The Chinese National Bureau of Statistics published data about the trend of profits of Chinese industrial companies last week. The data was not good, showing a downward trend in net earning among Chinese manufacturers of around 5,4%, compared to one year ago. That trend, with reference to July, was the worst during 2012.
Let us consider the facts. The data shows that profits are still in the black, and when we include this trend in the general economic scenario we might find tha the situation is not as bad as it may seem, because despite the global weak economic trend, the Chinese industrial sector is still able to at least turn a profit. We may think that when the general economic trend becomes positive again, an appropriate level of profits will recover and the CHinese trend will turn positive as well. The general, and easiest, conclusion could be “let’s just wait for better moments.”
If we go more in depth to the general situation inside the Chinese industrial sector, we may also note some endemic weaknesses that are working on the current level of profits and that are keeping any simple and optimistic future forecasts under stress. Generally speaking, during the past decade, most of the Chinese manufacturing industry spent little time focusing their attention on minimizing their production costs, and as a consequence, on how to optimize their level of profits. Following the rising trend of global demand (great memories of a golden age!), their first goal was to produce goods as fast and in the highest quantity possible, to be used for invading the fairer markets with their products. The main production factors (raw materials and man power) were determined without considering any alternative methods, with the only intent of aiming for high quantities. There was no analysis performed to determine if one worker would be able to produce more just by modifying some of his operations; in order to produce a higher quantity, it was easier add more workers instead. This is a simple example that is indicative of what was happening over the past decade. Anyone who has had direct contact with the infinite field of Chinese manufacturing has seen this before.
In the current situation where there is both a weak global demand and an increased level of production factor costs, the rate of industrial profits has sharply declined. Adding to this situation is the increased demand for better quality goods, which has forced the Chinese production environment to make some strategic changes. The production system should move away from the past “quantities system” to a new “quality system.” This is not a simple change, like going faster or slower during the production phases, for example; moving to the new system will require more attention to detail, more controls, and finally better quality. This will involve a different organization of production factors and overall a different oriented mind. Those who know China can surely envision how great is this challenge.
The need for this change is becoming urgent, and without this new revolution the “factory of the world” cannot continue to function as it has in the past. The incoming president needs to concentrate his attention and efforts on these important points. The general economic trend cannot be the the only justification for the under-performing industrial sector profit index; instead, it ought to be be managed like the right occasion to go forward with a new model for remaining the “factory of the world,” being more efficient, and reducing production costs while maintaining a higher level of quality. Without it, in the next decade, globalization as we once knew it will be just a golden memory.