Does China provide a sustainable competitive environment?
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.