How Chinese 'Little Giants' Made It, And Lessons For India's MSME Sector

As we enter 2025, two contrasting economic narratives unfold in India and China.

India, in a bold move, has unshackled its fiscal reserves through the Union Budget 2025, channelling greater funds and rolling out liberal policies aimed at revitalising its vast small and medium enterprises (SME) sector.

Yet, beneath this financial infusion lies a sobering reality.

The country’s 63 million small businesses, once the backbone of its economy, are now grappling with mounting pressures — soaring costs, dwindling demand, and a relentless struggle for affordable credit.

Despite policy interventions, the pulse of these enterprises grows weaker, their survival hanging in delicate balance.

Meanwhile, across the Himalayas, China has not only met but exceeded its 2025 ambitions, fostering an astounding 14,600 small, privately owned enterprises as drivers for top strategic industries.

These so-called "little giants" include 5,000 enterprises working in new technology, including artificial intelligence (AI) and the low-altitude economy characterised by commercial drones, state broadcaster CCTV reported.

The stark contrast between these two economic powerhouses sparks a compelling question: Why does India, despite its sweeping reforms, find its SMEs faltering while China surges ahead with unyielding momentum?

China’s “Little Giants”

The rise of China’s "little giants" is no accident — it was a meticulously orchestrated strategy within the grand design of the "Made in China 2025" initiative.

Often obscure companies, the "little giants" offer products or expertise linked to China’s strategic industries, including semiconductors, energy, advanced manufacturing, critical materials, and battery ingredients.

An overwhelming 90 per cent of the 14,600 "little giants" operate in the manufacturing sector, with more than 80 per cent operating in “strategic emerging industry chains,” such as aerospace and semiconductors, according to CCTV.

Take B Plus New Material Technology, a relatively obscure manufacturer tucked away in the eastern coastal city of Ningbo. It makes one of the world’s thinnest amorphous nanocrystalline alloys, commonly referred to as magnetic “liquid metals.”

These ultra-soft, nano-sized materials measure an astonishing 14 nanometres, a mere whisper compared to the 80,000 nanometres of a human hair. Their impact, however, is anything but small.

These materials fuel innovations across industries — from ultra-fast wireless charging for smartphones to heavy-lift drones and photovoltaic energy generation, reshaping technology at a microscopic level.

Beyond Ningbo, an entire ecosystem of niche pioneers is embedding itself into China’s critical supply chains.

PhaBuilder is revolutionising industrial raw materials by engineering microbes, Acoinfo is refining industrial real-time operating systems, and Beijing Hanfei Aviation Technology is redefining aerospace with its single-crystal turbine blades.

Together, these companies form a silent yet unstoppable force, accelerating China’s ascent in high-tech industries.

Gone are the days when China’s business mantra was “zuo da zuo qiang” — “become big and strong.” Today, the swelling breed of privately run, small but smart “little giants” are fuelling Beijing’s ability to revitalise its private sector and spur technological breakthroughs to win a full-blown technology war with the United States (US).

Unlike sprawling corporate behemoths deemed “too big to fail,” these agile industrial champions carve out irreplaceable niches, making them vital links in the global supply network.

“Private sector minnows now look like big fish since little giants assume outsized roles for the economy and tech breakthroughs. What Beijing wants now are these small but beautiful players,” remarks Zhu Tian, a professor of economics at the China Europe International Business School in Shanghai.

This relentless focus on SMEs is not a mere economic trend — it is a carefully crafted doctrine of self-reliance.

As former vice premier Liu He aptly put it, “The soul of ‘Specialized SMEs’ is innovation. At China’s current economic development stage, science and technology innovation is not only a development issue but also a survival issue.”

Where Do India’s MSMEs Stand?

India’s micro, small, and medium enterprises (MSMEs) have long occupied a paradoxical position in the nation’s economic landscape — celebrated in rhetoric, yet often overlooked in action.

They are the darlings of every industrial policy discussion, the highlight of every budget speech, and even command their own dedicated ministry since 2007.

Yet, the sector remains starved of bold, transformative policy moves that could propel it towards greater productivity and competitiveness.

Indian MSMEs' contribution to the economy is staggering. As of November 2024, they accounted for 30 per cent of India’s gross domestic product (GDP), providing livelihoods to a massive 23.24 crore people, making them the second-largest employment generator after agriculture.

With 6.4 crore enterprises, including 5.70 crore registered on the Udyam portal, their footprint stretches across industries, playing a critical role in shaping the nation’s industrial prowess.

Beyond merely generating employment, MSMEs have firmly entrenched India as a powerhouse in the global manufacturing arena.

In FY (fiscal year) 22, these enterprises accounted for a remarkable 35.4 per cent of the nation's total manufacturing output, while in FY 24, MSME-produced goods constituted an impressive 45.7 per cent of India’s exports.

The sector’s contribution is, thus, not just quantitatively significant but also qualitatively so, in terms of cultivating an entrepreneurial culture.

Struggling to Soar: The Stagnation of India’s MSMEs

Beneath the impressive statistics that define India’s SME sector lies a stark and unsettling reality—one that highlights not just challenges but deep-seated structural flaws that continue to hold the sector back.

The fundamental issue is not merely competition; it is a crisis of scale and ambition.

Despite their sheer numbers, 99 per cent of India’s 60 million MSMEs remain microenterprises, operating in small pockets of the economy with limited aspirations to expand.

These businesses, employing fewer than 20 workers, function largely outside the formal regulatory framework while struggling to break free from their micro status.

Unlike their global counterparts, they rarely evolve into larger, more dynamic enterprises — a stagnation that isolates them from the global value chains (GVCs) and limits their ability to compete on an international stage.

The consequences of this sub-scale structure are profound. While robust data for India remains elusive, studies from OECD (Organisation for Economic Co-operation and Development) economies reveal a telling pattern — medium-sized manufacturing firms (50-250 employees) exhibit 80-100 per cent higher productivity compared to their micro counterparts with fewer than nine employees.

Growth in scale does not merely translate to numbers; it enables firms to invest in skill development, adopt advanced technology and processes, and fuel innovation — the very ingredients that transform small enterprises into global champions, something that the Chinese have done successfully.

As Arindam Bhattacharya, Emeritus Partner at Boston Consulting Group (BCG), writes in the Financial Express, "The most competitive of them grow from their small beginnings to become world-beaters. This push to grow and improve capabilities and productivity is central to the dynamism of any country’s industrial structure."

The Economic Survey 2024-25 further reinforces this troubling paradox. It acknowledges MSMEs as powerful engines of economic growth, second only to agriculture in terms of employment generation and low capital cost job creation, yet also points to a persistent and troubling trend — the tendency for firms in India to remain small.

"So, they lose access to institutional capital, skilled talent, and technology infusion, and often operate outside the formal supply chains. This creates a parallel, informal economy and contributes to low labor productivity," the survey noted.

The Policy Dilemma: A Regulatory Straitjacket

Before diving deeper, it is essential to understand why 99 per cent of India’s MSMEs are micro-units, most being destined to remain so.

A seemingly straightforward answer is that the current policy landscape in India incentivises MSMEs to remain dwarfs, hindering their ability to reap the benefits of economies of scale.

For example, the Industrial Disputes Act (IDA), 1947, mandates that companies with more than 100 employees must seek government approval before retrenching workers. Smaller firms, however, are exempt from this requirement, making it easier for them to hire and fire employees at will.

Similarly, once a company crosses six employees, it falls under trade union laws, allowing workers to unionise. A mere increase to 10 employees subjects the firm to the Factories Act, piling on more compliance obligations.

The unintended consequence of these laws is that businesses deliberately choose to remain small, not because they lack potential, but to avoid getting ensnared in a web of complex labour and safety regulations.

Ironically, the very rules designed to protect labour and encourage employment generation end up stifling both, leading to stagnant enterprises and a restricted job market.

The Economic Survey 2023-24 acknowledged this very paradox, calling the licensing, inspection, and compliance burdens that all levels of government continue to impose on businesses “an onerous burden.”

The burden is felt more acutely by those least equipped to bear it — small and medium enterprises, it added.

Bhattacharya echoes this sentiment, pointing out that India’s complex regulatory framework does little to differentiate enterprises by size — except for those at the very bottom of the scale.

A micro or small enterprise faces nearly the same compliance burden as a large corporation, but without the financial muscle to absorb these costs. The result? The costs of compliance eat into a far larger share of revenue for these businesses, leaving them with no real incentive to grow.

This is particularly evident in Tirupur’s thriving textile industry, where thousands of enterprises remain micro by design, avoiding the cost of transitioning into a more formal setup.

The numbers paint an even starker picture. Out of 5.93 crore registered MSMEs, only about 69,000-odd qualify as medium enterprises.

The medium-enterprise sector finds itself in a policy vacuum — too big to benefit from schemes meant for small businesses, yet too small to compete with deep-pocketed corporate giants, says Animesh Saxena, president of the Federation of Indian Micro and Small & Medium Enterprises (FISME).

"The moment you become medium, you lose the advantages of being small and are suddenly pitted against large corporations with vast financial resources. The legal framework treats you the same as a corporate giant, making survival an uphill battle. This is where the ‘dwarf mentality’ sets in — there is no one speaking for them, no policy tailored to their needs," Saxena says.

China’s Playbook: A Pyramid of Industrial Excellence

China’s MSME landscape is nothing short of an economic marvel — 98.5 per cent of all businesses belong to this category, fuelling 60 per cent of the nation’s GDP and sustaining three-quarters of its workforce, including women, youth, and vulnerable groups.

This sector has expanded at an astonishing pace. In the 1990s, China saw the emergence of over a million private SMEs. A decade later, their numbers had skyrocketed, surpassing those of Europe and the US combined. By 2004, the count had surged beyond 40 million, dwarfing Europe’s 10 million SMEs at the time.

Today, this growth continues unabated, with China adding 5 million SMEs annually, representing a 10 per cent year-over-year growth rate, as projected by database company Statista.

China’s SME ecosystem thrives on a meticulously structured, pyramid cultivation system — a hierarchical framework where firms compete for government recognition, incentives, and financial support.

Much like a sports coach scouting for Olympic talent, Beijing continually holds nationwide tryouts, identifying the most promising SMEs through rigorous assessments of their economic and technological capabilities, reports a recent Mercator Institute for China Studies (MERICS) study.

The best-performing firms earn prestigious titles and access to resources that propel them onto the global stage.

At the foundation of this pyramid are "innovative SMEs," identified at the provincial level for their technological potential. Those that demonstrate exceptional promise ascend to "specialized SMEs," gaining entry into a vast network of support mechanisms.

The most outstanding of these advance to national “little giants” status, positioning themselves at the heart of China’s industrial transformation. At the apex of the hierarchy stand the "manufacturing champions," firms that have not only grown in size but have also secured leadership positions in specialised industrial sectors.

This rigorous selection system thrives on competition, performance-based advancement, and re-evaluation cycles. Firms that receive government titles enjoy a three-year grace period of support before facing reassessment. They must prove their mettle by gaining market share, advancing technology, and maintaining innovation. Only the truly competitive endure, ensuring that state resources are channelled into the most promising enterprises.

The rewards for climbing this ladder are substantial. Listing requirements on Chinese stock exchanges have been eased for the "little giants," opening vast avenues for capital infusion.

In 2022 alone, 40 per cent of IPOs on the Shanghai, Shenzhen, and Beijing stock exchanges were from the "little giants." Hubei Kait Automotive, for example, raised CNY 133 million Chinese yuan (approximately 15 million euros) during its IPO (initial public offering), securing a foothold among automotive giants like BYD and Volkswagen.

Among the most striking success stories is Leader Drive, a company that methodically scaled this hierarchy, outpacing foreign competitors in the harmonic reducer market.

It began at the provincial level, earning titles such as "high-tech enterprise" and "science and technology-based SME." By 2019, it had entered the elite ranks of national "little giants," and by the end of 2020, it had risen to the ultimate distinction of "manufacturing champion."

Through this finely calibrated system of competition, incentives, and state-backed acceleration, China has cultivated an army of over 14,000 "little giants."

It is an industrial strategy that seamlessly blends entrepreneurial dynamism with state-driven precision, ensuring that the country’s technological and manufacturing ecosystem remains an unstoppable force in the global economy.

The Road Ahead: Lessons for India

With the echoes of our Prime Minister’s clarion call to 'make in India' resonating through every corner of the nation, it is imperative to pause and reflect: Why is it that our MSMEs are struggling?

Can we truly claim readiness for a 'Make in India' revolution without the full-fledged participation of this vital sector?

Do we possess the infrastructure, capabilities, and policy framework necessary to transform India into a global manufacturing powerhouse, much like China has meticulously engineered over the past few decades?

If India aspires to replicate the Dragon’s remarkable ascent, an urgent reckoning with the challenges that MSMEs in the manufacturing space are grappling with today is long overdue.

Alexander Brown, an analyst with the Mercator Institute for China Studies, said in a research note that China’s "little giant" plan was “taking a leaf out of Germany’s economic handbook,” in that they hoped to emulate Germany’s “hidden champions” and develop core technologies that China was lacking.

India, too, has taken commendable steps in the past decade — improving access to finance, enhancing technological capabilities, providing market linkages, and addressing structural inefficiencies.

But now is the moment to go beyond incremental progress and engineer a radical transformation. India must craft its own version of these high-impact, specialised firms — a new generation of "dwarfs" that can punch far above their weight on the global stage.

To break free from stagnation, India needs a national MSME strategy — one that functions as a startup incubator for industrial and hardware technologies, mirroring the success of India’s booming software and venture capital ecosystem.

Larger corporations will undoubtedly play a central role, but New Delhi must actively foster smaller firms, ensuring their inclusion in value chains, technology transfers, and market access.

A structured framework must be followed. Once a strategy is firmly in place, evaluation mechanisms, targeted support, and regulatory handholding must follow suit.

Companies that demonstrate strength in innovation and sectoral know-how should be assured comprehensive backing from both central and state governments. This should include funding assistance, tax relief, and talent acquisition incentives to help them evolve into globally competitive industrial players.

Of course, no transformation is complete without addressing two of the biggest constraints — financing and regulatory burdens.

While the government has quadrupled MSME budget allocations over the years — from Rs 6,513 crore in FY 19 to Rs 23,168 crore in FY 26 — funding constraints remain severe.

The 2024-25 interim budget introduced a Rs 1 lakh crore interest-free loan fund for MSMEs, and bank credit to the sector has reached Rs 24 lakh crore. Still, MSME credit penetration stands at just 14 per cent, far below China’s 37 per cent and the US’ 50 per cent.

A Lok Sabha Standing Committee report highlights an alarming credit gap of Rs 20-25 lakh crore, with 47 per cent of MSME credit demand unmet.

Bridging this financing chasm demands a proactive policy push, alongside leveraging advanced fintech solutions to democratise access to capital.

The second major intervention — regulatory reform — has long been a thorn in the side of Indian MSMEs.

Despite multiple initiatives to reduce compliance burdens, streamline taxation, and rationalise labour laws, a large number of MSMEs still struggle under an archaic regulatory framework.

One model India could look towards is the United Kingdom’s "one-in, two-out" policy, which mandates that for every new regulation introduced, two existing regulations must be eliminated.

Simplifying land-use regulations, factory space requirements, and compliance norms would go a long way in boosting manufacturing capacity, particularly for micro and small firms.

The Forest Conservation (Amendment) Act, 2023, aimed at easing land-use constraints, is a step in the right direction, but more remains to be done.

Dong Jingmei, an economic strategist affiliated with China’s National Development and Reform Commission (NDRC), puts it best: "The birth of a hidden champion is not a one-day effort. It requires a cultivation process with strategic patience … We should further enhance the cultivation and development of hidden champions in advanced manufacturing segments … especially those that can fill technological shortcomings …”

The moment calls for a full-throttle drive to cultivate an Indian "Mittelstand" — a breed of highly specialised, globally competitive enterprises that can dominate niche markets, much like their German counterparts.