In a response to the much blogged and tweeted Economist article “Is the era of cheap Chinese labour over?“, Economist guest contributor Tyler Cowen answers the question intelligently in his response “The important thing is Chinese productivity is rising“.
Anyway, the money quote comes at the end of the article:
In the question stated above, “cheap” is a misleading word. The more productive China becomes, the cheaper its labour will be, at least relative to what you get.
There was some balanced perspective on the China labor situation from a July 1 Reuters article.
Just wanted to share some of the main points:
“China is still an attractive option for most companies looking for an effective manufacturing base, although many companies have been pursuing a China plus one or a China plus two strategy in recent years to diversify their manufacturing operations,” said Geoffrey Crothall of the China Labour Bulletin in Hong Kong, which advocates for improved workers’ rights.
“I really don’t think we’re going to see companies suddenly leaving China en masse.”
The SCMP shows that chasing cheap labor may be too expensive
A pair of recent articles in the South China Morning Post offer some more perspective on the much-predicted exodus of manufacturing from the Pearl River Delta and why, for the most part, it just ain’t gonna happen. (a paid subscription is required to access SCMP articles, but a 14-day free trial is available).
One article, Minimum wage rise doesn’t worry all China plants, is mainly about how minimum wage hikes don’t affect those who aren’t complying with the minimum wage law. It also also discusses the how two manufacturing groups well established in the PRD, garments and toys, are likely to react to rising labor costs.
First, according to the article, garment makers (40% labor content) gotta hit the highway…
Willy Lin Sun-mo, vice-chairman of the Hong Kong Textile Council, said: ‘Now, setting up a factory 500km from Hong Kong is okay, but several years ago, most Hong Kong factories were in a 100km radius from Hong Kong. The only way is to move further away. There is nothing much we can do. Rules are rules, so Hong Kong manufacturers have to pay.’
Hong Kong garment factories had difficulty paying ever increasing wages, as labour accounted for 40 per cent of the cost of a garment, he said. ‘If all garment factories have to raise salaries by double digits overnight, how can they compete?’
but toy makers (20% labor content) ain’t going nowhere…
A Hong Kong toy executive said he knew of a handful of toy factories that moved from Dongguan to more remote cities in Guangdong this year, namely Heyuan, Shaoguan and Qingyuan.
Toys are among Hong Kong’s biggest export industries and most toy factories are in Guangdong.
The impact of the minimum wage increase had not been too severe on Hong Kong’s toy industry, said the executive. Labour accounted for 20 per cent of the cost of making a toy, he estimated.
The toy industry was informed of the wage rise months ago, so they factored it into the cost of their products, said the executive. ‘We will raise the prices of our toys by about 5 per cent. Customers have to accept the higher prices because all toy factories in China are affected.’ [Note from DJL: I wonder how much of that 5% increase could be offset by gaining efficiencies in the manufacturing processes.]
The second article, Factories likely to stay in Pearl River Delta, shows why moving factories out of the PRD just to chase cheaper labor probably doesn’t make economic sense. Among the economists cited are Paul Krugman.
US economics Nobel Prize winner Paul Krugman, in his book Geography and Trade, says it is often uneconomical to move manufacturing from costly but established manufacturing coastal areas to lower-cost distant locations.
It is more profitable for manufacturers to keep factories in places like the Pearl River Delta than to relocate to cheaper but more remote places. The reason: convenient and cheap transport infrastructure, a large pool of migrant workers and a network of small to medium-sized manufacturers. Thus, the cost of setting up a new factory in Xinjiang is higher than keeping one in southern China.
It goes on to to quote Willy Lin Sun-mo, as did the previous article. This time, however, it quotes him to illustrate that even for labor intensive industries that need to move, moving out to chase cheap labor may incur hidden or at least less obvious costs:
Knitwear maker Willy Lin Sun-mo, chairman of the Textile Council of Hong Kong said: “A sophisticated supply chain takes decades to develop, just like the Pearl River Delta, which took some 25 years to come to what it is today.”
Lin set up a knitwear plant in Jiangxi province about 18 months ago to take advantage of the labour market but said he had managed to employ only half the 3,000 staff needed. “Labour shortage is not just a problem in Guangdong,” he said. “Insufficient labourers mean higher wages, a big threat to manufacturers.”
Danny Lau Tat-pong, chairman of the Hong Kong Small and Medium Enterprises Association, said relocation made sense theoretically but doubted that many firms would make such a costly move…
Yes, labor costs have increased, and it will mean readjustments for many factories. I’m still guessing, though, that relatively few will move from the PRD’s mature manufacturing infrastructure to “cheaper” places with questionable transportation facilities and without the extensive network of integrated parts, materials and service providers to which they are accustomed.
By the way, a related SinoFactory posts from the past may be of interest: Coming to China, but NOT for cheap labor!
Consider the source, but according to an article in today’s Global Times (a fairly new English-language paper published in the PRC) western manufacturers are increasing their outsourcing activities in China:
Foreign countries have started outsourcing to China again after a brief slowdown last year.
The first nine months of the year saw 3,287 new enterprises providing services that have been outsourced to China launched, offering 585,000 new jobs. International service contracts won by Chinese enterprises in the first nine months are valued at $12.7 billion, up 212 percent from the same period last year, according to Ministry of Commerce (MOFCOM) figures released Tuesday.
As of the end of September, there were 8,060 enterprises with 1.4 million employees operating in the outsourcing industry.
The rest of the article cites the existing and potential threats to China’s outsourcing business, namely India with it’s large English speaking population, but others as well.
For those of us operating the the Pearl River Delta, where most of this outsourcing is being performed, it might mean that the PRD is still an attractive place to set up export-oriented manufacturing. At the very least, since we assume that the GT writes what Beijing wants written, it means that the authorities are still interested in making China an attractive destination for western export manufacturing.
According to a CNN report, NAFTA, proximity to the U.S. market, and lower costs (largely the results of inverse currency fluctuations of the peso and yuan) have tipped the scales in favor of Mexico (and against China) as the new manufacturing destination of choice for U.S.- bound products.
There is talk that the Beijing and and Guangdong governments are starting to play hard-to-get with foreign investors, downplaying their importance in upgrading China’s manufacturing, R&D and local market offerings.
However one report in The Japan Times indicates that Dongguan, at least, is still welcoming foreign investment.
A vice mayor of the Chinese industrial city of Dongguan urged Japanese manufacturers Friday to expand on its turf and exploit its domestic market to help the city recover from the global economic crisis and fall in exports.
“We are looking for more Japanese manufacturers to build R&D (research and development) centers in our city and create domestic brands, securing distribution routes,” Jiang Ling, vice mayor of Dongguan in Guangzhou Province, said at a news conference in a hotel in Minato Ward, Tokyo.
In many ways, what Jiang is saying is in lockstep with what the central and Guangdong governments seem to be promoting– focus on domestic consumption, R&D and high-tech manufacturing.
But what makes Jiang’s comments interesting are that he’s actively courting foreign investment, stating clearly that it essential for the area’s recovery. Moreover, he’s speaking on behalf of Dongguan’s townships and villages, and these are the organizations which will be interpreting and implementing whatever policies flow down from Beijing and Guangzhou.
While this doesn’t mean that Dongguan is a good place to set up labor-intensive manufacturing, it does indicate that Dongguan, at least, is still Foreign Investment friendly.
This China Daily article quotes Guangdong governor Huang HuaHua and Guangdong Party Chief, Wang Yang making it very clear that the pre-downturn initiatives aimed at moving the province’s manufacturing base up the value chain will continue.
With the outline of the reform plan for the Pearl River Delta formally approved by the central government at the end of last year, the delta scheme has now been adopted as part of the nation’s overall development strategy. This will see the nine cities in southern China’s Guangdong province transformed into advanced manufacturing and modern service centers.
The article doesn’t talk about what they plan to do about the low-value exporting factories currently operating here, but Huang was quoted by People Daily in April saying:
…the province will step up efforts to achieve a change in development pattern by evolving self-innovative industry and upgrading industrial structure, while boosting the transfer of labor-intensive industries in the delta region to less developed regions and transferring labor forces from the agricultural to the manufacturing sector as well as from the rural area to the delta region. [italics mine]
For me it raises the following questions:
A post on the Financial Times “Dragonbeat” blog helps to rectify the “migrant workers gone wild” media fest of the past few months. These guys are getting it right. Anyone interested in this topic should read the FT article. (h/t to Danwei)
My comment on the post:
[There] was never an apparent trend toward violence on the part of unemployed workers in Southern China. There were a few protests, and very little violence, by workers who were abandoned without severance pay. As these few anecdotes echoed between blog and newspaper and back again, it seemed as if the trend toward worker violence was growing. Actually, it was the same few recycled anecdotes over and over again.
Those of us who live and work here in Southern China (I run a factory in Dongguan) could see first hand how distorted and repetitive the media story was.
Yes there are many unemployed. No, they are not threatening anyone and never were. Not news to anyone living here.
The real news here is how so many of the media outlets, new and old alike, have lazily copied and amplified one another’s inaccuracies.
Newspapers complain about free content on the internet pushing them out of business. Maybe it’s just poor quality ruining their business.
A new article in the Financial Times discusses the new face of migrant labor in Dongguan. The article basically says that the oft-predicted worker unreast didn’t materialize because those predicting it envisioned the migrant workers of yesteryear (hordes of rural, unsophisticated “factory girls”) rather than the migrant workers of today (semi-urbanized, getting more sophisticated, with more connection to the communities in which they work).
Seems accurate enough. But what caught my eye were the last two paragraphs, sharing the stated views of a famous Chinese labor activist:
[The activist]…once incarcerated for his efforts to establish an independent alternative to the government-sanctioned All China Federation of Trade Unions, notes that the last thing the country’s labour movement needs is more martyrs rotting away in Chinese prisons for daring to challenge the Communist party’s authority. Far better, he adds, to focus on factory-floor issues that affect workers’ daily lives. [emphasis mine]
As [he] said in an address to Hong Kong’s Foreign Correspondents’ Club earlier this year: “Why not let workers and employers settle their problems [independently] at factory level? That’s the best way to make a harmonious society.”
What does he mean by “factory-floor issues that affect workers’ daily lives”? It looks like he’s telling us workers rights will improve not by workers banding together to cause unrest, but by going to the gemba and working together with management to ensure that their working lives are safer, more comfortable, and more productive (with the assumption that increased productivity means increased compensation for the worker).
Not news to me… I’ve said elsewhere that LEAN, JIT, and related strategies and concepts can do more than just add value for shareholders and customers, but can add value for the workers and for the community as well. What surprises me is hearing it from labor.
AS AN EMPLOYER IN DONGGUAN, I HOPE NOT
There’s more rumbling in the press about the possibility of China suspending (or choosing to ignore) the year-old Labor Contract Law (LCL). The following, from a recent Wall Street Journal article (subscription required) suggests that the Dongguan City Government may be supportive of this effort, as it may help to mitigate the impact the downturn is having on enterprises operating there.
To aid businesses, Beijing has permitted local authorities to freeze minimum-wage levels and to reduce or suspend employers’ social-insurance contributions.
The vice mayor of Dongguan, in Guangdong, says many employers hope the central government will suspend the Labor Contract Law, and his office has sent that request to Beijing. “We can’t ourselves halt the implementation of a national law,” says Jiang Ling.
Giving business such leeway could ultimately undermine trust in the still-developing rule of law, says Andreas Lauffs, a partner at the law firm of Baker & McKenzie who focuses on Chinese labor issues.
As an employer in Dongguan, I hope this doesn’t happen for at least two reasons.
It helps keep an even playing field:
While the LCL may be flawed (I don’t think the open-ended contracts are reasonable) it does help to ensure that the rules are stated, contracts signed, and that the existing Labor Law is followed. That means that those of us who WANT to follow the law are not so easily undercut by those competitors who can take advantage of the murkiness of unenforced laws.
Happier, healthier community:
Those of us who live and/or work in areas where migrant laborers abound would like to see them develop into a happier and more satisfied population. If my workers are happy but the workers in the surrounding factories are not, the entire community suffers.
Just my 2 cents worth.
