Supply Side Reform is new. How to understand Supply Side Reform?
When Chinese economy achieves middle income, the advantage of low cost will lose gradually. China will be hard to complete with the low income countries in the low-end market, also hard to complete with high income countries in the middle and high-end market. Under such awkward conditions, the economy of China will easily stop growing.
Take outdoor iron furniture industry as example. The quick development in the last years benefit from the real estate. The hidden crisis can not be seen, such as increasing human cost, raw materials cost and management cost, etc. Since 2013, when the economy downs, the crisis comes out. Comparing with Southeast Asian countries, the human cost is more than 4 times and the materials cost is more than 3 times higher. That means the final price in the terminal market is a few times higher. Comparing with Italy, France and Germany, their designs and techniques lead in the middle and high-end market, the outdoor furniture enterprises of China always do OEM or ODM. They do not have price advantage nor brand advantage. So a lot of high-end customers will purchase in Europe.
China is the biggest country with the most furniture manufactures, including the leisure furniture. It is also a big consumer country. But today’s furniture enterprises are very hard to survive. There is too much iron furniture but the consumers will not buy because the domestic furniture lacks of innovation. They are too expensive or have few designs. They do not have many special products with high cost performance and environmental protection.
That means there are problems with the supply side of the furniture. How about the demand side?
We can see some from the data issued by IKEA. IKEA’s financial report in 2015 showed that the whole year’s sales volume in China was RMB10, 500million. The sales volume of a single shop achieved RMB100 million. Why the products of IKEA are so popular? They are innovated, special and offer reasonable price.
So Supply Reform must develop the new supply to meet the new demands.
Of course, Supply Reform has negative effects. It may increase the unemployment rate. During the upgrade, the traditional industry will eliminate some excess capacity and some will realize automation which will need fewer workers. But it is an inevitable process.
Then what is the critical point in the reform? The key point is that the government shall offer the most freedom as possible as it can.
Take leisure furniture industry as example. The enterprises that can not control the cost effectively with the backward management must close to eliminate the excess capacity. The enterprises that will innovate and have cost advantages will conquer the difficulties and grow up.