YES — IF ITS COMPANIES GLOBALIZE THEIR CULTURES AND STRATEGIES. In our view, China’s share of global business is based on a dynamic domestic economy. The top three Chinese companies on the Fortune 500 list in 2018 generated more than 85% of their revenue domestically. They, along with 84 others out of China’s 111, are state-owned enterprises; you would expect such companies to be reliant on domestic revenue for growth. But many of the privately owned enterprises on the list also generate the bulk of their revenue from domestic customers. The implication is clear: With a few exceptions, the great majority of the Chinese companies on the Global 500 would be vulnerable to a major slowdown in the domestic economy.
And a slowdown is inevitable, we believe. Demographic data shows that China’s working-age population is shrinking. In the absence of drastic improvements in labor productivity, a smaller workforce means a lower gross domestic product growth rate. Plus China’s penchant for debt could hamstring attempts to innovate by reducing the capital available for investment in international sales and dampen the country’s export competitiveness. And Chinese management style is antithetical to fostering innovation. We believe that after a meteoric rise, China’s giants could face a rocky future.
China’s working population (people aged 15 to 64) is anticipated to fall by 9% from 2015 to 2035, and by 20% in 2050. That’s a loss of 200 million people.
Two key ways a country can compensate for a shrinking workforce are by boosting the number of workers through immigration and by boosting the productivity of the remaining workers. Immigration as a countervailing force to a falling birthrate seems unlikely for China, which is not known for welcoming foreign workers. Countries can also offset a shrinking working-age population through dramatic improvements in labor productivity. With increased productivity, companies can pay fewer workers more money and still remain profitable, and the higher pay translates into higher domestic consumption per worker.
Can China correct or compensate for its falling productivity? That will depend on the long-term outlook for the main drivers of its labor productivity and on the ability of its firms to replace falling domestic revenues with exports (producing in China and selling abroad) and international sales (producing abroad and selling abroad).
To assess the outlook for Chinese productivity, we have to determine whether the factors contributing to its impressive growth to date are likely to improve, stay the same or decline. Economists and business strategists point to three drivers of China’s growth:
— A LOW PRODUCTIVITY BASELINE: In 1994 China’s GDP was just $564 billion, and its GDP per capita was only $473. In 2014, GDP topped $10 trillion. The economic reality is that the larger GDP gets, the harder it becomes to maintain the same rate of growth. A falling number of workers compounds the challenge.
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— AN EXCESS SUPPLY OF LABOR: Internal migration happens only if a country has an excess supply of rural labor. That no longer appears to be the case in China. Over the past 10 years, migration from rural to urban areas has dropped precipitously, with just 0.3% of the population leaving the countryside in 2016, according to the Chinese government. In the 10 years before that, more than 280 million workers migrated from the countryside to the city.
— EASY TECHNOLOGY EXPROPRIATION: Foreign firms increasingly recognize that giving away proprietary technology in return for market access makes little sense in China’s mature, increasingly competitive business landscape. The Chinese government recognizes that the days of easy productivity gains via technology expropriation are over.
For these reasons, we believe that Chinese corporations will have a hard time achieving the productivity gains that will be required in the future. That leaves only one way for them to keep their places on the Global 500: by boosting exports and international sales. But two serious obstacles stand in the way: high levels of debt and a conservative, inward-focused management culture.
Many Western multinationals are known for agility, adaptiveness and innovation. These sources of competitive advantage don’t happen by accident; they are the consequences of a management culture and capabilities that firms deliberately adopt, acquire and develop. To change their management style, China’s corporate leaders must:
— SHOW RESPECT: In our work, we hear complaints about Chinese businesses and executives. One complaint is best captured by a government official in a country in which a number of important Chinese firms have made significant investments over the past few years: “Maybe it’s because China is so big and has been growing so fast for so long, but Chinese executives come in and are a bit arrogant and think they can manipulate suppliers, ignore communities and discount the environment like they do back home.”
— PROMOTE INPATRIATION: Chinese firms need to accelerate their efforts to bring global leaders together, not just via email or teleconference but in person. A high level of inpatriation, or bringing people into the center for international assignments, is viewed as necessary to develop leaders, bring diversity and breadth of perspective to the company and build networks and trust. In our work with Chinese companies over the past 30-plus years, we have yet to see one that supports any serious inpatriation.
— FIX EXPATRIATION: It is natural for globalizing firms to send expatriates from the mother ship out to foreign satellites. Although there are benefits in terms of ease of communication, research has documented the serious limitations of this approach.
— INVEST IN LEADERSHIP DEVELOPMENT: Filling the global leadership pipeline requires not only expat assignments but also formal training programs. In many cases, these programs include multiple learning modules that bring participants together more than once and have projects and other activities that keep people connected even while they are back home and physically separated.
— INNOVATE OUTSIDE OF CHINA: That means that the China-centric mentality will have to change. The good news is that all the previous recommendations mentioned here will help this fifth one succeed.
Although most Chinese firms are well positioned to use their size and ecosystems for domestic advantage, they are ill prepared for the global expansion they will need to undertake if they are to maintain their newly acquired global rankings. If the current leadership composition continues, we predict that Chinese companies will begin to slide off the Global 500.
