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The Greater China 1,000

A Battle of Size vs. Quality


A Battle of Size vs. Quality


In this year's Greater China top 1,000, sales were up, but many mainstays failed to make the cut, as a titanic struggle of business philosophies unfolded. Which companies emerged as the biggest winners?



A Battle of Size vs. Quality

By Jimmy Hsiung
From CommonWealth Magazine (vol. 472 )

The results of the CommonWealth Magazine 2011 Greater China 1,000 survey are out, affording a glimpse at some of the trends that will soon impact the global economy.

In this year's top 1,000 rankings, Taiwan-based Hon Hai Precision Industry Co. rose from sixth to third, vaulting past Hong Kong's HSBC Holdings to become the top private company. Its biggest rivals were Chinese state-run giants, which have used their scale and privileged positions to gain clout.

Chinese companies have established new milestones on the global economic stage in recent years. Fifth-ranked Industrial and Commercial Bank of China (ICBC) Ltd. has emerged as the world's most profitable bank, and seventh-ranked China Mobile Ltd. the biggest telecom operator, but their status as state-run enterprises has somewhat tarnished their glimmer.

Prominent Chinese financial writer Wu Xiaobo observes frankly that almost none of the Chinese enterprises that rank among the Fortune 500 got their start in a competitive environment. "If you haven't overcome rivals amid intense competition and survived in battle, then you haven't had the birth of a great organization," Wu says.

Of the top 50 companies in this year's Greater China 1,000, 31 are Chinese. But only one of them – the 43rd-ranked Lenovo Group – is a private enterprise. As for Taiwan, it had 12 companies in the elite 50.

Though China's commercial environment remains far from completely fair or market-oriented, few if any of the world's leading companies are willing to be left out of the country's resplendent economic feast.

China has successfully maintained rapid economic growth over the years, and the International Monetary Fund has painted a promising picture of the future, forecasting 9.6 percent growth and 9.5 percent growth in 2011 and 2012, respectively.

This unbridled boom has helped Greater China's top companies generate outstanding growth. According to CommonWealth Magazine's survey, the top 1,000 companies had revenues of NT$128.99 trillion in 2010, 31.22 percent higher than a year earlier.

Chinese companies continue to assume increasing weight in the survey, relative to those from Taiwan and Hong Kong. Taiwan-based enterprises (or those issuing Taiwan Depositary Receipts, or TDRs) accounted for 237 of the top 1,000 companies, down seven from the 2010 rankings. China had 494 companies (including those also listed in Hong Kong), 14 more than last year, and Hong Kong was represented by 269 enterprises (not including those also listed on markets in China or Taiwan).

Unlike constantly fluctuating market capitalization figures, CommonWealth Magazine's numbers comprehensively reflect a company's operating performance, and the bar was set higher this year – in order to make the grade, companies had to have minimum sales of NT$15.71 billion, NT$3.44 billion higher than in 2010.

China Pushes for Scale, Taiwan for Quality

The shifting representation in the top 1,000 reflects different management philosophies across the Taiwan Strait. Qian Xiaohua, the executive general manager of luxury residence developer and 398th-ranked Greentown China Holdings Limited, says that faced with exploding domestic demand, Chinese companies initially focus on getting big and powerful before paying attention to their management capabilities. Taiwanese companies take the opposite approach.

In describing the clashing philosophies, Lee Ji-Ren, a professor in National Taiwan University's Department of International Business, says Chinese companies cash in on opportunities while Taiwanese enterprises capitalize on their management skills.

"Taiwanese companies in China first try to achieve excellence and gain strength, and then worry about scale," Lee observes. This approach conforms more closely to the rules of the game in normal markets, but could be questioned when applied in China.

Seafer Wang, general manager of the China headquarters of 88th-ranked Synnex Technology International Corp., says that because of the difference in strategies, Synnex's penetration of emerging markets may seem a step slow. But he stresses that over the past 10 years, the integrated IT services provider has steadily followed its plan and established modern operations centers in nine Chinese cities.

"Maybe we haven't been opportunistic, but Synnex has earned widespread respect within the industry in China," says Wang proudly in a ninth-floor office of Synnex's Shanghai headquarters, just across the street from the headquarters of major rival Digital China Holdings Ltd.

This year's top 1,000 was full of changes, with many companies in the region facing transition challenges. Sixth-ranked Prudential Plc. (which has a secondary listing in Hong Kong), 11th-ranked Farmers Bank of China, and 38th-ranked Pegatron Corp. all made it into the top 1,000 for the first time this year because they went public last year. A total of 101 newcomers appear in 2011, meaning that roughly 10 percent of the companies on last year's list were knocked out.

For many Chinese companies, the biggest challenge for staying competitive is building strong management and operations skills.

"Every new phase presents a painstaking transition," Xu Xiaonian, a professor of economics and finance at the Sino-European International Management Institute, remarked to NTU's Lee during a trip with Chinese CEOs to Taiwan at the end of April. Lee agreed, noting that Chinese companies widely embrace the mentality of growing big first without any guarantees that they will grow strong or eventually attain excellence.

In the past few years, for example, Chinese enterprises actively sold companies or engaged in mergers, Lee says. But with the concept of sustainable operations slowly seeping into the mainstream, those same enterprises now face real ordeals when trying to suddenly develop lean organizations or strengthen their management.

Electronics, Auto Sectors Heading in Opposite Directions

Taiwanese companies face transitional challenges of a different kind. New kinds of products are replacing those that were once mainstays of the economy, and margins earned by the OEM business, at which Taiwan's enterprises excel, are shrinking. The changing environment has been especially apparent in the electronics industry, which experienced noticeable declines in the top 1,000. Though it became the top private company in the rankings, Hon Hai saw subsidiary Foxconn International Holdings Ltd. slide from 72nd place in 2010 to 128th this year and Foxconn Technology Ltd. tumble 60 places, from 116th to 176th.

At the same time, Asustek Computer Inc. fell from 27th to 49th, Acer Inc. edged down slightly from 28th to 31st, and Wistron Corp. also lost ground, going from 31st to 33rd.

Even more companies, however, have reaped the fruits of China's transition from the world's factory to the world's market, especially automobile makers.

On the opening day of Auto Shanghai 2011 on April 21, the line of people waiting to get into the Shanghai New International Expo Center stubbornly remained over 100 meters long despite the muggy weather, while inside, orders were being taken at a frenetic pace.

The bullish mood of the world's biggest car market was evident simply based on the strong sales of sports cars and luxury models at the show. According to statistics released by the fair's organizers, consumers placed orders for 50 Bentleys at 3 million renminbi each, 10 Ferraris and 10 Rolls-Royces at nearly 4 million renminbi each, and five Bugattis at 38 million renminbi each.

That buoyant mood was also reflected in the CommonWealth Magazine top 1,000. Shanghai-based car maker SAIC Group rose from 24th to 15th after seeing sales soar 124.42 percent in 2010. Dongfeng Motor Corporation improved from 38th to 36th on a 33.39 percent increase in sales, and Geely Automobile Holdings moved up from 261st to 256th as sales rose 42.86 percent.

Even though its own Luxgen brand automobiles have yet to formally go on the market in China, Taiwan-based Yulon Motor Group also saw its sales rise 32.18 percent in 2010, helping it vault 10 places in the top 1,000 from 330th to 320th.

The service sector also thrived on China's exploding domestic demand. China's 12th five-year plan specifically identified upgrading the scale and efficiency of the country's modernized service sector as a main direction for China's future economic development, and will likely enhance the sector's competitiveness.

An Increasingly Competitive Service Sector

This year's CommonWealth Magazine survey indicated increasing demand for services from larger brands. Though there were 17 fewer service companies in the top 1,000 this year, they delivered far more clout than in the past. The combined revenues of the 343 enterprises remaining in the elite club totaled NT$36.86 trillion in 2010, NT$5.6 trillion more than the service companies in last year's survey posted in 2009.

Service companies also accounted for 25 of the survey's 50 fastest growing companies. Of those 25, 13 were real estate developers, not surprising since nine of the ten companies with the highest profit margins in the top 1,000 were also property companies.

China's booming economy stands at a crossroads. Zhao Xiao, a professor in the School of Economics and Management at the University of Science and Technology Beijing, says China has reached the pivotal "Lewis turning point," beyond which an economy runs dry of surplus cheap labor, causing wages to rise and making exports less competitive.

"As China's three big dividends – its demographic, export and property market dividends – gradually weaken, this signals the arrival of an era in which domestic consumption will be driving economic growth," Zhao says.

The changes seen in the top 1,000 survey not only demonstrate recent industry trends, but also provide a road map for enterprises to help plot their future development. These companies must now carefully consider the strategies they will use in harnessing the potential of China's rising consumer class.

Translated from the Chinese by Luke Sabatier