Regional Focus

Headwinds slow China’s international expansion

Published: Nov 2022

China is home to some of the largest corporations and brands in the world, which in recent years have experienced a meteoric rise and dramatic international expansion. Several external factors, however, are producing headwinds that are tempering their growth plans.

China is the birthplace of some of the world’s largest corporations that some people haven’t even heard of. And the country is also producing consumer goods that are giving the biggest brands in the world a run for their money. Then there are the tech companies that have ridden the wave of digitalization that surged during the COVID-19 pandemic. The rise of such Chinese corporations has been meteoric, but now there are many reasons to believe their international growth will be tempered in the coming months, possibly even years.

The rise of China’s corporations has been notable. Academic Lourdes Casanova, a Senior Lecturer at Cornell University’s SC Johnson College of Business and author of The Era of Chinese Multinationals: Competing for Global Dominance has been tracking their rise in the annual Emerging Market Multinationals Report. “We were surprised,” she says of the scale of Chinese corporations and how international they actually were. “We were surprised to discover the power of Chinese multinationals.” That was back in 2016 when the report began and since then those large Chinese companies have continued their rise.

And that rise has been impressive, which the latest figures from Fortune’s Global 500 list of top companies show. For the first time since Fortune has created the rankings, the revenues of the Chinese companies exceeded the revenues of US companies, and Chinese companies (from Greater China, including Taiwan) accounted for 31% of the total of the global list. State Grid Corporation of China – also known as State Grid – was ranked as the third-largest company in the world, by revenue, after the more well-known brands of Walmart and Amazon. In 2022, there were 145 Chinese companies that made the Fortune list and it was the fourth year that China had the most number of companies.

However, these 145 corporations are not all-powerful, and not all the data paints a rosy picture. The Fortune results show that the profitability of these companies is not as good when compared to their peers from other countries. When the average profitability of the 145 Chinese companies was compared to the global average, the Chinese figures fell short: China’s corporates had an average profit of US$4.1bn compared to the global average of US$6.2bn. This indicates that all might not be well with the meteoric international expansion of China’s corporates, or that they might have other objectives aside from making profits.

When looking at the Fortune top 500 list, it looks like the Chinese companies have really arrived on the global scene. This dominance has been building over several years, as Casanova explains. She tells Treasury Today Asia that things really started to change after the global financial crisis. That’s when Chinese corporations started to grow and the gap between them and multinationals from other emerging markets started to widen. Also, the influence of corporates from other places, such as Europe and Japan, started to wane while these Chinese companies were on the rise.

Today the largest Chinese multinationals are energy companies and financial institutions. State Grid – perhaps the largest company in the world that most people have never heard of – is the largest Chinese company and is a behemoth with over 870,000 employees. In descending order by revenue, the next largest Chinese companies are China National Petroleum Corporation, Sinopec, China State Construction Engineering and Industrial and Commercial Bank of China (ICBC).

When considering public companies that are measured by market capitalisation, it is a different breed of corporates although financial institutions still feature high in the list. At the time of writing, at the top of the market cap list were companies such as internet platform Tencent, drinks company Kweichow Moutai, e-commerce giant Alibaba, followed by ICBC and China Construction Bank.

When it comes to household names, it is in the consumer goods space that Chinese companies are becoming notable. Casanova points to the smartphone market, where China’s companies have slowly been building a presence there as well. Casanova gives the example of the market share for smartphones globally, and how many of those companies are Chinese. The percentage market share by units sold are dominated by them: Huawei (17.5%), Xiaomi (9.2%) and Oppo (8.3%), which compares to Samsung’s 21.6% and Apple’s 13.9%.

“Chinese companies compete on price,” says Casanova. Also, the cost structures in China – labour, gas and energy prices – are still relatively low when compared to other countries such as Germany, Japan, South Korea and the US, explains Casanova.

The quality, however, of Chinese companies’ goods are still questioned. When asked if this is like the trajectory that Japanese companies took with their international expansion in the 1980s, and then later with South Korean companies – which are now recognised for their quality – Casanova says there is a major difference in these stories. “The Chinese companies have grown mainly with the growth of their domestic market – the Chinese market is huge compared to Japan and Korea,” explains Casanova.

Although the Chinese companies’ expansion has been rapid in recent years, James Root, Andrew Schwedel and Kevin Chang – all Partners at consultancy Bain & Company – point to a number of headwinds, including geopolitical tensions, supply chain disruption and the impact of COVID-19. In this new macro environment, they write in an article, Chinese companies might be better off focusing on their home market: “Their greatest growth opportunities lie right in front of them.”

However, many Chinese companies are facing challenges on the domestic front as well. These challenges, such as the after-effects of COVID-19 and inflationary pressures, are not dissimilar to other countries. During the pandemic, China took a harsher line and adopted a zero Covid policy that resulted in severe lockdowns – long after other countries around the world were beginning to lift restrictions. Research by S&P Global Ratings found that this policy has impacted Chinese companies more than the threat of inflation and is more likely to affect the outlook for them for the coming months.

Meanwhile, the health of China’s state-owned enterprises (SOEs) has been called into question. Analysts at S&P Global Ratings argue they are over-leveraged and stuck in a debt trap. The smaller SOEs by revenue, eg, the companies that make up 90% at the bottom of the list, are expected to need outside help for them to survive, according to S&P Global Ratings.

The analysts note in their research that those companies – which account for 45% of China’s non-financial corporate debt, but only generate 15% of the earnings – have had to borrow more to repay existing loans. Given the economic slowdown in China, these SOEs will likely need to be propped up by government assistance. Given the tougher market conditions, there are projections that 13% of China’s SOEs could be cash flow negative in 2023. And S&P Global Ratings projects a worst-case scenario of 28% because of the size of the companies’ debt and their relatively low earnings.

The size of the borrowing of these SOEs is staggering. In the first quarter of 2022, for example, corporate debt in China was approximately the same size as the government debt of the United States. When it comes to the ability of the Chinese state to step in, however, China is better placed than other countries to help its ailing firms. China, the S&P Global Ratings researchers point out, has lower leverage with its government debt than other countries, such as the United States or in Europe.

In the media coverage of China’s economy, there has been much attention paid to the worsening conditions in the real-estate sector. However, there are problems looming for other sectors, and S&P notes that industrials (including construction and engineering) and consumer goods are also facing the same problems of high leverage and low earnings.

These warnings temper the enthusiasm about Chinese companies and their potential for further international growth. While many of the country’s multinationals have made a name for themselves and have had a meteoric rise, the Bain & Company consultants question how solid the Chinese companies are. They note there are now 3,400 Chinese multinationals, many of which have seen rapid growth in their international sales. Companies such as Lenovo, Haier and Huawei have been notable in their international ascent, but their success may not be indicative of the rest.

“It’s no wonder that the list of Chinese multinationals appears to be growing. But, the early leaders are starting to look more like a group of exceptional pioneers than an advance guard blazing a trail for the rest. The ranks of scale of global Chinese multinationals are, in some ways, surprisingly thin. While a sector-by-sector view reveals many Chinese firms that value international growth, these firms differ from other multinationals,” the Bain & Company authors write.

Also, they note, the foreign sales of these companies are a relatively small portion of their business. Casanova makes a similar point about the likes of ICBC, which although it has an international presence in over 50 countries, the revenue from those foreign countries is just a fraction of the total because its domestic market is so huge.

In considering the international expansion of Chinese companies, there are great differences in the types of companies that operate internationally. On the one hand there are the SOEs, such as State Grid and the energy companies that top the Fortune list of largest companies by revenue. And then there are the large brand names and consumer goods companies like Lenovo, which are more well-known, and the tech companies and influential platforms such as TikTok.

The SOEs have had a very different trajectory with their international growth when compared to these private enterprises. Martyn Davies, who at the time of the interview with Treasury Today Asia was the Managing Director of Emerging Markets and Africa at Deloitte, has witnessed the trend of Chinese companies going global, which has been gaining momentum since 2000. This internationalisation of China Inc, he explains, was supported by the banks, which would explain why they also feature in the largest company lists.

There are differences in the nature of the expansion of the Chinese companies. In Africa, for example, notes Davies, the expansion has mostly been the SOEs. Meanwhile, in the UK, Europe and the United States, the successful Chinese corporations are private enterprises.

Davies, as a specialist who was interviewed from South Africa, commented: “In my current part of the world it is similar to Latin America – the vast majority of the interest has been by state-owned companies.” He comments there has been the absence of substantial private capital coming into Africa.

Much of the expansion has been by Chinese companies building infrastructure and supporting the Chinese state’s plans of international influence. Davies notes a mega trend whereby the priorities of the Chinese government have changed in this regard. “Since 2013, there has been a shift,” he says, explaining that in the ten-year review of the government of Xi Jinping, there has been an approach of “increased caution” about the SOEs venturing outwards.

This, he notes, has been accompanied with management changes of the companies, and there has also been increased caution with the financing of projects on the part of the policy banks such as China Development Bank and Exim Bank of China. There is now an increased awareness of the risk of lending to projects in emerging markets, and there has been a more restrained approach to the projects. This was a trend that was happening anyway, and then COVID-19 exaggerated it.

Through the pandemic, the attitude to international expansion changed. “COVID-19 brought disruption for Chinese investment abroad,” notes Davies. Through the pandemic, he says, China has largely been closed which has made the dialogue and face-to-face meetings, which are necessary for such projects, difficult. The lack of travel and connectivity mean that such investment has slowed. “Capital does not automatically flow – there needs to be interaction of people and trade delegations,” says Davies.

Much attention has been paid to the expansion of SOEs in Africa, especially with China’s Belt and Road Initiative (BRI), but Davies points out this kind of investment had been occurring in Africa since 2000. “The BRI is nothing new at all in Africa – the investment has been happening since 2000 – but post-2013 it got a name,” says Davies, who is also a visiting professor at IE Business School in Madrid, Spain.

With the various projects of the BRI, there has been a change in the willingness of Chinese SOEs to invest abroad – and a rethink of their strategy – as some projects have not worked out and gained negative attention, as Treasury Today Asia has previously reported on.

As for the companies that are better placed to ramp up their international strategies, there are some that should be watched. Both Davies and Casanova say that the Chinese all electric vehicle (or EV) companies are the ones to watch as there has been significant investment in this sector. Davies comments that, “Before the Chinese car companies couldn’t compete internationally, but now the competition has equalised with the batteries,” Davies says.

One such company to watch is BYD, which has reportedly large expansion plans for Europe and at the time of writing had plans to enter the UK market at the end of 2022. The company produces both battery electric vehicles and plug-in hybrid electric vehicles and has been tipped to be one of the recognisable car brands of the future. Davies comments that this new wave of competition from the Chinese automotive sector can be compared to the rise of Korean auto companies. Twenty years ago, Korean car brands weren’t heard of – or not thought of as high-quality – but now they are considered world-class cars.

BYD, however, like other Chinese corporations has faced headwinds of its own. It attracted attention when legendary investor Warren Buffett bought a stake in it. But equally, it attracted negative attention – and the company’s stock price dipped – when it was reported Buffet had sold some of his shares. It remains to be seen whether BYD will have a meteoric rise like other Chinese companies, but like other Chinese multinationals it will have a number of headwinds to navigate in the current environment.

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