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Opinion / China Watch

China tech firms gain ground

By JASON DEAN (WSJ)
Updated: 2006-12-01 13:54

http://online.wsj.com/public/article/SB116493316308337474-1MUip_dHAKiF0HAan
yEUaLa__kg_20061207.html?mod=regionallinks

BEIJING -- China's technology companies are closing the gap with their
foreign rivals in productivity, positioning themselves to become a bigger
threat to multinationals both in China and abroad, according to a survey
by McKinsey & Co. and China's Tsinghua University.

The survey compiled nearly 40 different items of financial data for about
39,000 companies in China, including local companies and Chinese
subsidiaries of foreign companies. The companies come from a broad range
of sectors within the tech industry, from those that make fire-safety
products to makers of more typical high-tech goods such as mobile phones
and personal computers.

The survey suggests that Chinese tech companies are gaining ground on
multinationals in terms of size and in terms of the efficiency of their
operations, as they learn to fine-tune processes that in the past relied
strictly on China's abundance of cheap labor to compete. It also found
that Chinese tech companies are increasingly moving up from low and
midprice product segments, which they have long dominated, into
higher-end product segments that foreign companies have long dominated.

"This is a major wake-up call for multinationals," said Ingo Beyer von
Morgenstern, the Shanghai-based McKinsey director who oversees the firm's
technology practice in Asia.

Several Chinese tech companies, such as PC vendor Lenovo Group Ltd. and
telecommunications-equipment giant Huawei Technologies Co., have begun
competing in foreign markets. Mr. Beyer von Morgenstern said the survey's
results suggest that many other Chinese companies that have grown largely
"under the radar" of their foreign competitors are likely to follow suit.

One of the survey's more unexpected findings was that privately owned
Chinese companies have sharply increased their productivity, as measured
by revenue per worker, to levels that match or exceed their foreign
counterparts, McKinsey executives said. Improved productivity enables
companies to expand more quickly and can lead to greater profitability.

Among tech companies with annual revenue of at least 10 billion yuan, or
roughly $1.25 billion, private Chinese companies averaged revenue of
421,000 yuan per worker in 2005, while their foreign counterparts in
China averaged 439,000 yuan per worker. That marked a change from 2001,
when Chinese companies averaged 226,000 yuan in revenue per worker, while
foreign companies averaged 501,000 yuan.

The survey doesn't reveal why Chinese companies have been able to make
such gains in productivity relative to their foreign counterparts. One
limitation on productivity at multinationals is that they tend to enforce
higher standards of labor treatment -- limiting the number of hours
employees can work without overtime, for example.

Total revenue among the tech companies in the survey rose to $700 billion
in 2005, from $250 billion in 2001, while the share of sales coming from
exports rose to 43% from 32%. The survey showed that average net-profit
margins at tech companies in China, both domestic and foreign, have
declined in recent years -- to 3.7% last year among those companies
surveyed from 4.3% in 2001.

But it also showed that profitability remains high when measured relative
to equity, or assets minus liabilities. The survey showed that return on
equity in China's tech industry averaged 12.1% in 2005, below the 15.7%
average for companies in the U.S., but nearly twice the 6.8% average for
companies in Germany.

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