Innovation new growth driver in China

In light of lower economic growth in China, improving productivity and efficiency will remain the key to maintaining profitability for many domestic companies, according to Gordon Orr, a Director in McKinsey’s Shanghai office.

In his annual business outlook for China, Orr said that China would be the focus of many a boardroom discussion around the world next year. “Unlike most previous years, the topic won’t be whether to double down on China – it will be whether to hold or even reduce exposure to a particular sector or the country overall,” he stated.

Despite the country experiencing lower growth, greater competition and more volatility, Orr said most companies would likely stick with their current China strategy for now, “but there will be real choices and trade-offs on the table.”

According to McKinsey expert Orr, one pressing issue is wage development. “The vast majority of the economy has seen double-digit wage growth for the past decade, with the minimum wage in many cities doubling in less than five years,” he commented. “This has created an expectation that this is simply the new normal for income growth. It is not.”

Orr predicted that workers could be pricing themselves out of the market in 2015, with countries like Bangladesh or Kenya jumping at the opportunity to fill the void.

To balance it off, Orr said China would be on track to create its own version of the German Mittelstand, providing ever-more-serious competition to Fortune 1000 competitors. “No longer focused simply on cheap, they deliver great value, listen to what customers want, and develop products in response,” he explained.

“The result of all of this is that drivers of economic growth will be harder to find in 2015,” Orr concluded – adding that national-level statistics from China should be treated with care in 2015. “In times of slower growth, they are historically less reliable.”

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