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Using reforms as an opportunity to push company transformation
The "Decision on Major Issues Concerning Comprehensively Deepening the Reforms" passed at the Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee gives us a great opportunity for enterprise changes, and at the same time, the global economy is in transition and is forcing Chinese companies to enter a critical period of improvements, which requires a joint government, enterprise, and market effort.
Enterprises, a main part of the market economy, need to think about how to use this opportunity to speed up transformation and get more vigor and vitality from China's transition.
We've spoken about enterprise transformation for years and we know that it has two parts -- exogenous and endogenous – where exogenous refers to industrial restructuring and endogenous refers to many aspects, such as products, market, management, brands, and business model.
More specifically, in exogenous change, a company extends its business to a related industry or cross-industry and can expand upstream and downstream along the industrial chain. Its biggest advantage is that it can spread the risk. Let's take Shougang Group as an example. It was a major source of pollution in Beijing, in the past, and it suffered from steel overcapacity. The thin profit margin from a ton of steel was just peanuts and iron and steel companies running deficits were a common sight. So, what's to be done? Well, developing non-steel industries might be one choice. So, Shougang developed non-steel industries in recent years and, by 2013, that business was worth 6-billion yuan, or nearly 1.6 billion yuan more than for 2012, making the non-steel industry a pillar for Shougang.
Product and market changes include new products and shifting from overseas to the domestic market, while management change refers to introducing enterprise resource planning, or ERP, total quality management, or TQM, lean production, LP, and just-in-time, or JIT, taking the place of the old extensive management.
In business model changes, nothing like the Internet has had such a big impact on traditional production and sales. And, the Internet has begun to show its power in China as infrastructure developed and people surfing the Internet grow to a certain number. Alibaba's sales in a single day, Nov 11, 2012, hit 19.1 billion yuan, or the equivalent Beijing's Wangfujing Department Store's sales for the entire year. That record was broken, that same day, in 2013, when the sales figure reached 35 billion yuan, or the equal of Wal-mart China's sales for six months. When Suning, a traditional brick-and-mortar business, saw this it started an e-commerce business and build an O2O model with on-and-offline sales. Companies should not underestimate the power of the Internet, especially the mobile Internet, which has developed rapidly in recent years. And they should pay attention to the changes and challenges brought by this new wave of technology.
That Decision passed at the Third Plenary Session of the 18th CPC Central Committee marked the beginning of a new phase of reforms for China and gave a clear direction to enterprise development. It also brought great opportunities for enterprise change and development, as changes at home and abroad also forced companies to speed up transformation.
A general overcapacity nationwide is characteristic of China's surplus economy and the buyer's market means that companies have to change faster for competition. Excess production capacity has always been a problem in China's industrial development, especially during the difficult international economic situation of recent years and China's economic growth losing its high speed. And, reduced demand has aggravated the situation, so, China needs to use the market to deal with the overcapacity and tie it to other problem-solving, through a more effective long-term mechanism. Transformation is the only way companies can survive and develop.
China's population structure is reaching a turning point, and labor shortages and rising labor costs are bound to happen, which will put great pressure on enterprises, especially labor-intensive ones. In recent years, the working-age population has begun to decline. Statistics show the working-age population declining by 3.45 million in 2012, and another 2.44 million, in 2013 and it is expected to be on the decline to 2020. Labor costs have risen in recent years and there has been a sharp increase in the cost of living in urban areas. A total of 26 provinces raised the minimum wage, in 2013, and average minimum monthly wages grew by 18 percent so that China's labor costs are three times those of Vietnam and Myanmar.
International competition in resources and energy will become more intense, while there is a pressing need to strengthen ecological efforts and promote green development. Some domestic resources and energy have almost dried up after years of high-intensity mining. At the same time, more countries are rapidly industrializing and urbanizing, and the scramble for international energy resources will become fierce, so it's difficult to see us having cheap resources, energy or bulk commodities. The continued destruction of the ecology and environment comes from huge resource and energy consumption and, water, soil and air pollution are a serious problem, so resource and environmental problems play an increasingly problematic role in China's economic development. Meanwhile, as incomes increase, the masses are getting more demanding about the ecology and environment and less tolerance of pollution.
The era of long-term dependence on overseas market demand has gone and the changes in China's economic development depend on domestic demand, so enterprise transformation is inevitable. China has kept the high-speed growth after more than 30 years of reforms and opening up, to a great extent, through exports, but, global economic recovery has been slow after the international financial crisis and this dampens demand. In addition, European countries and the US have started "reindustrializing", and some enterprises have begun to pull back to their native country. And, China will see more labor-intensive, low-end manufacturers move to Vietnam and Myanmar because of rising labor and land costs.
Besides, the China's rise will result in more curbs in the rest of the world and growing trade friction. So, it will be difficult for China to see high-speed export growth in the future. But, as incomes reach a higher level, there could be a consumer spending upgrade, based on international experience, with demand for traditional consumer goods in decline while that for high quality goods and services rises.
Along with globalization and the new technology developments, such as the Internet and three-dimensional printing, enterprises are seeing greater competition globally. Some problems, such as underdeveloped technology and management as well as insufficient R&D, also force companies to transform more quickly.
A joint effort of government and enterprises is needed to quicken transformations at the micro level, which is crucial for an upgraded version of the Chinese economy, a well-off society, and a great rejuvenation of the Chinese nation.
The government needs to create a fair market environment, play a decisive market role in resource allocation, eliminate all kinds of barriers, and come up with a market access policy to ensure that all market players take part in the competition in accordance with the law, including State-owned and private-owned, and foreign and domestic.
The government needs to speed up changes in government, deal with economic management problems, and create a quality, more effective environment that is conducive to business. It should be more active in encouraging entrepreneurships and respecting the opinion of entrepreneurs, while improving policies that support business, and strengthening education and training for staff. There needs to be an indiscriminate, preferential fiscal policy to support enterprise development and innovation, bring down enterprise taxes, and help them build confidence in change.
Entrepreneurs are the key to these changes. Big goals and dreams are not enough, and enterprises really need to take action and have a vision. They need to concentrate on development opportunities and challenges over a three–to-five year period, or longer, and then create their own competitiveness. Now that China's enterprises are catching up with advanced technology, they still need to become leaders in technology. They also need to increase innovation and R&D input, cultivate talented people, and create well-known brands worldwide. China's enterprises can learn from Samsung, Haier, Huawei, ZTE and Lenovo that have grown into world-famous enterprise through hard work.
Author: Li Wei, minister, of the Development Research Center of the State Council (DRC)
Source: Economic Daily, Aug 26, 2014
