With the successful transition to new leadership in November, mid-size global companies trading with China have been carefully assessing what the new leadership means for them. The simple answer is, in the short-term, there will be little impact because the new leaders want policy continuity and stability. In the long run, companies buying from and selling to China may need to find partners that focus on innovation, efficiency, and productivity improvement in the face of a changing macro environment.
The new state president of China, Xi Jinping, has lived through personal hardships and governed from the grassroots at every level of the Chinese government. He is a down-to-earth, pro-business, and pro-market person who favors innovations and new ideas. He is known to connect well with Chinese society at large. He is also expected not to change policies radically, but to experiment with changes at the grassroots level first.
To maintain continuity and stability, the new Chinese government will follow a similar pro-growth strategy while tackling the problem of rising income inequality. In the past 12 years, labor costs in China have risen 10 to 20% a year. While exact productivity numbers are hard to determine, China has experienced a considerable productivity growth due to urbanization and an inflow of foreign investment and technology. Traditionally, Chinese workers have been flexible in adapting to the rapidly changing environment. With the new leadership’s emphasis on innovation and technology, productivity gains should continue to offset wage increases, just as in the past.
The implication for mid-size businesses is that they must partner with companies that focus on improving productivity. According to a recent Ernst & Young survey, to offset the slowdown in profitability due to slowing global growth and rising costs, companies need to pursue productivity as a strategic goal. This means that while understanding the national policy direction is important, finding a business partner that focuses on improving efficiency is even more crucial.
China’s determination to fight corruption, reduce bureaucracy, and extravagance should benefit Western companies, especially those in countries which uphold stricter business standards. State President Xi had been a governor in three dynamic regions in China. This may point towards more government support for smaller businesses, allowing mid-size foreign companies to locate better partners in China.
As China seeks to re-balance growth away from investment to domestic consumption, some slowdown in growth is inevitable. Mid-size businesses trading with China are well advised to seek business partners who will focus on increasing productivity to offset the expected growth slowdown and rising operating costs.
Mawson Global has on the ground experience in supply partner selection which will allow you to concentrate on making productivity gains in your own business.