Contributor: Russel Beron, Marketing Director, CBX Software
Gordon Orr, Chairman of McKinsey Asia and Old China Hand, recently wrote a provocative commentary titled What Could Happen in China in 2015?
In his article he makes a number of predictions based on the ongoing shift in China’s economy that are having far reaching consequences on everything from domestic Chinese policy, the labor market, currency valuations, commodity prices and both mature and developing economies across the globe.
While all these high level predictions will impact foreign companies and economies in one way or another, he also highlights some specific themes which will have consequences for companies who manufacture and source products from China. These include the need to continuously re-evaluate their China strategy, pushing companies to make hard decisions on the level of risk they are willing to bear with their reliance on China. Retailers and brands with vested interests in China should reflect on how these trends may impact their company’s growth and profitability.
Key predictions he highlights for 2015 include:
• Improving productivity and efficiency will remain the key to maintaining profitability for many companies given lower economic growth across multiple sectors
• Technology will continue to eliminate jobs in services and manufacturing
• The Chinese government will continue to focus on job creation – especially on higher value jobs in areas such as information technology
High wages are forcing a rethink
As he observes, China has seen double digit wage growth for more than a decade, with minimum wages doubling in many cities in less than five years. His thinking is that this rapid wage growth (which has fueled a consumer buying frenzy) is unsustainable and has far reaching consequences on Chinese society. In the manufacturing sector for example, companies are downsizing and lower cost manufacturing is moving to other regions across South-East Asia, Africa, and even to North America and Europe. Factories are relying less on cheap labor and more on technology which is getting cheaper.
As cloud technology becomes more mainstream and companies realize the benefits of cloud versus traditional infrastructure (as one example), both Chinese and foreign companies will continue to evaluate their business models to ensure they can enable the growth and profitability required to survive in today’s competitive marketplace.
We also reported on this theme of “does China make sense” in our Q4 2014 Sourcing Report analysis of a recent Oliver Wyman study, “Glo-calizing Sourcing and Supply,” which illustrated how companies have to weigh up the cost differential of producing a product in China versus Germany or the U.S. In many cases the costs are approximately the same.