China's Growing Electronic Information Companies

Grading of China's "100 Top Electronic Information Companies"

China's "100 Top Electronic Information Companies" (excluding foreign currency majority companies) grading began in 1986. At first the ranking’s standards for assessment were sales-based – the conditions were that over 60% of overall sales had to be from electronic products, and that the company must be operating in the black. Later the standards were changed to reflect industrial policy that favored profitable company management. Profit figures were announced in 1999, the requirement was changed to companies with profits over 10 million yuan in 2000, and later the disclosure of export and R&D investment figures also came to be required. Since 2002, companies have also been made to disclose IT investment figures.

In 2005, leading companies (such as Lenovo and TCL) having difficulty staying in the black in the wake of large-scale acquisitions and structural adjustments began to emerge. Because of this, the premise of "in the black" was changed to not having three consecutive years of deficits and total deficits under a third of net assets. This kind of shift in the standards for assessment reflect an industrial policy push for companies' technological development, strategic restructuring, and internationalization.

Because global competition is becoming fierce in the Chinese market for domestic electrical information products, it is not easy to crack the "100 Top Electronic Information Companies" list. Every year, the assessment yields a company turnover rate of about 15%. During the 20 year period from 1986 to 2005, only seven companies achieved continuous ranking, while six companies managed to regain their status after falling off the list.

The top three companies of China's 20th annual "100 Top Electronic Information Companies" announced on May 31, 2006, were the computer maker Lenovo, the household appliance maker Haier, and the electronic parts maker BOE Technology Group Co. Ltd.　 Lenovo's sales increased dramatically after its acquisition of an IBM computer division in 2004. Similarly, the BOE Technology Group Co. Ltd. expanded its sales by acquiring LCD panel companies from Korea and Taiwan. As the graph shows, Lenovo and Haier have an extremely high volume of sales, and they are becoming leaders of China's electronic information companies.　

It has been 20 years since the first announcement of the "100 Top Electronic Information Companies" ranking, and in that time the total sales of the ranked companies have increased from 11.6 billion yuan in 1986 to 964.3 billion yuan in 2005. Moreover, the sales from the top company in the ranking increased from 576 million yuan in 1986 to 108.2 billion yuan in 2005, representing a 187-fold increase. In fact, the current top company's sales (about US$13.2 billion) is closing in on the Fortune 500's cut-off line of US$13.74 billion (2005 performance), and so it is predicted that a Chinese electronic information manufacturing company will enter the ranks of the Fortune 500 in the near future.

Graph – A review of China's top ten electronic information companies in 2005 (refer to the PDF file)

Decreasing Profitability

Despite the rapid increase in sales of the "100 Top Electronic Information Companies", profits have hit a lull. As the graph indicates, excluding Huawei the profitability of the top ten companies is rather weak. Furthermore, three companies among the top ten – BOE Technology Group, TCL, and the SVA Group– are reporting in the red. They don't even come close to benchmark global companies (ex. Samsung Electronics 13.2%, Nokia 10.6%, Cisco 21.6%, Dell 6.4%). In fact, the collective working profit ratio of the "100 Top Electronic Information Companies" fell from 6% in 2000 to 2.6% in 2005.

Heightening Appetite for Research and Development

Recently, Chinese electronic information companies weak in technological capability have been focusing intently on research and development activities. In 2005, the ratio of total research and development investment to total sales for the "100 Top Electronic Information Companies" was 3.7%, a slight drop from 3.8% in 2004. However, the total amount of research and development increased 14.6% from the same period of the previous year. Twenty-three companies topped the 5% mark for the ratio of research and development investment to sales, and four companies topped 10%. Meanwhile, the number of companies applying for patents jumped from 44 in 2000 to 90 in 2005.

The ratio of research and development investment to sales for the technologically-oriented Huawei has consistently been maintained at over 10%, and in recent years its patent applications have been the highest among Chinese companies – in other words, Huawei's performance is on par with global benchmark companies. For example, Huawei's 2005 patent applications through the Patent Cooperation Treaty (PCT) ranked 37th in the world, exceeding Cisco's 212 applications.

Accelerated Internationalization Strategy

As the graph shows, the internationalization of Lenovo, Huawei, and TCL is progressing with international sales of over 50% at each company. International business is contributing greatly to the improvement of overall performance. In the future, overseas merger and acquisitions (M&A), research and development, and the establishment of production bases should be accelerated by China's electronic information companies. Examples such as Haier's M&A of South Korea's computer maker Trigem, and BOE's establishment of a R&D center in the UK are indicative.

However, while Lenovo accomplished an M&A with IBM's PC division, and TCL did the same with Alcatel's mobile phone division and with Thomson's color TV division, it is unclear whether or not these moves will be successful. Meanwhile, Haier's M&A of the second largest US house appliances maker Maytag, and Huawei's M&A of Marconi in the UK were not realized. The paths of internationalization for China's electronic information companies are varied.