The recent stock market plunge makes it is easy to lose sight of China’s fundamentals. But when the dust finally settles after the nearly 40% loss since its peak in June, China will still have the world’s largest consumer population, an unparalleled manufacturing base, and a strong public-policy foundation. These principals will continue to drive growth in China, but the question is: at what pace?
More than ever, innovation will be critical to maintaining China’s leading global economic and manufacturing position and reaching the growth target of 7% set by Premier Li Keqiang. A recent study by the McKinsey Global Institute underscored the point, analyzing China’s innovation along 4 dimensions: (1) Science-based innovation, (2) Engineering-based innovation, (3) Customer-focused innovation, and (4) Efficiency-driven innovation.
Let me zoom in on the last one, efficiency-driven innovation which is defined as “process improvements to reduce cost, shorten production time and enhance quality.” [1] This is the dimension where China has long excelled, especially in capital- and labor-intensive industries such as assembly manufacturing and commodity chemicals.
How much is efficiency-driven innovation worth? A lot! For just one Chinese industrial company in just one year, it was worth 1 billion RMB. A comprehensive efficiency program unleashed best-practice skills down to the shopfloor, significantly reduced energy consumption, and thereby increased profitability and overall competitiveness.
Clearly, China has several levers to reinvent its competitive advantages and maintain its global leadership. I will focus on 3 that are unique to this environment:
  1. Extraordinary scale
No other country operates at the same scale as China. There are over 150 million manufacturing workers in China, versus 14 million in the US and 9 million in Japan. With over 140,000 machinery suppliers, the total supply base is estimated at five times that of Japan [2]. The combination creates a manufacturing eco-system that is unrivaled globally in enabling flexible, fast and low-cost production across a broad range of sectors.
  1. Speed of adaptability
Time-to-market is a key differentiator and Chinese manufacturers have fine-tuned the ability to learn, copy, adapt and manufacture at an amazing pace. One consumer company we observed reduced the time it needed to build product prototypes from 3-4 months to 2-3 weeks—just by transitioning design from an in-house department to a Chinese design firm located in Shenzhen. Further examples are widely celebrated all along the design and supply chain, continually strengthening the culture of speed.
  1. Integration of policies with economic goals
With initiatives such as “Made in China 2025”, the government continues to identify key macroeconomic trends and opportunities for local industries all while focusing on quality versus quantity. These initiatives should learn from success stories like telecommunications equipment and high speed trains, the growth of which exploded in less than ten years.
With levers like these, China can continue to grow and excel at efficiency-driven innovation, not just at home, but around the globe.
[1] http://www.mckinsey.com/insights/strategy/chinas_innovation_imperative
Karel Eloot is the co-leader of McKinsey’s Asia Operations Practice, as well as the Global Energy and Materials joint venture with Operations. His work centers on operations transformation, manufacturing strategy, plant design, product development and launch, purchasing, commercial and organizational improvement and strategy development. If you would like to learn more about McKinsey Operations please visit:www.mckinsey.com/client_service/operations