Driving profitable growth:
China’s productivity challenge

The productivity imperative

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It is widely accepted that raising productivity will be critical if China is to keep growing and avoid the so called ‘middle income trap’. Leaders need to consider how their organizations can immediately start to build and implement the capabilities that will be essential to meet the challenges of China’s productivity imperative.

This report assesses how ready companies in China are for the challenge of productivity improvement, and sets out the key areas that high performing companies will need to tackle to take their productivity performance to the next level.

China’s previous growth engines running at a slower pace

Growth in exports has slowed significantly in the past three years as a result of gloomy conditions in key markets in Europe and North America. Within China, demographic change, environmental concerns, and other imbalances are impelling China to alter the speed and nature of its growth.

This has coincided with a fall in China’s productivity growth. Earlier rounds of market liberalization and privatization have largely run their course, and the mass reallocation of labor from low productivity agriculture to higher productivity manufacturing is drawing to an end.

Productivity on the government agenda

Companies can expect increasing pressure to raise productivity in coming years. The Chinese government’s industrial policy will give incentives to raise productivity, and penalize unproductive and wasteful companies.

The government is expected to implement further reforms to labor, capital and natural resources markets in line with the 12th five-year plan’s binding targets to lift average incomes and increase resource efficiency. This, in turn, is likely to make cost inflation a permanent feature in a slowing economy, something that most companies in China have yet to experience.

Improving operational practices may represent the single biggest driver of productivity gains over the next decade. 

Productivity will be driven by firm-level improvements

As the benevolent conditions of the past decade wane, productivity growth will increasingly have to come from improvements at firm level. This is an important change.

For companies, the challenge goes beyond simple cost cutting. If companies are to continue to grow profitably, they will need to make much deeper and longer lasting improvements in their management and operational practices, use of technology and the application of innovation to their business.
 

About this report

About this report

The survey on which this report is based was designed by EY and carried out by FT Chinese between November 2012 and January 2013. In total, senior executives and managers from over 1,700 companies in China responded to our questionnaire. We also undertook follow-up interviews to test and validate the main findings.

Our survey sought views on both trends in the Chinese business environment and individual organization’s operational practices. For this purpose we targeted both executives with a strategic view of their firms’ performance as well as senior managers with more knowledge of day-to-day operations.


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