Inside, outside and the future: What should China's private sector do?

Editor's note: What does the future hold for China's small and medium sized enterprises? As China transitions into innovation-led growth and face international pressures, how should they adapt? Is innovation the magic solution? See our interview with the former director of the University of Cambridge Judge Business School Christoph Loch and hear his take on this.

There was a time when China was regarded as the low-cost manufacturer for the world. Not anymore. Today, many Chinese private enterprises have become global leaders in their fields, exporting their innovative products and dominating global markets. They are attracting massive attention from people who like them, but also those who see them as threats.

Those are the ones that we talk about a lot. But for most of the private sector, they are not as famous, nor as resourceful, and have been paid much less attention. 90 percent of the Chinese private sector are small and medium sized enterprises (SMEs). Few of them have billions to invest in R&D. They have little chance of attracting heavy-weights' investments; and some of them simply try to keep afloat.

As China transitions into an innovation-led growth model, what does their future look like? Can they keep up with the rapid changes both inside China and outside? We've talked to Christoph Loch, the former director of the Cambridge Judge Business School at the University of Cambridge. He told us that innovation is crucial, but perhaps not in ways that the public usually perceives.

Loch says that "high-tech is looked at as the magic wand in order to solve all economic problems. Now, high tech is important, and all the advanced nations need to have enough competence in the leading technologies for the future, like AI, like quantum computing, like nano-technology, and a few more… special materials, software. But to believe that if you move into those technologies, that's going to magically create all the solutions, I think that's where the limitation is."

"I would say two things to this. The first one is innovation in this discussion is viewed just too narrowly. Innovation is something which really helps the economy if it becomes pervasive. A few, very big companies, they do fundamental research and they develop fundamentally new technologies. But every country has only a very small number of those, including the U.S. But innovation in all the other companies consists in picking up technologies which are getting to the point where they have been proven and are usable, incorporating them into the way they operate, using them in order to improve their processes, to develop new products, to develop new ways of working with their customers. And that's where the huge lever lies," Loch says.

According to the World Bank, firms are the prime actor for adopting more sophisticated technologies to be applied in the production of goods and provision of services. Workers can have access to higher-productivity jobs and countries can achieve higher prosperity through the adoption of more sophisticated technologies by firms.

Loch believes that "innovation is something which happens in all medium-sized companies in China and in any other advanced economy in the world. They don't develop fundamentally new technologies. They buy technologies in the form of artifacts, in the form of software, in the form of process knowledge that they can get from the outside. They use it in order to advance their products and improve their productivity. And that's the game for an advanced economy. That's where almost all the action is."

He says that "so, for example, total quality management, improvement, innovations, which are small, everyday improvements in the way we are conducting our processes. If they give you between 10 and 15 percent of productivity improvement every year, which is realistic, which I have seen in many companies, that means that you are halving your cost structure per unit every 7 years. That's huge. That's where jobs come from."

According to China's Small and Medium Enterprises Development Index, SMEs in China recorded an increase in their activities in 2023, rising from 88.4 in 2022 to 89.2 in 2023. The increase was attributed to booming consumption, fixed assets investment and high-tech industry development. But, with the global economic downturn, companies everywhere are facing pressure. The World Bank projects that the global economy is set to see a "sorry record" by the end of 2024 with a 2.4 percent growth projection. It will be the slowest half-decade of GDP growth in 30 years. What should the SMEs do in the face of these pressures?

Loch points out that "they need to be frugal and customer oriented and do a little bit better every day. So that's one thing they need to do. And some of that you can do with very little investment. But for some of this you do need investment. So, the fact that capital for investment is simply not easily available for smaller companies is a really, really big impediment that the government needs to acknowledge... Then the second thing that these companies need to do, they need to be entrepreneurial, and they need to look for additional market opportunities. And some of that they can do in the home market. One of the advantages of Chinese companies is you do have a huge home market like the companies in the U.S., different from companies in virtually every other place. And some of them who have critical size, they have the energy and the knowledge to actually want to go abroad."

But, going abroad isn't as easy as it was before. There are a number of military conflicts that are ongoing. Protectionism is rising among many major economies. "Decoupling" or "de-risking" are clear signals that many companies will have hard or harder times conducting transnational trade. Are there enough opportunities for companies to expand internationally?

Loch says that "now, it is, Chinese companies are still exporting into the U.S. So, in spite of the trade war, it doesn't destroy all the opportunities, but it makes everything harder and less predictable, because it can happen very quickly that somebody on the other side notices you and lashes out, and then sanctions are being taken... On the other hand, the fact that we have this polarization at the global level also has opportunities. Because there are some places in the world who say, we don't want to look toward the West anymore, we'd rather look to the East, who are actually receiving companies from China or East Asia more generally with open arms. So global opportunities are not only in the West. They are also in other parts of the world where actually at the moment doors are opening. And Chinese companies are noticing this."

Indeed, they are. In the first two months of 2024, the trade value of private enterprises took up 54.6 percent of China's total imports and exports of goods. It went up 4.2 percentage points from the same period in 2023. China's trade with its largest trading partner ASEAN rose 8.1 percent year on year, accounting for 15 percent of China's total trade value.

Loch points out that "the richest economies still tend to be in what people normally call the West. But A, that's changing; and B there is a lot more people in the not so rich economies. Right? So, India, Southeast Asia, South America, Africa, the opportunities are huge. There are a lot of people. They don't have as much money, but the growth opportunities there are higher. You need to conduct your business there in a different way. You need to acknowledge and adapt to the market conditions, but that is always true. There are other dysfunctionalities in markets in Europe or in the United States, which are of a different kind. In every market, you need to adapt to the local conditions."

"I'm seeing companies which are really impressively looking for the upside in the currently difficult situation. But not all of them will be successful. That is the nature of such a challenge," he says.

(If you want to contribute and have specific expertise, please contact us at opinions@cgtn.com. Follow @thouse_opinions on Twitter to discover the latest commentaries in the CGTN Opinion Section.)