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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?

37 comments on “What’s Your Next Move as China Hikes Wages?

  1. Barbara Jorgensen
    September 11, 2012

    I share your frustration on this topic. I hate to think the collective electronics industry is so naive as to think wages would remain low forever. And now that companies have invested so much to move there, are they just going to pick up and move? Any company that went into China purely for the low-cost labor deserves what it gets. China is  strategic location, not just a labor pool, and as such should be entered deliberately and for the long haul.

  2. Clairvoyant
    September 11, 2012

    Companies that have kept their manufacturing in North America may gain from this. Competitors that have manufacturing in China will end up having higher costs.

  3. Ariella
    September 11, 2012

    @Barbara good point. I'd say any major investment like that should be made for the long-haul and based on multiple factors — not just the cost of labor.

  4. Daniel
    September 12, 2012

    Jennifer, I don't think the Chinese labors sectors are no longer being attractive. Industrial survey reports are saying that for the last 02 years, labour costs are increased considerably when compare with the previous block of 2007-2009. If the trend continues like this, companies may rethink about investing in China.

  5. Daniel
    September 12, 2012

    Barbar, it's true that at initial stage labour wages in China are cheaper. When industrial growth happens, more peoples got employed and their life style also got changed. More over they also have a mentality that MNC s are utilizing their man power for profit generation and they also need a share of that. That's the main reason for period hike in wages. The other thing is China is a Communist socialist country and they won't encourage Capitalistic movements.

  6. Barbara Jorgensen
    September 12, 2012

    One of the issues here that is also largely ignored, at least in high-tech, is that labor is only a small fraction of the overall cost of manufacturing. Automated manufacturing and assembly lines do not require a lot of human contact. Now, if Foxconn insists on assembling everything by hand, then labor costs will be significant. Rather than pull out of China if costs increase, non-China manufacturers should consider automation. It will still be less expensive than closing down or disassembling entire factories.

  7. SP
    September 13, 2012

    Its inevitable that wages remain so low. With the rise in the cost of basic needs, the wages need to go up. No one can stop that. The companies also have to give in. Because they cannot move to another location so easily. May be the manufacturers would look for other areas where they can get still cheaper labor.

  8. prabhakar_deosthali
    September 13, 2012

    It is a well known fact that the inflation in the developing economies has been at double digit figures for the past couple of decades and to compensate this inflation, the employees in all categories have to get their pay packets revised by atleast that much percentage .

    So any company setting u business in a developing economy has to plan for such kind wage hike.

    Many of the electronic manufacturing units in India , in fact pay their workers something more than the minimum wages stipulated by the government and the same must be true in China also as per my guess.

     

    So this hike in minimum wages should not have a major impact on the off-shore manufacturing in my opinion

  9. Adeniji Kayode
    September 13, 2012

    @Clairvoyant

    You are right, Probably due to low labour cost.

  10. Adeniji Kayode
    September 13, 2012

    @Jacob,

    I believe thats a possibility, there are so much products coming from China alone not to talk of other part of the world.

  11. Adeniji Kayode
    September 13, 2012

    @Barbara,

    Which means you are saying that implementation and maintenance of automation is cheaper and  better than human labor.

  12. Adeniji Kayode
    September 13, 2012

    Sp,

    you are right on that, probably manufacturers should starting looking into Africa cheaper labor or what do you think?

  13. Barbara Jorgensen
    September 13, 2012

    @Adeniji: Cheaper in the long run. I wouldn't necessarily say better.

  14. Jennifer Baljko
    September 14, 2012

    Barbara, Ariella – Good point. Think companies with high, consumer volumes and thin margins (textiles, apparel, and some low-end electronics etc) that went to China 10 or 15 years ago for low-cost only business may have already started to shift to some of their production to places like Vietnam. I'd like to think that companies that have moved to China more recently know wages will have to factor into longer-term investments and that they went to China with more strategic focus. But, who knows.

  15. Jennifer Baljko
    September 14, 2012

    Jacob – I don't  agree with you on your last point about China's tendency to want to ward off capitalism. Yes, communism restricts social and cultural development and the government has set up a system that requires companies to jump through hoops to do business there, but the country — and its people — have an undeniable capitalist bend. Besides all the multi-nationals that have been lured there and the fact that the country is open to receive those billions and billions of investment dollars, Chinese people have created highly lucrative cheap-product and counterfeit businesses models for everything from shoes to purses to toys to electronics. Those models were created purely out of capitalistic intentions – these markets wouldn't exist if there wasn't a demand for them and if Westerners didn't buy these products. I see it every day – tourists walking through Barcelona pulling out their wallets to buy cheap knock-offs of all sorts of brands. And, if you think for a moment about the Chinese that have left China, I bet you'll find a whole lot of them are super industrious — opening new shops, taking over local bars, getting the best grades in school — probably because they want a better life that more money can buy. And, people aren't stupid… executives from all the leading MNCs make millions every year in salaries, stock options and bonuses, why shouldn't the people who produce the goods that generate high profits benefit as well?

  16. Jennifer Baljko
    September 14, 2012

    Barbara – True, labor is not the biggest overall cost and automation could provide more savings, but there are many companies that run factories 24 hours a day with a significant number of employees and demand that workers put in overtime without always paying fairly for those extra hours, etc. Then they congratulate themselves for setting up human resources programs aimed at “we listen and respond to our workers.” And, even though things like Lean practices make sense and cuts out inefficiencies, when you hear things or read reports about workers being chastised for, say,  taking three seconds longer to do a task than a machine, you really got to wonder what's really happening there.

  17. Jennifer Baljko
    September 14, 2012

    SP – Right, the cost of things just go up. It's beyond inflation, it's also taxes, utilities, food, housing, schools…of course, emerging markets would feel this pressure as well. It's not something that only happens in the U.S.

  18. Jennifer Baljko
    September 14, 2012

    Adeniji – Africa is a very interesting place to me, and there is quite a lot of technology-centric momentum in certain spots of Africa, primarily from a device user and software development standpoint. The BBC recently covered some of the buzz and tech hub action happening there: http://www.bbc.co.uk/news/business-18878585

    I have seen for myself some of the cool stuff happening in Kenya and Ghana, and personally would love to see more technology initiatives take off on the continent. But, after some conversations with site selectors recently – the guys who scout out global locations for multi-nationals — I doubt manufacturing companies will land there any time soon. There are still a number of big concerns about the lack of infrastructure and political stabilty that concern many executives. 

  19. bolaji ojo
    September 14, 2012

    Jenn, The cycle you describe is interesting and indeed it may happen that firms move from one low-cost country to another lower-cost location in the bid to reduce cost but that process takes such an evolutionary time to happen. Companies are implementing short-term measures to improve profitability and mostly not taking the long view.

  20. bolaji ojo
    September 14, 2012

    Barbara, In addition, it's not just about lower labor costs. The infrastructure support is even more critical as well as the supply chain eco-system. Minus the components suppliers, the backplane companies and PCB enclosure manufacturers, etc., lower cost labor is really irrelevant. The reason China is a major manufacturing zone is because of the system in place to support manufacturers. Do alternative regions have this?

  21. bolaji ojo
    September 14, 2012

    A shift in production to even cheaper countries and outside of China is occurring but it can hardly be seen as a major shift currently. Many companies are simply moving deeper inside China, which adds to their costs. It may be quite a while before it is seen as a major migration of plants.

  22. Barbara Jorgensen
    September 14, 2012

    Bolaji: From what I read, the answer is 'no.' Infrastructure is a major issue with India, which land-wise is as sprawling as China and workers will need a way to get to and from factories. I also believe that with a few exceptions, Vietnam hasn't linked the technology hubs that are developing there. With all the investment that has gone in to China–and no one believes for a minute the infrastructure was financed only by China's government–moving on just for labor's sake doesn't make sense.

  23. Adeniji Kayode
    September 14, 2012

    @Bolaji,

    That is a critical question to look in to.

    However, other regions might not have so much support for manufacturers compared to China but they are waking up to it now and calling out to foreign investors because they have come to understand that that will aid the level of level of development, civillization and economy just like it was and is for China.

  24. Daniel
    September 17, 2012

    Adeniji, now most of the Chinese labors are educated and aware about their rights and responsibilities. Even though they are failing in their responsibilities, they are much bothered about their rights and salaries are the major in that. I heard from one of my friend who is working in China as a part of off – shore assignment that even they have the bargain power also. I mean, they always have a mentality that MNCs are exploring them for making profits. So in some companies employees are asking even for profit sharing as part of salary package.

  25. Daniel
    September 17, 2012

    Jennifer, you how why government is sponsoring or keeping mum for counterfeit business and duplication efforts? The reason is simple, they wants to engage peoples with some sort of works and in turn living breads. Very Recently Volkswagen made some allegation that their counterpart in China had leaked their design and started their own automobile manufacturing company. Why government had not taken any action against them? They won’t because the actual idea for FDI is promoting technology and duplicating/counterfeiting it for the local industries.

  26. Jennifer Baljko
    September 17, 2012

    I came across this Ted talk with reporter Leslie Chang. She spent two years in China talking to women who work in multinational companies as factory workers. Leslie's reporting adds depth and perspective  to the conversation we're having here. Well worth the 15 minutes to watch this clip: 

    http://www.ted.com/talks/leslie_t_chang_the_voices_of_china_s_workers.html

  27. Anand
    September 17, 2012

    there are many companies that run factories 24 hours a day with a significant number of employees and demand that workers put in overtime without always paying fairly for those extra hours

    @Jennifer, I agree with your observation. Many companies are using slow-down in the market as an excuse to force the employees to work extra hours without paying fairly. I think thing might improve in coming days because market condition is improving thus giving employees an opportunity to switch the job easily.

  28. Anand
    September 17, 2012

    Infrastructure is a major issue with India, which land-wise is as sprawling as China and workers will need a way to get to and from factories

    @Barbara, you are right. I would say corruption is major cause of this. Many infrastructure projects get delayed because of corruption. Sometimes because of corruption even quality is compromised because of which infrastrcture needs to rebuilt again and again. 

  29. Anand
    September 17, 2012

    Don't companies care about that potential? Shouldn't they?

    @Jennifer, thanks for the post. Unfortunately companies dont care about the  value streams that can be created when a low-cost region gets converted to a developed market. Many companies just care about the balance-sheet and profit margin, they will easily move the next destination when they find that they can build the product at lower cost in another country.

  30. Anand
    September 17, 2012

    With the rise in the cost of basic needs, the wages need to go up. No one can stop that.

    @SP, you are right. One of the major cause of this inflation is rising oil prices. Rising oil prices have pushed the inflation in developing nations like India to very high levels because India is net importer of oil. 

  31. Anand
    September 17, 2012

    Companies that have kept their manufacturing in North America may gain from this.

    @Clairvoyant, I think many manufacturing units are shifting their base to their respective home countries because of increase in transportation cost. 

  32. Daniel
    September 20, 2012

    Barbara, I don't think land is an issue, but infrastructure is a major issue. Lots are lands are available in interior and villages, which are not so far explore. But rail/road accessibility, lack of power, water etc are the major issues.  I read that government has a plan to segregate each remote village as clusters and to made necessary infrastructure for developing it as industrial hubs within the next five year plan.

  33. Daniel
    September 20, 2012

    Anandvy, transportation is the only factor. What about the other factors like resources, availability of skilled man power, various taxes and tax treaties etc. While moving the facility to native country, some of these factors are favorable and some other is unfavorable. So companies are making decisions based on how they can balance between the positive benefits and negative drawbacks.

  34. Mr. Roques
    September 21, 2012

    Well, that know-how that those chinese workers have must have some value so inmediately moving to the cheaper country might not be the best solution.

    What it does is bring “robot” workers closer to reality. That break-even point is getting closer.

  35. Daniel
    September 24, 2012

    Roques, you are right. After making so much of investment in setting up a factory and production environment, it's not easy to wind it up or move to some other location because of labor/wage issue. I think while investing for FDI, government has to assure the labour/wage contract for a certain period. This can assure that atleast there won't be any change or unexpected things in wages and related expencess.

  36. Mr. Roques
    October 25, 2012

    Has there being cases of governments creating guarantees such as those that you mention? (wage limits, etc)

  37. Daniel
    October 26, 2012

    Roques, yes in my country there are such contracts with employees. Before the financial year starts, management and employee union /federation will sign an agreement for the next 2-3 years about their wages and other facilities. Before completing the bond period nobody can break the bond either for change in salary or facilities. This will make sure that there won’t be an surplus expense from company side and employees won’t go for strike for a wage hike.

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