What should we do about laggards?

Photographer: Kim Kyung-Hoon/Getty Images

China's $5 Trillion Opportunity

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
Read More.
a | A

Most metal detectors in China share a curious trait: The alarm goes off no matter what. You can have emptied your pocket of every last coin, and the thing still sounds. Then there are usually two young women waiting to screen you with hand-held detectors that do seem to work.

After several experiences with this procedure, I developed a theory that the useless metal detectors were part of a vast job-preservation scheme, an indication of the Chinese government’s unwillingness to countenance job losses in the service of efficiency.

Then I caught a flight at the Beijing airport’s newish Terminal 3. I emptied my pockets as instructed before walking through the detector, and the alarm didn’t go off. There was only one young woman waiting on the other side with a hand-held detector, and she briskly waved me through.

So perhaps there isn’t a vast job-preservation scheme. Maybe it’s just that they used to make really bad metal detectors here, and now they’ve gotten better.

I’ll take that as a sign that China might be able to take advantage of what the McKinsey Global Institute is calling its “$5 Trillion Productivity Opportunity.” China’s labor productivity -- output per hour worked -- is at 15 percent to 30 percent of the average for countries in the Organization for Economic Cooperation and Development (aka the club of rich nations).

Raising that productivity is a big potential source of economic growth. But it’s also a potential source of layoffs and uncomfortable societal changes.

The McKinsey China report, released last month, is the latest in a series of productivity studies that MGI, the consulting firm’s research arm, has been producing since the early 1990s. The first ones showed that German and Japanese manufacturers and service providers were on the whole far less productive than their U.S. counterparts. I remember these surprising results as an early sign that the Japanese economic miracle, already tarnished by a stock-market and real-estate crash, really was over. (The German economy didn’t exactly have a great 1990s either.)

Yes, some Japanese companies were world beaters. Japanese firms were much more productive than U.S. ones in making cars, car parts, machine tools, consumer electronics and steel. But in industries where Japan hadn’t made an effort to become an export power, things were very different. Here’s Sylvia Nasar reporting in the New York Times in 1993:

In Japan, for example, a worker in the highly protected and fragmented food-processing industry -- which employs more workers than the auto, computer, consumer-electronics and machine-tool industries combined -- produces $39 worth of food in an hour, compared with an American counterpart's $119.

Productivity gains have been the main driver of rising living standards in country after country. That was the case in Japan, too, but spectacular productivity growth in a few key industries in the 1970s and 1980s failed to spread to the rest of the economy and eventually slowed to a near halt even in those industries. In a report last year, McKinsey found that “productivity growth has steadily eroded in almost every sector, including Japan’s signature advanced manufacturing industries.” Regulatory barriers that discourage competition, and struggling firms and divisions of large conglomerates that are “kept alive in the interest of stability” are dragging productivity down.

Which brings us back to China. There are some companies here with productivity near rich-country levels, and many that lag dramatically. But the stars and the laggards aren’t concentrated in particular industries as in Japan. “In every sector there are leaders that achieve global competitiveness and yet there is also a long tail,” emailed Shanghai-based McKinsey senior partner and MGI director Jonathan Woetzel, who worked on both the China productivity report and the 2015 Japan one.

Woetzel thinks this is a sign that China may find it easier to raise productivity than Japan did. All it will take is more companies emulating the industry leaders through digitization, globalization, lean production, automation -- and maybe even some things that don’t end in -ion.

What could keep that from happening? Well, China’s banks have kept a lot of the productivity laggards in business by continuing to lend to them. And it’s China’s government that controls the biggest banks, as well as a lot of the low-productivity companies they lend to.

Chinese President Xi Jinping actually talked about reforming these state-owned enterprises this week. The English-language report from Xinhua news agency kind of made it sound as if he’d been reading the McKinsey study:

Xi urged authorities to continue to deepen SOE reform, focusing on the establishment of a modern corporate governance system. More should be done to advance industrial structure adjustment and innovation-driven development, letting SOEs play a leading role in the country's supply-side structural reform, Xi told the meeting.

Bloomberg Intelligence economists Tom Orlik and Fielding Chen pointed out in a note, though, that Xi also called for “stronger, better, bigger” SOEs that were more closely controlled by the Communist Party. They argued that these priorities could stand in the way of reform and economic growth.

In some ways China’s leaders seem more willing than Japan’s to accept the upheaval that often comes with productivity gains. They are unwilling, however, to cede control of the economy. And that may be what keeps them from realizing their $5 trillion opportunity.

  1. I realize this is a sweeping statement that I cannot possibly back up with conclusive evidence, but I’ve been through a lot of metal detectors since arriving here almost two weeks ago -- the Chinese have them at train stations as well as airports, plus they were in constant use at the World Economic Forum meeting I attended in Tianjin -- and have checked this observation with several people who live here.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Paula Dwyer at pdwyer11@bloomberg.net