(Yicai) Sept. 27 -- Yicai Research Institute has developed a Chinese enterprises’ globalization evaluation system to evaluate the globalization degree and development path of Chinese firms and recently released the Chinese Corporate Globalization Report 2022 based on the study of typical examples of globalization.

Yicai Research Institute started a new round of survey and study of Chinese enterprises’ globalization in 2021. It takes over two years to write the report based on survey of 12 Chinese firms including Weichai Power, Himile Mechanical Science and Technology (Shandong), and Ningbo Joyson Electronic Corp.

Many Chinese companies have gone international and been moving forward to the upstream of the global industrial chain over the past more than four decades since the country’s reform and opening up. Companies have been changing their operation philosophy to pay more attention to the society and environment as they seek for financial value.

The report is aimed to record the process of globalization of Chinese companies, provide experience for the future global development of Chinese firms and reference to making reform and opening up policies.

I. New Stage of Chinese Enterprises’ Globalization

China’s total imports and exports of trade in goods took up 13.5 percent of the global total in 2021, which more than tripled that when the nation just joined the World Trade Organization in 2001, so the country became the world’s largest trading nation, statistics from the WTO said.

Globalization has brought the world prosperity and is an irreversible trend. China blending in the world market system does not only raise the global market’s capacity and range of production but also gives the country’s advantages in factor cost, infrastructure and supporting facilities into full play for the nation to make huge great economic achievements.

Chinese enterprises’ globalization is far from smooth sailing. As the world’s largest economy and former leader in economic globalization, the US now turned to trade protectionism and started trade frictions with China from 2018. The Covid-19 pandemic helped the rise of the global trade protectionism and became an inducement to the instability in the global industrial chain in 2020.

The comparative advantage of part of the factor cost is becoming smaller as China’s economy is developing rapidly. For example, the average pay to labor in the country’s manufacturing sector jumped 765 percent from 2001 to 2020, nearly seven times the growth in major economies.

Against such a backdrop, Chinese companies are gradually changing their operation mode from promoting their products to the international market relying on their low cost to high value-added links such as technological innovation, branding, marketing and services. The strategic goal of Chinese enterprises’ globalization is gradually changing from expanding market to forming competitive advantages by building technical advantages and brands as well as investing in the global industrial chain.

Cost advantage and profitability are not all of companies’ competitiveness. How to develop internationally competitive companies, achieve high-quality development and integration of innovative, coordinated, green, open, and shared development has become the focus of China's future development.

II. Globalization Characteristics of Chinese Firms

Based on the globalization results of Chinese enterprises, Yicai Institute summarized the characteristics of more than 1,300 leading global firms in terms of ownership, scale, and industry.

From the perspective of ownership, foreign-funded enterprises have become international quicker than Chinese ones. Among Chinese firms, state-owned enterprises still need to optimize their structures in terms of foreign talent, technology reserves, as well as spending on research and development.

In terms of different fields, companies in the manufacturing industry are scoring higher because their industrial products are easier to trade and they are more smoothly participating in the global division of labor in the value chain.

Different industries develop in different ways and the sample data show that the secondary industry allocates more resources to R&D while the service industry has its advantages in brand building.

Chinese service providers significantly lag behind overseas ones and that is why the main direction to improve future development is expanding the opening-up of the service industry and enhancing its international competitiveness.

Specialized and emerging enterprises score higher in global operations than other types of companies. High R&D investment has enhanced the core competitiveness of these enterprises in technology and supported the development of globalization to a certain extent.

A breakthrough for these companies would be to transform technological advantages into more comprehensive competitiveness to produce stronger economic benefits.

III. The Experience of Chinese Enterprises in Globalization

Chinese companies need to follow certain rules to successfully go abroad.

In the survey, more than half of the polled enterprises pointed out that overseas markets and customer needs play a great role in operations and development. But even if the current demand is well defined, the business environment is constantly changing so firms must pay close attention to the diverse development scenarios.

Running operations in different locations can bring geographical advantages to enterprises so they are able to integrate their resources while improving their performance. This kind of diversity positively correlated with firms' overseas revenue growth in the past three years, according to the results of the Yicai study.

On the other hand, geographical diversity can also reduce operational risks caused by uncertainties in the international environment while enhancing companies' resilience to macro risks. Some enterprises choose to build factories in Egypt, which is close to nations in the European Union, in order to avoid anti-dumping duties on products manufactured in China, and many finally succeed.

Enterprises need to establish a global management mechanism and talent is at the core of that. "True internationalization is represented by staff, and if managers of foreign factories are all Chinese, they are not international enterprises," one manager pointed out to Yicai.

Evidently, companies with a higher share of foreign executives were more likely to grow their overseas revenues quicker over the past three years, according to the model data.

Chinese enterprises should establish their own brands and try to form brand advantages abroad. Research shows that listed companies with more renowned brands also expand quicker overseas.

However, Chinese companies still lag behind their competitors in terms of making their brands known overseas. Among the world’s top 500 brands, the total brand value of Chinese firms was USD1.6 trillion in 2022, less than half of that of companies in the United States, according to a list by Brand Finance.

Chinese enterprises should attach more importance to high-quality research to transform their performance. Over the past decade, the ratio of R&D expenditures to sales among Chinese firms has leaped and in 2020, the number of patent applications in China was the largest in the world.

However, just 6.1 percent of domestic patents were licensed for use in 2019, and a large number of research results were not applied to create value, based on data from the National Intellectual Property Administration. Moreover, companies with higher R&D spending also had lower profit margins in the past three years, according to Yicai data.

The competition of production is becoming fierce and companies need high-quality patents with instrumental value. Having more high-quality R&D results contributes to revenue growth and margin growth, based on Yicai's global evaluation model.

The model also shows that foreign-funded enterprises in China generally score high in terms of technology reserves and R&D investment, which explains their competitive advantages to a certain extent.

IV. How Chinese Firms Go Global

Yicai Research Institute evaluated 12 Chinese firms based on how they decided to go global.

The 12 Chinese companies are powertrain manufacturer Weichai Power, apparel firm Hongdou Group, stationary products maker Beifa Group, polymer functional membrane manufacturer Solartron Technology, auto parts supplier Joyson Electronic, ergonomic furniture maker Loctek Ergonomic Technology, fiberglass manufacturer China Jushi, medical equipment and solutions provider Mindray, intelligent security solutions supplier Himile Mechanical Science and Technology, television maker TCL Technology, drone maker DJI Technology, and portable power devices supplier Anker Innovations.

Some of the above companies began their globalization process as China started its reform and opening-up efforts, therefore, their globalization is a miniature of China’s. For example, Loctek started as a foundry of TVs and stereo equipment, then gradually established its own brand, then invested more in building warehousing bases overseas and added offshore freighter services after the Covid-19 outbreak.

Some other firms targeted the overseas market as soon as they were established, going through a process that brought their products from abroad to China. Anker Innovations and DJI are some examples. Their products are high-tech, high-quality, and competitive in prices and shaped a new image of Chinese products in the international market.

Meanwhile, other enterprises opted to build plants overseas to better consider the local market and cost factors. For example, Jushi mainly sells its products to Western countries, so it set up factories in the United States and Egypt.

It is also worth noting that Chinese companies have been doing more overseas mergers and acquisitions since 2010. This way, their business model remains light, so they can make quick changes in case of problems and issues. But at the same time, the overseas firms they acquire are long-established brands with rich resources in marketing channels and excellent talents and technologies.

After mergers and acquisitions, Chinese and overseas firms can complement each other, like Joyson did when it bought German automotive parts supplier Preh.

Chinese firms attach greater importance to integration with local culture, community co-construction, and recruiting local employees. For instance, Hongdou set up the Sihanoukville Special Economy Zone in Cambodia, bringing in China’s poverty alleviation approach.

Chinese companies also adopt a more mature pattern in globalization, as their managers and decision-makers have a more global thinking and view. In addition, as globalization is demand-driven rather than just a decision for the sake of it, some enterprises decide to go global based on technology and product needs. For example, Weichai Power acquired only foreign companies that operate in fields related to its primary business to succeed.

V. Chinese Firms’ New Globalization Era

Covid-19 did not change the trend of globalization for Chinese companies but did alter some logistics scenarios as the pandemic significantly hurt economic activities and buoyed the deglobalization and trade protectionism movements.

When facing challenges brought in by the pandemic, Chinese firms should go with the tide, adjust measures to local conditions, and come up with new solutions to become more resilient and find a path that suits them in the new context of economic globalization.

Yicai Research Institute’s Chinese Enterprises’ Globalization Index, which measures the degree of Chinese enterprises’ globalization in terms of overseas investment, international trade, and overseas revenue since 2010, jumped 17 percent in 2021 from the previous year, the highest growth rate in the past four years. The index climbed 13.8 percent last year and is expected to maintain double-digit growth this year.

As an advocate of multilateral trade, China is further opening up, hiking trade and facilitating investment in free trade zones, and promoting the Belt and Road Initiative. The first overseas projects under the BRI have gradually become a driving force of Chinese economic development, trade and economic cooperation, science and technology exchanges, and cultural integration.

Moreover, the Regional Comprehensive Economic Partnership came into effect on Jan. 1 last year, thanks to the joint efforts of all member countries. After China joined the RCEP, Chinese companies were entitled to lower tariffs when trading with other member countries. The rules and regulations of their partners will likely help Chinese firms improve their business positioning as well.

Chinese enterprises will not slow down their globalization efforts this year, thanks to the RCEP trade deal and the BRI, which was launched 10 years ago. China’s investment overseas will continue to grow fast. Its overseas direct investment in non-finance sectors rose 14.8 percent in the first half of the year from a year earlier, the highest since 2020, according to statistics from the Ministry of Commerce. The overseas revenues of Chinese listed firms soared over 20 percent in the period.

Yicai Research Institute is a non-profit independent think tank backed by China’s largest financial media group Yicai Media Group. 

Editor: Kim Taylor, Emmi Laine, Futura Costaglione