Chapter 4 Constraints and challenges Cgraphics.eiu.com/files/ad_pdfs/domcompchap4.pdf · Oil Corporation’s doomed bid for Unocal, and the EU’s moves to curtail the growth of imports

70 © The Economist Intelligence Unit 2005

Domestic companies in ChinaTaking on the competition

Chapter 4

Constraints and challenges

China’s approach to economic reform has been gradual, with Beijing preferring to “cross the river by feeling for the stones”. Twenty-five years after Deng

Xiaoping began the first phase in this process, China has definitely made it to the opposite river bank. However, consolidating its position there means first ensuring the sustainability of economic growth and second, fostering innovation, so that China can keep pace with (and create) new technology. This will require the creation of an environment that allows China to move beyond its position as “workshop of the world” by encouraging the development of the design studios, laboratories and boardrooms that support the workshop.

What, specifically, must be done? Some of the obstacles blocking the development of Chinese companies are rooted in the regulatory environment, while others are linked more directly to the immaturity of the corporate model in China. Overcoming them will require macroeconomic structural reforms, as well as remedial action on an enterprise level.

Political support also will be an important factor in the development of Chinese companies. There is already a long tradition of linking politics with trade issues, particularly in the Sino-American relationship but also increasingly in relations with Europe and Japan. The hyperventilated comments of congressional members in the face of China National Offshore Oil Corporation’s doomed bid for Unocal, and the EU’s moves to curtail the growth of imports from China, suggest that politics will continue to play a role in determining the pace of China’s commercial development, and it will be a test of China’s diplomatic skills to avoid major trade conflicts or backlashes against investment by its largest firms in the years to come.

Ironically, the biggest threat facing Chinese companies is the one being felt by many companies

worldwide—the intense downward pricing pressure being exerted in light of the intense competition in and rapid growth of China’s economy. The truth is that Chinese and foreign multinational companies (MNCs) in China have much in common in terms of the obstacles in the path of their growth. Indeed, the regulatory problems identified by domestic companies, give or take a phrase or two, could have been lifted from a foreign chamber of commerce “complaint list”.

Growth is not all goodMany companies participating in our survey were frank in their assessments of external risks to their business ventures, and their fears reveal a relatively high level of insecurity about the Chinese economy. This may be surprising to foreign observers who regularly praise the speed and audacity of China’s economic growth. However, growth at a runaway pace is unsettling, especially if companies are faced with many external factors over which they feel they have little control.

Just as foreign companies fear the impact of China’s low-pricing strategy on their markets and industries, 68% of the Chinese companies surveyed for this report cited intensifying pricing pressure based on growing competition as the greatest risk to the success of their business plans. The same number identified the pace of growth of the domestic market as the greatest macroeconomic risk to their planned investment projects. On the latter question, 33% identified higher interest rates as a risk, while 30% cited a change in the exchange rate (the survey was conducted before the July 2005 de-pegging of the renminbi from the US dollar). External protectionism and political instability each were chosen by 23% of respondents. Major financial challenges faced by companies were ensuring effective risk management and accessing sources of finance, followed by managing internal financial controls and managing credit.

© The Economist Intelligence Unit 2005 71


When seeking to forecast the likely success of planned investment projects, which, if any, of the following macroeconomic risks does your company take into account? Select all that apply.(% respondents)

Higher interest rates

Exchange-rate change

External protectionism

Pace of growth of domestic market

Pace of growth of external markets

Political instability

Don’t know

Other

33

30

23

66

21

23

5

4

Which of the following do you perceive as affecting your pricing power?

Rate on a scale of 1-5, with 1=Significantly increasing pricing power and 5=Significantly eroding it.

(% respondents)

1 2 3 4 5

Competition 31 13 7 19 29

The number of buyers/customers 20 29 28 17 5

The threat of substitute goods/services 8 20 43 18 11

Economies of scale 19 34 29 10 8

Financial barriersFor many Chinese companies, financing is a major barrier to all but the most short-term planning. Barring large state-owned enterprises (SOEs), access to formal sources of finance is an issue for many firms. Several studies, including ours, have found that formal financing is particularly difficult for private enterprises, the most experimental, fast-growing and recently legitimised of China’s corporate structures. This is also the conclusion of a report issued in 2002 by the Asian Development Bank (ADB) titled, The Development of Private Enterprise in the People’s Republic of China, which was based on more than 700 questionnaires and interviews with over 80 chief executives of private companies.

In our survey, 40% of respondents say accessing sources of finance is difficult or very difficult, while only 20% say they have no difficulty. Many of our surveyed executives say they rely on friends and family or retained earnings for a significant percentage of funding. Only 22% of respondents rely on the formal

banking sector for more than 75% of their annual funding.

These findings correlate with those of a 2001 World Bank study of 1,500 high-tech firms, which revealed that only 20% had bank financing, with retained income and loans from friends and family making up the balance. As noted previously, fear of cash shortfalls makes it very difficult for a company to sustain any production or marketing effort without immediate returns, so that strategic planning and management concentrate on recouping investment in the shortest possible timeframe. This reinforces the “short-termism” prevalent in Chinese enterprises. As the ADB report points out, it is not coincidental that private enterprises usually concentrate on light industry, which has fewer entry barriers and a rapid cash flow. The report specifically cites Zhejiang province, in which private enterprise makes up almost 100% of total industrial output, with a high concentration (over 30%) in textiles.

Had our survey pinpointed only family-run,



and health products (children’s vitamins). In 2002 the company further diversified into kids’ clothing. It may soon develop personal-care products, including shampoo and toothpaste. Shan Qining, vice-

Wahaha sees no point in planning

Wahaha currently produces 30 varieties of milk and yoghurt drinks, purified and mineral water, carbonated soft drinks, fruit and vegetable juices, sports drinks and teas, as well as congee, canned food

director of public relations at Wahaha, says, “Our general manager doesn’t like five-year plans because the market changes so quickly. But the company hopes to increase this year’s sales revenue by 10% over last year.”

small and medium-sized enterprises (SMEs) or high-tech start-ups and their credit problems, the extent of the problem with financing would not have been surprising. However, although 33% of survey participants were private enterprises, most respondents were sizeable corporations (81% of participants had earnings over Rmb100m, and 61% had more than 450 employees) so the level of precariousness they experience in sourcing working capital means something is still amiss in China’s financial system. While the banking sector has undergone substantial deregulation—there are many new commercial banks and numerous foreign players are now engaged in local-currency commercial lending—it seems that many of our survey respondents fit the profile of problematic “sandwich” credit risks for banks. On the Chinese scale, they are medium-sized, and thus too large for mom-and-pop informal lending, but they lack the political clout and economic importance of a big SOE. Their business plans probably lack the allure of fast profits, so they are not attractive for local venture capitalists.

The result is not just a missed market opportunity for bankers—domestic enterprises that cannot or will not join the ranks of commercial borrowers also miss out on financial advisory services that would help regularise their own accounting procedures.

As for China’s SMEs, they have the usual credit problems of SMEs the world over—and then some. The hazy registrations of many SMEs in China, as well as their lack of collateral (property) and reluctance to open their books

to outside auditors, no doubt preclude bank financing. Hence they often rely on informal finance mechanisms or self-generated funds. As the economy has grown, there has been a scaling up of such informal financing, and as noted in Kelley Tsai’s study of informal finance, Back-alley Banking: Private Entrepreneurs in China, informal financing mechanisms range from lending co-operatives to casual lending, rotating credit associations, private moneylenders and pawnshops. Rotating credit associations in clustered industries (such as in Wenzhou) are the most sophisticated, as both borrowers and lenders are part of the same production cycle and credit risk is easy to assess.

Unfair competitionAnother problem facing domestic companies in the wider economic environment is the lack of a level playing field, particularly for tax treatment. Tax rates for MNCs located in investment zones are set at 15%, with tax holidays for the first couple of years until the enterprises are profit-making; reduced rates follow this for an unspecified grace period. Outside of investment zones, local officials, who collect corporate tax, often offer foreign investors tax incentives to locate in their region. By contrast, the tax rates for local companies are set at 33%.

Tax rates are to be integrated, with “national treatment” extended to all enterprises, regardless of ownership status, in accordance with World Trade Organisation (WTO) guidelines. However, a recent announcement from the Ministry of Commerce stated that the tax



holiday for foreign investors would be extended. This preferential policy for foreign investors reinforces the dualism of business regulations, and the “negotiable” aspect of dealing with local officials undermines transparency. The dualism is also reflected in financing. According to Huang Yasheng, a US academic, China’s private entrepreneurs have been forced to raise money by selling equity to foreigners because they are unable to obtain loans from China’s state-owned banking system.

Another obstacle for business in China is the lack of consistency in regulation. At the moment the scope for bureaucratic discretion is far too broad for transparent, predictable rulings. As discussed above, China’s economic reform has been very decentralised, with local authorities given considerable leeway in devising preferential policies to attract investors. Taxation is one issue, but property rights—particularly zoning for industrial or commercial use—are also an area of potential contention. For example, in 2004 many “illegal” industrial zones were reclaimed for agricultural use.

Achieving uniform regulation across the country will be difficult, but some small steps in this direction have already been taken. As discussed elsewhere in the report, government intervention in the local economy has been a reflexive instinct for many officials ever since the start of economic reforms. In areas where there has been a strong pattern of collective enterprises, local government likely has a history of providing credit, infrastructure assistance, and

protection to help the local economy develop. These habits are hard to break, particularly if there is still a degree of state ownership in the enterprise. The formation of industry associations or business groups eventually may help to provide a counterweight to government interference, but these groups are only beginning to grow into a political force.

Business associations are also playing important roles in business education. The China Council for Promotion of International Trade, and the All-China Federation of Industry and Commerce are active in hosting seminars and networking sessions. Other assistance has come in the form of WTO training for local officials, and the general trend towards “e-government” has seen much more transparency, with the uploading of government regulations and fee schedules on to websites.

Government interferenceGovernment interference on a more macro level, in specific, so-called “pillar industries” is also an issue. The tendency to interfere, rather than allow market forces to work unhindered, depends on the level of overheating in specific sectors, and bank exposure to non-performing loans. In the past year, there have been numerous government statements warning of lending restrictions on over-heated sectors, notably automotive, low-end steel manufacturing, property development and electronics. Steel, an acknowledged pillar industry, now has a consolidation blueprint (which has yet to be

Although still hampered by arcane

registration laws—only one industry

association is permitted to register per

industry—they are increasingly seen as

legitimate “stakeholders” in government

consultative processes.

They hold market-oriented views,

Budding lobbyists

China’s industry-association representa-

tives are evolving into lobbyists. Many

association members own private com-

panies (the chief executive of Bosideng,

Gao Dekang, is vice-chairman of the Gar-

ment Industry Association) or companies

that are joint-venture partners.

and expect their representatives to

reflect their business outlook. By

contrast, earlier industry association

representatives were usually former

bureaucrats from defunct government

departments, and were instinctively in

favour of maintaining the status quo.



implemented).Strengthening core companies, and using

mergers and acquisitions (M&As) to winnow out the smaller players, was the blueprint officials used in consolidating airline operations in China. Similar edicts to the widely dispersed (and usually privately owned) electronics industry are much more difficult to enforce, but that doesn’t stop officials from trying. In mid-2005, the Ministry of Information Industries convened a meeting of Chinese handset makers, encouraging them to export more, noting that the local market had become saturated. The ministry was also trying to be helpful in thinking of ways to restrict imports. The issue does become more complicated when there is a strong dependency on export markets, and any trade litigation pushes the sector back into a politicised context, regardless of whether it is formally acknowledged as a “pillar” industry. Thus even the highly privatised textile sector in China is subject to extensive government controls: with the expiration of the Multi-Fibre Arrangement in January 2005, exports to the US and EU have surged, leading to new rounds of negotiations by trade officials to offset import restrictions.

InfrastructureOther fears voiced by respondents to our survey focused on the physical environment, information-technology failure and shortfalls in logistics. Although the question was not specifically asked in the survey, a frequently voiced concern of many companies is that of totally random external risk, such as the SARS-induced shutdown in 2003 or fears of computer viruses and lost data.

There is far less fear of random danger in the physical environment. China’s cities in general have upgraded infrastructure, but shortfalls in electricity are a growing worry. In the summers of 2004 and 2005 rationing of power supplies was implemented in the coastal cities. In other parts of the country, water shortages have an impact on economic performance. Generally speaking, however, since economic reforms began improvements in China’s telecommunications, road, sea and air infrastructure have been

dramatic, and all major cities boast new airports and upgraded highways. The improvement in logistics does not mean that the physical infrastructure can keep pace with growth, or that some installations are not redundant or wasteful. Booking road and rail transport can still be a problem, as is port congestion. The quality of infrastructure is far from even across the country, reflecting huge income disparities among local governments and making it difficult even for domestic companies to tap the full potential of their “national” market.

Labour issuesHuman-resource shortages are a challenge for all companies operating in China. Over 100m rural migrants seek work off the farm, and more than 30m urban workers have been made redundant in the course of SOE restructuring. Yet companies complain about labour shortages. Demand and supply are clearly out of sync and in general there is an under-valuation of labour resources. This not only wastes talent, but also makes it harder to upgrade skills and human capital.

Laid-off workers’ efforts to find re-employment are made more daunting by the extremely decentralised (and disorganised) nature of much labour recruitment in China. Most job searches are done at the local level, through employment fairs and labour exchanges hosted by local governments, and usually only local jobs are on offer. In the meantime, job opportunities in other provinces are not well-publicised, and even if match-making were done, labour transfers are still not easy, as pension rights are not transferable, and many barriers to the integration of migrant households remain, such as differential fees for school students.

By contrast, the market for unskilled labour, which has become a commodity, does reach across provincial lines, and involves large pools of workers, albeit selectively, and for short-term contracts only. Labour brokers for factories usually build up relationships with source townships and counties in poor interior provinces, resulting in, for example, yearly migration patterns of long-distance buses



carrying migrant workers from Sichuan villages to factories in the Pearl River Delta. If these recruitment links are disrupted (as they have been recently by bad press concerning working conditions in the Pearl River Delta), brokers will simply try to replicate these patterns in even more obscure villages, as the “race to the bottom” in wages continues.

Recruiting top talent—senior managers, higher-level technicians and other professionals—is usually done in a much more personalised, “head-hunting” manner. Domestic companies surveyed did the majority of their hiring from SOEs, or else signed up new graduates. This recruitment pattern is reflected in the personnel complaints voiced by domestic companies—namely, lack of innovation and creativity. Indeed, their workforce comprises older employees who need to unlearn bad work habits, or recent graduates who have yet to acquire good ones.

Our survey results also pointed to an interesting anomaly. “Face” (company image) was deemed by respondents to be a major factor

in recruitment, along with performance-related pay and opportunities for training. This is rather puzzling, particularly given the amorphous nature of “face”. It also suggests a built-in cycle of over-inflated expectations, followed (inevitably) by disappointment: workers have high expectations based on the company’s image but are disappointed by the hard reality of set wage packets and limited opportunities for promotion. Given the circumstances, high attrition rates should not come as a surprise. Attrition is also no doubt tied to another thread that runs throughout this study—“short-termism”. In a cultural context where an accelerated pace is the norm, commitment to completing a task, or remaining in a team, is not a high ethical value, and local workers see nothing wrong with job-hopping.

As mentioned earlier, both foreign and domestic companies are struggling with many of the same issues: how to build staff loyalty, reduce attrition, ensure ethical behaviour and

among counterpart firms in the US,

where it is credited with productivity

improvements, and encouraging

innovative thinking.

State-owned enterprises (SOEs)

surveyed by Grant Thornton had the

lowest rates of worker empowerment,

reflecting more autocratic management

styles. The flip side of this problem

was illustrated by Miao Mingzheng at

Dongfeng Electronic Technology, who

bemoaned the entrenched work habits of

older SOE workers, and their resistance to

change.

Such a sense of entitlement

perpetuates an “iron rice bowl”

attitude among employees, which in

turn hardens a top-heavy management

style. Often such resistance is not only

The case for empowerment of workers

A survey of Chinese ISO-certified compa-

nies by Grant Thornton, a business advi-

sory firm, found that most had adopted

Western human-resource practices and

were devoting considerable resources to

training (more than 50% reported pro-

viding more than 20 hours of training per

year to each worker).

However, in other senses, Chinese

companies were much less advanced,

notably in terms of worker empowerment.

Although work processes were considered

cutting edge (with investments in plant

and machinery), local enterprises had

not followed the organisational example

of grouping workers into “self-directed

teams” for shop-floor innovations

and efficiency gains. This style of

personnel management is common

embedded in thought processes, but also

in actual manufacturing processes, at

un-ergonomic assembly lines and physical

plants of older factory sites.

However, joint ventures that have

been set up adjacent to older factories

offer some striking illustrations of what

can be achieved. For example, when

Suzuki set up its joint venture with

Chang An Automotives in Chongqing, the

new factory was on the old compound

site, and its employees were given

extensive training and coaching in

Japanese production and management

techniques. They quickly stood out from

their erstwhile SOE colleagues, not only in

terms of productivity per worker, but also

in terms of company morale and sense of

responsibilty.



improve corporate governance. This is somewhat surprising, as we had expected that a foreign presence (either as a joint-venture partner, or wholly foreign owned enterprise) would be more successful in inculcating a strong corporate culture and personnel practices. This is apparently not the case. In fact a similar phenomenon is evident in local companies—several of the companies interviewed employed foreigners in senior managerial positions, and more returnees are taking up jobs with local companies.

There are many possible reasons for China’s human-resource problems: the overly rigid education system, with its rote learning and stifling tendency towards elitism, or the top-heavy management matrix of many enterprises, which suffocates innovation and independent thinking. However, part of the problem undoubtedly lies with companies’ own lax attitude towards corporate-governance procedures, which are bound to tempt untrustworthy managers and employees. As multinational companies told us in a 2004 survey, forensic accounting exercises on potential domestic M&A target companies almost always dig up skeletons, such as murky paper trails for land leases, or unpaid tax bills.

According to Edward Steinfeld, a professor at the Massachusetts Institute of Technology, a lack of trust in the regulatory environment, and weak enforcement efforts undermine corporate and personal ethics, so that rent-seeking behaviour becomes the norm. This is manifested in high non-payment rates for loans, including student and car loans. Mr Steinfeld has described the growth of a “non-payment” economy in China, in which debtors default with no penalty, and companies become entangled in triangular debt, up and down the supply chain. “The banking system remains mired in conditions of moral hazard; bank balances remain awash in red ink, large borrowers too big to fail, the mortgage market teetering—and everyone else seems to face tight liquidity restraints.”

Access to the formal banking sector by more domestic companies would improve their corporate governance, as would the use of external auditors and credit-rating agencies. Despite the banking

system’s weakness, it is undergoing reform, and will be increasingly challenged by more commercialised lending practices.

The other side of the coin involves building up the professional capacity of the work force. This is far easier said than done, but positive incentives, such as performance-based bonuses, training and more responsibility usually go down well. Many MNCs have set deliberate targets for “localisation” of management, and rotate promising staff through a series of preparatory assignments. By contrast, most domestic companies have relatively unstructured career-development policies, which is not surprising given the newness of private companies in China, and the traditional nomenclatura system of SOE appointments. Wumart’s approach to managerial training (see Chapter 3) is still unusual in China, and the fast growth of many sectors (and subsequent “compression” of seniority) will impede more stable career planning for some time. However, the current “rapid footprint” phase of market growth will be followed inevitably by a slowing down and this should result in a tightened job market and reduction in job hopping.

In the meantime, businesses in China are being encouraged to build professionalism within sectors as a way to self-regulate, and improve work ethics. Much as preparation for ISO certification or meeting higher production standards have helped improve productivity and performance, the introduction of “third party” certification for business credentials is being promoted as a way to raise professional standards. Better business education should also help to build up professional integrity and business skills, and it is noteworthy that so many of our interviewees had gone back to school for EMBA training. Licensed training institutes and accreditation protocols could do with some upgrading, for industry-wide national recognition (and de-recognition, in case of negligence or failure to uphold professional standards). Professional journals, websites and conventions can also facilitate technical exchanges, and employment match-ups within the profession.

Given the weaknesses identified in the country’s regulatory environment and corporate history, is



The good and the bad : Broad, Nintaus, Kelon

At the other end of the corporate

spectrum are companies that implode

under power struggles, or out-and-

out embezzlement. A series of scandals

afflicted major appliance makers in

mid-2005.

Nintaus scandal, Kelon’s messNintaus, a Zhuhai-based DVD manufac-

turer, saw its chairman, Wan Ping, receive

a 15-year sentence for embezzlement,

while a co-founder and former chairman,

Yang Minggui, is still on the run after

being accused of smuggling.

Kelon, a refrigerator maker, has faced

similar problems. Kelon started out as a

town-and-village enterprise in Shunde

County, Guangdong, and grew to become

China’s largest manufacturer of fridges.

It built up additional business lines

through technology transfer agreements

with Sanyo, followed by Whirlpool (for

washing machines).

Kelon listed as an “H” share in Hong

Kong in 1996 and, at its height, was

a household name for quality home

appliances. In 2001 Greencool became

Kelon’s largest shareholder, and its

president, Gu Chujun, became chairman

of Kelon. The company lost Rmb60m

(US$7.4m) in the final quarter of 2004,

and by mid-2005 disputes about loans

Broad’s green credentialsA local company at the cutting edge of

responsible corporate practice is Broad

Air Conditioning, which produces absorp-

tion chiller systems run by solar energy.

Under the leadership of its founder and

chief executive, Zheng Yue, Broad has a

pro-active moral philosophy and corpo-

rate social-responsibility policy.

Broad has a mission statement of

its values, and all business decisions

are made in accordance with those

values, which include protection of the

environment and intellectual property

rights, honesty, integrity—and paying

the tax bill. In fact Broad is one of the top

tax-paying private companies in China,

and has been cited as one of the most

respected companies in the country.

However, even Broad comes up against

the reality of doing business by local

rules. Broad claims that it has no bank

loans—so it is not surprising that the

company sometimes finds it difficult to

manage its cash flow smoothly. It also

has trouble meeting competitors’ prices.

But Broad is marketing itself in a niche

area, and its green credentials do impress

potential buyers in the industry. One of

its more recent contracts was to supply a

cooling system to Madrid’s international

airport.

to subsidiary companies had intensified.

Kelon’s own stocks were suspended from

trading, and production halted in mid-

year due to cash shortages.

Apart from investigations launched

by the China Securities and Regulatory

Commission, other efforts have been made

to sort out Kelon’s mess. A shareholder

activist, Yan Yiming, tried to have himself

placed on the board as an independent

director at Kelon, with the objective to

investigate finances. Three previous

independent directors had already

resigned, as had its auditor, Deloitte

Touche Tohmatsu. In early August 2005,

Gu Chujun was placed under house arrest,

accused of embezzlement, and Kelon is

still awaiting a “white knight” rescue.

Rumoured merger-and-acquisition suitors

are domestic appliance makers Midea and

Hisense.

Such cautionary tales illustrate

not only the rise and fall of a specific

company—from village-based workshop

to an “H” share listing to near bankrupty—

but also the interplay of market regulators

and market discipline, in the full glare

of media attention. This combination of

professional ethics, regulatory scrutiny

and free information flow is essential

for Chinese companies to reach their full

potential.

it premature to be talking of Chinese companies moving to the next stage of development? The issue of sustainability is complex. Low-end manufacturing is gradually shifting location, as costs of real estate and labour price it out of many cities. It is also becoming more agglomerated, as upstream and downstream chains (as well as logistics providers) move closer to assembly lines. The tipping point will be when higher-value services, such as design, marketing and finance also become part of the local chain, whether through

foreign investment or indigenous development. This process may be beginning in the automotive sector, with the success of homegrown models such as the QQ car. Arguably it is already under way for some players in the textile industry. Following the dismantling of quotas on textile imports, some multinational companies have shifted many higher-value employees to China, essentially integrating the entire industry. This degree of integration does have risks, because although production becomes more efficient and capacity is enlarged,



the sector also becomes more vulnerable to en bloc protectionist trade litigation.

For many other domestic companies, dependency on export markets precludes many stages of the brand-building process since most of the crucial steps (design, marketing and cross-fertilisation of ideas) are offshore. For example, the main clients of the cashmere industry are overseas, as are the top labels and best designers. Without these essential components interacting with local mills in a more concentrated way, local companies will remain relegated to supplier status, with few opportunities to develop their own brands.

In more-complex manufacturing chains, modularisation of components has aided Chinese companies to break in and establish themselves as lower-cost suppliers capable of meeting quality standards. However, the number of companies competing for these slots is increasing, placing pressure on the incumbents to contain costs or speed up output, which in turn means focusing research and development (R&D) on improving or retrofitting existing technology. There is less incentive and hardly any time for domestic companies to invest in the requisite R&D, product development and marketing to create something entirely new, or to adapt or integrate the manufacturing chain for their own purposes. It is striking that so many of the companies we interviewed had instead ploughed their profits into unrelated product lines, such as real estate.

Our survey showed that most companies in a manufacturing cluster of companies depended on their own in-house efforts to develop new products

or systems, and relatively few interviewees had worked with research institutes to develop new commercial applications. Similarly, there are few commercial success stories from the research institutes themselves—Lenovo (then known as Legend), set up in 1984 by researchers at the Institute of Computing Technology, is a rare example. However, institutional and attitudinal barriers to closer integration between research institutes and enterprises are likely to be bridged as more returnees, who are familiar with both the academic and the business worlds, make their presence felt in local companies.

Adolescence Like adolescents, many domestic companies seem to suffer from a lack of focus and short attention span. Also symptomatic of adolescence are growth spurts that transform the physical appearance but do not always imbue maturity. The next formative stage in the maturation of Chinese companies has probably already begun with the growing wave of M&As by domestic and foreign investors. This will undoubtedly trigger over-exuberant cockiness among local companies in search of investors and large cash-touts. However, M&A will also inject new capital and new skills in companies that sorely need them.

Such freedom to restructure also signals a continuation of the reform tradition of openness in the Chinese economy, which has motivated local enterprises, helped them to accelerate growth and compensated for historical shortcomings. When they are fully mature, perhaps, domestic companies in China will indeed be ready to take on the world.



Documents

Chapter 4 Constraints and challenges Cgraphics.eiu.com/files/ad_pdfs/domcompchap4.pdf · Oil Corporation’s doomed bid for Unocal, and the EU’s moves to curtail the growth of imports