Headwinds Threaten China's Continued Growth

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.

High turnover will be highly detrimental to this new model. Companies will have to train, provide career paths and ensure that managers can focus and motivate.

Fundamentally changing these management practices is akin to a corporate personality change. And how many successful personality changes -- corporate or individual -- have you seen?

2: Can China Build Global Brands?

Traditional sources of competitive advantage are low-cost, quality/service excellence and innovation. With advances in quality practices and a throwaway culture, quality as a compelling value proposition is difficult in many industries. However, well-managed brands can provide a perception of quality. As Chinese companies lose their cost advantage, they will need to build powerful global brands.

But branding is a new capability in China, one that requires creativity and a deep understanding of global consumer requirements.

Brand power alone will not be sufficient to maintain a 7.3% growth rate over the next eight years. It took Japanese automakers decades to convince the world their cars were high quality. If China is to surpass the U.S. as the world's biggest economy, it seems reasonable to assume that it would have a similar number of global brands as the U.S.

3: Can Chinese Companies Effectively Manage a Global Workforce?

Name a Japanese company whose products you have purchased. You can probably name many. Now, name a Chinese company whose products you've purchased.

It is true that China is a huge market, but in most cases its home turf is not uncontested. Take Lenovo, for example. Samsung, LG, Apple ( AAPL), Hewlett-Packard ( HPQ) and Dell ( DELL) all aggressively fight Lenovo on its home turf. Lenovo could not survive as a domestic-only company.

In the past 25 years, Chinese companies have made dramatic improvements in the way they manage their domestic workforce. Their typical management approach is very top-down. This is consistent with a culture shaped by generations of emperors and, more recently, communism. Top-down works in China. It also works well in many emerging areas such as Africa and the Middle East. But it does not work well in advanced economies such as Japan, Western Europe or North America.

Will the Germans accept top-down management? Will the French accept strict Chinese work rules? Probably not.

4: Can State-Owned Companies Become Globally Competitive?

In the 1980s, Americans cried "foul" when Japan's Ministry of International Trade and Industry (MITI) protected target industries from global competitors. MITI's official strategy was to make big profits at home and use them to "buy" international market share.

Unfortunately, the plan backfired. A decade later, Harvard Business School Professor Michael Porter investigated Japan's protected industries (e.g., aircraft, pharmaceuticals, telecom, chocolates, insurance), and found that virtually all were globally non-competitive. Non-protected Japanese industries included autos, motorcycles, consumer electronics, robotics and cameras.

Today, of Fortune's largest 50 companies in China, 43 are state-owned -- three from Hong Kong and four from mainland China. Similar to Japan, there is little open competition in many industries such as banking and insurance. Will China's outcome be different from Japan's?

Trends never last. Over the next decade China will lose its low-cost labor advantage. To maintain 7%+ growth, Chinese companies must shift from competing on cost to competing to a more balanced approach of cost, innovation and effective global brands. That will be a very difficult transition. Be it individuals, companies, or even nations, as Marshall Goldsmith succinctly states, "What got you here won't get you there."

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Hall is managing director of Human Capital Systems (www.humancapitalsystems.com), a firm that designs systems for improving workforce performance. He is also an instructor in Duke Corporate Education's teaching network and author of The New Human Capital Strategy. Hall was formerly a senior vice president at ABN AMRO Bank in Amsterdam and IBM Asia-Pacific's executive in charge of executive leadership and organization effectiveness. During his tenure, IBM was twice ranked No. 1 in the world in Hewitt/Chief Executive magazine's "Top Company for Leaders." Hall completed his Ph.D in industrial-organizational psychology at Tulane University, with a dissertation on people management practices of Japanese corporations.

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