The Rapid Advancement of Chinese Private Enterprises as Revealed by the Fortune Global 500

The number of Chinese enterprises listed in Fortune's annual Fortune Global 500 ranking is increasing year by year, symbolizing the rise of China as an economic power. While the majority of such companies are still state-owned enterprises (SOEs), the rapid advance of private enterprises has become increasingly apparent. The headquarters of these SOEs are concentrated in Beijing, whereas those of private enterprises are spread more widely among major cities, led by Shenzhen. Sector segregation can also be seen, with SOEs concentrated in upstream (raw materials) and midstream (intermediate goods, capital goods) sectors, and private enterprises in the downstream (consumer goods and services) sectors of the supply chain.

The Fortune Global 500 was first announced in 1995 (based on revenue of the previous year, same hereinafter) when only three Chinese enterprises (mainland only, excluding companies from Hong Kong and Taiwan, same hereinafter), namely, the Bank of China, Sinochem, and COFCO found their places in this list. In the same year, 149 Japanese companies were listed, closely approaching the number of U.S. corporations, which stood at 151. In subsequent years, the number of Japanese companies decreased sharply, and the number of U.S. corporations also kept falling from a peak of 198 in 2002. In contrast, the number of Chinese enterprises increased dramatically, and overtook Japan in 2012 to claim the second spot. In the 2017 Fortune Global 500 announced in July this year, the number of Chinese enterprises increased by seven from last year to 105 (115 if four Hong Kong companies and six Taiwanese companies are included). This greatly exceeds the number of Japanese companies, which stands at 51, and is approaching the number of U.S. corporations, which stands at 132 (Figure 1). This change is broadly in proportion to the shift in the share of global gross domestic product (GDP) of China, United States, and Japan (Figure 2).

Note: Data for China exclude Hong Kong and Taiwan.

Source: Compiled by the author based on "Fortune Global 500," Fortune, various issues.

Note: Taking into consideration of the fact that the companies listed in the Fortune Global 500 ranking are selected according to revenue of the previous year, the 1995 and 2017 GDP figures used here are those of the preceding years.

Source: Compiled by the author based on "Fortune Global 500" (1995, 2017), Fortune and World Economic Outlook Database, IMF.

Of the Chinese enterprises listed in the latest Fortune Global 500 ranking, 81 are SOEs, which still hold the overwhelming share. However, the number of private enterprises has grown to 24 over approximately 10 years, since Lenovo Group became the first Chinese private enterprise to join this list in 2008 (Figure 3, Table 1). For China, which is aiming to shift from a planned economy to a market economy, the change in the main players from SOEs to private enterprises is inevitable. This transition can follow two routes. One is the growth of private enterprises established with private capital, and the second is the privatization of SOEs. However, in China, so far only small to medium-sized SOEs, and not the larger SOEs, are targeted for privatization. This is reflected in the fact that the majority of private enterprises listed in the Fortune Global 500 are those initially established with private capital.

Note: Excluding Hong Kong and Taiwan.

Source: Compiled by the author based on "Fortune Global 500," Fortune, various issues.

The top three locations for the headquarters of the 105 Chinese enterprises listed in the latest Fortune Global 500 ranking are as follows: Beijing (56 companies), Shanghai (eight companies), and Shenzhen (six companies). Of the 81 SOEs, 52 are based in Beijing, and of these, 48 are “central enterprises” which are controlled by the central government through the State-owned Assets Supervision and Administration Commission of the State Council and other agencies. On the other hand, of the 24 private enterprises, five are based in Shenzhen, four in Beijing, and two each in Hangzhou, Nanjing, and Foshan. In Beijing, 92.9% of the enterprises that find their places in this list are SOEs, while in Shenzhen, 83.3% of them are private enterprises (Table 2).

Shenzhen, which is adjacent to Hong Kong, has become China's major hub of private enterprises. Until the 1970s, it was merely a small fishing village. However, with part of the area being assigned as one of the first special economic zones in 1980, Shenzhen has become a window for the opening of China and an experimental area for reform. It enjoyed high growth over the next 30-plus years. In the 1980s, many Hong Kong companies moved their factories to Shenzhen to take advantage of the incentives available in the special economic zone. Subsequently, as wages and land prices in Shenzhen rose, the majority of factories moved to the surrounding areas, such as Dongguan. Shenzhen on the other hand, has experienced a rapid growth in finance, logistics and high-tech industries, and industrial upgrading continues to advance. Shenzhen has a large migrant population from other parts of China, dominated by young people. This has become a factor favoring economic growth and innovation.

Shenzhen is located in the Pearl River Delta, which has emerged as one of the world's leading industrial cluster. Here, the infrastructure is well established for the whole supply chain, from research and development (R&D) to component production and assembly factories, in a wide range of industries, such as electronics and automobiles. Economies of scale and scope are achieved, new ideas are generated, and productization is possible in a short space of time. Hence, Shenzhen has come to be known as the “Silicon Valley of hardware.”

In Shenzhen, besides Huawei (communications equipment), Amer International Group (electronics/electrical equipment), and Tencent Holdings (internet service and retailing), which are listed in the Fortune Global 500 rankings, there are emerging companies which have a high level of competitiveness in both domestic and overseas markets in some high-tech fields. These companies include ZTE (communications equipment), BYD (new energy vehicles), BGI (biopharmaceuticals), DJI (drones), and Royole (displays).

By sector, China's SOEs are concentrated in the upstream (raw materials) and midstream (intermediate goods, capital goods) of the supply chain, while private enterprises are concentrated in the downstream (consumer goods and services). This shows that, in the downstream sectors, a competitive market environment has already formed, whereas in the upstream and midstream sectors, the barrier to entry for private enterprises is still high, and the SOE monopoly structure has remained intact (Note). Thus, SOEs and private enterprises do not compete in the same sectors. Rather, they are segregated into different parts of the supply chain. This “vertical structure” is a main feature of the Chinese economy, and can be seen from the list of Chinese enterprises in the Fortune Global 500 ranking.

Specifically, the Chinese SOEs in the 2017 Fortune Global 500 maintain an overwhelming share of the capital goods and business services, energy, financial services, and materials sectors, while private enterprises are dominant in consumer goods and services and real estate (Table 3).

In consumer goods and services, seven Chinese private enterprises are listed in the ranking, with three of them (JD.com, Alibaba, Tencent) being internet services and retailing corporations. There are only six global internet services and retailing corporations on the list, which means that Chinese enterprises account for half of them. (The other three are U.S. companies: Amazon.com, Alphabet (Google), and Facebook.)

Moreover, six Chinese real estate companies are listed in this year's Fortune Global 500 ranking. Of these, four (China Vanke, China Evergrande Group, Dalian Wanda Group, and Country Garden Holdings) are private enterprises. There is not a single non-Chinese real estate company on the list.

While China's economic growth rate has slowed down, it has remained higher than that of major economies including the United States, Europe, and Japan. Reflecting this, China's presence in the global economy will continue to grow, and the size of its GDP (60.4% that of the United States in 2016) is expected to exceed that of the United States, and become the highest in the world sooner or later. Against this backdrop, the number of Chinese enterprises in the Fortune Global 500 should continue to rise, and finally exceed the number of U.S. companies. This is likely to be led by private enterprises established with private capital. However, we must wait for the privatization of large SOEs if we are to see the number Chinese private enterprises overtaking that of SOEs.

The original text in Japanese was posted on September 5, 2017.