In 2021, Fortune’s Global 500 ranking listed 143 companies, including Taiwan, headquartered in China—a handful more than the United States’ 122. In 1995, only three Chinese firms made the list; in 2021, three were in the top 10. Here comes to the realization that China overtakes the U.S. as the home to the highest number of Fortune 500 firms.
Data Source by Fortune 500 Global list/1995-2021; Designed by Thealphabet
Achieve this as China did, and overwhelmingly. However, some scholars and skeptics argue that the triumph would likely be fleeting. The skepticism is rooted in Japan’s example: In 1995, Japan was second only to the United States on the Fortune 500 list, with just four fewer companies. It had achieved that position thanks to several decades of soar- ing growth in the domestic economy. The China story is almost identical: Since 1995, the domestic economy has grown from just $735 billion to $14.7 trillion today, and the correlation between the rise of Chinese GDP and the ascent of Chinese firms onto the Global 500 list is 99%.
Data Source by Trading Economics/GDP 1995-2021; Designed by Thealphabet
It is quiet challenging for Chinese firms to avert the upcoming slowdown, primarily because the factors that have driven China’s spectacular growth over the past 20 years—a low baseline of productivity to begin with, an excess supply of rural workers, and easy access to foreign technologies—have dramatically weakened. Among those worsening situations dominates the shortage of sufficient supply of work forces. Demographic data shows that China’s working age population (people aged 15 to 64) is shrinking. In the absence of drastic improvements in labor productivity, a smaller workforce means a lower GDP growth rate.
According to sources provided by United Nations, the share of China’s working population reached its peak to 74% of it total population in 2010. Unfortunately, the figure is projected to fall by 9% from 2015 to 2035, and by 20% in 2050. That’s a loss of 200 million people—more than the total working-age populations of Germany, France, the UK, Italy, Belgium, the Netherlands, and Switzerland combined. A country’s workers are its most powerful consumers; when the working-age population shrinks, so do revenues. That has already happened to Japan’s global giants. As the country’s working age population fell, domestic consumption faltered, and Japanese firms started sliding off the Global 500 list.
Image by United Nations
Image by United Nations
Two key ways a country can compensate for a shrinking workforce are boosting the number of workers through immigration or enhancing the productivity of the remaining workers. Immigration as a countervailing force to a falling birth rate seems unlikely for China, which is not known for foreign workers. According to World Bank data, in 2021 less than one-tenth of one percent of the people living in China were foreigners. On the contrary, the number of registered foreigners in both the United States and Germany last year was about 15% of the total population.
Countries can also offset a shrinking working age population through dramatic improvements in labor productivity. With increased productivity, companies can pay fewer workers more money and still remain profitable, and the higher pay translates into higher domestic consumption per worker. In Japan’s case, the improvements didn’t happen. In the two decades that followed its peak working age population in 1997, after that the workforce shrank, productivity growth averaged less than 1% per year. The vast majority of those gains came from the manufacturing sector, not the service sector, which now represents 70% of Japan’s economy.
How can China correct or compensate for its falling productivity? That will depend on the long-term outlook for the main drivers of its ability to build up labor productivity at home and on the ability of its firms to replace falling domestic revenues with exports (producing in China and selling abroad) and international sales (producing abroad and selling abroad).
Measures worth being taken to raise China’s domestic labor productivity should center on upgrading its industrial structures to expand resources pool, so that various competitive forces are to be gathered under the umbrella of competition and innovation. With ample free market competition, even friction, Chinese companies are bound to optimize their resources allocation and innovate their products or services to keep abreast of market demands. However, this is easier said than done—structure reform faces big headwinds.
If we solely focus the number of how many firms are listed on the Global 500 list, with 143 enterprises listed on Fortune’s Global 500 ranking, China tops all of its counterparts globally. Promising as it is, things will differ provided that we study the ranking systematically and structurally. Analyzing the ownerships of China’s Fortune 500 family in 2021, we found 82 of the 143 firms are state-owned. Situations become more intensified if we narrow down our analysis to the top 60 ranking; we observed that China landed 16 spots in total but there are barely three private owned enterprises—Ping An Insurance, Huawei Investment and Holding, and JD.com, ranking 16, 44, and 59 respectively. How the state owned enterprises have dwarfed the private owned enterprises!
Although markets almost monopolized, and resources sufficiently supported, most state owned firms still underperform comparing to their private owned counterparts. What’s more, many Chinese state owned companies favor top-down, autocratic approaches to management, which is inconsistent with a culture of innovation. This muddies decision making, skews rewards, and bureaucratizes the innovation process. Consequently, the manage team of those companies should loosen their grip on ideology training or studying, and invest more time and energy in analyzing market demands, training employees to better master prerequisite techniques and skills, and finally cultivating a culture of innovation. Building upon that, those Chinese firms should also take into consideration developing a bottom-top decision making strategy, motivating staff working in the front line of business to contribute their ideas to the information pool that is essential for leaders to make the right decision. Business is not about doing stuff by books since markets are changing; companies need their teams being agile and flexible to adapt their business to the environment in which the companies operate.
Now let us dig a little bit deep to analyze China’s Fortune 500 family from the perspective of their industry sectors. For all the 143 firms, approximately 65% of them fall into what we call the first or secondary industries, the percent of which represents the degree of a country’s development, of course inversely. As we mentioned before, China’s big three in the top 10 are State Grid Corporation of China, China National Petroleum, and Sinopec Group, which belong to utilities and petroleum refining, typically representatives of the secondary industries. The U.S. , on the other hand, secured five spots in the top 10, and also all of them make impressive revenues in the tertiary industry, such as technology, retailing, and health care.
Also, the percent of ICT (information and communications technology, or technologies) industries of a country shared in the Global 500 is often employed as an edge over other countries when we consider its global competitiveness. As we can see in the global ranking last year, the U.S. contributed 19 companies to the international community, while China did only 9. On top of that, in the software field, the mobile operating systems Android and iOS controlled by two Fortune 500 companies, Google and Apple, account for 81.5% and 18.4% of the market respectively, dominating almost the entire smartphone operation system market.
As we can see in the real estate, financial industry, telecommunications, and coal industries, government monopolies widely exist in it. If you ask these industries to give up their monopoly rights to embrace free market and fierce competition, there will be great resistance from these interest groups. It is not only just an economic issue, but it is largely a broad political issue. The Chinese government has to change its mind. It is true that the government wants to protect the interests of workers, especially for some basic industries involving people’s livelihood, but that does not mean protecting specific jobs. If an enterprise excesses its capacity, or its products and services are ineffective or inefficient, then the enterprise is doomed.
Protecting these jobs or even industries is dead wrong. Instead, what the government should do is equipping those working forces with new skills to meet the needs of the market. For industries such as technologies, retailing, merchandise, and services, dominant interests often benefit most from elimination of governmental interference in business, since they are able to take care of themselves if left alone. The best part that the government plays in these fields is formulating reasonable and fair market rules, then implementing and guarding those rules.
The pivot of harnessing international exports and sales to counteract its declining domestic revenue for Chinese companies lies in endowing their management and business teams with international leadership capabilities, which facilitate their business expansion over the wold. Many Western multinationals are known for agility, adaptiveness, and innovation. These sources of competitive edges do not happen by accident; they are the consequences of a management culture and capabilities that firms deliberately adopt, acquire, and develop. The Swiss giant Nestlé, for example, is competitive globally because it has deliberately diversified its leadership pipeline and created an outward looking management culture. Chinese firms could theoretically do the same. But their management style would have to change in four important ways.
Adjust their mindset
The very first thing that Chinese firms should do is adjusting their mindset. That is to say, Chinese companies must show respect to all related business partners, be it domestic allies, or its international friends, and they should also downplay their China-centric mindset to meet the benefits of broader stakeholders.
Two complaints about Chinese businesses and executives are worth being notified here. The first is best captured by a government official in a country in which a number of important Chinese firms have made significant investments over the past few years: “Maybe it’s because China is so big and has been growing so fast for so long, but Chinese executives come in and are a bit arrogant and think they can manipulate suppliers, ignore communities, and discount the environment like they do back home.” We heard similar complaints about American and to a lesser extent European executives 30 years ago. All have learned through bitter experience that what works at home does not necessarily work abroad. This is a lesson that more Chinese executives should bear in mind if their efforts to boost international sales are to succeed.
The second complaint relates to a mindset that we call international business for China. “Every company has a degree of self-interest,” one executive mentioned, “but Chinese companies here seem to care only about how to suck out value for their own benefit and to help China overall.” Stakeholders increasingly demand that foreign businesses create value for, and not simply extract value from, the countries and communities in which they operate. These common complaints reflect a China-centric mindset that is out of step with today’s global business environment.
Diversify team membership
Looking at a random sample of 20 Chinese firms on the 2018 Global 500 list, we found that just over 97% of board members and just under 97% of executives were Chinese nationals. Thirteen of the 20 firms were state owned enterprises, accounting for 65% of the sample pool. The seven private owned enterprises in the sample demonstrated similarly low levels of diversity, with one, notable exception—AIA, a major insurance company. Examining an additional 10 randomly chosen private owned enterprises from the Global 500 list, we concluded a somewhat higher level of leadership diversity than in state owned enterprises, but it was hardly convincing: Over 80% of the board members and 87.3% of the senior managers were Chinese nationals. Although there is a long way to go for Chinese CEOs and executives to change China’s demographic realities and the macroeconomic forces behind the productivity slowdown, the leadership crisis we have described here is a cultural challenge that is within their capabilities to manage, as are many of the other innovation challenges they face. Chinese firms must learn to rely less on an inward-looking, hierarchical approach to management and more on the innovativeness and agility that characterize the world’s most successful multinationals.
Cultivate global leadership capabilities
Filling the global leadership pipeline requires not only expat assignments but also formal training programs. In many cases, these programs include multiple learning modules that bring participants together more than once and have projects and other activities that keep people connected even while they are back home and physically separated. UBS, Nestlé, and ABB all run customized programs in conjunction with major business schools that are required for advancement. The exposure to people and best practices outside the company are particularly valuable.
Chinese firms tend to regard leadership development as a training function—so while they often spend heavily on technical training and basic business skills, their commitment to developing global leaders is frequently lacking. They pay little attention to program content or participant engagement, sticking with a dated education model that emphasizes mass lectures in huge auditoriums filled with participants who never put down their smartphones.
However, a few Chinese companies have begun embracing the development of global executives. In 2018, Alibaba set up a leadership academy comprising a 16-month, all-English program in China. The participants are required to rotate across three business units.
Innovate outside of China
Although a great number of Chinese firms are well arranged to use their scale and ecosystems to take advantage of their domestic markets, they are inadequately trained for the global expansion they have to undertake if they are to sustain their newly acquired global rankings. Absent a major pivot in thinking and approach, the Chinese companies are hardly to trigger the productivity realizations necessitated to cancel out the consequences of the steepening drop in the country’s working-age population.
The Chinese government’s Made in China 2025 initiative is very ambitious, but it faces many challenges, especially if it insists that innovation can solely happen at home. A number of leading global firms, including some Chinese cooperations such as Huawei, have established strategic innovation centers in foreign countries. Many wisely choose to station them in geographic hotbeds of innovation, including Tel Aviv, Berlin, Austin, Boston, and Vancouver. Of course, success requires more than just investing in facilities or even hiring top guns in corresponding fields. The right culture is likewise essential for the success of these investments, meaning the China-centric mentality should have to change.