The Chinese productivity revolution has not yet begun

The Chinese productivity revolution has not yet begun

It's no secret that wages are rising in China; indeed, a hike of at least 80% by 2015 is official government policy. But so too is increased productivity, with plans to double apparel output over the next five years. So while buyers need to think about their sourcing portfolio as China gets pricier, the country also has plenty of room to maintain its manufacturing strengths, says Mike Flanagan.

Is the world about to be turned upside down all over again?

In early May, the Boston Consulting Group (BCG) predicted that around 2015: "We expect net labour costs for manufacturing in China and the US to converge."

As is so often the case with these headline-grabbing predictions, there's an important kernel of truth at its heart. The continuing rise in Chinese wages isn't just a forecast by Westerners; it's official Chinese government policy. Leaked extracts from its next Five-Year Plan predict that "wages will rise at least 80%" by 2015.

But it's a huge leap from practically doubling China's wages to seeing labour costs converge to US levels. The average Chinese worker today earns less than the average Albanian, and an 80% increase brings the Chinese up to the level of the average Serbian - less than a quarter of the average American.

Even this doesn't phase BCG, which says that "after adjustments are made to account for American workers' relatively higher productivity," costs will start converging with the US. Especially, it adds, since America will up the amount of subsidy it pours into manufacturing.

Well, I wouldn't make a business decision that relied on the US government winning a subsidy war with the Chinese - least of all at the labour-intensive end of the garment and textile industry.

True, there have been one or two recent examples of capital-intensive textile mills being induced to set up in the US by great dollops of taxpayers' money. Brazil's Santana, for instance, confirmed a $100m denim mill investment in Texas last year, after lengthy negotiations to get more US public money.

But America just hasn't got the political culture to emulate China with its permanent, ever-changing support for manufacturing. It's one thing to throw a couple of million dollars at a big project to get it off the ground: it's something entirely different to tell your banks to offer credit to businesses that might not survive, suspend minimum wage laws and delay anti-pollution regulations when business turns down, and tell your central banker to keep your currency low as well.

And that's before we get on to other things governments do to help businesses thrive. China's highways, high-speed railway and port facilities are now better than any you'll find in Europe, the US or Japan - and its infrastructure keeps on getting upgraded.

A match for China?
If American manufacturing costs are ever going to match China's, the only realistic possibility is by relying on "American workers' relatively higher productivity." For which, in the garment industry at least, there's not the teeniest bit of evidence.

Between 2003 and 2010, for example, the number of workers in Chinese apparel manufacturing rose 69%, while their output grew four-fold in value (and, with falling prices, almost five-fold in volume).

By 2015, the China National Textile and Apparel Council plans to double apparel production again - with virtually no increase in the industry's workforce. Increased productivity, it says, is going to be the sector's main priority.

Given that output per worker grew two and a half times in the past seven years - when productivity, apparently wasn't the priority - what's the most likely result of a five-year period in which Chinese business really, really business starts to concentrate on it?

Central objective
BCG is quite right to emphasise that higher labour costs in China aren't just an uncomfortable side- effect of China's recent economic growth: they're the absolute central objective of all Chinese policy.

They're central because the Chinese Communist Party believes that only under its constant control can China escape the centuries of disorder that mean even Albanians are still better off than the average person in China. And constantly increasing wages are essential, in Chinese policy makers' eyes, to ensuring political stability and the Party's survival in power.

That inevitably means working out how to maintain high employment if China's wages are rising faster than elsewhere in Asia.

BCG is also right to believe that productivity, not the cash cost of labour, makes a business competitive. China's never had the lowest wages in the world garment industry. Indeed, during the five years since 2005 in which it has become the world's largest supplier, wages have got more, rather than less, expensive compared to rivals like Bangladesh.

Incidentally, it's worth recalling that all the nonsense about "China price" has never applied to the garment industry, either.

At no point in the past 20 years has China been the cheapest place to make clothes. Instead, China dominates because for most buyers its superior efficiency and reliability merits the small premium over buying in many other developing countries.

Productivity improvements
The key to a company's continuing domination in any market has to include constant productivity improvements.

That, of course, was how European and American garment and textile companies saw their problem around 1990. But for them there was an alternative: moving production to poorer countries generated an immediate reduction in labour costs of 80% or more.

After that it never made sense for most rich-world textile or garment makers to make the capital investments that might - and only ever might - have improved their productivity.

Many of us are old enough to remember the boom in Japanese-inspired management theory during the 1990s. Whenever a business had a problem, there was always a solution, usually involving group meetings, lots of Post-It notes and flow diagrams, that helped squeeze twice as much production out of a line where a key machine had temporarily broken down.

It helped Japanese businesses beat their competitors, in spite of higher wages, in the 1980s and 1990s. But it couldn't stop Japan's garment industry being moved almost entirely across to China, where wages were so spectacularly lower that no Seven Sigma theory, or Tom Peters handbook, could bridge the gap.

Today, though, when a company manufacturing in China looks elsewhere - say to Bangladesh - it sees far, far, more limited scope for wage reduction abroad. And even that limited opportunity will almost always be in a country plagued with power shortages, endless labour disputes and a transport and port infrastructure that strike most Chinese as downright medieval.

Unlike European and American business 20 years ago, firms in China will be looking at the rest of Asia, seeing a world that's far from perfect for making garments quickly and efficiently - and concluding there are worse things than investing a few million more to produce things more efficiently at home.

I suspect Chinese businesses are likely to work harder than the West did in the 1990s at making domestic factories more productive. And that we've not even begun to see the results of a Chinese productivity revolution yet.

When we do, we'll forget any more foolish talk about "American workers' relatively higher productivity."