China is transitioning from a low-cost economy to a value-added, technology-driven country.
This has implications for New Zealand companies setting up business in China, with opportunities for those offering expertise in productivity improvement.
The importance of lifting productivity is spelt out in two just-released Ernst & Young reports, Rethinking profitable growth: the productivity imperative for foreign multinationals in China and China's productivity imperative.
The two reports show China has been successful in creating indigenous national champions in several high-technology industries, the most well-known being telecommunications, high-speed rail transport, information technology, car assembly and an emerging civil aviation sector.
But there is still a long way to go in productivity improvement as China ends its mass reallocation of labour from low-productivity agriculture to higher-productivity manufacturing.
Lifting productivity is the only way to offset the impact of slowing revenue growth and rising costs. This means companies must dramatically improve their internal processes to deliver products or services with fewer inputs, along with targeting customer needs more effectively.
These insights can also be applied to New Zealand businesses.
The current slowdown is not just a result of the global financial crisis but is also because China is exhausting its gains from the first-generation policy reforms. Although 320 million labourers are still employed in agriculture, it is estimated only 20 million of these will move to the cities.
Earlier rounds of market liberalisation and privatisation have largely run their course.
The focus now is to move from labour- and capital-driven economic growth to productivity improvements.
Excellent growth opportunities still exist for New Zealand businesses in China in the technology and green space. Those with expertise in these sectors benefit not only from expanding their markets but can also qualify for incentives offered by the Chinese Government.
In addition, New Zealand offers tax exemptions for active overseas businesses.
But New Zealand business must be prepared to invest for the long-term rather than looking to China as an immediate solution to the demands businesses are currently under.
China's leaders clearly recognise the importance of productivity to China's economic future.
A key objective of their 12th five-year plan is to shift China toward consumption-led, efficiency-focused growth. So the Chinese Government wants to implement input-factor market reforms in line with the current five-year plan's binding targets to lift average incomes and increase resource efficiency.
China has experienced a huge increase in both labour and commodity costs in the past five years.
Labour costs have increased the fastest, with average wages more than doubling since 2007.
These cost increases are expected to continue because of the introduction of mandatory employer social welfare contributions, moves to increase the minimum wage, rising employee expectations and the increased cost of living.
Critical areas for New Zealand businesses are:
The five-year plan for China targets a lower growth rate of 7 per cent a year. The intention is for growth to be more sustainable. More growth is expected from domestic consumption, with an increase from 35.1 per cent of gross domestic product to 40 per cent by 2015.
The five-year plan specifies that income per capita will rise by at least an annual average of 7 per cent in real terms each year. This reflects a burgeoning middle class, generating an increased demand and more pressure on companies to increase labour productivity to offset wage inflation.
Binding targets have been set to reduce energy and carbon intensity, to eliminate the loss of arable land, reduce water consumption per unit of industrial value added, and increase forest coverage. The proportion of fossil fuels and energy consumption to GDP is targeted to decline.
China expects to have innovation-driven changes with seven strategic industries: non-fossil energy, environmental technology, new-fuel powered vehicles, new materials, high-end manufacturing, biotech pharmaceuticals and IT.
The contribution to GDP from these industries is expected to increase from the current 3 per cent to 8 per cent in 2015, and to 15 per cent by 2020.
This will be supported by increased research and development spending from 1.75 per cent to 2.2 per cent of GDP. There will also be government-funded incentives for companies to upgrade their technologies and move up the value chain.
By matching and understanding the huge economic shift taking place in China, New Zealand companies will be best placed to identify what they can offer and make the most of these enormous opportunities.
Joanna Doolan is the chairwoman and Florence Wong is the leader of Ernst & Young New Zealand China Business Group.