China: Increasing Labour Costs Pose Greatest Threat to Profitability

May 18, 2015

The Economist’s Asia Business Outlook Survey for 2015 reveals that rising labour costs offer the greatest threat to corporate profitability for companies operating in China in 2015. 

 

In China, How Are Changes in These Issues Impacting Your Profitability ?(% Respondents)

Source: Economist ABOS Survey 2015

 

We have previously blogged about the changing labour outlook for China and highlighted that manufacturing earnings are expected to grow between 12 to 14% in selected Chinese provinces between 2013 and 2020. Clearly, these dynamics are seriously impacting profit margins.

 

Behind labour costs, surveyed executives said that the next greatest threat to profitability stems from local competition, which is threatening foreign companies’ competitive positions. The report cites the rise of internet giants such as Alibaba and Tencent as examples of this trend.

 

Surprisingly, lower growth in China poses a relatively small threat to profitability for surveyed executives. In effect, annual growth of 7-8%, though slower than previous years, still offers many opportunities to corporates, making worries about China’s ‘new normal’ relatively redundant. 

 

In sum, the survey paints a picture of an increasingly difficult outlook for companies in China, presenting challenges in terms of cost control and maintaining market positions. These outcomes speak to longer-term trends that will drive the outlook for the APAC region, chief among them being ongoing migration of manufacturing in the region, the steady emergence of competing Chinese entities on both domestic and international markets and support for the China consumption story from rising disposable incomes. 

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