China has witnessed tremendous economic growth over the last 30 years and the country's business landscape has been transformed.
In the last 30 years China has witnessed tremendous economic growth to become the world’s second largest economy.
The business landscape has similarly been transformed. Today mainland China has 85 companies in the Fortune Global 500 list of the world’s largest corporations. Moreover, foreign investors have flocked to China’s shores and today many of the world’s iconic brands dot the shopping districts of the major cities.
China’s growth to date has been built largely on the twin bedrocks of a growing labor supply and rapid capital accumulation. However, China now faces two major bottlenecks. First, China’s population is getting older, and the size of the labor force is set to plateau at sometime around 2016. Second, the pace of investment growth is also expected to slow as China’s government works to reduce the economy’s reliance on capital-led growth and increase consumption.
These both will make it harder for China to sustain its previous rapid rates of growth over the next decade.
Our scenario analysis shows that the only way for China to successfully transition to a more balanced economic model, is to improve its productivity.
The productivity imperative applies to Chinese firms as well. Our research shows that many sectors in China are facing pressures on profitability, and the situation seems to be related to poor productivity: firms with higher productivity growth were found to deliver greater net profit margins.
Therefore, productivity improvement is critical for better business performance.
In this report, we examine China’s productivity performance through three lenses: macro, sectoral, and firm.
China’s productivity growth surpasses that of many other countries in the world. However, that impressive trajectory began from a very low baseline level of productivity. At the absolute level, China’s performance is still far behind that of many mature economies.
The 19 sectors that we looked at exhibited great differences in productivity growth. In general, tertiary sectors such as banking, recreational services, and media, displayed strong productivity growth over the past five years. But some secondary sectors, particularly those which used to be the economic backbone of China’s economy, performed very poorly. And it shows—these disparities are significantly correlated with variations in financial performance across different industries in China.
We analyzed variations in productivity performance across a dataset of 3.07 million Chinese firms. Once again, even within industries, firms differ greatly in how productive they are. Four factors were important in differentiating the high-productivity firms from the low productivity ones. Firms with larger scale, bigger investments in research and development, better use of technology, and higher levels of internationalization are significantly more likely to exhibit strong productivity performance.
How should China’s leaders—both in government and in business—work to close China’s productivity gap and propel future economic growth and business performance? We identified three broad areas of action.
From factor accumulation to improved quality and distribution In order to rebalance its economy and close the productivity gap with advanced economies, China needs to shift its focus from simply accumulating labor and capital to improving their quality and distribution.
More specifically, China should work on the following:Moving from labor to talent, including:
Making capital count, including:
Promoting efficiency and innovation for long-term growth, including:
From production-driven to market-oriented strategies
Second, Chinese firms need to shift their focus from supply to demand, from production-driven to market-oriented strategies. By doing so, they will be able to move up the value chain, compete with foreign firms in the domestic market and even win consumers as they move into international markets. This will entail:
Lastly, Chinese businesses need to forge strong connections—with adjacent industries, with educational institutions, with customers, with IT vendors. The future network-driven era of productivity growth is fast approaching. The next wave of growth for China’s economy will be driven not only by individual firms’ actions, but increasingly by the interactions and relationships between firms and other institutions, such as educational and research organizations. Firms can no longer be isolated entities; they must embed themselves in dense networks of physical and social capital. Therefore, Chinese firms need to strengthen bonds in three layers of connectivity: firm-to-firm connectivity, firm-to-consumer/supplier connectivity, and machine-to-machine connectivity.
For further insights read:
The Accenture Institute for High Performance collaborated with several research partners in the data collection and analysis for this research report. For our macro-level analysis, Oxford Economics constructed the framework for breaking down China’s GDP growth to assess and forecast the contribution of three factors (labor, capital, and TFP). For our sectoral-level analysis, Lombard Street Research, using their own proprietary models, estimated the TFP performance against other performance metrics (such as ROAand profit margins) of 19 sectors in China.
For our firm-level analysis, Professor Heng Yin supplied his personal methodology to quantify TFP at the firm level and to identify the possible levers that contribute to varying outcomes. See page 64 of the report for in-depth explanation and methodology.
The Accenture Institute for High Performance develops and publishes practical insights into critical management issues and global economic trends. Its worldwide team of researchers connects with Accenture’s business leaders to demonstrate how organizations become and remain high performers through original, rigorous research and analysis.
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