Practically nonexistent at the start of the 1990s, private sector companies have become a significant and growing part of China’s economy. (I use the term private companies here to refer to all companies with primarily nongovernmental owners, including both those listed and unlisted on public stock exchanges.) The number of Chinese who are either self-employed or working in private companies has risen from around 8 million in 1992 to nearly 80 million in 2008. The private companies’ share of China’s total industrial output and profits may be low now, but most are still young and the competition in the sectors in which they are free to operate is far greater than in the protected industries where SOEs hold sway. But as the private sector continues to mature, the opportunities for entrepreneurial companies will increase.
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The vast majority of new Chinese companies fall into this category. They are highly competitive and very dynamic. They have adopted market-driven mechanisms and outlooks, are extremely fast to react and willing to experiment, and are driven by ambition and a belief that they have at least as much right to succeed as anyone else. Many of these companies are already well known within China and have the potential to become influential forces in their global industries. Their ranks include almost all of China’s “fast” companies, among them technology firms, such as Baidu, China’s leading Internet search company, QQ, China’s hugely successful Internet messaging company, and the business-to-business e-commerce portal Alibaba.com; manufacturers, such as the home appliances firm Midea and automotive components maker Wanxiang; and retailers, such as the electronics chain GOME and appliance retailer Suning.
Mindray, a leading developer, manufacturer, and marketer of medical devices (such as patient monitoring devices, in-vitro diagnostic instruments, biochemistry analyzers, and medical imaging systems), is a noteworthy example of a successful new entrepreneurial company. It started in 1991 with a three-person team; by 2009 it had 5,600 employees, introduced six to eight new products per year, and claimed nearly twenty “China’s firsts” among its portfolio of products. Mind- ray’s leaders attribute their success to a deep-rooted commitment to continuously invest in R&D and to continuously push for innovation. Over the years, regardless of the company’s ups and downs, they have never wavered from these beliefs; this has allowed them to build a globally competitive business based on Chinese human resources.
Another example is Dongxiang, a rapidly growing multibrand sportswear company that owns the exclusive rights to Italy’s Kappa brand in China and Macau. Started only seven years ago, Dongxiang is now among the top five companies in China’s sportswear sector in market share. The others are Nike, Adidas, Li Ning, and Anta. Like Adidas and Nike, Dongxiang outsources all its manufacturing. However, while the company’s revenue is only about one-quarter of Nike’s in China, its operating margin in 2008 was 42 percent: far higher than
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the 10 to 15 percent of its key competitors. Dongxiang’s performance can be attributed to its focus on a market sector that was previously ignored: sports-loving, fashion-conscious eighteen- to thirty-five-year- olds. Targeting this segment allowed it to increase its retail prices with a 7 to 10 percent premium over similar products from its competitors.
Dongxiang has also leveraged Kappa’s international marketing strategies while it developed its own innovative marketing practices as well. These have brought its advertising and promotion costs down to less than half those of its international competitors. During soccer’s 2006 World Cup, Li Ning spent Rmb 30 million (about $3.75 million) advertising on China’s main television channels, and Adidas invested ten times that amount or more on China’s national team, which failed to make it past the competition’s first round. Dongxiang spent less than Rmb 2 million (about $250,000) on sponsorship, concentrating on sending a team of Chinese entertainment celebrities to Germany. Dressed in Kappa apparel, these celebrities attracted the attention of many Chinese reporters and their activities were widely reported in print, broadcast, and online media.
Private companies are concentrated in China’s least regulated, most fragmented economic sectors. They receive correspondingly little official support (even securing bank loans can be difficult), but this has made them very resourceful. To date, their main focus has been China’s domestic markets. Many of the sectors they operate in are fragmented and ready for consolidation, although it is still not clear when any substantial number of mergers and acquisitions will happen.
Some of these businesses, such as Huawei, are privately owned but behave in many ways as if they were state-owned enterprises. Others are publicly held but act like private companies, such as Haier, the world’s fourth-largest maker of white goods, which officially remains classified as a collective. There are three major reasons for understanding private companies and taking their influence seriously: their fast growth rates, the kind of innovations they are making, and the changes they are making in global value chains.
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