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June 14, 2010


Does China provide a sustainable competitive environment?

Chinese Shipyard

The SWS Shipyard outside Shanghai

A few weeks ago I had the pleasure of submitting my last term paper of my MSc-degree at Norwegian School of Management. It turned out, it was going to be the most challenging and interesting paper to write. The data presented in the paper is based on a study trip to Shanghai, China and interviews with 11 Norwegian and Chinese maritime companies in the region.

The paper contains a assessment of the sustainability of the competitive environment for the Chinese maritime industry. Based on Michael Porter’s diamond framework for national competitiveness, the paper sketches out some major challenges to the Chinese environment in terms of long term competitiveness:

The overall challenge: A shift from factor driven to efficiency driven competition

Cheap labor and the production of basic products to a low price have been vital to establishing China’s current competitive position. However, reports show that China is losing their competitive advantage on this arena to India and Vietnam (Schwab 2009). In order to sustain a competitive position, China faces several challenges regarding what to focus on in order to sustain the competitive edge. According to Porter (1998), such changes include, but are not limited to, efficiency improvements in the production processes. This again will pose challenges to China in terms of sustaining growth rates and to prevent rise in social unrest and unemployment rates.

Access to qualified labor

As earlier discussed, China produces an incredible number of graduates every year.  It seems, however, that the knowledge the graduates possess is not sufficient aligned with the needs in the industry.  According to the interviewees, this is especially prominent when it comes to complex systems thinking, where the workers are required to understand relations in larger systems (e.g. offshore installations). If China is to develop from a country where learning from others is a necessary condition for development, this challenge needs to be addressed.

A workforce with high mobility

Many Chinese companies invest heavily in specific training for their workers, often due to the challenge above. To possess a specific knowledge base is one of the prerequisites for gaining a sustainable competitive advantage. Even though some mobility in the workforce may foster innovation (Lenzi 2009), too much mobility between companies or industries may be an impediment to building and sustaining knowledge bases. According to several of the general managers interviewed, this high mobility is a result of competing companies attracting the employees with only slightly higher wages.

In addition, there is another significant challenge for companies operating in the more urban parts of China. When recruiting labor from the more rural parts of China, managers often experience that workers does not show up for work after holidays, because they have earned “enough” to support their family back home.  This also represents a flow of knowledge out of the industry, a pressing challenge for managers.

Too much intervention from the government

As discussed earlier, the intervention from the government is rather extensive in the maritime industry in China. Based on observations, it seems like the strategy of the government is to avoid internal competition between companies, so that the players can concentrate on competing on the global arena. In addition, the industry enjoys great subsidies and other government controlled benefits as a result of being defined as a key industry. By protecting the national player, they are not exposed to free competition, leading to lower degrees of innovation. The Chinese government is under heavy pressure from many institutions arguing that China needs to open their markets and expose their domestic companies to more competition (e.g. EurActiv 2010; E24/NTB 2010).

This challenge is also of great concern among researchers. Porter (1998) argues that governmental control that is based on subsidies and protection from companies may be a hindrance to the development of sustainable clusters in a country.

Feel free to download the term paper to read the full analysis and my recommendations to companies and the Government in China.

  • Dragan

    In the light of recent major US government interventions within the national economy landscape (particularly within the automobile industry) the proposition that interventions from the government lead to lower degrees of innovation deserves a particular consideration. Also, how different is Chinese model differnt from the Norwegian model (besides the single-party leadership paradigm)? Is the factor of the population important and to which degree? In other words, does the governmental intervention acts negatively in regards to innovation by default and why? Just curious…

  • Christopher Eikanger Andersen

    Hello Dragan, thanks for your comment.

    Regarding governmental support and innovation: The government should at any point of time consider the economic development when they are considering subsidies or other involvements in the economy. When an economy is developing (like it is in China) more intervention might be the right thing in order to kick-start innovations etc. However, subsidizing a particular industry over time like China is doing in the ship building industry, may be a type of disservice to the innovative forces in the industry. As I write in the paper, this may be short-term painful and some companies may turn bankrupt, but in a macro perspective, and for the industry as a whole it is likely to be beneficial.

    The Norwegian model (e.g. subsidizing the national ship building industry) is another sensitive issue. I would claim that it may not be the right thing to do, as the manpower used to build ships today may be used to provide other services tomorrow (Services or products where Norway’s main competitive advantages may be exploited: high technology competence and extensive knowledge on offshore and related). Ship building (where input factors like steel and unskilled labor are the main components) may not be the thing for Norway in the future due to the high labor costs – and I think the government should acknowledge this.

    In conclusion – governmental intervention are not negative by default, but should carefully be considered taking the state of the economy into account, and I claim that China (and Norway for that matter) should not use these interventions as a false security leading to lower degrees of innovation.

  • john whitaker

    I was just considering this myself and googled myself to your blog. I guess my concern for china is that despite low wages, competitiveness is driven by cheap export financing … something that does not bode well for long term cometitive advantage. To be long term competitive China need to improve quality and efficiency. In short they are challenged in two ways:
    1) They’ve grown too fast so skilled management and labour has become too thinly spread across the industry
    2) As youc orectly identify they have a turnover of up to 40% – much of which is leaving the industry rather than transfering within it – and under such conditions its proving imposible to develop a sustained learning curve. As one of our site managers told me: ‘ was in China 10 years ago and China was about 10 years behind Korea. 10 years later they’re still 10 years behind Korea, maybe 15′

  • Christopher Eikanger

    Dear John,

    Thanks for your insightful comments! I very much agree with the challenges you present here.

    I think the turnover is of great importance. Given the fact that the mobility is to a large extent intra industry, the industry looses lots of valuable competence. I recently wrote my master thesis on clustering effects in the Norwegian offshore industry, and we got indications in our data that inter-industry mobility affects innovation in the industry positively and significant, while inter industry mobility has a negative (however not significant) impact on innovation.