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TheStreet Open House

Headwinds Threaten China's Continued Growth

Stocks in this article: HPQ DELL AAPL

NEW YORK ( TheStreet) -- For the past 25 years, China has been the world's greatest business story. Not since the emergence of Japan has a country become a world power so quickly. But will China's growth continue unabated?

Forbes predicts China will average 7.3% GDP growth between now and 2020. Given that 2013 GDP growth will come in at about 7.5%, over the next eight years, growth will remain about the same and China will surpass the U.S. as the world's biggest economy soon after 2020. But, is it reasonable to use past trends to forecast the future?

Chinese companies are facing four speed bumps that might bend today's trend lines.

1: Can China Change its Source of Competitive Advantage?

For China to maintain 7.3% growth either global product consumption must increase by 7.3% each year (the World Bank estimates 2013 global GDP growth at 2.4% ), China must capture a higher share of global manufacturing output or China must change its source of competitive advantage.

China's main challenge is rising labor costs. For example, in 2011, IT salary growth was 8% in China vs. 3.1% in the U.S. Then add in 6% 2011 renminbi appreciation and total labor costs in IT increased by 14% in 2011 versus 3.1% in the U.S. The cost gap is closing rapidly.

As happened in the U.S, Japan and Taiwan, low-tech manufacturing such as textiles, furniture and clothes are now leaving China for Sri Lanka, Vietnam and Indonesia.

Companies that want to stay in China and continue to compete on cost will need to automate. Foxconn is a prime example. Foxconn is expanding its robots from 10,000 to one million over three years.

Buying robots is easy. But the resulting business process changes will require Foxconn to dramatically change its workforce management practices -- that's very difficult.

The typical Foxconn employee has been a young adult from the countryside who moved from company to company working in very narrow jobs. The new Foxconn employee will be a technician who understands his/her machine, company business processes, and who can perform as a successful member of a high performing work team.

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