http://online.wsj.com/public/article/SB116493316308337474-1MUip_dHAKiF0HAanyEUaLa__kg_20061207.html?mod=regionallinks

BEIJING -- China's technology companies are closing the gap with their foreign rivals in productivity, positioning themselves to become a bigger threat to multinationals both in China and abroad, according to a survey by McKinsey & Co. and China's Tsinghua University.

The survey compiled nearly 40 different items of financial data for about 39,000 companies in China, including local companies and Chinese subsidiaries of foreign companies. The companies come from a broad range of sectors within the tech industry, from those that make fire-safety products to makers of more typical high-tech goods such as mobile phones and personal computers.

The survey suggests that Chinese tech companies are gaining ground on multinationals in terms of size and in terms of the efficiency of their operations, as they learn to fine-tune processes that in the past relied strictly on China's abundance of cheap labor to compete. It also found that Chinese tech companies are increasingly moving up from low and midprice product segments, which they have long dominated, into higher-end product segments that foreign companies have long dominated.

"This is a major wake-up call for multinationals," said Ingo Beyer von Morgenstern, the Shanghai-based McKinsey director who oversees the firm's technology practice in Asia.

Several Chinese tech companies, such as PC vendor Lenovo Group Ltd. and telecommunications-equipment giant Huawei Technologies Co., have begun competing in foreign markets. Mr. Beyer von Morgenstern said the survey's results suggest that many other Chinese companies that have grown largely "under the radar" of their foreign competitors are likely to follow suit.

One of the survey's more unexpected findings was that privately owned Chinese companies have sharply increased their productivity, as measured by revenue per worker, to levels that match or exceed their foreign counterparts, McKinsey executives said. Improved productivity enables companies to expand more quickly and can lead to greater profitability.

Among tech companies with annual revenue of at least 10 billion yuan, or roughly $1.25 billion, private Chinese companies averaged revenue of 421,000 yuan per worker in 2005, while their foreign counterparts in China averaged 439,000 yuan per worker. That marked a change from 2001, when Chinese companies averaged 226,000 yuan in revenue per worker, while foreign companies averaged 501,000 yuan.

The survey doesn't reveal why Chinese companies have been able to make such gains in productivity relative to their foreign counterparts. One limitation on productivity at multinationals is that they tend to enforce higher standards of labor treatment -- limiting the number of hours employees can work without overtime, for example.

Total revenue among the tech companies in the survey rose to $700 billion in 2005, from $250 billion in 2001, while the share of sales coming from exports rose to 43% from 32%. The survey showed that average net-profit margins at tech companies in China, both domestic and foreign, have declined in recent years -- to 3.7% last year among those companies surveyed from 4.3% in 2001.

But it also showed that profitability remains high when measured relative to equity, or assets minus liabilities. The survey showed that return on equity in China's tech industry averaged 12.1% in 2005, below the 15.7% average for companies in the U.S., but nearly twice the 6.8% average for companies in Germany.