China Productivity Imperative

By Joanna Doolan

The game is changing for foreign multinationals operating in China, with both warnings and opportunities tipped by Ernst & Young in its latest reports on Chinese productivity and growth.

For the past decade foreign companies have done well in China, on the back of world-beating productivity gains, an expanding labour force, rising inflows of investment government policies that have kept the price of inputs low.

But the old engines of growth in China are running out of steam. Export growth to key markets in Asia, Europe and North America has slowed markedly since 2010 while productivity has fallen from an annual average of 4.7% in 2001-2007 to 2.8% in 2008-2010.

A mass reallocation of labour from low productivity jobs to higher-end manufacturing is underway.   Since 2007 the average wage in China has more than doubled and this, along with future changes, means China is no longer a low cost economy.

The opportunities for New Zealand businesses come from targeting areas such as the five-year plan to lift average incomes, increase productivity and penalise unproductive and wasteful companies.

New Zealand companies have expertise in both the green space and in technology productivity improvement.  By establishing businesses in China, they can qualify for incentives offered by the Chinese government and also benefit from the New Zealand tax exemptions offered for active offshore businesses.

Analysis of the profitable multinationals in China show most have operated in China for 10 years or more, bearing out the old saying that China is a long game.

It is also evident that as margins come under pressure and demand is redistributed to higher value areas, the old paradigm of doing business will radically change.

While New Zealanders often bemoan our lack of long-term growth plans, China’s leaders are very focused on the importance of productivity to the country’s economic future. They key objective of their twelfth five year plan shifts the growth pattern towards consumption-led, efficiency-focused growth.

It is also evident that the Chinese leadership actively drives policies that will ensure China meet these objectives.

For those not operating in China, these two latest Ernst & Young reports “Rethinking profitable growth: the productivity imperative for foreign multinationals in China” and “China’s productivity imperative” provide valuable insights that can also be applied to New Zealand businesses.

Joanna Doolan is the  chairperson and Florence Wong is the Leader of Ernst & Young New Zealand China Business Group

China’s productivity imperative – Ernst & Young – China