Watch out for the private giants

It is certainly a good time to be leading a private enterprise in China. We all know about the success of Chinese Internet and consumer electronics companies. But there have also been successes by Chinese private enterprises in other fields. It is hard to pinpoint how much of this has been achieved due to the reduction of some advantages to State-owned enterprises, or due to the shrinking margins of multinationals. But one thing is for sure: It is an ongoing trend that has reached a tipping point.

Gordon Orr, director and chairman of McKinsey Asia

During my conversations with the heads of the multinational companies operating in China, most of them admitted that it was a daunting task for them to keep track of the rapidly growing private sector in China and the threat posed by the focused approach of these companies.

In my view, I see the development more as the emergence of a new Mittelstand in China. Mittelstand refers to the core of mid-sized industrial companies (often family-owned) that have been the backbone of the German economy for several years. Most the emerging Chinese companies are multibillion-dollar businesses, and most have turnover in the tens of millions or even hundreds of millions range. All of them are fast growing. They are family-owned, often led by entrepreneurs just entering the midpoint of their career - and they plan to be around for a long time.

They are also tough competitors - often those who survive the intense competition in China and are good at whatever it is they focus on. They are competing against a myriad of other private companies, State-owned enterprises and global giants. China may be the largest market for their products worldwide, but it is also the most competitive.

What has changed in recent years? Growth in the domestic market has certainly been one factor. The much improved ability to hire talent is for sure another, as State-owned enterprises are seen as less attractive career choices. Lenders are also starting to pay attention to private enterprises by allowing them funding access from the formal banking system, thereby lowering costs significantly. They have also become much smarter on intellectual property, recognizing its importance and going abroad to buy or license what is needed.

It won't be long before they get bolder and spread wings abroad by organically expanding their sales network. Destinations like Southeast Asia, India and Africa are generally high on that list, and this could soon be followed by acquisitions in more mature economies. Watch out!

Heading in the right direction	Exclusive interview with global partner of Mckinsey