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McKinsey: Chinese firms still lack global status
Chinese companies still have relatively low profitability and lack global status despite a record presence in the latest Fortune 500 list, McKinsey & Company said on Thursday.
As economic structural reform advances and cost advantages fade away, investment-driven growth must give way to higher productivity, said the US-based consultancy firm.
The average profit margin of China's 42 central State-owned enterprises on Fortune Magazine's latest annual ranking of the world's 500 largest companies by revenue was only 2.2 percent, compared with an average of 4.8 percent for non-financial companies outside the Chinese mainland.
Sinopec Group, the largest company in China by revenue, which ranked fifth globally, reported a profit margin of 2.8 percent in 2011. In comparison, Exxon Mobil, which came third on the list, had a profit margin of 8.6 percent.
The mainland had a total of 70 companies on the list, overtaking Japan for the first time as the second-largest base for the world's top 500 companies.
However, Xu Haoxun, a director with McKinsey China, said that less than 10 of these companies can really be regarded as "world-class enterprises".
"The growth of China's SOEs is mostly a result of their competitive edge in the domestic market, but these Chinese 'giants' face a lot more challenges when they enter the global market," Xu said.
Apart from its monopolized sectors, the Chinese market has the most severe competition in the world, which has resulted in the lowest profit margins, Xu said, adding that the investment-driven growth of previous years is no longer sustainable.
Meanwhile, rising costs in the domestic market mean that managers need to pay more attention toward both human and capital costs.
"The best form of defense is offence, thus taking a slice of the global market is key to the survival of Chinese enterprises," he added.
To build world-class enterprises, Chinese companies need to make more efforts to improve their profitability and sustainability, and improve the efficiency of their management systems and their ability to allocate resources globally, he said.
"In the next five to 10 years, China will need at least 100 CEOs with the ability to run Fortune 500 companies, 100,000 talented and experienced managers, and millions of skilled workers who can operate advanced equipments," Xu said.
The State-owned Assets Supervision and Administration Commission recently launched a program to improve internal controls in SOEs, and Xu said that McKinsey is working with the national assets watchdog to help build these companies into "world-class enterprises".
Xu said that as this process continues, more SOEs will pull out from non-core businesses, offering more opportunities to private business.
"Sometimes it's not that the SOEs don't want to reform, they do face a lot of resistance," said Xu Baoli, a researcher with the research center affiliated to SASAC.
The researcher said despite the SOE reform in 1998, there are still some non-performing assets, and the problem has been hidden by the rapid growth since 2003.
But SOEs may now face a period of contraction. At a recent meeting, Shao Ning, a vice-chairman of SASAC, called on the companies to prepare for a "winter period".
"Coping with contraction will be a tougher mission than expansion for the management of SOEs," SASAC's Xu said.
"World-class enterprises in the West evolved in an environment of complete competition, but China's SOEs have to deal with more social responsibilities, thus there isn't a universal standard," he added.
Chinese companies still have relatively low profitability and lack global status despite a record presence in the latest Fortune 500 list, McKinsey & Company said on Thursday.
As economic structural reform advances and cost advantages fade away, investment-driven growth must give way to higher productivity, said the US-based consultancy firm.
The average profit margin of China's 42 central State-owned enterprises on Fortune Magazine's latest annual ranking of the world's 500 largest companies by revenue was only 2.2 percent, compared with an average of 4.8 percent for non-financial companies outside the Chinese mainland.
Sinopec Group, the largest company in China by revenue, which ranked fifth globally, reported a profit margin of 2.8 percent in 2011. In comparison, Exxon Mobil, which came third on the list, had a profit margin of 8.6 percent.
The mainland had a total of 70 companies on the list, overtaking Japan for the first time as the second-largest base for the world's top 500 companies.
However, Xu Haoxun, a director with McKinsey China, said that less than 10 of these companies can really be regarded as "world-class enterprises".
"The growth of China's SOEs is mostly a result of their competitive edge in the domestic market, but these Chinese 'giants' face a lot more challenges when they enter the global market," Xu said.
Apart from its monopolized sectors, the Chinese market has the most severe competition in the world, which has resulted in the lowest profit margins, Xu said, adding that the investment-driven growth of previous years is no longer sustainable.
Meanwhile, rising costs in the domestic market mean that managers need to pay more attention toward both human and capital costs.
"The best form of defense is offence, thus taking a slice of the global market is key to the survival of Chinese enterprises," he added.
To build world-class enterprises, Chinese companies need to make more efforts to improve their profitability and sustainability, and improve the efficiency of their management systems and their ability to allocate resources globally, he said.
"In the next five to 10 years, China will need at least 100 CEOs with the ability to run Fortune 500 companies, 100,000 talented and experienced managers, and millions of skilled workers who can operate advanced equipments," Xu said.
The State-owned Assets Supervision and Administration Commission recently launched a program to improve internal controls in SOEs, and Xu said that McKinsey is working with the national assets watchdog to help build these companies into "world-class enterprises".
Xu said that as this process continues, more SOEs will pull out from non-core businesses, offering more opportunities to private business.
"Sometimes it's not that the SOEs don't want to reform, they do face a lot of resistance," said Xu Baoli, a researcher with the research center affiliated to SASAC.
The researcher said despite the SOE reform in 1998, there are still some non-performing assets, and the problem has been hidden by the rapid growth since 2003.
But SOEs may now face a period of contraction. At a recent meeting, Shao Ning, a vice-chairman of SASAC, called on the companies to prepare for a "winter period".
"Coping with contraction will be a tougher mission than expansion for the management of SOEs," SASAC's Xu said.
"World-class enterprises in the West evolved in an environment of complete competition, but China's SOEs have to deal with more social responsibilities, thus there isn't a universal standard," he added.
