EY: raising productivity key to unlocking China's economic potential
Beijing, 25 September 2012 – Findings of EY Advisory's latest report China's productivity imperative suggest that companies in China urgently need to boost productivity in order to sustain profitable growth. Consequently, improving productivity has become a critical issue for China's economic future.
Understanding cost drivers
The analysis shows that both labor and commodity costs have increased substantially in the past five years. Labor costs have increased the fastest, with average wages more than doubling since the beginning of 2007. In the same period, the average price of commodities consumed by China increased by 51%: soft commodities rose 60%; metals rose 19%; and energy prices rose 77%.
Nigel Knight, Managing Partner Greater China, Advisory says, “We expect these cost increases to continue. The introduction of mandatory employer social welfare contributions, accompanied by government targets to increase the minimum wage, rising expectations from employees, and the increasing cost of living, will put continuous upward pressure on labor costs.”
How these rising costs impact on companies depends on their cost structure. For the manufacturing sector, the predominant inputs are commodities (raw materials, energy) and intermediate goods (equipment, semi-finished goods etc.). In contrast, labor and capital make up a greater share of costs for the services sector.
Ways to enhance productivity for companies
Given the uncertain global outlook, the impact of slowing revenue growth and rising costs will directly impact company profitability, as is already being seen in a number of sectors. To address this, companies must view productivity as a strategic imperative. And for the economy as a whole, productivity growth will in future need to be driven by improvements at the firm level.
Through surveys and in-depth analyses, the report has identified a number of ways in which companies can – and should – be seeking to improve their productivity. These include:
- Taking advantage of structural changes such as Government reforms to lower market barriers and the opening up of new industries to target new investment.
- Maximizing the benefits of information technology by making better use of data, and utilizing new technologies such as cloud computing to increase flexibility and reduce costs.
- Exploiting technological catch-up by combining different existing technologies and adapting them for China’s needs.
- Increasing the pace of talent development including the use of innovative approaches to learning and development.
- Selectively pursuing mergers and acquisitions to drive economies of scale and add value through creative partnerships.
- Undertaking direct investment overseas to gain experience and import advanced technologies.
If companies are able to pursue these, and other, strategies to improve productivity, this should lead to another round of productive growth which will support China’s overall economic development.
Productivity on the government agenda
China’s leaders recognize the importance of productivity to China’s economic future. A key objective of the 12th five-year plan is shifting the growth pattern toward consumption-led, efficiency-focused growth. Companies can therefore expect increasing pressure to raise productivity in coming years. Industrial policy will give incentives to raise productivity, and increasingly penalize unproductive and wasteful companies.
Nigel explains, “The government is expected to implement market reforms in line with the current five-year plan’s binding targets to lift average incomes and increase resource efficiency.”
"China is still an emerging economy with tremendous potential for convergence growth. Getting productivity right by improving governance and processes, diversifying products and services, leveraging IT, driving R&D, upgrading human resources, these will be the keys to unlocking China's potential." Nigel concludes.
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