Corporate China 2.0

The Great Shakeup

verfasst von: Qiao Liu

Verlag: Palgrave Macmillan US

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book argues that that the rise of great firms - those with sustainable high return on invested capital (ROIC) - will lay the foundation for China’s successful economic transformation. Drawn from the author’s research on corporate finance and the Chinese economy, the author maintains that being big could be easy but means little for corporate China, especially in the context of China’s transition from an investment-led economy to an efficiency-driven one. The work discusses both internal and external impediments that lead to lack of great companies in China and suggests institutional conditions which foster the rise of great companies in China, including, reversing the government’s obsession with GDP, reforming the financial system, and promoting entrepreneurship. Policy makers, investors, corporate executives, and MBA students and scholars will appreciate case studies of Huawei, Alibaba, Xiaomi, and Lenovo, among others, that illustrate the endeavors made by Chinese entrepreneurs at the grassroots level and highlight what makes successful companies in China.

Inhaltsverzeichnis

Frontmatter

Chapter 1. The Improbable Surge of Corporate China

Abstract

Accompanying the fast growth of the Chinese economy is the surge of corporate China. By 2015, China boasts of more than 20 percent of the world’s largest companies (by sales), the majority of which are state owned and concentrated in commodities, energy, and finance. Three structural factors account for the rise of Chinese companies: investment-led economic growth model, globalization and China’s WTO accession, and government policies favoring the state sector. While the large Chinese companies contribute significantly to gross domestic product (GDP), they do not generate much value. While the Chinese economy is going through the transition from investment-led to efficiency-driven, its success largely hinges on whether the Chinese companies can place value creation ahead of size.

Qiao Liu

Chapter 2. What’s In A Great Company?

Abstract

Large sales do not necessarily lead to high firm value. Credit-fueled investment gives birth to big companies, but not great companies. This chapter introduces a definition of great companies from a corporate finance perspective: great companies are those delivering high return on invested capital (ROIC) for a long enough time. This chapter uses IBM’s transformation from a manufacturer to a service provider in the 1990s to demonstrate the relevance of ROIC to a firm’s greatness. The rise and fall of Suntech, a Chinese solar power company, further attests to the relevance and importance of ROIC. Drawn from findings in academic research, this chapter shows that firms born in recession are more likely to focus on ROIC rather than sales.

Qiao Liu

Chapter 3. Does ROIC Apply to Corporate China?

Abstract

ROIC applies to China Inc. The lackluster performance of China’s listed companies is largely due to their lower ROIC. Over 1998–2012, the average ROIC of China’s listed firms was only 3 percent. Trading strategies that long stocks of firms with higher ROIC and short stocks of firms with lower ROIC generate statistically and economically significant alpha (α. Investing in the top quintile of the listed companies in China (by ROIC) can generate an annualized return as high as 13.2 percent, on par with China’s nominal GDP grow rate. To sustain China’s strong economic growth, it is important to fix its micro-foundations. Improving ROIC is the key.

Qiao Liu

Chapter 4. The “Great” Hope Struggles

Abstract

Two interrelated external factors largely account for the abundance of large companies but the paucity of great companies in China: investment frenzy driven by the political tournament based on economic performance and weak institutions. Credit-fueled investment is more associated with firm size, but not ROIC. The Chinese government has been practicing a financial repression policy and oftentimes resorts to administrative measures to interfere with economic matters. As a result, the bulk of investment has concentrated in the state sector. However, it is shown that the SOEs on average report ROIC 4 to 6 percentage points lower than that of non-state firms. This chapter also uses the case example of China Ocean Shipping Company (COSCO) to demonstrate how undisciplined investments led to the quick surge and sudden fall of a Fortune Global 500 company.

Qiao Liu

Chapter 5. It Is Also About Corporate Governance

Abstract

This chapter highlights the importance of well-practiced corporate governance to the surge of great companies in China. Using the Wanfu Biotechnology scandal and the puzzle regarding the ‘special treatment’ firms in China’s A-share market as the motivation, this chapter shows that the prevailing corporate governance mechanisms in China, which are shaped by various China-specific institutional and economic factors, are not effective in resolving the agency problems. Drawn from the research on Chinese corporate governance, this chapter in particular discusses the weakest link in Chinese firms’ corporate governance practice—the widespread use of the pyramidal ownership structure. It is shown that the use of pyramidal structure could be very effective in forging large business groups. But these groups’ overall ROIC is problematic.

Qiao Liu

Chapter 6. The Perils of Diversification

Abstract

Diversification has been a myth for China Inc. Chinese companies, state owned or privately held, are sprawling over time. Using data on China’s listed companies, this chapter demonstrates that there is a negative correlation between ROIC and the extent of diversification. Diversification in general leads to large companies but not great companies. The case examples of Kunlun Energy and China Resources Enterprises, two central government-controlled companies listed in Hong Kong, illustrate how staying focused helps improve firm value. The aggressive pursuit of an expanding business portfolio, to a certain extent, should be held accountable for the lack of great companies in China.

Qiao Liu

Chapter 7. Shake Up the Foundations

Abstract

Facilitating the emergence of great companies in China is more a marathon than a sprint. It calls for a pro-market institutional foundation, which comprises at least three building blocks: reconfiguration the role of government, enhancing the efficiency of financial intermediation, and seeding a culture of innovation and entrepreneurship. Governments at all levels should transform their roles from rule-setter, umpire, and player to public services provider. Deregulating interest rates and allowing private capital to enter financial services is the key to rejuvenating the financial system in China. Enduring entrepreneurship may unleash individuals’ creativity. This chapter also uses the Chinese local government debt market as the example to illustrate how weak institutions distort the pricing and undermine the functioning of a market.

Qiao Liu

Chapter 8. The Beginning of a Breakthrough

Abstract

Does China have great companies? Great companies are created by great minds. This chapter discusses China’s “built to last” potentials. Jack Ma of Alibaba once said, “You must have a dream—what if you realize it!” Xiaomi’s Lei Jun refused to be called China’s Steve Jobs. Ren Zhengfei of Huawei has taken a less traveled road by insisting on self-developed technologies and intense spending on R&D. Wang Wei of SF Express rejected flirting with the capital market so that SF Express can focus on providing the best delivery services. China’s great companies will arise from those who cultivate innovative business models, hold respect for customers, and aim at creating long-term value rather than short-term gains. Huawei, Alibaba, Xiaomi, and SF Express are representatives heralding the coming of a breakthrough.

Qiao Liu

Chapter 9. Conclusion: How Can Chinese Companies Be Truly Great?

Abstract

What make great Chinese companies? Eight aspects, some at the macroeconomic and institutional levels and some at firm level, are indispensable for corporate China to re-align its incentives and adapt its strategies so that it can move in the direction of becoming truly great: transforming the growth model, redefining the role of government, interest rate liberalization, allowing private capital to enter finance, reforming production factor markets, being in the right place, focusing on ROIC, and promoting innovation. Although the eight aspects are not mutually exclusive, they collectively provide an enabling formula. The success of the influential companies that emerged in the four entrepreneurial waves during China’s reform era highlights how these eight elements can translate into higher ROIC.

Qiao Liu

Backmatter

Titel: Corporate China 2.0
verfasst von: Qiao Liu
Verlag: Palgrave Macmillan US
Electronic ISBN: 978-1-137-55089-7
Print ISBN: 978-1-137-60371-5
DOI: https://doi.org/10.1057/978-1-137-55089-7