Will 2019 be the Year when Foreign & Swiss Businesses do better than their Chinese Competitors?
Conventional wisdom is usually wrong in China matters
As pointed out in our previous analyses, what meets the eye in China rarely provides satisfactory explanations. As a result, misunderstandings on what happens in China are more often the rule than the exception.
In this case, we believe that China’s overall need for product quality and manufacturing efficiency provides good reasons for this situation.
Indeed, China has embarked in a drive to improve the quality of its products. As mentioned by Vice-Premier Liu He in Davos a year ago, China needs to stop producing more but produce better instead. And product quality is undoubtedly, still today, a competitive advantage of international companies operating in China. Examples abound: Swiss sell more and more of their watches in China (11% more in 2018, see details here), while the Americans and European continue to sell high quality cars and airplanes, among others.
There is however another important element, in our opinion, that we believe is a key factor to understand this trend. It is the relentless need for productivity that businesses must fulfill in China since a few years. It is no secret that salaries in China go up every year by amounts unheard of in the rest of the world. 6% to 15% increases are common depending on the industries and different locations. What is not so well understood is that these wages hikes do not stem from scarce labor and market forces. The key reason is actually the minimum wages increase ordered by the government all over the country. At the same time, competition is so intense that prices are not going up. In manufacturing, actually, factories still have to lower prices yearly under heavy customer pressure. As a consequence, margins are squeezed every year ever more tightly. The inescapable result is that China operations face the relatively new, but ruthless imperative to make more products with less resources, every single year.
In the past decades, the western business world has faced a mirror situation which required very much the same measures. Prices in our home markets came under pressure from low-cost, Chinese-made products. China was named the Great Deflator and businesses have been forced to lower the unit costs of their products to stay competitive.
Japanese manufacturers invented lean and industrial robotics, European followed and developed better and better production techniques and equipment. The Swiss additionally had to find ways to compensate the appreciation of their currency to remain competitive worldwide.
Today, in an almost ironic reversal of fortunes, the relentless chase for efficiency that western companies had to pursue for the last 3 decades has put them a step ahead of their Chinese competitors. Western companies active in China can reasonably easily increase their productivity by copy-pasting the efficiencies they have developed in their home countries. On the other hand it is at the moment much harder for domestic firms: they have to change their mindset from just making more to becomeefficient in everything they do. They have to learn from scratch how to raise their productivity, often by a brutal amount every year.
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