China Focus: Companies ignore innovation at their own risk as profits at top 500 firms dip

Profits at China's largest companies are feeling the pinch as the world's second largest economy struggles to adapt to slower growth and weakened demand for its industrial goods.

Profit-growth slid at 169 of the country's 500 largest companies by revenue this year, compared with 141 a year ago. Fifty-seven companies are now in the red, 14 more than a year ago. Revenue shrank at 94 of the top 500, nearly double last year's 50.

The downward trend facing the top 500 firms, with combined revenue amounting to nearly 94 percent of the country's economic output, reflects the shifting of growth drivers, as weak demand from home and abroad has left the vast manufacturing sector saddled with overcapacity.

"It is not a surprise to see the downward trend extend further this year," said Li Decheng, executive vice chairman of China Enterprise Confederation (CEC). "Economic growth is driven more by innovation than intensive labor and capital investment, which these large companies have relied on."

China's dwindling labor pool is also compressing corporate margins with rising labor costs. Less than 17 percent of Chinese are under 14 years old, even lower than that in advanced economies like the United States and Britain.

Global expansion could also weigh down on profits if overseas strategies are ill-conceived or poorly executed. Undue consideration of political risks, a lack of understanding of the local culture and negligence over the demands of stakeholders, including unions and environmental groups, have been blamed.

While state-owned industrial firms still command a heavy presence in the top 500, Internet companies are also making a dent. Online retailer JD.com, Internet conglomerates Alibaba and Tencent, search engine Baidu and IT infrastructure provider Inspur all made the list.

Technology and innovation are also redefining the way companies make money.

"Many big companies have ignored the rise of new technology and business models [...] leaving these companies behind." said Liao Rong, deputy director of CEC research department.

The only way out is to commit to reform and innovation, said Li Jin, chief researcher at China Enterprise Research Institute.

On average, R&D expenditure at the top 500 firms is 1.28 percent of revenue, even lower than the whole country's R&D input of 2.01 percent of GDP.

"If these companies begin to invest more heavily in innovation, it will mean a world of difference for the whole nation." Li said. Endi