ODU's Shaomin Li Co-Authors Op-Ed on Threat to Chinese Firms
January 15, 2015
Shaomin Li, Eminent Scholar and professor of international business in Old Dominion University's Strome College of Business, has co-authored a guest opinion piece in Forbes magazine, surmising that rapid growth in large Chinese companies can be fatally threatened by a sudden downturn because of that rapid growth itself.
The op-ed "Corporate Ponzi Game In China?" was published January 12 in Forbes, co-authored by Seung Ho Park, professor of strategy at China Europe International Business School, and Li.
The authors note that Chinese companies have bypassed the typical model to corporate success followed in other developed countries, building a product or service that meets a market need, achieving financial strength based on sales and profitability, followed by expansion.
Chinese startup companies defy that logic, quickly expanding, obtaining financial backing based on their rapid expansion, and then developing a product or service for the market, Li and Park write.
"Like the Chinese economy that seems to have defied fundamental economic laws (such as "the right to private property is a prerequisite for development"), many Chinese firms have also been able to defy the 'gravity' or 'golden rule' of profitability. They defy the odds by achieving rapid growth without turning a profit," the authors write.
A full copy of the op-ed is available HERE.
To determine whether this type of "hyper-growth without profitability" is sustainable, the authors conducted a study looking at more than 100,000 companies in the emerging economic powers of Brazil, Russia, India and China (the BRIC economies), determining how profit-oriented strategies fare over time, compared with growth-oriented strategies.
"Our results raise an alarm on the strategy of pursuing growth at any cost," the authors write.
Looking at the large sample of BRIC economy companies within two time periods, 2002-2006 and 2007-2011, the researchers found the average profit margin of Chinese firms is only 4 percent, compared with 9 percent in the other BRIC economies. As well, China is the only one of the four countries whose corporate debt is more than 100 percent of its GDP, and that debt growth is accelerating.
Many firms in China followed this model to eventual profitability during the years the Chinese economy rapidly expanded. But with signs of slower growth in the overall economy, danger signs loom, Li and Park write.
Firms that don't make the transition to refocus on improving product and service qualities, and ultimately profit margins, "will face tremendous pressure if the Chinese economy contracts, which seems quite likely. You can see the signs in the widespread over capacity across most manufacturing industries," the authors write.
"As previous cases in China show, this investment pattern may turn into a Ponzi scheme with many small investors losing their life savings. To avoid such a fate, it is time for Chinese firms to focus on internal competence and achieving sustained profitable growth. After all, they can't 'defy gravity' forever."
Li is the Haislip-Rorrer Faculty Research Fellow and professor of management and international business at ODU. He studied in China and also worked in his home country as a business executive, qualifying him to be an expert witness before the U.S. Congress on China's reform.
Li is the author of 13 books and more than 100 articles, which have appeared in Harvard Business Review, Journal of Business Ethics, Journal of International Business Studies, The Wall Street Journal, The New York Times and many other publications. In 2008, he received Virginia's top honor for university faculty, the State Council of Higher Education for Virginia (SCHEV) Outstanding Faculty Award.