t the 20th National Congress of the Communist Party of China which concluded in October, China’s central leadership again vowed to build the country into a manufacturing power through promoting “high-quality development.”
In the past decades, China has become the world's largest manufacturer in terms of output, earning a reputation as the “world’s factory.” But in general, China’s manufacturing is concentrated at the middle and lower ends of the global supply chain. According to Li Yizhong, former minister of China’s Ministry of Industry and Information Technology (MIIT), China is self-sufficient in only one-third of the key parts, components and materials it needs. Take the semiconductor industry, China imports 95 percent of the high-end chips it uses. In 2021, China spent about US$300 billion on importing chips, much more than it spent on oil imports (US$180b).
To upgrade China’s manufacturing industry, China should strive to promote the development of “hidden champions.” Coined by German management expert Hermann Simon in the 1990s, a hidden champion refers to a small- or medium-sized enterprise (SME) that is extremely successful in a niche market with a leading position in the global market, but it is usually unknown to the public. According to an analysis by Forbes in July 2019, there are about 2,700 extremely successful companies around the world that can be categorized as hidden champions. Almost half, or 1,307 companies are in Germany, which is why Germany is arguably the world’s manufacturing powerhouse. The US and Japan have 366 and 220 hidden champions. China ranked fourth with just 84.
As the US tightens sanctions on China’s tech firms, China needs to brace for an escalating tech war. A key component of China’s strategy should be to encourage the emergence of more hidden champions. In 2016, the MIIT established a list of “single-item champion enterprises” (SCE), referring to an enterprise that focuses on a particular product market in the manufacturing industry with leading technology and global market share. By the end of August 2022, 848 enterprises received SCE status.
In the meantime, the MIIT identified about 9,000 manufacturing SMEs as “little giants,” companies that have the potential to develop into single-item champions. According to the MIIT, on average China’s little giants spend about 10.4 percent of revenue on R&D, which is higher than the average 6 percent of a hidden champion and the 3 percent of standard corporations. At a press conference in August 2022, the MIIT said it has arranged more than 4 billion yuan (US$560 million) in direct financial support and 200 billion yuan (US$28.2b) in loan support to promote the technological development of such companies.
It takes a long time, often more than a decade, for a company to develop into a hidden champion. They should pursue ultimate professionalism in the niche market, be innovation-oriented and have the determination to stick to their path, not pursue reckless diversification.
In order to nurture the development of hidden champions, the government should aim to support the upgrade of the manufacturing industry. More hidden champions will be key for China to break the US-imposed technology containment and to achieve its much-desired modernization.