Yesterday, a  post within the China Supply Chain Council site (China’s High-Tech Companies Go Global) highlights a research study, conducted in conjunction with Tsinghua University in Beijing, involving 43,000 Chinese based companies (state-owned, private-sector and foreign owned) across 10 technology sectors that include many from high tech.  High tech industry participants should take note of this research study since I believe it provides indicators of what competitive forces to expect in the coming months and years as recessionary-driven declining demands and higher inflation play out on the global scene.

One of the conclusions to this research was noted as follows::

Our research suggests that productivity gains, together with quality improvements and an emphasis on midrange product segments will continue to propel the growth of Chinese technology companies.  Productivity measured against unit labor costs remains competitively high compared with that of other low-cost countries, to say nothing of developed ones.  As long as productivity grows more than labor costs, China should remain an attractive location for technology manufacturing.”

The research summary additionally points out that scale has helped to spur productivity gains and Chinese high tech companies must push into overseas markets to secure continued overall growth.  There is a prediction that Chinese companies will raise their share of China’s domestic market from 60% in 2002 to a 75% share by 2012, and that “private-sector Chinese technology companies are reaching- and at times surpassing- the productivity levels of their foreign-owned rivals in China.” 

The research interestingly indicates that Chinese companies with annual revenues of more than 10 billion renminbi ($1.5B USD) have average profit margins of 2.6%, compared with 4% for smaller companies with revenues from 1 billion ($146M USD) to 10 billion renminbi.  The implication is that expansion will invariably lead to higher costs and initial lower profitability, but margins can improve when global scale and higher volumes buffer these increased costs.  The researchers further point out that global expansion for Chinese based companies will involve increased R&D, brand recognition and supporting marketing costs, and that strong management skills will be required to buffer the shock.  They rightfully conclude with the obvious statement:

 “A strong domestic position, capable talent management, and a detailed understanding of target markets are elements of a thoughtful globalization strategy”.

Not obviously stated is the fact that if one steps back and views the total overall global high tech market, even with the most optimistic forecasts, one has to question whether 43,000 manufacturers within China can all compete on a global scale, with less than 10% current profit margins.  In my view, pending consolidation among Chinese high tech manufacturers is an obvious conclusion, the question being how much and how quickly in time.  In the end, this may come down to the ultimate survivors of the clash between private-owned vs. foreign owned companies within China’s high tech sector.

 Bob Ferrari