Letter from China No: 5

Productivity does not exist without competition
I was asked by a Chinese colleague about how can a company improve its productivity. She works for a government-owned company here in China and they have all been asked to improve their productivity. That sounds familiar to everybody in Finland today when “we have to improve productivity by 5%!” She explained that we receive higher salaries in the West because we are more productive. The FT often makes these remarks too. But here I was, sitting in a restaurant on Number 3 Street East, in Hainan that specializes in Northern Chinese food – delicious fried octopus, roast chicken, spicy ladies fingers, sweet peppers and Anchor beer. The restaurant was full with over 100 guests eating huge plates of this food served by a few running, smiling waiters and waitresses who are as productive and service minded as anyone in Helsinki or Stockholm. Are we Westerners really so productive and what does it mean?
At first I found myself no being able to answer her question because I saw no point in talking about general policies like cutting wages, working longer hours, reducing travel and other expenses, etc. They are the easy things to do but can have devastating consequences, like poor customer service, falling staff motivation, strikes. When you are a company, competition will keep you on your feet or kill you, so you cannot just cut costs or force staff to work longer.
You have to be a lot smarter than that. Equally bad advice is that the company should increase the “added value” of its production line. This is just another truism that has little value to companies since everybody wants to make a lot of money selling high value products with huge profits. However, the world is not like that, except for small few like Apple, and only then their road to riches ends after a decade or two. The rest of world has to live with reasonable profits, from hard work in tough competition with their neighbors, and with technological and social change.
So I found myself thinking that the key to productivity is for companies to work hard to attract and keep customers by selling products and services at the right price and quality. They need to have service minded sales people, with management and staff who understand and follow what customers need. The best way for this to happen is when there is competition in the markets. Competition ensures product development, a pool of trained staff for all the companies various activities, and supporting services form other companies. Competition also drives demand from customers. They see new products and innovations and try them out, or not. Innovations are not driven by customers but by companies with ideas. The bigger and more open the markets the greater the chances of success for the companies. Those with good ideas and production benefit, Apple, and those who don’t Nokia, disappear.
Now that line of thinking opens up a new meaning for productivity. It means that products come to the markets when customers decide that they want even though, in cases of innovation, they did not know existed before! All of us continue buy basic goods every day, but just step back and think about all of the products and services that we buy now or could buy that we have never seen before or even knew existed a few years ago.
In fact there is a continuous flow of products – innovations and new experiences. They are the spice of life and give new meaning to the word “productivity” They are just like visiting a really good restaurant for the first time. Competition will either kill it or let it live on, but the open and competitive market will not allow things to remain as they are. So my conclusion is that you cannot have improvements in productivity without true competition in the markets. In other words when you have too much state-ownership, or private monopolies and cartels you are effectively reducing your chances of increasing productivity.