E&Y report urges focus on improved productivity

Individual companies to overtake government to become main driving force in boosting output

Improving productivity will be of central importance to China in the next decade to maintain economic growth and avoid the "middle-income trap", an Ernst & Young survey said on Tuesday.

Individual companies will overtake the government to become the main driving force in improving productivity levels by moving up the value chain and technological upgrading, it said.

The survey was conducted among executives and senior managers from 1,700 domestic and international companies in China earlier this year, and measured profitability.

The average profit margin for the sample companies was 20.9 percent. Only 3 percent of executives reported they were loss-making in the past financial year.

"Companies in general continue to be profitable in China, suggesting that the economy remains in good health," the report said.

Nigel Knight, E&Y's managing partner of advisory services in China, said: "Raising productivity is now critical for China's economic future", as the previous engines of growth in China are running out of steam.

Foreign multinationals had the highest profitability compared with State-owned enterprises, private domestic enterprises and joint ventures, with a profit margin of 44 percent.

Of the nine sectors covered, including basic material, consumer goods and financial services, the healthcare sector gained the highest average profit margin of 25.2 percent.

Knight said companies showed strong willingness to focus on future profitability with profit margins expected to come under increasing pressure.

Amid modest economic development in China, corporate revenue growth has slowed but costs continue to rise unabated, "resulting in a considerable profit squeeze", he added.

The slowdown has hit the industrial sectors hardest, particularly telecommunications, industrial goods, and consumer goods, the report said.

The survey showed that foreign multinationals felt the revenue drops most acutely, as they relied more on export markets in developed countries, where demand remains weak.

On Monday, the National Bureau of Statistics released figures showing industrial profit growth in the first four months slowed to 11.4 percent from a year earlier, compared with 12.1 percent increase from January to March, suggesting that lackluster demand is still a factor in China.

Louis Kuijs, chief economist in China with RBS, said: "Industrial profit growth continued to lag sales growth in April as margins remained affected by wage costs and pressure on output prices, amidst spare capacity in several sectors. "Earnings growth should continue during the rest of 2013 but is unlikely to rebound impressively."

E&Y's Knight added that lower quality of management will act as a constraint on growth, suggesting that companies will be under pressure to adopt a transformational approach to improve productivity, by focusing on strategic planning and alignment, standardization of operating processes, internal controls, workforce planning, and technology infrastructure.