Increasing Labor Productivity will be Key to China Success

The conference organized last week by the European Chamber of Commerce in China was extremely interesting.

I took notes during the other speakers’ presentations, and a theme came back again and again: if China doesn’t increase its labor productivity, times are going to get tough:

• Tough for China because its potential growth will be seriously capped.
• And tough for the importers, because costs will  have to rise a lot.

The Necessity of Productivity Gains for China’s GDP Growth

Ben Simpfendorfer, a strategic consultant with an economic background, set the stage:

• The working population is contracting and this trend will continue;
• The debt/GDP ratio has been growing but will have to stabilize sometime in the future, so capital investments will need to decrease.

These two trends mean that the only way for China to keep growing at a rapid rate will be through productivity gains.

How to gain productivity? By making farms, companies, and administrations more efficient. And a big part of this effort will have to take place in factories.

The Search of Manufacturing Efficiencies by Importers

I asked the panel of experts for their forecast regarding the rate of price increases over the next 5-10 years. Their responses were pessimistic.

They all agreed that prices of Chinese products would increase faster in the next 5 years than they have over the past 5 years!

The main reasons they invoked were as follow:

• Supply and demand will dictate higher prices, since there will be less labor supply for the manufacturing sector… and more demand, coming in good part from the domestic market;
• The central government plans for higher wages and a move to more advanced industries.

Will it be very brutal? Probably not. One speaker suggested it might follow a “stop & go” pace. His meaning is, Beijing will devalue the currency a little if they see they overshot what foreign companies are willing to pay.

So, what are importers trying to do?

The low-hanging fruits have been reaped. Now, improvements to the bottom line will have to come from reduced waste (in other words, higher efficiency all along the supply chain).

That’s why more and more companies are launching lean programs to reduce costs. And why others are getting their feet wet in other Asian countries.

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Any comments about what YOU are doing to prepare for the future?