also took first place on the list of top 100 Chinese electronics and information technology companies, overtaking Haier, a state-owned company. The key to Huawei’s success is bold global marketing and high R&D investment. As many as 42% of its more than 100,000 employees are working in R&D; more than 10% of its annual revenue is spent on R&D. Huawei also files more than 1,000 patent applications each year, and it ranked 4th in international patent application filings in 2010. The founder and president, Ren Zhengfei, ranked 5th on the list of Asia’s Top Business Executives released by Fortune magazine, after Lee Kun-hee, the chairman of Samsung Electronics, who ranked 4th. He is dubbed a“solider CEO”or“wolf CEO”because of his company’s strict military-style corporate culture, and his merciless discharge of the bottom 5% of the workforce in performance reviews. That said, he is revered by the Chinese public for turning his company into a global company with world-class competitiveness in the high-tech industry.

While the average profit margin and return on assets of the 316 public companies on the list of China’s Top 500 Enterprises were 5.7% and 1.8%, respectively, those of the 184 private companies were 6.1% and 3.6%, respectively. The R&D to sales ratio of private companies was 1.8%, higher than that of public companies at 1.4%. With large-scale public investment projects dominated by public companies, and bank loans and restructuring subsidies concentrated on public companies, private companies showing 092 POSRI Chindia Quarterly� W i n t e r 2 0 1 2

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The “Wave of Bankruptcy (倒閉潮)” of SME’s in the Pearl River Delta According to a survey conducted by the All-China Federation of Industry and Commerce (ACFIC), the disadvantages of private enterprises include discrimination in approvals and authorization, falling cost competitiveness due to rising labor costs and increasing investment burdens for environmental facilities, and difficulty in securing workforce. (ACFIC is a non-public economic chamber with 3,200 regional bodies and 1.97 million members as of August 2011.) This year, the production costs of companies located in the Pearl River Delta and the Yangtze River Delta have risen by 15% due to rising raw material prices, and their labor costs have risen by 20%. As the government has continued to tighten policies in order to control commodity prices, SME’s have found it difficult to borrow money from banks, and have turned to private loans at 30-40% annual interest rates. Since August, many have gone bankrupt and taken to moonlight flitting. By mid-September, approximately 20% of the 360,000 SME’s located in Wenzhou of Zhejiang Province were suspended or closed down. If financial stress continues, this figure is expected to surge to 40%. On October 12, the State Council finalized emergency financial policies to support SME’s and began preparing their implementation. These financial and fiscal policies include: halving the income tax on SME’s; raising the threshold of value-added tax and business tax; and rationalizing financial support.

higher efficiency than public companies is significant. If China wants to reduce inefficiency arising from government and public sector-oriented investments, such as insolvencies and overinvestment caused by financial adhesion, and be reborn as a technology-based industrial powerhouse, China must encourage entrepreneurship by providing motivation, and distribute resources effectively. This is why both public and private sectors must compete on a level playing field. 093 Winter 2012� POSRI Chindia Quarterly