Is the real problem with the Chinese economy just that there are way too many people who are unproductive in their jobs?

You would not generally accuse Chinese workers of not working long hours, but what are they really doing all that time on the job?  Are they being productive?

This question applies not just in the factory, but just as much in the office.  And for the future of China’s economy, productivity in the office may even be the more important of the two.  Without sustained and rapid growth in productivity, there is no chance that China will double per capita income by 2020, as its goals require.  Tough to find macro data to rely on in this area, but there are many indications that wage inflation has way outstripped productivity growth in many areas of the economy over the last decade.

If you run an office in Shanghai, try cutting off access to ecommerce sites from your corporate network.  The reaction will make you think you had announced no bonuses for the year.  The time spent on these sites by workers in the office can be hours a day.  It’s easy to track, harder to do something about.

Talk to Taiwanese businessmen about the difference between white collar staff in the mainland and in Taiwan. Costs are similar but productivity and stability are seen as much higher in Taipei.  I have heard of companies shifting secretarial roles from Shanghai to Taipei.  In high tech,Taiwan may well be now the lowest cost location for Chinese R&D, with all-in costs about 20% lower than the equivalent in the mainland, with lower turnover and higher engineering capability. It was interesting to hear how a local software company that is “very local” in its products and customers is aiming to do most of its hiring this year into its new Taipei branch.

Factories, certainly private sector factories, have been addressing this challenge for many years.  China’s appetite for robots only expands as their cost declines, and this cost decline is now extremely rapid. China’s share of global purchases of industrial robots is now about the same as its share of consumption of steel – about half of the world demand.  If your China factory has not installed a new wave of robots in the last year and does not have more on order, it’s unlikely you are remaining competitive with local firms.

These robots are not entirely substituting for labor in the factory, but certainly they are for lower skilled workers who are unable to step up and learn new skills. When factories in Southern China say they can’t find workers these days, it is skilled workers they are focused on, not factory laborers. Even if these workers doubled their hours for the same pay, their skills won’t become relevant again.

To bring this to life with another tech industry example.  How many people’s work in China is somehow dependent on the PC and smartphone industries today, everything from retail through logistics to assembly and design? 30 million, maybe more?

Project forward not very far into the future and imagine how many of these roles will remain.  Will there be anything more than a residual level of retail?  Will system integration that brings more and more functionality into the chip in the device make assembly dramatically simpler?  Will absolute demand decline? How many million fewer workers will this industry need?

For many multinationals, it was relatively easy to justify paying sky high compensation to not just white collar staff but also senior executives in their China team, when China was supposed to be delivering the largest chunk of their global revenue growth and somewhere down the line their profit growth also.  Yet today many multinationals are seeing low single digit or no growth in China, and are not expecting a return to the “land grab” years.  Compensation has not reacted yet.

Simply put, there are too many areas of China’s economy where costs are high and productivity is low.  This has to change from factory to office to government.  It’s not about working harder, it is about working smarter – with new skills, with new technologies in hand, and with a regulatory environment that allows this to happen, rather than holding back the required changes

I recognize the balancing act. China cannot suddenly unleash a transformation that leave tens of millions out of work, or that rolls back the gains made by many middle class citizens over the last 20 years.

But productivity must rise.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter @gordonorr.