What's Your Next Move as China Hikes Wages?

If you scanned some of the headlines coming out of China last week, you may have stumbled upon several newspaper stories reporting that Shenzhen, a major hub for electronics, is likely to hike its minimum wage by about 13 percent in early 2013.

From Wired UK to The Register, the news articles point out that the region is considering raising the monthly minimum wage from 1,500 to 1,700 Yuan, the idea of which is already causing jitters among high-tech companies. By today's currency rate, that would be going from $236 a month to about $267.

News like this could put pressure on companies that insist on competing on the basis of low-cost manufacturing. For mass-produced, low-margin, price-sensitive consumer products and manufacturers that ran to China to cut overhead, local wage increases will force companies to re-examine what costs they can absorb and what costs have to be passed along to the consumer. And, it's not just happening in China. A few weeks ago, I wrote about the uncertainty around the impact expected wage increases in some provinces in Thailand could have on factories there. So, multi-national decisions may have to be considered. (See: Thailand: Managing a Manufacturing Transition.)

But even though my logical head understands the correlation between labor costs and final price, I don't understand why anyone in the high-tech supply chain finds this kind of news surprising. As developing economies the world over grow, it's natural that workers will need higher incomes to keep up with the rising costs in more urbanized areas. Obviously, too, because factory workers are human, like you and me, they eventually are going to want a higher quality of life that higher paychecks theoretically buy, and they will shop around for better-paid opportunities.

And don't even get me started on the topic that many of these "lower-cost workers" are probably women who are bused in from rural villages or live in dorms near factories, and who may or may not receive equal pay compared to their male counterparts. That's a whole different can of worms.

Generally, I'd like to think that some of this minimum wage discussion is a mute point among electronics companies. To stay competitive and retain a labor force they have trained, many companies already pay above minimum wage in most tech centers around the world. Yes, the labor pool is cheaper than what companies would buy in the Western world, but employees are not the worst paid workers in the regions they live. I hope that's true.

If it's not, then maybe it's time that high-tech companies own up to the total cost of ownership practices always talked about throughout the industry. Companies can't really believe it's sustainable over the long term to march into developing countries, demand tax breaks and business incentives, pay workers low wages (when is the last time you lived on $236 a month?), and then pack up shop and move to the next low-cost region a few borders away when government subsidies run out or workers think they deserve $30 more a month.

Sure, there are plenty of other places that would love to win business from companies who may leave China or Thailand because these places have become too expensive. But won't those "new low-cost countries" develop the same patterns of behavior as the "old low-cost countries" as they become more competitive and mature?

Aren't there other value streams that can be created when a low-cost region converts to a developed market with smarter consumers who have more disposable incomes? And, what happens in a place like China or Thailand when a family earns a bit more income every month and can better educate its children or buy something beyond its basic needs? Don't companies care about that potential? Shouldn't they?