Two words can be used to describe the profit model of China’s economy: speed oriented, namely high speed economic development driven by large-scale investments. It is also called “speed-oriented profit model”. However, this type of profit model has come across tremendous difficulties and challenges since 2013.
I, together with Doctor Chen Chuan, published a paper titled “The speed type profit model and the quality type profit model: An empirical explanation of the heterogeneity of enterprises” in South China Journal of Economics (No. 6, 2016). In this paper, we calculated and found that the growth rate of gross industrial output value, sales profit ratio and total factor productivity were respectively 2.29%, -12.45% and -1.96%, significantly lower than the macro GPD growth rate of 7.8% in the region where the sampled enterprises located. The declining performance of the enterprises adopting “speed-oriented profit model” (hereinafter referred to as “speed-oriented enterprises”) is owing to high consumption substitution elasticity of their products. With macroeconomic downturns and external demand fluctuations, the enterprise’s market sales and operating profits are more vulnerable to impacts, and even negative growth may occur when they are unable to hedge risks arising from macroeconomic downturns.
Opposite to the “speed-oriented enterprises”, there are other enterprises performing well in the same economic context. Through comparative analysis, these enterprises’ business performance was found to be 10.5%-12.0% more than that of the “speed-oriented enterprises”; the growth rate of their gross industrial output value, sales profit ratio and total factor productivity were respectively 10.29%, 23.31% and 10.88%, significantly higher than that of the “speed-oriented enterprises”, and even higher than the macro GPD growth rate of 7.8% in the region where the sampled enterprises located. What are the facts behind their growth against the trend? According to the analysis, these enterprises can obtain lock-in effects on market demand and fully withstand the downturn risks by harnessing their quality capability, therefore to achieve their “rising performance against the trend”. Moreover, their business performance has been significantly improved by enterprises’ quality capability, human capital, R&D investment and other indicators, so the growth rate of their performance surpassed that of GDP in the region located, creating a “new miracle”. By further empirical examinations, it is found that difference in quality capability determines difference in business performance in enterprises. Higher quality capability is an essential factor to their better operating performance than those “speed-oriented enterprises”. These enterprises belong to the type of what is called “quality-oriented profit model”. This also explains why although the US economy is growing at a rate of 2% to 3%, and Japan’s economy is growing by 1% or even zero, most of the enterprises are still profitable.
Above all, it is concluded that a transition from “speed-oriented profit model” to “quality-oriented profit model” is inevitable and essential to the long-term sustainable growth of China’s economy. “Quality-oriented profit model” represents the supply side reform, the macroeconomic development based on micro entities (enterprises), and the development model that enterprises’ growth and profitability is driven by their endogenous capacity. Moreover, this new development model promotes the realization of sustainable growth in enterprises.