Process and Productivity in China

McKinsey has just published a short paper on China’s Digital Transformation.  (See:

Nominally, the article is about the gap between what China is already doing and what it could do to increase the automation (digitalization) of its business processes.   I would interpret the article as an acknowledgement that the days of China’s being the world’s low-cost producer are drawing to an end.  Wages are rising.  More important, China has nearly reached the limits of the growth it can achieve by manufacturing for others, and is increasingly turning inwards, and trying to foster domestic growth.  Luckily for China, its consumers love cell phones and computers and represent a huge potential audience, if China’s companies decide to introduce more digital commerce.  Such an approach requires changes in infrastructure and assumptions.  It will require a new emphasis on productivity and efficiency — and a new emphasis on pleasing consumers.  It will involve making it easier for Chinese to order things on-line and get them delivered at home in a reasonable time.

More broadly, it will require Chinese managers to think in terms of efficient processes.  It’s one thing to hire as many employees as required to solve any given problem, confident that labor costs are negligible.  It’s another to think of replacing employees with software systems to reduce overall costs per item produced.  In the case of many of China’s large industries, which are in effect run by the government, its a matter of shifting from a full-employment policy to a policy that focuses on improving labor productivity.  These are all things that China is beginning to do.    As McKinsey’s report points out, by doing it a little more aggressively for the course of the next decade, China could add up to 22% to China’s incremental GDP growth by 2025.

Assuming this type of thinking catches on in China, there is going to be a demand for both software technology, and for business process analysis.   It will be the Nineties all over again for China.  If done wrong, Chinese companies will pave cow paths, using software to automate poorly thought out processes that are already in place.  If done with more insight, Chinese companies will want to review their existing processes and be aggressive in imagining how digital technology can help them to create process freeways and achieve major jumps in productivity.  Luckily, there are plenty of US process people who have lived through the Nineties and who have experience of what works and what didn’t.  Hopefully US and Chinese organizations will be able to work together to utilize that experience to help China transform its business processes in an efficient and an effective manner.



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