Almost 700 companies are awaiting Chinese government approval to sell a total of roughly $63 billion in stock, according to a tally by The Wall Street Journal of securities filings. The reason? The Chinese government's strict IPO process, which includes an overwhelming list of requirements for the Shanghai Stock Exchange and an application process that can take four or five years to be approved. As a result, many of China's largest companies, like Alibaba (BABA) - Get Alibaba Group Holding Ltd. Sponsored ADR Report and Baidu (BIDU) - Get Baidu, Inc. Sponsored ADR Class A Report , have gone public in the U.S.
Chinese companies benefit from the sheer size of their home market, which has more than 100 million mainstream consumer households, according to a 2015 McKinsey Global Institute (MGI) report. This massive population allows companies to commercialize new ideas quickly, and on a large scale.
By the time Chinese companies arrive to IPO in the United States, they have already learned how to successfully monetize their products and services in a rapidly urbanizing country as well as how to scale up their business. By going through this proving ground before going public, they provide investors with an advantage in market experience compared to fledgling U.S. competitors.
The Chinese market offers other unique attributes that you simply can't find in companies based elsewhere. Because it is so insulated, there is no real threat from international players. In fact, China's Anti-Monopoly Law is so stringent that it has allowed Chinese corporations to grow in a protected bubble -- an advantage that is not going away even when listed on a foreign exchange.
The market's acceptance of copycat products is another interesting trend, especially for technology manufacturers. The practice of copying and producing fakes is so entrenched in Chinese culture there's even a word for it -- Shanzhai. Copycatting has helped China build the world's most extensive manufacturing ecosystem, so Chinese factories can be adapted to many types of manufacturing, even mass customization.
It's important to note that some analysts have begun to argue that this copycat model may now be hindering China's profitability, but it has helped companies like Xiaomisucceed, according to an October MGI report. The company is known for offering hardware features as good as those from global brands (like Apple) but priced for the Chinese market. Xiaomi uses its access to China's massive consumer market as a means to iterate and innovate quickly, updating its product based on customer feedback through a variety of social media channels. It also utilizes the manufacturing infrastructure in Shenzhen, a purpose-built city that caters to electronics makers, to quickly build smartphones with flagship-standard specs at very low cost.
A major strength of many Chinese companies is that unlike their Western brethren, they are mobile-first when it comes to sales and marketing, putting them ahead of the trend in other countries. There is no question that China is the world's largest and most integrated e-commerce market, with 70% of Internet users shopping online regardless of an individual's access to a large commercial center, per MGI, again. In China, a consumer's mobile shopping experience integrates search, e-commerce and social networks, as well as GPS location and mobile-payment capabilities. While other markets are becoming more mobile, Chinese companies don't have to waste time or resources transitioning from a desktop-based online experience. When Chinese e-commerce companies head to the United States, they bring an innovative edge that helps build their success -- and that of their investors.
Despite some recent down trends in its economy, China is still one of the biggest players in the global market. With a strong factory ecosystem and protected home market, Chinese companies headed to IPO in the U.S. have already proven their success rates, which should make investors feel confident in their decisions to buy shares. Furthermore, as the world makes a global shift to a mobile-first approach, investors can feel secure knowing that they are investing in companies that understand the future of e-commerce.
Recently, some Chinese companies have abandoned the NASDAQ and NYSE to go private and relist in China for a large payout at higher valuations. While these moves may have some negative impact on the diversity of options in U.S. stock markets, these deals are yet another reason it's a good idea to invest in Chinese companies that IPO in the U.S.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.