The next wave: innovative private Chinese companies

Peter Bowie is former CEO and currently senior partner with Deloitte China where he has been working with domestic and multinational companies since 2003.

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In the 15-year period ended in 2007, Canadians invested $514-billion in business internationally. But only $1.8-billion - or about 3/10ths of 1 per cent - was invested in China, the world's fastest-growing economy.

Many Canadian companies - in mining, manufacturing, finance, insurance and other service sectors - understand the opportunities in China; they have developed their presence in the country, both in sourcing products and, to a lesser degree, expanding their operations into the domestic market.

But this is just the start, and a modest one at that. Canada's businesses, and its leaders, must wake up to the broader implications of China's potential and its rapidly developing business environment - or risk being left in the dust.

Foreign companies entered China initially to source products to sell in their own home markets (currently, about 60 per cent of the exports from China to the United States are controlled by U.S. companies). Increasingly, however, foreign companies are focusing on the vast Chinese domestic market itself and doing so quite profitably.

It's estimated that more than 800 Canadian companies are currently operating in China, but their activities are relatively low key - especially when compared with the march of Chinese state companies into Canada (PetroChina's $1.9-billion investment in the Alberta oil patch, for example, or China Investment Corp.'s stakes in Teck Resources, Kinross Gold and Potash Corp.).

And big changes are on the way in another level of Chinese commerce.

In the early 1990s, China had few "non-public" companies - only about 200,000 in a population of more than 1.3 billion. Today, millions of private businesses, by some estimates about 40 million, are operating in a ferociously competitive domestic market - and they are gearing up to move beyond China's borders.

Chinese private companies compete not only against each other but also, in some sectors, against multinational companies. The best of them develop strategies and operations that allow them to win in a market that is extremely demanding. They are aggressive, efficient, ruthless in competing on cost, and have a deep understanding of the domestic market and their customers.

Long-held views about Chinese private companies being unable to innovate or be effective in marketing are off the mark, and will be even more so over the next decade. Many of these companies are increasingly looking abroad to gain access to new markets, acquire additional capabilities and expand into new products and services.

A recent survey by China Market Research Group of several hundred Chinese business executives found that 50 per cent expect to enter the U.S. market in five years, after expanding domestically and in regional markets such as Africa and the Middle East.

Make no mistake: In the next five to 10 years, Chinese private companies will be competing in Canada on both cost and quality and will be able to innovate rapidly.

A current example is Haier Group, the fourth-largest white goods manufacturer in the world, with annual global sales of more than $18-billion (U.S.). Haier sells more domestic appliances than any company in 19 product categories in China, and has established manufacturing plants, and sales, distribution and design centres in all major international markets. Even in the global financial crisis, Haier accelerated its push overseas, which now accounts for one-third of its revenue.

In addition to potential Chinese competitors, Canadian businesses should be alert to the multinational companies that have learned to adapt, grow and compete in China. The Chinese market is unique, with huge potential volumes, low household incomes, widely diverse regional markets, rapidly evolving infrastructure and ever-increasing competition.

Consider General Electric. It came up with an innovative portable ultrasound machine, priced at only $15,000, that was originally developed for rural China, but was then adapted for the U.S. market. China's demanding marketplace will drive more multinational companies to become creative not only in developing products and services, but also in revamping business models, marketing strategies and operational efficiency.

The implications of these trends are critical to the success and survival of Canadian companies. They will have to compete with private Chinese companies as they expand into Canada, and with other foreign companies that are sharpening their capabilities through China-driven innovations.

In short, Canadian companies need to fully understand the characteristics and developments in their respective industry in China. Failing to prepare for Chinese competitors could dramatically affect the growth, profitability and even sustainability of Canadian businesses.

At the very least, it's time for Canadian companies to work out strategies to deal with Chinese competitors, and to do so with a sense of urgency. It isn't difficult to carry out a competitive analysis of market segments in China and to stay informed. But it does take commitment and recognition of the need to adapt.

Better learn as much as we can now. India will be next.