Against the backdrop of accelerated technological progress and shorter technology updating cycles, private enterprises in China can no longer maintain a leading position in the industry just by relying on traditional methods such as imitation and copying. They must strengthen research and development and accelerate technological innovation to gain competitive advantages and realize leapfrog development.

During the process of economic transformation, private businesses are facing several severe challenges.

Rapid growth in investment in China in the past few years has led to excessive production capacity in many traditional industries. Of the 39 major industrial sectors, nearly 21 report overcapacity. Because of market access restrictions and other reasons, most private enterprises belong to the traditional industries with overcapacity. They have been facing great difficulty in getting financing, with the problem intensified as the nation began to eliminate outdated production capacity and deleverage.

Moreover, as China's working-age population shrinks, labor costs have been rising in recent years. Resource costs have also increased significantly and the burden of taxes and social security expenses on private enterprises has become heavier.

According to the international experience, after a country's per-capita income surpasses $3,000, it sees consumption spending grow much faster. China entered this stage in 2008, but its commodity supply structure, with most of the products at the low end of the industrial chain, cannot satisfy people's demand for upgraded consumption. Most of the products from China's private enterprises have not yet established themselves as reputed brands and built public trust, so traditional private enterprises still face great difficulties despite the vast market demand.

Worse still, an increasing number of low-end products made in China have been replaced by commodities made in neighboring countries with lower labor costs such as Viet Nam. While China is losing some of its traditional competitive advantages, it has not yet established new advantages. Hence Chinese exports are dropping rapidly, affecting many export-oriented private companies.

In China, the number of private enterprises is huge, and since they come from a wide range of industries, their conditions are diverse. Against the backdrop of the great changes in the economic landscape both at home and abroad and accelerated economic transformation, these enterprises must develop innovatively, taking into consideration their own conditions.

First, they should innovate by integrating in the industrial chain of large enterprises. Among private enterprises in China, 90 percent are small and medium-sized. To survive in the fierce market competition, a good option is to integrate into the industrial chain of large enterprises. Large enterprises often need a lot of spare parts or services, and because of technological and cost factors, they are unlikely to produce all these spare parts or services on their own, instead purchasing them from outside.

The C919 narrow-body twin-jet aircraft independently developed by Chinese aerospace manufacturer COMAC is a prime example. The production of this model involves more than 200 enterprises, 36 universities and a large number of industrial workers. The suppliers or potential suppliers of the aircraft include both state-owned and private enterprises.

Second, private enterprises should join hands in innovation. An individual small or medium-sized enterprise may be weak while facing fierce market competition, but if many such enterprises unite, they will become much more powerful. So innovation cooperation is an important way for private enterprises to survive.

Third, private enterprises should lead in technological innovation. After years of development, a few large and powerful private enterprises have come up in China and their brand recognition and innovation capability have been growing. Information and communication technology provider Huawei Technologies is one of the best examples. It ranked 88th on Forbes' list of the most valuable brands in 2017, the only Chinese brand on the list. Most of Huawei's products are trendsetters, not "followers."

Fourth, private enterprises should make innovations in specific market sectors. As the division of labor becomes increasingly elaborate, to intensively and meticulously target specific market sectors is a good choice for some private enterprises.

Fifth, they should innovate their business formats. The development of Internet technology has greatly affected many traditional industries, but it has also brought new possibilities and space for innovation in the business format, such as the sharing economy. Such innovations will provide new options for the development of private enterprises.

This is an edited excerpt of an article by Zhang Peili,associate professor with the Institute of China's Economic Reform and Development of Renmin University of China, published in Economic Information Daily

Copyedited by Sudeshna Sarkar

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