Chinese companies set for rapid globalisation

Hong Kong, 20 Jan 2016

Chinese companies are set for rapid globalisation over the next two decades as they become more competitive and shift their focus to innovation.

"They won’t just do well in China, they’ll do well outside of China," says Macquarie Group’s Head of China Strategy Erwin Sanft.

Slowing domestic growth is encouraging China’s best corporates to pursue a greater share of overseas sales.

Rather than do this through exports, Macquarie analysts predict China’s corporate leaders will build genuine multinational companies in the service and manufacturing sectors.

Sanft identifies five sectors that will "continually outgrow China’s economy" and lead China’s growth into the next two decades.

Those sectors are healthcare, consumer goods, technology, industrial and the auto industry, which he says are "undersized if China proceeds as we expect" with estimated GDP growth of 6 per cent per annum.

"China’s still moving up the value curve in its manufacturing sector," Sanft says.

"Part of that moving up the curve is actually about becoming more globally competitive, relying less on cheap labour and more on technological innovation."

But the shift won’t come easily and will require a transformation in the way Chinese companies do business.

New companies will become more innovative in terms of the amount they spend on research and development and they will become multinational.

Sanft says China’s largest listed auto, healthcare, technology, retail, utilities and metals and mining stocks are much smaller than their global peers.

"This is partly because they haven’t looked outside China for growth," he explains.

"Comparing the weighting of China indices with developed market indices, the China market clearly has some way to develop."

Sanft foreshadows a consolidation of companies across most sectors of the Chinese economy.

"Chinese companies, they’re too numerous. In many sectors, there’s too many companies," he says.

"They’ve also relied too much on cheap labour.

"Instead of innovating, they’ve tended to copy and produce cheaper versions of things."

It is those "cheap, copycat companies" he expects the Chinese economy to shed.

New companies will become more innovative in terms of the amount they spend on research and development and they will become multinational.

While China’s Research and Development spending as a percentage of GDP still trails economies such as Japan, Korea and the United States, it has boomed in recent years, putting China ahead of other emerging markets.

The percentage of Chinese graduates in science, technology and engineering is also second only to Malaysia, a ranking Sanft says matters little when China "has the most graduates in the world".

"Generally, China’s going to be a real powerhouse," he says.

Sanft says there have already been promising signs from new Chinese companies in recent years.

"Even in the last five years we’ve seen the emergence of some really innovative companies," Sanft says.

"That’s already the trend."

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