Productivity, innovation critical to a changing China - AVCJ Forum

“People still underestimate the potential of China to grow by improving productivity. They underestimate the potential of innovation and the commitment to this, not just from tech entrepreneurs but also from traditional entrepreneurs and the government, which is improving productivity by pouring billions of dollars of capital into areas such as next generation manufacturing, artificial intelligence, and data centers,” said Jing Hong, a partner at Hillhouse Capital.

Emphasizing the role played by traditional industries in this transformation, she cited the example of Kidswant, a primarily brick-and-mortar retailer specializing in mothers, infants and children, which has received investment from the likes of Warburg Pincus as well as Hillhouse. The company equips its sales assistants with mobile devices that are used to track individual customer preferences and target them with particular offers.

Manufacturing is another obvious beneficiary of productivity-boosting initiatives. Factory wages in China have more than doubled since the global financial crisis – from a monthly level of around RMB24,000 to RMB55,000 ($3,500-8,000) – but automation is increasingly seen as a viable means of replacing labor. Companies are bringing in high-end equipment from North America and Europe, resulting in more efficient use of inventory, capital and labor, which in turn brings down costs and drives up yield.

“This has a huge impact on manufacturing and consumption because it means people get the products they want as soon as they can,” said Kyle Shaw, founder and managing partner of Shaw Kwei & Partners, adding that China is the largest purchaser of robotic equipment globally, which means it will likely be at the forefront of productivity gains.

At the same time, rising wages have contributed to the creation of a new generation of consumers – and this demographic is playing an ever larger role in the wider economy. While China is seen by many as an export powerhouse, exports account for a significant portion of GDP in gross terms but not in net terms. A lot of manufacturing activity has traditionally involved importing components from overseas and re-exporting assembled products. The challenges in shifting the country’s growth model lie elsewhere. 

“Investment is a big component of GDP, but leveraging is already very high and overcapacity is seen across the manufacturing sector,” said Jonathan Zhu, a managing director at Bain Capital Private Equity. “Investment is going to become a much less dependable driver of growth in the future so you need consumption to come in and take its place.”

The AVCJ China Forum is taking place in Beijing on March 15-16. For more information, go to www.avcjchina.com.

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