Western labor costs may not be declining but they are definitely not rising. In the meantime, Chinese labor costs are on the rise and they will continue to march higher. These two developments will eventually lead to a situation where Western labor costs won't be as prohibitive in future as they are today. Does that mean Western costs willll match Chinese labor costs soon? I don't think so but they may weaken enough to make some executives review their overall costs and decide the savings may not be worth the headache.
I don't think they will quite be on the same level but if the innovation quality lags from either side, the shift will most likely be related to that and not necessarily cost. Managers have the task of custting costs so that will always be a major factor when it comes to procurement of services.
Absolutely! The labor cost has been the bane of the West. No nation can be competitive if the cost of living arbitrarily rises sharply and the labor cost subsequently matches the high cost of living. The rise in labor cost in China will likely never match that of the West because of the government control on most things in China so the West will always be at a disadvantage especially in the US where citizens never want government in their business.
If one has been taking snapshots of consumer prices in China's major cities, one would find high inflation over the last 5 years or so. In many places, one can find examples in which prices, e.g. certain food, has gone up by 50%. That's inflation. It's not quite true that "government controls most things", but one should also note that government intervention in certain areas is a common method of preventing social unrest and administer some form of equity. And it has plus and minus like most policies. Even the US instituted some pricing control in 1971. It certainly doesn't mean that China will always be advantaged because of this control.
The Idea that costs in China are some how magically cheaper is actually to a large extent a misnomer:
When you get down to the basics you find that somewhere along the line, the actual costs should be much higher. Many of the businesses are actually operating out side the law as regards to minimum wages, maternity leave, pensions,medical, housing, moving allowances, government taxes, and environmental protection.
If you actually sit down and go through the China governments requirements for workers, they are really ahead of their time as regards worker protection, benefits,Tax and other requirements.(even by western standards)
Unfortunately many business people treat these laws as nonexistent(certainly the Tax part), this is where much of the 'edge' comes from, it is not down to advanced production methology (anyone who has actually visited a China production facility will be aware of the absolute chaos that exists in >90% of the facilities, don't even get me started about the supply chain!!)
Once the manufacturing within China is 'reined in' and starts to operate fully within the law/ quality/traceability requirements, costs will escalate rapidly, causing much of the low-tech manufacturing to be forced either further in land or even out of the country. (Vietnam, North-Korea)
Currently the China Government is trying to move towards the 'second coming', that is to say a secondary wave of high technology manufacturing, with home grown technology (own chips, own standards, own materials) specifically targeted at the China market rather than external markets.
The hidden and uncredited costs of doing business in China must be huge especially based on the way you enumerated them. I wonder if the contract manufacturers to electronic companies in China, for instance, pay all of the additional costs employees in the West enjoy. Do they provide health insurance coverage, give sick and vacation days, retirement plan, etc. As you said, if these are currently excluded from total wage packages, then China's labor rates are grossly understated. Should they be added someday, we may see a sharp increase in China wages.
There is actually a lot of 'robbing peter to pay paul"
for example the government may give certain days off above and beyond the normal holiday entitlement.
legally 'yes' the workers SHOULD enjoy:
2. Housing fund allowance offset against future purchase of property
Usually many companies 'substitute' days in, I.E you can have the Government Wednesday off, if you work Sunday., which in reality is actually double time but substituted for a single time payment.
Then there is maternity benefits, which in china are surprisingly strong and forward thinking, both in payments and time allowance, furthermore the husband is also allowed paid leave under china law, unfortunately in many cases the businesses block both maternity leave for the parents and then fail to make the full payments to the female.
Then there is the issue of overtime payments, during my time as an ethical auditor, there were massive 'frauds' in this area by many many companies used by 'big' name companies.
The fraud works something like this:
You have multiple clocking on/off machines, the machines are set so that one lags the 'real' time or is even offset by 8 hours.
You log in with the 'real ' machine then log off with the retarded one, and Abracadabra, 4-6 hours of overtime magically disappears.
They then do the same for shift work, with both clocks being retarded.
There are many frauds such as this, but when a local government has > 25,000 factories in a single area it becomes very difficult to manage, they are getting better but it is a massive job for the government.
But when they do finally get on top of it, you can expect costs to rise significantly.
While labor cost is important factor in competitiveness, it's not the only factor. US has long lost most of the labor-intensive, low pay industries, and we have long been moving up to food chain of knowledge-based workforce. In the short term, that will be the differentiation between the US and China. So while the media trumpets the manufacturing job loss to China, note that it's not the biggest part of our economy. On the other hand, we should consider the following: 1) so our labor cost lowers, does it mean it's lower than other countries? Like the other person pointed out, China labor cost is also rising, so likely China will experience some job loss to other emerging countries. 2) Germany has one of the highest labor cost in Europe, but it also has the strongest. Why? Because of their higher productivity and value contribution by their labor market, and it's not because they have the lowest cost manufacturing like China.
Germany's high labor cost in Europe, coupled with high productivity and value contribution by their labor market has only helped to make Germany recognizable but not competitive. Germany will soon not be able to compete with India and China in terms of manufacturing. Gone were the days when PUMA was the sporting clothing of choice because they were made in Germany and cheap. Moving of US manufacturing to China at a time when labor in China was cheap has made the competition one sided. The rise in labor cost in China can never match that of the West.
We have seen jobs move out of the US to countries like China for decades now. Even if labor costs start to rise, we will be hard pressed to see these jobs come back to the US. Manufacturers cannot bear the increase in production costs, taxes, labor costs etc. Even if China's costs increase, they will probably still be lower than what manufacturers can absorb in the west. Manufactuers will find other countries where they can set up production plants in which they can continue to keep their costs down or even cut them further.
I think the high-tech industry--which is generally non-union--has led other industries in accepting wage cuts. Even CEOs occasionally take $1 in salary when business is awful. I wouldn't expect the same from heavily-unionized industries (auto; construction; infrastructure development) or the finance industry. Finance execs just took major bonuses (again). Granted, the financial sector does not create manufacturing jobs, but it controls a lot of the activity publicly-traded companies are involved in. If a manufactuing company's stock tanks, don't look for them to be building in the West any time soon. In fact, Wall St rewards companies that cut costs--even when it means moving jobs offshore.
I think a seismic shift in the financial food chain is also needed before we see the kind of chnages that will spur more US manufacturing expansion.
I agree with you on point 1, but on point 2, I believe China is actually imposing more environmental mandates on industry than the US ever has. Its so-called "RoHS" policy goes beyond the EU's in scope; it's anti-pollution laws are extremely ambitious and its focus on green technology is leading the globe in terms of investment.
Granted, the quality controls on products coming out of China have a lot to be desired (baby formula; children's drinking glasses), but I believe the penalties in these cases were swift and punitive. For all the other issues, I don't think China is any friendlier to polluters than the US.
As for China revaluing the Yuan upwards...They have made it clear it won't happen no matter what the rest of the world thinks.
Which is why we will most probably see most if not all Manufacturing shift to China/Asia.The only saving grace for Western Manufacturing is Oil Prices(priced in depreciating US Dollars).If Oil becomes very,very expensive then it no longer makes sense to manufacture half way around the world for consumption in the West.On the other hand,I am wondering does the Bankrupt Western Consumer really have any credit left to keep on consuming???
Not a pretty picture for the Global economy.But thats just the way things are today.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.