Fortune just released the list of the 500 largest firms in the world. To us the most interesting feature of the list is the presence of 73 Chinese companies, up from only 11 companies just ten years ago. This performance is an example of the incredible strides that companies in China have made, as the Chinese economy has transitioned from a backwards and closed country to a global power.
It was only 20 years ago that Deng Xiaoping’s tour of southern China announced the replacement of a planned, centrally dictated economy by a market economy. His heavy criticism of those who doubted reform was combined with a statement that China could reconcile socialism with a market economy. With the reform message taken to heart by the nation, China was off to the races, and two decades of remarkable growth and change have followed.
How China has followed his model, combining socialism and market forces, is seen vividly in the Global 500 list. At the risk of oversimplification, we can see that there are two types of companies in that list. There are “mostly socialist” companies, largely the government enterprises, and “mostly market” companies, the smaller, fast moving companies that win in tough competitive settings (some of which are also government owned, but behave quite differently from those in the first cluster).
We will look at the differences, but would first be quick to emphasize that the driving force propelling growth for both groups of companies and enabling their position on the Global 500 list is that they serve a population of 1.3 billion people whose average incomes have increased nearly six-fold in 20 years. In some cases, maintaining a market position over time in a huge market that is growing that fast has alone been sufficient to allow them to move rapidly up the list.
Traditional State-Owned Enterprises
The Chinese companies at the top end of the Global 500 might be in the same position if reform had never happened but the Chinese economy had somehow managed to achieve the growth it did. While that outcome might have never happened without reform, it was the growth in the economy that has driven the growth of most of these top-tier firms. In the top ten are two state-owned oil industry giants and the state electrical grid. In the top 100, Fortune includes the four main state banks plus China Mobile and State Construction Engineering.
In the next 100 are also mainly traditional state-owned enterprises that owe their growth largely to the same factor as those at the very top, by having been given the mission by the government to serve the Chinese population in banking, energy, resources, insurance, and telecom. The government has ensured that they can do so without much competition being allowed, locally or from abroad. These companies are widely viewed by the public as bureaucratic, political, and often customer-unfriendly. They are not necessarily innovative, fast, or even particularly well-run, but they have a captive market that is huge and booming.
Despite their shortcomings (at least from a western point of view), these companies have succeeded in becoming employers-of-choice for some of the brightest young Chinese these days. Their managements, while politically motivated, should over time be capable of responding to a changing China with more modern and increasingly market-oriented practices.
These companies also have government support to move outside of China to extract minerals, do construction projects linked to Chinese government investments, and acquire new technology. Many are linked to the priorities defined by the current (and previous) five-year plans.
In the bottom half of the Global 500 list (and even more frequently in the roster of the next 500), we see some Chinese companies that are very different. While they owe their size to China’s growth performance, they have won their market positions in tough competition with Chinese and foreign competitors.
Some of our examples from the Fortune list, like Lenovo in computers, are state-owned (more accurately “state-controlled,” although traded publicly). But it is in the mission and attitudes of these companies that differences are found, and it is their competitiveness that has placed them among the top 500 global companies.
When asked by Fortune to comment on the remarkable rise of Chinese companies, we noted the presence of new companies like Lenovo and Geely that grew up by first selling “good enough” products to the large mid-tier market in China and later expanded to become global players (by acquisition of the Thinkpad division and Volvo, respectively).
These are companies that haven’t simply ridden the wave of China’s growth, but have thrived in the new environment of the market economy and in the process have created what we believe is a distinctive Chinese business model, defined by the way they compete and win.
We have described them as Second Mouse companies, from the saying “The early bird gets the worm, but the second mouse gets the cheese.” As we have studied these companies, we have become convinced of the viability of their skills in the mid-tier markets across the globe. They have mastered fast-follower competencies, learning world-class manufacturing and sourcing practices, being quick to market, borrowing the best features from global products, and focusing innovation on cost reduction rather than adding features to which the mid-market is largely indifferent.
The Second Mouse manufacturing companies on the list succeeded because they figured out a way to serve the booming middle-class Chinese population better than their competitors. They are moving outside of China, sometimes with government support, but always based on offering products with a price-performance ratio that attracts consumers outside of China. A number of Second Mouse companies now accrue more than half of their revenues outside China. To some extent, their position on the Global 500 list is more like that of large companies from small countries; they are on the list because they’ve become successful in global markets, not simply because of their leadership in their home market.
In hundreds of interviews with modern competitive Chinese companies, “a better price-performance ratio” is stated as almost a national motto when it comes to company market strategy and also choices among suppliers. Huawei is a poster child for this philosophy and has used it to rise from a private startup in a country just starting to build its telecommunications infrastructure to #2 behind Ericsson globally by offering belter value to customers. While government support was no doubt quite important in selling into China’s state-owned telecom industry, Huawei didn’t become a supplier to 45 of the 50 largest service providers in the world or to the #2 position in its industry without competitive strengths.
Sinomach is an example to show that even a large state-owned enterprise can behave in a way that puts it on our Second Mouse list. It boasts a global engineering and construction division that is visible winning competitive projects around the world. It is also the parent company of agricultural machine company YTO, which grew out of the monopoly First Tractor to become the largest participant in a now-competitive agricultural equipment market. YTO is also developing a significant global presence, especially with last year’s acquisition of McCormick, France. This company certainly gets its share of government support, but it wins most of its business the old- fashioned way.
Fortune’s Global 500 is taking on a very new look with 73 Chinese companies on the list, second only to the U.S. with 143 companies represented. Chinese companies have edged out Japan’s in numbers among the countries spawning the world’s largest firms. The numbers of Chinese companies on the list will continue to increase in future years, as many of those now in the second 500 continue to grow in China and abroad.
In this article, we have attempted to describe the diversity of the Chinese participants on this list. All are on the list in part (or in some cases, only) because their home market has been booming for so many years, allowing them to achieve this necessary level of scale, mainly at home. For some of China’s Global 500 firms, with government support and monopoly or near-monopoly positions in their home market, that will be the end of their story. They probably won’t drop off the list, but they will largely remain China-centered companies.
Others that are already on the list (and many who will challenge for positions over the next decade) have found a way to deliver value to customers in a hotly competitive market, not only in China, but increasingly around the world. The end of their story will be more like Huawei’s, the telecommunications equipment supplier that has joined Ericsson on the Global 500 list while long-term industry leaders like Alcatel-Lucent have fallen to the next tier. Such firms will become world leaders, with significant shares of their revenues earned outside China. For western firms thinking about the future competitive environment or looking for acquisitions that can bring new competencies into their corporate portfolio, it is these latter firms that must remain in the spotlight.
 Fortune magazine, July 2012. Also on-line at http://features.blogs.fortune.cnn.com/2012/07/09/global-500-intro/.
 Some of the changes have profound implications for western businesses and China’s own firms alike. See David G. Hartman, Two Decades of Change in China, Blue Canyon Partners, Inc., © 2012.
 We are sure that the Chinese government would not support our characterization, believing that all Chinese firms reflect both market and socialist characteristics, but we see a useful distinction here.
 See George F. Brown, Jr., and David G. Hartman, "Are You Ready to Take on China’s Next-Generation Competition," Chief Executive, September 2011, and Second Mouse Tales from China, iP Frontline, February 2012.