A report by the Financial Times makes an interesting claim this week about Asian shipping costs and European labor. The product at hand is, of all things, high-tech windmills.
According to the report, Denmark’s Vestas, which makes power generating wind turbines, plans to lay off a third of its Danish workforce. Sales are down, and Danish labor is expensive. “A turbine manufactured in China and shipped to Denmark costs about the same as making it at home,” writes the Financial Times.
That’s a pretty common situation -- outsourcing jobs to Asia. But it’s not the whole story this time. Though labor costs in China are greatly less than in most of Europe, the balance between the shipping costs and the European labor situation is hardly static. “Vestas must always be able to compete against what we call Asia cost plus freight,” the company’s CEO told the FT. But he added that the company has other options outside Asia -- and within crisis-wracked Europe.
Building a windmill in Spain -- where unemployment is nearing 20 percent -- and shipping it to a customer in Sweden, is cheaper for Vestas than building one in Denmark, he said. What that means is that “Asia cost plus freight” has competition now: Let’s call it, a little awkwardly, “Spain cost, or Greece cost, or the cost of any other place with crippling unemployment and a convenient three-day trucking distance from Denmark.”
Labor for building a windmill in China may cost less than Spain’s Euro-compensated workers. But with Europe still reeling financially, at some point companies like Vestas are going to wonder if shipping from Shenzhen is really cheaper than from Seville or Slovakia. Sofia. St. Petersburg. OK, enough with the S’s; you get the point: Labor’s cheap everywhere these days.
Just how cheap is part of the issue. The gap between China’s labor savings, and the cost of the long supply chain to reach it, is still very wide. Last summer, speaking to The Economist, Stephen Roach, Morgan Stanley ’s chair in Asia, argued that even as China develops, its labor remains virtually free, and could stay that way for the visible future:
According to research published in the Monthly Labour Review of the US Bureau of Labor Statistics in April 2009, compensation of Chinese manufacturing workers was only $0.81 per hour in 2006—just 2.7% of comparable costs in the US, 3.4% of those in Japan, and 2.2% of compensation rates in Europe. While these figures are now out of date by nearly four years, they underscore the magnitude of the gap between China and the developed world—and how difficult it would be to close that gap even under the most excessive of Chinese wage inflation scenarios.
By comparison, minimum wage in Spain for 2005-6, the same period as the Roach-cited study, was just under €500 (US$700) per month. It currently stands at just over €600 per month, minimum. That’s about eight times more than the Chinese wage of US$0.81 an hour, which is about $120 a month.
Still, Vestas, which is the world’s largest manufacturer of windmills, in an era of strong investment in clean energy, thinks it's worthwhile to look into building closer to home. As Chinese labor costs rise, and wages stagnate in crisis-era Western Europe and still-emerging Eastern Europe, the part that has to give is in the shipping (and the port taxes; keeping supply chain costs between EU economies competitive is, of course, part of the point of the European Union).
Asia’s advantage, wages, have to rise eventually, and Europe’s, these days, don’t. When labor costs rise, a company like Vestas is naturally going to start wondering whether a windmill loses more value spending two weeks on a boat from the Pacific, than it does in three days on a truck from the Mediterranean.