Companies in China Experience Labor Pains as Costs Increase

June 8, 2010 Posted by China Briefing Reading Time: 2 minutes

Op/Ed Commentary: Andy Scott

Jun. 8 – The news that Foxconn and Honda agreed to raise wages in their South China factories last week is merely the beginning of a new era in the “Made in China” story. At the beginning of the 1990s, China’s dramatic shift from a closed, mainly agrarian society to an economic powerhouse was in full swing. The nation had become the world’s factory, and millions of peasants were flocking to the nation’s new manufacturing heartland of South China. Nearly 20 years later, the story is no longer the same.

China’s booming economy lifted millions out of poverty in the last 20 years. Coastal boom cities like Shenzhen literally sprung from nothingness as immigrant labor poured in to help construct the world’s consumer products, driving the cost of anything from toys to televisions down. But the rising standard of living in China, brought on by decades of economic growth, is now cutting into the razor thin margins that many of China’s export manufacturers rely on to see a profit.

As China continues to increase minimum salary requirements and mandatory benefits throughout the country, and assembly line workers – often better educated than the previous generation – increasingly press for a better, living wage, more and more manufacturers, many either selling to or partially owned by foreign investors, will see their business model come under assault and possibly break.

With the RMB likely to continue its appreciatory climb against the dollar, those selling products or services in China and not simply tied to the export economy will profit, but only if they also reevaluate their business model in the changing economy. From the factories of Dongguan to the restaurants and hotels of Shanghai, the story is the same: prospective employees are getting harder and harder to find. Companies that used to be able to fill slots within days are having to go weeks with positions vacant. Companies that have relied on cheap labor to replenish their workforce will now need to address turnover differently. The time of low cost, readily available labor in China is over.

Many, seeing the writing on the wall even before the financial crisis, began moving their operations across the border, seeking locations and government incentives in Vietnam and other Southeast Asian nations where the costs remain lower. Others have moved inland, taking advantage of China’s “Go Inland” and “Go West” campaigns to develop China’s interior.

With the low cost export manufacturing becoming less sustainable in China, companies, both foreign and domestic, will need to reevaluate their production models. In some cases, this will mean continuing the exodus of manufacturing production lines to save costs, in other cases it will mean reevaluating production, domestic sales and employment practices.

The shift from selling from China to selling to China for many will need to be made if it hasn’t already, as the future lies in the very thing that is pushing many out, the increased wages, and with it, the increased buying power of the Chinese worker.