In 2019, we predicted that China would likely account for more companies on the Fortune Global 500 list than any other country. That seemed like a bold prediction at the time, given that American firms had held the number one position since the list’s inception in 1995 and the U.S. economy was 50% larger than China’s. But just one year later, in 2020, China did indeed top the list, with its 124 firms edging out the U.S. at 121 (see here for the Fortune Global 500 data).

We also predicted, though, that China’s position at the top would be short lived. Last year that came true as well: U.S. firms reclaimed the title, with 136 forms on the Fortune Global 500 vs. 135 for China. Of course, China taking over the top spot by three firms and then the U.S. reclaiming it by one might seem that we’re witnessing a back-and-forth battle between the two economic superpowers that will go on for some time.

But we don’t believe that is the case. Although China is certainly growing (after all it added 11 firms to the Fortune Global 500 list between 2019 and 2023), we believe that that the odds are against it reclaiming its position at the top. There are six reasons for this belief:

U.S. business fundamentals are strong.

Since the inception of the Fortune Global 500 list in 1995 until 2020, the U.S. not only had more firms on the list than any other country, but it has also held a larger share of firms on the list than its share of the world economy. This alone speaks to the vitality of U.S. businesses.
There are no signs that this has changed: in 2023 the U.S. not only reclaimed its number one spot overall, but it also captured five of the top 10 spots on the list, up three firms in the last four years. Not only did the U.S. have more firms on the list than China, but on average its firms had 15% higher revenues than China’s largest companies ($95.8 billion versus $83.3 billion).
What’s more, as we’ll discuss more fully later, the profitability of U.S. firms on the 2023 Fortune Global 500 list were more than 114% higher than Chinese firms. As important, U.S. firms’ profitability growth outpaced that of Chinese firms by 50% (27.6% growth for US firms vs. 18.1% for Chinese firms).

Japan and Europe have bottomed out.

Virtually all of China’s gains (and indeed the U.S.’s gains) over the past two decades have come at the expense of Japan and Europe. Just in the last four years (a period that spans Covid plus recovery), Japan lost 12 firms from the Fortune Global 500 (from 53 to 41); France dropped seven firms (from 31 to 24); and the UK saw seven of its firms fall from the list (from 22 to 15). These declines in firm numbers are unlikely to continue.

1 First, Japanese and European firms have been globalizing for many decades and have diversified their revenue streams away from their relatively stagnant home economies.

2 Second, many have made the transition from heavy industry to services and technology-based competitive advantages well ahead of many of their Chinese peers.

3 Third, and perhaps most importantly, Chinese firms, while continuing to grow revenues, significantly lag their chief economic rivals in terms of profit margins, as shown in Exhibit 1. This matters because healthy profits reduce the cost of capital, allowing a company to invest in new technologies, fund international expansion, develop and sustain brands, recruit, and retain talent, and so on.

International resistance to China is growing.

In 2023, Pew Research reported that across the 24 countries surveyed, the median unfavorability rating for China was 67% — with the U.S. registering an 83% rate, up from just 35% in 2005. These growing negative views may reflect increasing friction around trade, human rights, intellectual property, data controls, and territorial claims in the South China Sea. According to China’s customs office, net trade balance in 2023 fell by about 6% compared to 2022 — the first drop in five years. And according to S&P Global, through the first half of 2023, Chinese firms announced 15% fewer M&A deals worth 13% less than in the same period in 2022. Additionally, China’s State Administration of Foreign Exchange reported that in the third quarter of 2023, China recorded its first negative net FDI result since 1998.

China’s working population is falling fast.

As we observed in our 2019 HBR article, between now and 2050, China’s working age population will fall by approximately 200 million people due to the decline in birth rate that began more than 60 years ago. A fall in the working age population can only be offset by immigration. Since China allows virtually no foreign immigration, its demographics are unlikely to improve. In our article, we noted how a similar demographic shift in Japan that began in 1997 had negative economic spillover effects for decades and we predicted that China would likely encounter similar economic difficulties, which would act as a drag on the growth of its largest firms.

Most of China’s large firms are state owned.

Collectively, state-owned enterprises (SOEs) account for more than one-third of China’s economy and two-thirds of the firms on the Global Fortune 500 list. Some of these firms are owned at the national level, others at the provincial level, and many at the municipal level. As such the government controls the strategy, leadership, and finances of these enterprises. Historically, SOEs globally have underperformed privately owned enterprises (POEs), and this is true in China as well. The average profit margin for the Chinese SOEs on the Fortune Global 500 list was just 3.5% (see again here for the source data).
To make matters worse for China’s prospects, most of its POEs, even though they are not owned by the state, are still controlled or heavily influenced by the state in terms of access to capital, the granting of licenses and permits, access to labor, participation in vital state-controlled supplier and buyer ecosystems, and so on. 
  • This influence does not help profitability, which was still only 4.5% for these firms. Thus, SOEs and what we label State Influenced Enterprises (SIEs) constitute virtually all of China’s largest firms (see Exhibit 2), which will likely prevent Chinese firms from growing faster than firms from the U.S., Japan, and Europe.

China’s debt burden is rising.

According to the IMF, in 2022 China’s private debt (including corporate) as a share of GDP rose to 196%, 28% higher than the U.S. 
  • Its non-financial corporate debt as a share of GDP was double that of the U.S. 
  • As important, the indebted firms are heavily dependent on the government for financing. 
  • Nearly three-quarters of China’s top firms are directly state owned, and all private firms depend on state-owned banks for at least some of their financing, which has so far been provided on favorable terms.
Unfortunately, mounting state debt risks crowding out funding for Chinese firms, increasing business uncertainty, and reducing the strategic flexibility Chinese firms have traditionally enjoyed.

Exploiting China’s weaknesses

Western companies should not assume that the Chinese will falter going forward in ways and to the extent that Japanese firms have over the last two decades. 
  • The Chinese state retains the ability and political will to support large enterprises in ways and to an extent that the Japanese government could not. With that in mind, below we offer four key recommendations for U.S. firms in tackling the competitive challenges from Chinese global firms that while struggling will remain significant threats in the coming years.

Pick the right sectors.

While competitive and regulatory conditions for foreign firms in China have soured somewhat, completely withdrawing from China may be short-sighted. The Chinese market is immense and will grow even if at a slower pace. Nonetheless, the competitive domestic landscape in China is uneven. Foreign firms in targeted areas where the Chinese government wants indigenous firms to dominate must be sure they have strong and sustainable competitive advantages over Chinese rivals. However, in areas less critical to the government our research (published in our recent book) indicates that large foreign companies can continue to make good money.

Build the “made here” brand.

In the U.S., few people know that brands as diverse AMC Theaters, GE Appliances, Smithfield Foods, The Waldorf-Astoria, and Motorola Mobility are owned by Chinese firms. Obfuscating ownership by leveraging local branding has helped Chinese enterprises get a toehold in the states. U.S. firms may want to take a page out of this playbook and apply it in China.

Double-down on innovation.

Some executives think that the solution to China’s theft of intellectual property is to lock the doors and batten down the hatches. Sadly, the word proprietary only goes so far in today’s battles with China. Firms wanting to play in China are more likely to succeed if they simply out-innovate their Chinese competitors.

Turn diversity into a competitive advantage.

The U.S. workforce is one of the most culturally and ethnically diverse in the world. Exploiting this diversity will enable U.S. companies to not only foster innovation at home but also facilitate their expansion around the world. The ability to deploy decision makers with language and cultural skills in foreign markets can be a powerful differentiator in current and future competitive battles with Chinese firms across the global marketplace.

• • •

To be clear, we are not predicting the demise of China’s largest firms. 
  • But we do believe that those who predict that China will become the world’s undisputed economic leader are wrong. China has lost its pole position on the Fortune Global 500 list not just because its economy has lost momentum due to Covid, but because of significant economic and social factors that were in place well before Covid struck. 
  • For American, European, and Japanese firms the opportunity exists to exploit these factors to put more distance between themselves and their Chinese rivals.