McKinsey: Chinese future economic growth depends on innovation

23 May 2016 Consultancy.uk

The Chinese economy is slowing down from a mammoth 9.4% annual increase over the past three decades. In order to remain a key player in the competitive landscape with Industry 4.0 in sight, China needs to, according to a new report, evolve from an innovative ‘sponge’ to an innovative leader. The study finds that China's two strongest areas with potential for innovation are the service sector and next-generation manufacturing.

In a new report from McKinsey Global Institute, titled ‘The China Effect on Global Innovation’, the management consulting firm considers how improving productivity through innovation can shore up the country’s GDP growth over the coming decade.

Economic growth dependent on massive productivity boost

Economic grow sustainability
Two factors have driven Chinese growth in recent years: a constant flow of new workers into the labour force and massive investments in housing, infrastructure, and industrial capacity. These forces however, are receding. China’s labour force may well peek in 2016 but a long period of decline may follow due to ageing, which could see the labour force reduced by 16% by 2050. The investment streams too are falling rapidly, it now takes 60% more capital to produce one unit of GDP in China than it did, on average, from 1990 to 2010, while investment is also constrained by China’s debt, which, at 282% of GDP, exceeds debt-to-GDP ratios in the US and Germany.

On the back of its major growth factors, the Chinese economy grew at an average annual rate of 9.4% between 1985 and 2015. The changing demographics, as well as investor sentiment, will, according to the research from McKinsey’s Global Institute in collaboration with McKinsey China, see annual GDP growth fall significantly over the coming decade. A substantial decline may be halted however, if a trend in the share that productivity brings to GDP is halted from its steady drop over the past three decades, from 48% to 30%. Boosting productivity as a share of GDP growth to between 35% and 50%, would see the Chinese economy grow between 5.5% and 6.5% between 2015 and 2025 – adding between $3 trillion and $5 trillion a year to GDP by 2025.

Chinese innovation strength areas

Innovating productivity strengths
One of the aims of the consultancy’s research is to identify the effect that innovation has on the Chinese economy’s GDP growth, as well as identifying ways in which China’s strength in innovation may be leveraged to boost productivity. According to the analysis, specific innovation opportunities in manufacturing and service industries can contribute $1.0 trillion to $2.2 trillion in value by 2025, or equivalent to as much as 24% percent of total GDP growth.  China has established strengths in 15 innovation metrics out of 31 considered by the research, which are spread over four categories.

In the broader customer-focused innovation category, the country has a very strong household appliances innovation proposition, and a relatively strong internet and software, as well as internet retail, proposition. In terms of efficiency-driven innovation, its top performing sector is solar panels – which is expected to continue to boom on the back of meeting COP21 targets. The country also performs well in the area of generic pharmaceuticals. Key manufacturing sectors, such as steel, textiles, construction machinery, electrical equipment and chemicals too do relatively well in the category – the least innovation capacity in the category is found in semiconductor foundry and back-end engineering, as well as paper and forestry.

The two categories in which the Chinese economy fares the poorest are engineering-based innovation and science based innovation. In the former, the economy does well in rail-road equipment, wind turbines and communications equipment. While in the latter category, the economy produces only the lowest level of innovation.

Innovation in services, manufacturing and other

Innovation value
The analysis highlights innovation within its two strength areas, service-sector innovation and next-generation manufacturing, have the potential to significantly boost the country’s productivity addition to GDP. Continued improvement in the former could add between $550 billion and $1.4 trillion to GDP, while in the latter an additional value of $450 billion to $780 billion could be derived. The combined effect creates the $1 trillion to $2.2 trillion in additional benefit to the economy. Additional benefits may be derived from breakthroughs and other innovation categories – although given the significant unknowns, the consultancy declined to quantify the potential effect.

Service-sector innovation
Service-sector innovation is backed by a number of key factors, the research finding that the country’s 1.3 billion consumers uniquely positions it to excel at customer-focused innovation. This large and dynamic consumer market gives innovators a huge supply of problems to solve and needs to fill, as well as a means of commercialising new ideas rapidly. Another advantage: Chinese consumers are willing participants in market testing and commercialisation—happy to accept new products that are not completely refined and eager to share feedback to make them better. This makes China a hotbed of innovation for an expanding universe of Internet services and products ranging from air conditioners to smartphones.

According to the authors, a number of structural barriers inhibit service-sector performance by limiting competition and by business models that limit productivity. China could, the consultancy adds, expand the service sector by improving access to services, and improve quality and efficiency by using technology and best practices.

Next-generation manufacturing
To capitalise on China’s strengths within manufacturing, the consultancy considers a number of key factors. Its current position, the report finds, is based on it being the premier global manufacturing location and increasingly becoming a world leader in efficiency-driven innovation, in large part because of the vast ecosystem of suppliers, workers, service companies, and logistics providers that has arisen around China’s manufacturing industry. This ecosystem has transformed China into a global manufacturing hub, making it possible for both Chinese and foreign companies to put virtually any kind of product into production rapidly and affordably.

To remain a top contender within the field and to meet productivity targets, the report suggests: “China embraces new technologies, adopts structural measures to aid manufacturing, and addresses cost challenges, we believe that Chinese factories can remain highly competitive in global manufacturing. While Industry 4.0, other innovations, and changes in factor costs have the potential to alter the competitive landscape, we also think that some of these trends can favour China.”

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Project management industry adds £156 billion of value to UK economy

15 April 2019 Consultancy.uk

Project management has grown into one of UK’s largest areas of business over the past decade, amid the increasing ‘projectification’ of work. With the gross value added to the UK economy by project management estimated to be £156 billion, this trend is likely to continue in the coming era.

Despite the huge success of project management in recent years, until now there has been relatively little data available on the size of project activity. As a result, there has been a great deal of debate on things like the number of people involved in the sector, the number of projects, and how it contributes to economic output. Due to this need for clarity, APM, the UK’s professional body for project management (the largest organisation of its kind in Europe, with 28,000 individual members) commissioned economists from PwC to shed light on the industry's economic impact.

The research concluded that the profession makes a more significant contribution to the UK economy than the financial services sector. 2.13 million full-time equivalent workers (FTEs) were employed in the UK project management sector, generating £156.5 billion of annual gross value added (GVA). In comparison, the financial services sector contributes £115 billion, and the construction industry adds £113 billion.

Gross value added to UK economy

Commenting on the discovery, Debbie Dore, Chief Executive of APM said, “Project management runs as a ‘golden thread’ through businesses, helping to develop new services, driving strategic change and sector-wide reform.”

Who is a ‘project manager’?

To reach these estimates, PwC’s researchers used detailed models to map out the value of project management activity. They ultimately defined relevant ‘projects’ as “temporary, non-routine endeavours or rolling programmes of change designed to produce a distinct product, service or end result… [with] a defined beginning and end, a specific scope, a ring-fenced budget, [and] an identified and potentially dedicated team with a project manager in charge.”

Building on this, they then went on to define what the act of project management actually is. The job consists of applying “processes, methods, knowledge, skills and experience” so that clients can meet their objectives and bring about planned outputs or outcomes. The analysts added that this includes “initiating the project, planning, executing, controlling, quality assuring and closing the work of an identified and dedicated team according to a specified budget and timeframe.”

Importantly, it should be noted that the profession is not exclusive to only roles explicitly labelled as ‘project manager’, but to any role where specialist project management skills are used. This means that across sectors these roles can have very different titles, from the self-explanatory contract managers of procurement, or the campaign managers of advertising, to the likes of festival co-ordinators in the events sector, and many more. The roles in question also span all strategic levels of the profession, from strategic to tactical and operational positions.

Gross value added of project management profession

From a sector perspective, the financial and professional services, construction and healthcare industries make up almost two-thirds of the total project management GVA. At the same time, understandably, the UK Government has a huge project portfolio, which further drives the size of the GVA the sector contributes, thanks to megaprojects like HS2 and Crossrail.

Commenting on this to the report’s authors, Oliver Dowden, Minister for Implementation remarked, “Project delivery is at the heart of all Government activity, whether it’s building roads and rail, strengthening our armed forces, modernising IT or transforming the way government provides public services to citizens. Getting these projects right is essential if we are to ensure that we build a country that works for everyone.”

Throughout 2019, 26 major government projects were delivered, representing a fifth of the overall Government Major Projects Portfolio (GMPP) of 133 projects. According to the IPA annual report 2017-18, these represented a whole life cost of £423 billion. In addition to this were a plethora of smaller scale projects, and those in early development.

Elsewhere, with the increasing digitalisation of the economy impacting entities of all shapes and sizes, IT and digital transformations tended to dominate the projects of the UK scene alongside new product development projects, with a respective 55% and 46% of organisations in the research sample having undertaken these types of project in the past year. At the same time, this varied across sectors, and unsurprisingly, in the construction and local government sectors, fixed capital projects were the main project type undertaken.

Outlook

Looking to the future, 40% of business leaders expect project management will grow in the coming years due to the increased use of projects – or the ‘projectification’ of the UK. In a trend that has been witnessed elsewhere, organisations have to rapidly and continuously change in the digital age of business, driving the need for project management.

Outlook for project management services

An increased focus on value over cost – especially in the construction sector – and a forecast increase in the number of international projects are predicted to be key drivers of growth, according to the expert contributors. However, this will not happen in the absence of challenges; more than half of organisations expressed concern over the perceived impact of political uncertainty in the UK. Skills and capability shortages were also cited as a potential barrier by a third of organisations.

With regard to budgets, meanwhile, a third of those surveyed by PwC said they expect the size of project budgets will increase in the coming three years, while 40% anticipate a growth in project size. As the profession continues to mature, and as the recognition of the importance of good project management grows, it is expected that a greater proportion of project work will gain more distinct attribution to the profession itself, giving more recognition and appreciation to the role of the project manager.

Speaking on the findings of the study, Sandie Grimshaw, a Partner at PwC, concluded, “The project management profession is relatively new compared to some other professions, such as lawyers, teachers and doctors. However, as project management is a core competence vital to organisations in the UK, the profession is critical and will continue to grow in stature.”