Rising costs underscore need for innovation

Higher wages in China rein in growth potential of low-end manufacturing

Chinese enterprises are starting to gain wide recognition for their innovative abilities. Indeed, names like Lenovo, Xiaomi, Tencent and Huawei were ranked among the world's 50 most innovative companies, according to the 2014 Boston Consulting Group Global Innovators Survey released Thursday.

That same day, Xiaomi Inc and Zhengzhou Yutong Bus Co Ltd received the Best Innovator Business Model and Best Innovator Chinese Industrial Company awards respectively from major organizer A.T. Kearney, a global consulting company. Earlier in September, the Economic Observer named Guangdong Development Bank Ltd, and Midea Group as among the most innovative companies in China.

It's hard to deny that media outlets, business professionals and other observers are focusing more attention on innovative Chinese companies. This heightened level of attention comes as companies in China look to harness innovation as a powerful growth engine amid sweeping efforts to reconfigure the country's economy and industrial structure.

Such changes are sorely needed in light of current domestic conditions. China has nearly exhausted the low-cost labor resources which fueled its rapid economic growth during the decades which followed the country's reform and opening-up. As wages and production costs rise, enterprises can no longer rely on low-cost advantages alone in the future.

Data show that the average wage in China increased by an average of 11.4 percent every year between 2000 and 2013. To put this jump into context, Chinese wages were only one-third of those in Mexico at the start of the above mentioned period, but by the end of last year they were more than 50 percent higher, according to media reports citing US congressional research. Such gains have enriched the entire country. Yet they are starting to have an obvious impact on the country's low-value-added manufacturing sector, which has long represented the key link in China's connection with the global market. For example, about 40 percent of Nike shoes were manufactured in China in 2000, according to media reports. By 2013, this share had fallen to nearly 30 percent. Over the same period though, Nike shoe manufacturing in Vietnam increased from 13 percent to about 40 percent.

Rising labor and resources costs are forcing foreign companies to relocate their manufacturing businesses in China to developing nations in Southeast Asia and other regions where costs are lower. What's more, many of China's largest manufacturing companies are hot on their heels for the same reasons. It's high time that local enterprises move up the global production chain with the help of value-added, innovative products and services.

As the business community gravitates away from the traditional industrial sectors that formed the basis of China's economic growth during previous decades, entrepreneurs should study Apple, Tesla, Alibaba and Xiaomi as guiding examples. On the global stage, Apple has upended the consumer technology sector, many would argue, with its creative offerings and flare for branding and marketing. Closer to home, Jack Ma Yun and his team at Alibaba have reinvented the way hundreds of millions of people shop, do business and manage their money.

Of course, the potential upsides to innovation can be enormous for those who succeed in meeting market demands. Apple, for instance, is the fifth-largest company in the world in terms of market value, the Financial Times reported in September. Meanwhile, Alibaba recently overtook Wal-Mart to become the world's largest retailer, according to the UK-based paper.

But despite a handful of well-known success stories and a wider acknowledgement of China's nascent ability to blaze new trails, the country still has a long way to go when it comes to unleashing its full creative potential. Recent statistics show that over 40 percent of senior managers at Chinese enterprises regard their capacity for innovation as middling or worse.

Enterprises across the country have to make themselves more competitive with the help of new ideas and business models. This will become more important over the years ahead, as market competition grows more intense and economic reforms aimed at bolstering consumption gather steam.